Encyclopedia of Law & Economics - 0610 PUBLIC CHOICE, CONSTITUTIONAL POLITICAL ECONOMY, AND LAW AND ECONOMICS

0610

PUBLIC CHOICE, CONSTITUTIONAL POLITICAL ECONOMY, AND LAW AND ECONOMICS

Ludwig Van den Hauwe

Brussels, Belgium

© Copyright 1997 Ludwig Van den Hauwe

Contents

Abstract

A. The Manifold Legacy of Adam Smith

1. Introduction

2. The Leading Journal

B. The Theoretical Foundations of Constitutional Political Economy

3. Constitutional and Sub-Constitutional Choices

4. Methodological Individualism

5. Homo Economicus

6. Normative Individualism

7. Excursion: The Wicksellian Ancestry

8. The Rent-Seeking Trap

9. Judicial Independence

10. A Rule of Law in Politics

11. Veil of Uncertainty and/or Ignorance Versus the Availability of Exit Options

12. Federalism, Once Again

C. Outline of a Reconstruction of the Coase Theorem from a Subjectivist-ContractarianPerspective

13. Buchanan on the Irrelevance of Transaction Costs

D. Refinements and Applications: A Survey of Contributions

14. Foundational Explorations

15. Contractarianism and Evolutionism

16. Compliance, Renegotiation, Secession

17. The Common Law and Its "Efficiency"

18. Studies in the History of Ideas

19. Variations on Hayekian Themes

20. Towards a Constitutional Economics of the Firm

21. Redistribution

22. European Integration

23. Other and Related Subjects

E. Conclusions

24. Conclusions

Bibliography on Public Choice, Constitutional Political Economy, and Law and Economics (0610)

Other References

Abstract

The various subdisciplines within the emerging "new institutionalism" in economics all draw specialattention to the legal-political constraints within which economic and political agents choose andtherefore represent a return of Economics to its appropriate legal foundations. By changing the nameof his research program to constitutional political economy Buchanan distanced himself from thoseparts of the public choice literature that remained too close to the traditional welfare economicsapproach. The article draws lessons for Law-and-Economics from recent developments in the re-emerging field of CPE. CPE compares alternative sets of institutional arrangements, in markets andthe polity, and their outcomes, using "democratic consent" as an internal standard of comparison.The present article discusses the methodological foundation of the CPE approach, presentsBuchanan's reconstruction of the Coase theorem along subjectivist-contractarian lines and gives anoverview of recent contributions to the literature.

JEL classification: B41, D70, H10

Keywords: constitutional economics, constitutional political economy, public choice, James M.Buchanan, methodological foundation


A. The Manifold Legacy of Adam Smith

1. Introduction

As the title of this article suggests, the new Law-and-Economics movement on the one hand and thenow rapidly emerging field of Constitutional Political Economy - as well as the somewhat olderPublic Choice branch of economics from which it emerged - on the other hand, are research traditions that are in some respects genuinely related. In other respects the differences between them aresufficiently important, however, to warrant a more or less detailed discussion.

Both exemplify the "extension" of economics beyond its traditional boundaries - from marketto non-market behaviour - and both belong to a set of subdisciplines that draw special attention tothe legal-political constraints within which economic and political agents operate. Both constitutecomplemental facets of the emerging "new institutionalism" in economics.

Both may have drawn substantial inspiration from the encompassing theoretical perspective and thereformist attitude that were characteristic of Adam Smith's approach. Indeed, CPE can beconsidered to be an important component of a more general revival of the classical emphasis,particularly as represented in the works of Adam Smith. Among the various approaches to the neweconomic institutionalism, constitutional economics is probably the one that comes closest to what inAdam Smith's time was called "moral philosophy". It seeks to bring closer together again the economic, social, political, philosophical and legal perspectives that were once part of the study of moralphilosophy, and which the process of specialization in modern academia has fragmented intoseparate fields. Buchanan's constitutional economics is the modern-day counterpart to what Smithcalled "the science of legislation", an academic enterprise that is concerned with a comparison of theworking properties of alternative sets of rules, and ultimately aims at guiding our efforts to improvethe social order in which we live by improving "the rules of the game".

On the other hand, Coase, in his 1991 Nobel Memorial Lecture (Coase 1992, p.713), madethe claim that during the two centuries since the publication of The Wealth of Nations, the mainactivity of economists - including, by implication, a very substantial part of his own work - had beento fill the gaps in Adam Smith's system, to correct his errors, and to make his analysis vastly moreexact.

The new Law-and-Economics field is usually said to have started in the early 1960s, whenGuido Calabresi's first article on torts and Ronald Coase's article on social cost were published(Calabresi 1961; Coase 1960). Coase's article was without any doubt the more significant for thelong-run development of the new Law-and-Economics field.

Modern Public Choice - or the economics of politics - is usually said to have been founded bysuch classics as Black (1958) - following earlier papers published in the late 1940s and early 1950s- Arrow (1951), Downs (1957) and the precursory inquiries in Schumpeter (1942) - thoughelements of public choice analysis can already be found in the work of Pareto (see Backhaus,1978). The major breakthrough however came with Buchanan and Tullock (1962). The Calculusof Consent was a seminal work in several respects. The public choice perspective is usuallycharacterized as combining two distinct elements: the extension of the economist's model of utility-maximizing behavior to political choice and the conceptualization of "politics as exchange". TheCalculus was the first book that integrated these two elements into a coherent, logical structure.Moreover, the Calculus differed from the precursory works in that it embodied justificatoryargument. It sought to outline, at least in very general terms, the conditions that must be present foran individual to find it advantageous to enter into a political entity with constitutionally delineatedranges of activity or to acquiesce in membership in a historically existing polity. It was recognizedthat, if one remains within the presuppositions of methodological individualism, the state or the politymust ultimately be justified in terms of its potential for satisfying individuals' desires (see alsoBuchanan 1987, p.133).

