This is part of the larger concept of federalism (which comes from the Latin word foedus, "covenant"), in which all of human life and society is viewed as a series of interrelated social relationships, such as the family, the church, the town, etc. Each unit is independent and sovereign within its own sphere, and it forms mutual contracts (or covenants, or compacts) with other units. Each covenant entails a constitution (either explicit or implicit) delineating the respective rights and responsibilities of each party. For example, families will contract together to form a town, and each family will usually retain the right to decide what they will have for dinner, and so they will retain their natural sovereignty. Under federalism, all relationships are mutual and consentual, and all parties to the contract are equal within their own spheres. All power is horizontal, not vertical, and rather than one party being superior to another, instead, all parties are equal, and the difference lies in their different spheres. For example, the national government for the United States would be equal in power to the state, but its sphere would be different, including, for example, the power to raise a military and coin money, but not including the power to regulate intra-state commerce.
According to all this, the government has only the powers which members of society choose to grant it. Everything else must be left to private enterprises. In fact, the government itself is a sort of private enterprise. The government is simply one member of society among many others. To quote The Covenant Origins of American Polity by Professor Steven Alan Samson:
Furthermore, decentralized political institutions required the existence of healthy social institutions, which included voluntary associations. … It is this combination of ingredients that lends a peculiarly libertarian quality to American social institutions. The civil government was regarded as a constituent rather than a constitutive element of society. ... One of the great practical advantages of the covenant design is the possibility of reconciling a number of self-governing entities within a larger union or commonwealth, such as family, church, and state.
The government has only the powers granted by the citizens because all men retain their own natural powers until and unless they delegate them to another. For example, all men have the right to defend themselves against attackers, and so they can delegate this power to the government. (Actually, because all men have the right and even the duty to defend their neighbors against attack, the government does not require the consent of its citizens to enforce basic rules of justice.) To quote Cato’s Letters:
The two great laws of human society, from whence all the rest derive their course and obligation, are those of equity and self-preservation: By the first all men are bound alike not to hurt one another; by the second all men have a right alike to defend themselves.
Government therefore can have no power, but such as men can give…no man can give to another what is none of his own…
Nor has any man in the state of nature power…to take away the life of another, unless to defend his own, or what is as much his own, namely, his property. This power therefore, which no man has, no man can transfer to another.
Nor could any man in the state of nature have a right to violate the property of another…as long as he himself was not injured by that industry and those enjoyments. No man therefore could transfer to the magistrate that right which he had not himself.
No man in his senses was ever so wild as to give an unlimited power to another to take away his life, or the means of living… But if any man restrained himself from any part of his pleasures, or parted with any portion of his acquisitions, he did it with the honest purpose of enjoying the rest with greater security, and always in subservience to his own happiness, which no man will or can willingly and intentionally give away to any other whatsoever.
Because the government, according to this, is a collection of voluntarily consenting individuals, the citizens can always withdraw their consent to be governed, stripping the government of its authority over them. Therefore, it behooves the government to limit itself to merely enforcing strict justice and any universally and axiomatically held principles (such as enforcing Puritanism among citizens in a thoroughly Puritanistic society, for example), because otherwise, citizens will simply withdraw their consent. If the government continues to assert its authority even after citizens have withdrawn their consent, then the government is simply a thief who may be punished as all thieves may be.
Thus, the government has only powers which the citizens have granted, or which are considered axiomatically authoritative simply because they enshrine Truth with a capital "T." For example, men may defend themselves against thieves, and so the government may do so too. In Puritan societies (the Reformed/Calvinist tradition invented federalism and social contract theory, by the way), Puritanism was taken for granted as authoritative and true, and anyone who disagreed was considered to be simply wrong, and was expected to leave town and find somewhere else to live.
