Washington -- SEVERAL THEMES run through the Contract With America: promotion of free markets, objection to government regulation, concern for the middle class.
But when it comes to the passage on reforming securities law, the contract is oddly in conflict with those objectives.
Adam Smith, in the most famous sentence in economic literature, said that "it is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest."
It is significant that the examples Smith used all refer to daily purchases. If the baker puts sawdust in my bread I will know it immediately, I will not buy from him anymore. So it is in his own interest not to put sawdust in the bread.
But suppose that I, a member of the middle class, am buying stock in a corporation with which I have no personal connection.
How is it in the interest of the corporation's executives to make a diligent effort to tell me everything I ought to know?
How will my property rights be protected? If they are not, am I likely to know what has happened?
Will I be able to distinguish between the inevitable vicissitudes of the market and inadequate performance of the people he relied on? If I find that I have been disserved, what difference will it make -- as I probably wasn't going to have any more business with them anyway?
Still, it is essential to the efficient functioning of our economic system that the passive investor be willing to put his money in private enterprise.
To give him confidence to do that, we rely on three forces: the trustworthiness of the people who manage the money, which is generally sufficient but, alas, not always; government regulation, which is expensive, ineffective and unnecessarily intrusive; and the power of the legal system.
Although the wronged investor can seek redress in the courts, he cannot, of course, do it by himself.
So there is a market demand for people who can assemble the injured investors, perform the necessary research and pursue the claims in court. A supply of people -- mainly lawyers -- exists to meet the demand.
But the Contract With America proposes to interfere with this market. Its creators intend to interpose a court-appointed trustee between the plaintiffs and their lawyers, and to limit the ability of lawyers to seek out cases of likely misfeasance and to organize suits to obtain redress.
The House Republican leadership also wants to limit court action to cases where deliberate intent to mislead or reckless disregard dTC for the truth can be proved. This would let responsible parties off the hook for failure to exercise the diligence that the law requires of them.
The contract presents its suggestions as if the urgent problem is to protect corporations from middle-class investors' lawyers. True, frivolous lawsuits can be an unnecessary drain on the system.
But a much more serious problem is assuring the middle-class investor that the people to whom he entrusts his money will look after his interest honestly and diligently. The possibility of recourse to the judicial system is integral to that assurance, and the proposals in the contract would weaken it.
In 1993 there were 238 class-action suits in securities cases. Some might say that the number of suits is so small that the whole thing does not make much difference either way. But what counts is not the number of suits but the amount of dishonesty and negligence that is prevented by the possibility of stockholder suits. And that could be a lot.
Herbert Stein, a senior fellow at the American Enterprise Institute, was chairman of the President's Council of Economic Advisers under Richard M. Nixon and Gerald R. Ford.