Furthermore, The Calculus of Consent confronted the market failure presumption of the newwelfare economics by demonstrating that the problems associated with markets were ubiquitous,indeed entered into the calculus of political consent arguably with far greater significance because ofthe indivisibility of collective action (Rowley 1993 p. xiii; Goetz 1991, p.10). The market failureconcepts were applied evenhandedly to the alternative institutional arrangements, especially those ofpolitical control and for the first time, various policy arguments could benefit from a consistent andbalanced approach.

Finally, the Calculus contained the germs of the recent developement of the research programof Constitutional Political Economy. It seems that Tullock's complaint about the lack of further research along the lines suggested in the Calculus was premature (Tullock 1987, p.139). Theboundary between Public Choice, in its non-constitutional aspects of inquiry, and ConstitutionalPolitical Economy may seem somewhat fuzzy. It is generally considered that Public Choice, in whichattention is concentrated on analyses of alternative political choice structures and on behavior withinthose structures, is, through its focus on predictive models of political interactions, a preliminary butnecessary stage to the more general constitutional inquiry.

On the other hand, Law-and-Economics remains somewhat closer to orthodox economictheory than either Constitutional Economics or Public Choice. The standard efficiency norm remainscentral to the Law-and-Economics subdiscipline, both as an explanatory benchmark and as anormative ideal.

The complex relationships between Law-and-Economics and Public Choice were carefullyanalyzed in (Rowley, 1989). A masterly survey of the public choice literature is contained in(Mueller 1989). Equally recommendable is (Charles K. Rowley's 1994) essay on "Public choiceeconomics" in (Boettke 1994). In the present article we propose to draw some lessons for Law-and-Economics from recent developments in the re-emerging field of Constitutional PoliticalEconomy.

At a time of major world-wide constitutional change, it will come as no surprise that the focus ofpublic choice discussion is shifting away from ordinary political choices to the institutional-constitutional structure within which politics takes place.

2. Leading Journal

The leading journal of the sub-discipline is Constitutional Political Economy. Some preliminaryand intuitive understanding of what CPE is all about can be gained from explaining the logic behindthe logo of the journal, which is drawn from Greek mythology. CPE's logo is a representation of thefamiliar Homeric account of how Ulysses heard the Sirens singing, and survived (see Kliemt andBrennan, 1990). Ulysses wanted to hear the exquisite voices of the Sirens. He was passing close byand, in principle, there was nothing to prevent him from listening to them while continuing his journey.However, he recognized that the power of these voices was such that he would steer the ship evercloser to the rocks where the Sirens were located. The ship would be wrecked and he would beunable to continue his journey.

Formally, Ulysses faced a problem of time inconsistency in his optimal plan. His optimal planwas to listen to the Sirens and then continue his journey. But this was time inconsistent, becauseonce he had embarked on the plan by listening to the Sirens he would not be able to implement thelater part of the plan, the rest of his journey. By contrast, a time consistent optimal plan is one thatspecifies a sequence of actions (At,At+1,At+2 and so on), one for each moment in time (T,T+1,T+2 and so on), which enjoys the property that the individual will actually choose in each timeperiod the action specified by the plan. Thus, when T+1 occurs, having undertaken At in T, theindividual will still choose At+1 as the best action rather than some other, and so on.

The time-inconsistency arises because the Sirens affect Ulysses's preferences. His perceptionof the best action changes in the middle of the plan and this leads him to deviate from the originalversion. Ulysses implemented his optimal plan by denying himself freedom at the later stage of theplan. Having instructed his men to tie him to the mast and to ignore any orders to do anything otherthan sail past the rocks, he told them to plug their ears and row.

Thus, Ulysses established for himself a private constitution, a set of more or less binding rulesthat constrained his future choices. By exploiting elements of his natural and social environment,Ulysses was able to subvert certain inclinations of his future self, inclinations that he knew would bedestructive to his overall interests but which would nevertheless prove irresistible when they arose.

Though the theory of private constitution is a - small - part of the domain of constitutionalpolitical economy (Buchanan 1990, p. 3), the principal issue for constitutional political economy isthat of forming a mutually agreeable constitution for social arrangements among a community ofpersons. Ulysses is therefore to be seen not merely as a single actor but more particularly asrepresenting society as a whole, and the mast and rope are to be identified as the rules by whichordered society is governed.

As Kliemt and Brennan (1990, p. 125) point out, some care must be taken in interpreting anysuch image. Following the individualist methodology, "social action" must be decomposed into theactions of the individuals of whom society is made up. The exercise of social binding, specifically,must be seen as an intrinsically multilateral activity. Each agrees to a set of rules and proceduresbecause this is the price each must pay to restrict the conduct of others. "Weakness of the socialwill" will arise precisely because it is opportunistically rational for any individual to depart from thecollectively agreed rules and procedures.