To quote Professor Samson again (in turn quoting Edward S. Corwin),
The attribution of supremacy to the Constitution on the ground solely of its rootage in popular will represents, however, a comparatively late outgrowth of American constitutional theory. Earlier the supremacy accorded to constitutions was ascribed less to their putative source than to their supposed content, to their embodiment of an essential and unchanging justice.... There are, it is predicated, certain principles of right and justice which are entitled to prevail of their own intrinsic excellence, all together regardless of the attitude of those who wield the physical resources of the community.
In other words, the Constitution as held to be authoritative not because it was approved by the majority, but rather, simply because it was true, period. You cannot argue with Truth, with a capital "T." Now, then, of course, men lack an empirical way to establish the absolute truth without any admixture of error or bias. But the best we can do is consider whatever is nearly unanimous to be the truth. Under social contract theory, the government can engage in those things only which enjoy nearly universal assent. If it can be characterized as partisan, then it is ipso facto illegal for the government to engage in it.
The central idea is this: the government is your proxy, your agent, your שליח. Anyone’s proxy has only those powers which he has granted him. The government is meant to be everyone‘s proxy, and therefore, it can do only those things which everyone agrees to. (Or at least, which nearly everyone agrees to. In Puritan society, for example, a non-Puritan was simply considered to be outside the bounds of ordinary people and society. Likewise, in Biblical Israel, anyone who violated Shabbat was simply a criminal, violating what was considered a fundamental norm for society binding all people and accepted by all reasonable people.)
Fundamentally, what libertarianism enshrines is humility. It accepts that no man has the right to coerce his neighbor. If your party occupies 51% of the legislature and your opposition occupies 49%, the libertarian accepts that he has no moral right to coerce the minority. He accepts that any act of coercion by one person over another or one group of people over another group is simply an act of tyranny and violence and evil. There is no difference between one man bullying another, and a whole group bullying another. To quote Ralph Waldo Emerson’s Politics:
Every man’s nature is a sufficient advertisement to him of the character of his fellows. My right and my wrong, is their right and their wrong. Whilst I do what is fit for me, and abstain from what is unfit, my neighbour and I shall often agree in our means, and work together for a time to one end. But whenever I find my dominion over myself not sufficient for me, and undertake the direction of him also, I overstep the truth, and come into false relations to him. I may have so much more skill or strength than he, that he cannot express adequately his sense of wrong, but it is a lie, and hurts like a lie both him and me. Love and nature cannot maintain the assumption: it must be executed by a practical lie, namely, by force. This undertaking for another, is the blunder which stands in colossal ugliness in the governments of the world. It is the same thing in numbers, as in a pair, only not quite so intelligible. I can see well enough a great difference between my setting myself down to a self-control, and my going to make somebody else act after my views: but when a quarter of the human race assume to tell me what I must do, I may be too much disturbed by the circumstances to see so clearly the absurdity of their command. Therefore, all public ends look vague and quixotic beside private ones. For, any laws but those which men make for themselves, are laughable. If I put myself in the place of my child, and we stand in one thought, and see that things are thus or thus, that perception is law for him and me. We are both there, both act. But if, without carrying him into the thought, I look over into his plot, and, guessing how it is with him, ordain this or that, he will never obey me. This is the history of governments, – one man does something which is to bind another. A man who cannot be acquainted with me, taxes me; looking from afar at me, ordains that a part of my labour shall go to this or that whimsical end, not as I, but as he happens to fancy. Behold the consequence. Of all debts, men are least willing to pay the taxes. What a satire is this on government! Everywhere they think they get their money’s worth, except for these.
Under federalism, all associations are contractual and mutual. Therefore, there is no tyranny and no unjust coercion, because every association has been freely and voluntarily entered into, with stipulated terms. The government is accepted as a contractual union of willing individuals, horizontal and parallel with other bodies of society, not vertically superior, exercising only those powers which citizens have granted it, making it their approved proxy.