Moreover, in the setting with which CPE is concerned, there is no external technologyavailable that is totally effective or not excessively costly. The tools of enforcement and maintenancemust themselves be socially constructed. Human beings are not bound by nature to pursue rules:they are endowed with the capacity to deviate from rules if it is profitable to do so. Accordingly, wemust search out rules which so order individuals' behavior that it is individually profitable for mostpeople to keep and enforce those rules most of the time. The gains from violation should not be toogreat. The analysis of the kind of rules and the associated institutional apparatus that exhibit theseproperties represents a centerpiece of constitutional political economy as an area of inquiry.

As far as dynamic choice theory in the strict sense is concerned, mention must certainly bemade of the promising and in-depth analysis of the problem of dynamic consistency offered inMcClennen (1990a). McClennen develops his argument in the context of a critical examination ofthe principles that constitute the cornerstone of the modern theory of expected utility and subjectiveprobability: the weak ordering and the independence principles. McClennen argues for an alternativeto the myopic and sophisticated approaches to the problem of dynamic consistency: the theory ofresolute choice. The resolute chooser achieves dynamic consistency by regimenting ex post choiceto his ex ante evaluation of plans, thus achieving a "cooperative arrangement" between his presentself and his relevant future selves that satisfies the principle of intrapersonal optimality. Technicallyspeaking, resolute choice characterizes a commitment to dynamic consistency (DC) and normal-form/extensive-form coincidence (NEC) at the expense of separability (SEP). Reference should alsobe made to McClennen (1993).

The problem of time inconsistency is addressed formally in Klein (1990).


B. The Theoretical Foundations of Constitutional Political Economy

3. Constitutional and Sub-Constitutional Choice

One solution to the problem of defining "Constitutional Political Economy" would consist ofcharacterizing it simply as "the economic analysis of constitutional law" (see Backhaus, 1995). Theexamination of real-world constitutions using the perspective of modern constitutional politicaleconomy is certainly an interesting exercise and can provide a kind of test for the usefulness of theCPE approach. In addition to Backhaus (1995), reference should be made to several case studies.Holcombe (1991) analyzes the role of constitutional rules as constraints on government using threeUnited States constitutions: the Articles of Confederation (1781), the Constitution of the UnitedStates and the Confederate Constitution.Geoffrey Brennan and Jose Casas Pardo (1991) examinethe Spanish Constitution (1978). Sobel (1994) analyzes the evolution of two international constitutions: the League of Nations Covenant and the United Nations Charter. However, the aforesaiddefinitional strategy may tend to be somewhat misleading. The use of the term "constitutional" in theself-description of the subdiscipline is largely metaphorical.

CPE as a scientific subdiscipline is characterized by a particular kind of orientation in socialanalysis. Whereas orthodox economic analysis attempts to explain the choices of economic agents,their interactions with one another, and the results of these interactions, within the existing legal-institutional-constitutional structure of the polity, constitutional economic analysis attempts to explainthe working properties of alternative sets of legal-institutional- constitutional rules that constrain thechoices and activities of economic and political agents. The emphasis is on the rules that define theframework within which the ordinary choices of economic and political agents are made. Thus, CPEinvolves a "higher" level of inquiry than orthodox economics. CPE examines the choice of constraintsas opposed to the choice within constraints.

A preliminary example can be drawn from the theory of "market failure". We know that undersome conditions, and given the legal order of the protective state (the protection of property and theenforcement of contracts), "markets fail" when evaluated against idealized "efficiency" criteria. But inexamining allocative institutions, the economist should ask "As compared to what?" (Goetz 1991, p.10). We know today that "politics fails" when evaluated by the same criteria. The analysis andcomparison of the working properties of underlying sets of rules or constraints constitutes thedomain of Constitutional Economics.

A market is always a system of social interaction characterized by a specific institutionalframework, that is, by a set of rules defining certain restrictions on the behaviour of the marketparticipants. "Market failure" arguments sometimes tend to ignore that the rules upon which a marketis based may well be variable and that an adjustment in these rules is possibly a better way to dealwith alleged shortcomings than to replace market forces by a political mechanism.

When it is said that the rules upon which a market is based may well be variable, this shouldnot be misunderstood. It means that the rules can be varied at the level of constitutional choice. Atthe level of sub-constitutional (or post-constitutional) choice, the rules are parameters: they are itemsthat single economic entities cannot adjust and, indeed, must adjust to. Coase's (1960) tradableproperty rights are not really rules as the constitutional economist defines them. Coase's tale wasabout trading defined rights, about private rearrangements of rights within a given legal structure,not about redefining the rights that the market participants hold. We will take a closer look at Coase's contribution in the next section.

Elementary to any constitutional analysis is therefore the explicit recognition of a notion ofhierarchy. Any constitutional analysis will distinguish between at least two levels of choice - constitutional choice and sub-constitutional (or non-constitutional) choice - and correspondingly alsobetween constitutional and sub-constitutional preferences. Constitutional choices are choices amongalternative rules (constraints). Sub-constitutional choices are among alternative strategies availablewithin rules (constraints), such as ordinary market choices.

4. Methodological Individualism

Only individuals choose and act. CPE is informed by an explicit methodological individualism(Buchanan, 1990, p.13). Whatever phenomena at the social aggregate level we seek to explain, weought to show how they result from the actions and interactions of individual human beings who,separately and jointly, pursue their interests as they see them, based on their own understanding ofthe world around them.

(Vanberg, 1994, p.1). An aggregative result that is observed but which cannot, somehow, befactored down and explained by the choices of individuals stands as a challenge to the scholar ratherthan as some demonstration of non-individualistic organic unity.

5. Homo Economicus

Orthodox public choice models usually contain the postulate of homo economicus: they go beyondthe logical presuppositions of individualism to incorporate non-tautological models of individual utilitymaximization. Individuals are assumed to seek their own interests, which are defined so as to retainoperational content. It is increasingly recognized, however, that at least a part of the traditionalpublic choice emphasis has been wrongly placed. Thus the emphasis is shifted away from themotivational postulates for political actors to the incentive structures of politics. In Buchanan (1993a,p. 69) it is argued that the seminal Alchian (1950) analysis of the market's analogue to evolutionaryselection can be extended to politics in relatively straightforward fashion, the difference between thetwo evolutionary models lying in the compatibility with overall efficiency. The structure of the politicsin which politicians act requires them to act contrary to public interests if they are to survive at all.For the constitutional economist the relevant question then becomes: "How Can Constitutions BeDesigned So That Politicians Who Seek To Serve "Public Interest" Can Survive and Prosper?"(Buchanan 1993b).

6. Normative Individualism

The whole exercise of CPE is ultimately aimed at offering guidance to those who participate in thediscussion of constitutional change. In other words, constitutional economics is meant to offer apotential for normative advice in constitutional matters and to provide a normative framework forcomparative institutional analysis. As a normative enterprise, CPE is informed by normative individualism: the presumption that the evaluations of the persons involved, their interests and values,provide the relevant criterion against which the merits of alternative sets of rules are to be judged.

7. Excursion: The Wicksellian Ancestry

The distinguishing feature of the Buchanan and Tullock (1962) approach to the study of politicalinstitutions from a normative viewpoint was to treat the political process by which individuals advance their interests as one of exchange. In adding this second element - "politics as exchange" - to theutility-maximizing models for individual choice behavior in politics, they were directly influenced bythe great work of Knut Wicksell.

CPE could be characterized as "Wicksellian" political economy. Wicksell's influence isdiscussed in (Wagner 1988). In his basic work on fiscal theory Wicksell (1896) called attention tothe significance of the rules within which choices are made by political agents, and he recognized thatefforts at reform must be directed toward changes in the rules for making decisions rather thantoward modifying expected results through influence on the behaviour of the actors.

In order to take these steps, Wicksell needed some criterion by which the possible efficacy ofa proposed change in rules could be judged. He introduced the now-familiar (near to-) unanimity orconsensus test. Thus for Wicksell "the consent of the governed" was the point of departure for theevaluation of government activities.

This "Wicksellian" idea has had considerable influence on Buchanan's approach. According toBuchanan, politics must be understood in terms of the model of market exchange. Thus, the politicalproces is conceptualized as one of mutually beneficial exchange. It is for this reason that he is drawnto unanimity as a collective decision rule. Since the choice among rules is more a social choice thanan exchange, the form of voluntary exchange is political consent. Through the emphasis on "consent"or "agreement" as a normative yardstick, the research program of CPE became closely related tothe contractarian tradition in political philosophy. As Buchanan sees it, contractarian political institutions typically exhibit three attributes. Central to the contractarian vision of the political process is theplace of the individual. Individuals' own - and necessarily subjective - evaluations, their interests andvalues constitute the relevant benchmark against which the efficiency or desirability of alternativerule-regimes or institutions are to be judged. Contractarianism complies with this criterion byaccording each individual equal treatment at the constitutional stage. The unanimity rule serves toprotect the individuals' rights and thereby ensures that those rules and institutions that becomeimbedded in the constitution will also treat individuals equally and impartially. Second, there is thefundamental distinction between actions taken within the constitutional rules, and changes in the rulesthemselves. The latter are to occur only at the constitutional stage and ideally are made using theunanimity rule. The image of political activity as a two-stage process, first developed in The Calculusof Consent, has recurred in many of Buchanan's later writings as a sort of normative benchmark oryardstick by which to measure the quality of a community's political institutions. Third, actions takenin the second stage of the political process should be effectively constrained by the rules written inthe first, constitutional stage, and this is true not only for the individual citizen, but also for the electedrepresentatives, and the bureaucrats and jurists who administer the system.

Recapitulating and summarizing, we can say that the two most important aspects of Buchanan's position are his emphasis on "rules of the game" and his analysis of efficiency as involvingconsent. At the most fundamental level of constitutional choice, consent serves as the basis of justification. It provides the ultimate criterion of efficiency. Unlike other economists who have emphasizedeither the efficiency or rationality of rules, Buchanan is concerned exclusively with whether or notpeople consent to them.

It should be noted that Buchanan and traditional economic analysts develop the relationshipbetween autonomy and efficiency in exactly opposite ways (Coleman 1990, p. 141). Traditionaleconomists believe that efficiency can be defined as a property of social states independent of theprocess of voluntary exchange. For example, the perfectly competitive market is efficient, but theoutcome of the prisoner's dilemma is not. And given the logic of the relevant concepts - especiallyPareto superiority - it follows logically that people would consent to efficient rules. Consent followsfrom efficiency. Buchanan puts the matter exactly the opposite way. What people consent to isefficient. Efficiency follows from consent.

In contrast with Paretian "optimum resource allocation", a situation of "Wicksellian efficiency"will be characterized by the fact that citizens are satisfied that the existing system of rules, institutionsand policies of their society is free from improper coercion (Wiseman, 1990, p. 110).