Because federalism was created by the Reformed/Calvinist Christians, it was assumed by them that all human contracts and constitutions must agree with the highest constitution of all, the Bible. Any law which violated the Bible or natural law (which was considered identical to the Bible except that it was written on men’s hearts and consciences rather than on paper) was ipso facto illegal. Later thinkers who relied on natural law or other higher laws, to invalidate any law that was unjust, were following the same type of thinking. For example, Martin Luther King, Jr. - who was, after all, a reverend - in his Letter from a Birmingham Jail, says,
You express a great deal of anxiety over our willingness to break laws. This is certainly a legitimate concern. Since we so diligently urge people to obey the Supreme Court's decision of 1954 outlawing segregation in the public schools, at first glance it may seem rather paradoxical for us consciously to break laws. One may well ask: "How can you advocate breaking some laws and obeying others?" The answer lies in the fact that there are two types of laws: just and unjust. I would be the first to advocate obeying just laws. One has not only a legal but a moral responsibility to obey just laws. Conversely, one has a moral responsibility to disobey unjust laws. I would agree with St. Augustine that "an unjust law is no law at all."Similarly, Henry David Thoreau's On the Duty of Civil Disobedience says,
Now, what is the difference between the two? How does one determine whether a law is just or unjust? A just law is a man made code that squares with the moral law or the law of God. An unjust law is a code that is out of harmony with the moral law. To put it in the terms of St. Thomas Aquinas: An unjust law is a human law that is not rooted in eternal law and natural law. Any law that uplifts human personality is just. Any law that degrades human personality is unjust. All segregation statutes are unjust because segregation distorts the soul and damages the personality. ... Thus it is that I can urge men to obey the 1954 decision of the Supreme Court, for it is morally right; and I can urge them to disobey segregation ordinances, for they are morally wrong.
Can there not be a government in which majorities do not virtually decide right and wrong, but conscience? - in which majorities decide only those questions to which the rule of expediency is applicable? Must the citizen ever for a moment, or in the least degree, resign his conscience to the legislator? Why has every man a conscience then? I think that we should be men first, and subjects afterward. It is not desirable to cultivate a respect for the law, so much as for the right. The only obligation which I have a right to assume is to do at any time what I think right. ... He who gives himself entirely to his fellow men [i.e. including his conscience] appears to them useless and selfish; but he who gives himself partially to them [i.e. giving only his obedience and ignoring his conscience] is pronounced a benefactor and philanthropist.Now, Thoreau was hardly a religious Christian, and King was actually a social-democrat, not a libertarian. But we see the same concern for a higher law, for absolute and sacrosanct canons of right and justice, which no government, no matter how popular or democratic, may violate. And of course, the Reformed Christians did not invent the concept that obedience to G-d and the Bible comes before obedience the man; they may have perfected this doctrine and make the most use of it in practical politics, but Christians had already for centuries at least theoretically believed this.
In fact, federalism was modeled on Reformed Christians’ studies of covenant (ברית) in the Bible, and originally, their entire conception of government was based on its duty to enforce the Bible and punish sin. The rights that we are familiar with, especially in the Bill of Rights, originally grew out of the Protestants’ grievances against the Catholics. For example, they demanded protection of their right to freely practice Protestantism, which developed into general rights of freedom of speech and association.
Similarly, Reformed Christians demanded democratic-republican government and separation of powers and checks and balances and explicitly written constitutions, all to protect against government tyranny, which they considered dangerous because of the Christian belief in the sinfulness of man. (This does not mean that man is wholly sinful. The Reformed Christians believed that while man was sinful due to Original Sin, he was nevertheless also good and holy, due to his being created in the image of G-d and having the law of G-d written on his heart and conscience in the form of natural law. Calvinist "absolute depravity" meant not that man was entirely depraved, but rather, that every single last bit of a man had some admixture of depravity mixed in with his goodness.) When Rousseau and the radical philosophes in the French Enlightenment believed that it was not human sinfulness, but rather human institutions, that gave rise to injustice, the result was a license to tyranny. Without the belief in human selfishness and sinfulness, one will grant a free license to the elites and the government's officials to do as they desire. Without the belief in human sinfulness, the government is left without limits or checks, and tyranny results.