The Wicksellian criterion of social efficiency focuses on subjective choice processes, inmarked contrast to the Paretion optimality condition of neoclassical welfare economics, whichpermits an external observer to use individual utility as an objective measure of welfare. Socialefficiency is too complex a notion to be reduced to a set of technical propositions concerningresource-use. Efficiency is not a property of social states that could be specified or definedindependently of the actions of individuals and the process of voluntary exchange.

The limitations of conventional Pareto criteria in assessing efficiency are also discussed by De Alessi(1992).

However, Wicksell did not move beyond the development of criteria for evaluating policyalternatives one at a time.

Buchanan and Tullock (1962) operationalized Wicksell's (1896) insights and extended theapplicability of the unanimity or consensus criterion from the level of particular proposals to the levelof rules - to constitutional rather than post-constitutional or in-period choices.

For Buchanan and Tullock (1962, Chapter 6) constitutional design was a matter ofdetermining which voting rule or choice mechanism would be specified by the constitution for eachstate activity. The best public decision rule for each activity was the one that minimizedinterdependence costs. It was specified that the representative individual perceived interdependencecosts for an activity as the sum of the anticipated external costs levied on that individual if not part ofthe decision set, and the anticipated decision-making costs experienced by the individual if part ofthe decision set. External costs arise because some individuals cash in the benefits of collectivedecisions but shift the costs to other individuals. The group forces an individual to contribute tocollective action that is not wanted by that individual (at that price). From the point of view of theindividual in question, external costs are the result of wrong decisions. The higher the percentagerequired for a group decision, the lower the chance of wrong decisions being made, so that thecorresponding curve will show a declining trend. Decision-making costs are the individual investmentof time and energy in the process of negotiation, expressed in money value. The closer therequirement of unanimity comes to being met, the higher the decision costs will be because, amongother reasons, strategic behaviour of individuals becomes more profitable. The corresponding curvetherefore has a rising trend. The sum of both external costs and decision costs was shown to have aunique minimum somewhere between the extremes of individual rule and unanimity rule, the exactposition depending on relative external and decision costs.

The shift of the Wicksellian criterion to the constitutional stage of choice has some remarkableconsequences. It becomes conceivable to allow for the possibility that preferred and agreed-ondecision rules might embody sizable departures from the unanimity limit, including simple majorityvoting in some cases and even less than majority voting in others (Buchanan 1987, p.135). Theconstitutional calculus suggests that both the costs of reaching decisions under different rules and theimportance of the decisions are relevant. Since both of these elements vary, the preferred rule willnot be uniform over all ranges of potential political action. The in-period Wicksellian criterion mayremain valid as a measure of the particularized efficiency of the single decision examined. But the in-period violation of the criterion does not imply the inefficiency of the rule as long as the latter is itselfselected by a constitutional rule of unanimity.

As a consequence, while it was recognized that unanimity and not majority rule is the pivot ofconstitutional democracy, it was equally demonstrated that "at best, majority rule should be viewedas one among many practical expedients made necessary by the costs of securing widespreadagreement on political issues when individual and group interests diverge" (Buchanan and Tullock1962, p.96).

The appropriate degree of inclusiveness of the collective decision-making rule - e.g. qualifiedmajority rule - as an instrument to cope with perverse forms of uncertainty about the incidence ofcollective decisions is discussed in Pinto Barbosa (1994).

8. The Rent-Seeking Trap

It has become common to model the choice situation at the constitutional as well as the post-constitutional stage with potentially conflicting interests between rational persons as a classic Prisoner's Dilemma (Wagner and Gwartney 1988, p. 32; Buchanan 1993b, p. 2). The Prisoners'Dilemma game depicts a situation in which private interests and the search for individual gain, whengeneralized, become the source of mutually harmful results. In other words, private interests cannotbe generalized without losses. But what can be generalized (moral codes) does not obey privatemotivations. Conflicting interests are clearly involved, since everybody wants to be the only defector.

Classic Prisoner's Dilemma
B
CD
AC3,31,4
D4,12,2

In "generalized prisoner's dilemma situations", i.e. social constellations under which individuals, inseparate and rational pursuit of their own interests, unintentionally but systematically contribute to anoverall outcome that is undesirable for all of them (or in any case less desirable than some alternativeoutcome that could be realized by concerted, organized action) there is a possible potential formutual gains by collective action (collective organization).

In this way the constitution is essentially a contract intended to secure mutual gains from socialcooperation and to avoid the dominant defective strategy in the Prisoner's Dilemma game whichleads to a socially inefficient Nash equilibrium solution. Since the mutual gains from socialcooperation constitute a public good, the maintenance of the constitutional contract gives rise to aproblem that will not resolve itself naturally.

Even when it is supposed that agreement on appropriate rules can be achieved at the stage ofconstitutional contract formation, it should be recognized that individuals and interest groupsinevitably will attempt to engage in post-contractual opportunism (problem of constitutional maintenance). Therefore the agreement, once achieved, must be enforceable. This opportunism takesseveral forms. First, each individual may have an incentive to defect from the cooperative agreementafter it has been concluded (compliance or unilateral defection problem). Whether or not it is rationalfor persons to comply with rules that they constitutionally may agree on is a matter of contingent,factual circumstances. It depends on whether or not the constraints that persons face after theagreement, i.e. post-constitutionally, make it rational for them to comply with previously agreed-onrules. As Vanberg has pointed out repeatedly, their constitutional interests and their complianceinterests are not necessarily in congruence (Vanberg 1994, passim, e.g. p. 21-23).

A second form of post-contractual opportunism consists of rent seeking and special interestplundering, which ultimately reduce the value of post-contractual cooperation and undermine theconstitution itself. Groups of individuals have an incentive to seek and capture the instruments ofstate power and to use them as vehicles to enrich themselves in ways that are unattainable for privatecitizens.

Rent-seeking is a term used by economists to describe actions taken by individuals andgroups to alter public policy in order to gain personal advantage at the expense of others.

The incentive to engage in rent-seeking activities is directly proportional to the ease with which thepolitical process can be used for personal (or interest group) gain at the expense of others. In otherwords, distributional politics is viable and tends to become dominant to the extent that differentialtreatment is constitutionally permissible (Buchanan 1993b, p.6).

Tullock (1959) had already shown that under any voting system which requires less than unanimousapproval to implement policies, majority coalitions of interest groups will seek to obtain publicprovision of special interest projects.

A few years later Tullock (1967) independently published his innovative ideas on what cameto be called rent-seeking, which he argued entailed social costs. The latter were called "rent-seekingcosts" or, by some, "Tullock Costs". Tullock Costs have been re-analyzed recently by Spindler(1990).

The dominant strategy for any organized interest group in a majoritarian polity is to lobby forpolicies which provide large benefits to its members and disperse the costs over everyone else. Thistendency exists even in liberal democracies. Through implicit vote-trading, a coalition of interestgroups, comprising a bare majority of voters, can get all or at least most of their favoured projectsapproved for public provision. Under certain conditions, the total costs of these projects can exceedtheir total benefits, while cost-spreading through the "fisc" induces a rational ignorance of this process on the part of the disadvantaged majority. On the other hand, the asymmetric distribution ofcooperative benefits leads subgroups of the collective to invest energy in the struggle for access tothe government's coercive power. But the effort may turn out to cost more than it is worth and theend result will be that the collective's loss purchases the subgroup's gain (Schmidtz 1991, p.91).

Buchanan and Lee (1991) demonstrate that the gains from politically generated restrictions onmarkets, even to organized producing interests, are more apparent than real. The analysisdemonstrates that under plausibly realistic assumptions concerning coalition sizes, excess burdens,organizational costs, and rent-seeking outlay, a genuine utility maximizing calculus may dictatesupport for constitutional prohibition of all market restrictions, by all members of the polity, includingthose producer interests that might be considered to be potentially identifiable beneficiaries ofcartelization.

Principal-agent theory has been used to examine the rent-seeking problem (Anderson andHill, 1986; Merville and Osborne, 1990). The principal, also the citizen, grants the agent (thegovernment) the power of coercion. In exchange, the agent supplies the principal with public goods.Since the capitalized value of public assets is owned collectively, public-good outputs of thegovernment are like communal resources with widely diffused benefits. It soon becomes evident tovote-maximizing agents or legislators that they can maximize their political support by significantlyreducing the provision of public goods to the population at large in favor of greater transfers tointerest groups. These transfers are financed by general tax collections and provide concentratedbenefits to designated groups. Such collusion between agents and special interest groups willinvariably lead to the development of a Leviathan state.

Merville and Osborne (1990) use agency theory to demonstrate formally that, in majority-rulepolitical systems, coalitions of minority factions will induce politicians to systematically break theconstitutional contract in order to supply special interest projects. Unlike contracts in privatemarkets, political contracts are much more susceptible to this kind of opportunism.

Is the rent-seeking trap inescapable? A serious consideration of this question will take us along way to the understanding of Constitutional Political Economy.

By far the most important problem with respect to ensuring the self-enforcing character of aconstitutional contract is that it must successfully constrain the power of the Leviathan state itself.Whereas Brennan and Buchanan (1980) endow Leviathan with the objective of revenue maximization, La Manna and Slomp (1994) argue that Hobbes's political construct envisages asovereign-principal who devises rules and incentives to induce his subjects-agents to contribute tohis own preservation and glory. Leviathan is a glory-seeker instead of a revenue-maximizer.

Generally speaking substantive constraints on government have been dismissed as ineffectiveprecisely because of the wide latitude they allow for reinterpretation. Wagner and Gwartney (1988,p. 44-49) make a strong case for procedural rules designed to uphold decentralization ofgovernmental powers and to prevent the formation of legislative coalitions. Procedural rules willprovide more effective mechanisms for self-enforcement than will substantive restraints ongovernment. In their view, the weakness of substantive restraints derives from the politicization of theSupreme Court and the ease with which legislatures can find alternative ways to implement any givenpolicy. They propose procedural rules requiring larger legislative majorities for legislative action athigher levels of government, thereby diffusing the power of the state to regional and local governments.

Several other "solutions" have been proposed in the literature.

9. Judicial Independence

Does independence of the judiciary serve the long-term public good? The traditional view of thepurpose of judicial independence has been attacked as naive by law-and-economics and publicchoice scholars. Unlike many legal contracts, it is argued, there is no third-party enforcer, external tothe contract, who can ensure that defectors are caught and forced to comply with the terms of theagreement. Though many countries have a nominally independent Supreme Court whose purpose isto enforce the constitution, the Supreme Court can only do this imperfectly in most cases, becausethe judges themselves are not totally immune from political pressure by groups wishing to subvert theoriginal intent of the constitution. Thus, given the unreliability of third-party enforcement, and giventhe strong individual incentives to defect from social cooperation, the constitutional contract shouldsomehow be self-enforcing if it is to be maintained.