The Reformed Christians pioneered the concept of the two-kingdoms, later referred to as sphere-sovereignty. Under this concept, the civil government and church were to be completely independent and parallel, each having the same amount of power and sovereignty, but only within their respective spheres. The church's job was to preach the word of G-d, while the civil government's job was to enforce the word of G-d as appropriate. Neither entity had any authority over the other, and the civil government was to enforce Christianity not because the church forced it to, but simply because Christianity was considered the Truth (again, with a capital "T"), and if it didn't enforce Christianity, then it would have to enforce some other philosophy. All philosophies are subjective and biased, and so why is one any better than the other? But the point for us now is that the Reformed Christians limited the civil government and church in their powers, prescribing for each one a strict and unalterable sphere of influence, beyond which all activity for each respectively was forbidden. The Reformed Christians thus understood that governments had their proper purposes, but that they must be limited from engaging in any activity outside these purposes. Absolutist government was out of the question, and was viewed unequivocally as beyond the pale. While the Reformed Christians still believed in established churches, they at least acknowledged the basic principle that everything had to be limited to its proper sphere. And in fact, the Baptists, whose view prevailed in America, took this same concept even further, and held that the government should limit itself to protecting life and property, and that the church should be entirely privatized and decentralized, and that morality should be left to it. The Reformed Christians and Baptists differed in degree, but they both held the same basic view of the two-kingdoms, that church and state should be separate, each with its own jurisdiction.
The Reformed Christians also believed that the very existence of government was due only to the sins of man, and that therefore, government was necessary to cause men to fulfill their duties. (Cf. Pirqei Avot, chapter two: "Pray for the welfare of the government, for without it, man would swallow his fellow alive.") But implicit in this notion is the fact that government has a strict purpose, and that any activity beyond this is forbidden. If government is meant to curb man's sins, then it is a necessary evil, and that government is best which governs least. To quote Thomas Paine's Common Sense,
SOME writers have so confounded society with government, as to leave little or no distinction between them; whereas they are not only different, but have different origins. [Cf. Samson above, that "The civil government was regarded as a constituent rather than a constitutive element of society."] Society is produced by our wants, and government by wickedness; the former promotes our happiness positively by uniting our affections, the latter negatively by restraining our vices. The one encourages intercourse, the other creates distinctions. The first is a patron, the last a punisher.
Society in every state is a blessing, but government even in its best state is but a necessary evil; in its worst state an intolerable one; for when we suffer, or are exposed to the same miseries by a government, which we might expect in a country without government, our calamity is heightened by reflecting that we furnish the means by which we suffer. Government, like dress, is the badge of lost innocence; the palaces of kings are built on the ruins of the bowers of paradise. For were the impulses of conscience clear, uniform, and irresistibly obeyed, man would need no other lawgiver; but that not being the case, he finds it necessary to surrender up a part of his property to furnish means for the protection of the rest; and this he is induced to do by the same prudence which in every other case advises him out of two evils to choose the least. Wherefore, security being the true design and end of government, it unanswerably follows that whatever form thereof appears most likely to ensure it to us, with the least expence and greatest benefit, is preferable to all others.
Here then is the origin and rise of government; namely, a mode rendered necessary by the inability of moral virtue to govern the world; here too is the design and end of government, viz. freedom and security. And however our eyes may be dazzled with snow, or our ears deceived by sound; however prejudice may warp our wills, or interest darken our understanding, the simple voice of nature and of reason will say, it is right.