The interest-group theory first advanced by Landes-Posner (1975) makes the independentjudiciary an integral part of the system of rent-seeking engineered by Congress. However, thedebate goes on. A very detailed criticism of the Landes-Posner theory is contained in Boudreauxand Pritchard (1994). They argue that the Landes-Posner theory is seriously deficient and concludethat the United States federal judiciary is truly independent of Congress and the President, and thatthis independence was designed by the Constitution's framers as a means of furthering soundgovernment.

Blankart (1994) compares the legal rules for private clubs with the constitutions ofrepresentative governments. A nearly perfect laboratory case for a club government can be found inthe example of Switzerland. The Swiss do not have a constitutional court, but have developedinstead a system of popular voting rights serving as a substitute for a judicial review by aconstitutional court. Though this system does not work perfectly, it has relative advantages incomparison to constitutional courts, which often tend to become political decisionmakers therebycircumventing the control of citizens-as-principals.

Moser (1994) carefully analyzes the contribution of the Swiss and the U.S. Constitutions toprotect economic liberties, and compares the different strategies that both constitutions rely on toachieve this goal. It is argued that the substantial constitutional changes that did occur in bothcountries followed strikingly similar patterns: the constitutional protection of economic liberties waseroded in both countries, especially as far as federal legislation is concerned, due to changes in theinterpretation of the constitution through the courts, or by formal amendment.

Tucker (1992) looks at the impact and the judicial philosophy of the now dominatingConservative group of justices on the Supreme Court.

Rowley (1992) examines the erosion of the economic liberties of U.S. citizens with specialreference to the takings-clause provisions of the Fifth Amendment. It is noticed that the Courtchanged direction during the late 1980s as justices appointed by Presidents Reagan and Bush gainedascendancy.

10. A Rule of Law in Politics

According to Buchanan (1993b) the direction of constitutional reform is obvious. If, somehow, thepotential for differential treatment is reduced, so will be the inducement to rent-seeking behavior.The off-diagonal solutions should simply be made impossible to achieve by the introduction of somerule or norm that prevents participants from acting or being acted upon differently, one from theother.

If the off-diagonal attractors are eliminated, then the players operate with the followingreduced matrix:

B
CD
AC3,3X
DX2,2

Thus the constitutional reform measure modifies the original Prisoner's Dilemma game into a reducedsetting in which each player, as a member of a political coalition, knows that any choice of an actionor strategy must involve the same treatment of all players or constituencies (Buchanan 1993b, p. 3).

If and to the extent that differential treatment is replaced with equal treatment, or with theprinciple of generality in politics - analogous to that present in an idealized version of the rule of law -mutual exploitation will be avoided and politicians who seek to serve the "public interest" will surviveand prosper (Buchanan 1993b, p. 6).

Therefore it seems at least conceivable that rational persons, at the stage of entering into theagreement, may recognize the "rent-seeking trap" and engage in concerted efforts to escape.

However, in the hypothetical matrix construction above, the interaction was in fact assumed tooccur in a state of nature, with each person holding equal prospects for membership in the majorityand minority coalitions. This means that membership was assumed to be symmetrical among allparticipants. But this assumption may turn out to be too heroic with respect to real-world settings.

The prospects may differ among persons and groups of persons so as to create divergences ininterests which may become a source of disagreement. Thus the question remains whether it ispossible to modify the constitutional choice setting so as to reconcile such possible divergences. Itappears that, at least from the perspective of potentially-conflicting interests among constituencies,the general problem of constitutional efficiency and survivability doesn't resolve itself naturally.

11. Veil of Uncertainty and/or Ignorance Versus the Availability of Exit Options

Is it possible to specify the conditons under which constitutional agreement may be facilitated in real,non-hypothetical choice situations? Is it possible to modify the constitutional choice setting so as toreconcile divergences in interests?

In this respect, two lines of reasoning have been pursued in the contractarian and neo-contractarian literature.

The first line of argument focuses attention on the need for a "veil of uncertainty and/orignorance" as a precondition for an efficient constitution.

Buchanan and Tullock (1962) had to present a convincing positive argument that unanimous consentat the constitutional level was possible at all. How can agreement be achieved on rules amongpersons with potentially conflicting constitutional interests?

Buchanan and Tullock's (1962) characteristic way of approaching this issue consists ofemphasizing the uncertainty confronting all individuals taking part in constitutional deliberations. Theexistence of "a veil of uncertainty" induces individual participants in a constitutional process to preferrules that do not systematically favor any particular subset of citizens.

The proposed remedy involves the introduction of some means of insuring a person's inability toforesee reliably their future particularized interests, as these may be affected by different rules,thereby inducing persons to make constitutional choices on some assessment of the general workingproperties of alternative rules, and divorced from particularized interests. Thus, agreement isfacilitated by whatever increases a person's uncertainty about the particular effects that alternativerules can be expected to have on them. In fact the assumption of a "veil of uncertainty" was alsohidden in Buchanan (1993b), discussed above.