Libertarianism often results in a concern for localized rule. The reason is that if government requires consensus, then all action must be limited to the smallest geographic region where that consensus is achievable, which is usually relatively small in size. For example, Justice Joseph Story (appointed by James Madison and presided 1811 to 1845) explained, in his magisterial Commentaries on the Constitution of the United States, that the First Amendment prohibits favoring or establishment of religion by the national government not because involvement in religion is ipso facto illegal – indeed, he emphatically noted that government involvement in religion is quite a good and laudable thing – but rather, he said, because there was no consensus on the national level, and so government involvement in religious matters had to be left to the states, where consensus could either be formed, or where power could be further handed down to a more local level of the federal relationship, such as counties or towns.
Story also considered that any punishment of heretics or dissidents to be inherently wrong. That is, while he favors the government’s establishment or favoring of religion, he opposes punishing nonconformists. But even as he argued this point, quoting John Locke, he reiterated that government support of religion is good, and that civil society cannot endure unless religion is its foundation, and he asserted that Locke agrees with this.
Story also believed that while government involvement in religion is quite good, nevertheless, it is a fact that because of man’s sinful nature, the government is liable to often abuse this power. Rather than argue as an atheist would, that government involvement in religion is ipso facto unjust, Story instead argues that this power is completely legitimate and just and laudable, only that it is liable to be perverted and misused, and that therefore, what would otherwise be a good power for the government to have, must be limited if not denied.
For a good excerpt of Story’s views on the First Amendment, showing all this, see here.
In fact, I would hazard the opinion that due to all this, that the First Amendment must be sui generis. Whereas the rest of the Bill of Rights enshrines absolute and unalienable human rights, granted by G-d (see the Declaration of Independence), by contrast, the First Amendment is relative and not absolute. (I speak only of the prohibitions of respecting and establishing religion, not the prohibitions on restricting free exercise, free speech, and free association.) That is, men do not have an absolute right to the First Amendment's prohibitions of respecting and establishing, even though they do have an absolute right to the rest of the Bill of Rights. As the Ninth Amendment states, the Bill of Rights is not even comprehensive, and if the government repealed the Bill of Rights, even then, the rights it enshrines would remain, as they are granted unalienably by G-d, and no man can remove that which is not his, just as he cannot grant that which is not his. But the First Amendment is different. As Justice Story shows, the prohibition of respecting and establishing is a relative value, not an absolute one. The Bill of Rights originally applied to the national government alone, not encumbering the states. But this was a technical limitation, and if any state failed to protect the right to due process or freedom of speech or association, for example, then Justice Story would bemoan this miscarriage of justice, and sadly note that unjust as it may be, the national government has no ability to force the states to protect the unalienable rights of men. Similarly, for example, slavery was regarded as evil, but the national government had no power to prohibit it among the states, because slavery was intra-state commerce. It was only the Fourteenth Amendment that changed this. But Justice Story's attitude regarding the First Amendment is different: he holds that the prohibition of establishing and respecting religion applied only to the national government, but that the states may and even should establish or respect Protestant Christianity! He believed the states would be negligent and criminal if they did enforce the First Amendment on the state level! So the First Amendment is a very different right than the rest of the Bill of Rights, being relative rather than absolute. This being so, I would hazard the opinion that even when the Bill of Rights was incorporated onto the states via the Fourteenth, even then, I would say, the First Amendment's prohibition of respecting and establishment should not have been considered to have been incorporated, because this prohibition is a relative one, not an absolute one, and it is not a human right protected by due process. By contrast, however, the rights of freedom of speech and association and free exercise of private religion are in fact human rights, and should have been incorporated, as indeed they were. This is all especially so, because if the rights of men are granted by G-d (see the Declaration), then how can men have a G-d-given right to be free of religion??!! Such a position is absurd!! Likewise, being that the First Amendment is largely Christian in orientation, being based on Christian theories of the separation of church and state, it would be absurd for the very Christian First Amendment to prohibit all respecting and establishing religion as an inherent and absolute human right, for if so, the First Amendment would contradict itself! The First Amendment is itself a thoroughly Christian document, and all rights are granted by G-d, so the First Amendment's protections for the non-religious must be relative than absolute ("religion" for the Founders indicating Protestant Christianity).