Buchanan's approach has affinities with John Rawls's (1971) construction, who utilizes the veilof ignorance along with the fairness criterion to derive principles of justice that emerge from aconceptual agreement at a stage prior to the selection of a political constitution. Thus in Rawls'sconstruction the prospect of agreement is secured by defining certain "ideal" conditions under whichconstitutional choices are hypothetically made. The choosers are assumed to be placed behind a"veil of ignorance", that makes it impossible for them to know anything specific about how they willbe personally affected by alternative rules. Ignorant about their prospective specific interests inparticular outcomes, they are induced to judge rules "impartially". Potential conflict in constitutionalinterests is not eliminated, but the veil of ignorance transforms potential interpersonal conflicts intointrapersonal ones (Vanberg 1994,, p. 170).

However, the constitutionalist notion of a veil of uncertainty is not very operational. It is notclear how genuine uncertainty could be achieved in real-world constitution formation.

Moreover, in certain parts of the rent-seeking literature there is a certain tendency to suggest thatconflicts of interest are no less characteristic for choices among rules at the constitutional stage thanfor choices within rules and that therefore the idea of some genuine constitutional agreement is amere illusion when placed in a real world context. This view seems to be espoused by e.g. Sutter(1995).

Therefore, it has been argued that the availability of exit options can ensure a competitivesetting for participants in constitutional deliberations and can even substitute for a veil of uncertainty.This condition for efficiency can be given operational substance in processes of real-world constitution formation Lowenberg and Yu (1992).

In order to produce an efficient social contract or constitution, deliberations must be carriedout in a competitive "constitutional environment". This condition is satisfied if an exit option exists foreach contracting party. As will be argued later on, this conclusion is quite consistent with the Wicksell-Buchanan-Vanberg contractarian consensus test. Only in a competitive setting does unanimousagreement acquire operational substance (normative content).

The notion of exit has thus been invoked to give more operational substance to the concept ofvoluntary agreement. It is derived from Albert Hirschman's (1970) classic distinction between exitand voice. Exit (and entry) is an important means by which individuals are able to express theirpreferences, and is precisely the method through which preferences are revealed in competitivemarkets for private goods.

An exit option introduces an element of market-like competition into the contracting process,which limits the ability of any party to wield power over another party. It is not even necessary thatthis exit option be exercised, since merely the threat of its use should be enough to restrain rentappropriation. The scope for opportunism is effectively constrained by competition, actual orpotential.

Furthermore, it is argued that exit options can help to solve the constitutional maintenanceproblem by establishing a competitive environment for post-constitutional political and marketexchange (Lowenberg and Yu 1992).

12. Federalism, Once Again

The strengthening of regional and local government relative to national government has beenadvocated by many scholars as an effective way to restrain the growth of legislative redistribution.The existence of separate jurisdictions with some protected powers within a constitutional federationinhibits coercive behavior by the government. Such an arrangement facilitates migration at low costbetween federal sub-regions and thereby enhances competition between these sub-regions. Theresulting mobility forces competitive governmental units to supply public goods in preferredquantities and to "price" them broadly in line with relative marginal evaluations.

The foregoing is related to the Tiebout effect (Tiebout 1956), which says that individuals willsort themselves across communities in accordance with their preferences for the packages of taxesand public goods provided in each community. The ability of the owners of property rights to moveto competing jurisdictions protects them from potential rent appropriation by a coercive government.

Therefore, it is argued, a federalist constitution can effectively constrain the power of the state.In a federal system, citizens seeking political relief can vote with their feet.

The preceding paragraphs suggest that post-contractual exit opportunities might be characterized interms of Tiebout competition between different political groupings. If the constitution permitsmobility and political plurality, it will help establish and maintain a competitive political postconstitutional environment.

The unifying theme in the preceding approach to constitution formation and maintenance isgenerally that of exit (or entry).


C. Outline of a Reconstruction of the Coase Theorem from a Subjectivist-ContractarianPerspective

13. Buchanan on the Irrelevance of Transaction Costs

One way to interpret the Coase (1960) analysis consists of seeing it as a contribution to theexternality literature, though Coase would presumably object to any use of the term "externality". Putin externality language, Coase was essentially arguing that all Pareto-relevant externalities wouldtend to be eliminated in the process of free exchange-contract among affected parties (Buchananand Stubblebine 1962).

According to Buchanan (1984) Coase didn't like the Buchanan-Stubblebine externality paperand Buchanan conjectures that Coase's objection may have stemmed from a certain "ambiguity inperspective" (Buchanan 1984, p.11, footnote 6).

The "ambiguity in perspective" Buchanan refers to is related to the fact that there are twoprofoundly different conceptions of competition and the competitive process. In the objectivistperspective, there is an efficient allocation of resources independently of any process through whichit is generated. From this supposition, it follows that institutional arrangements can be directlyevaluated in terms of their relative success or failure in attaining the desired pattern of resource use.Normative argument in support of competitive institutions emerges, in this perspective, only becausesuch institutions tend to be relatively superior "devices", "instruments", or "mechanisms" in generatingindependently derived results. Where competitive institutions do not seem to exist, as defined bysome independently derived structural criteria (e.g., the number of firms in an industry, concentrationratios, etc.), there emerges a normative argument for direct intervention with the voluntary exchangeprocess as a means of moving results toward the externally derived allocative norm or ideal.

In the subjectivist-contractarian perspective, "efficiency" cannot be said to exist except asdetermined by the process through which results are generated, and criteria for evaluating patterns ofresults must be applied only to processes. In this perspective, voluntary exchanges among persons,within a competitive constraints structure, generate efficient resource usage, which is determined onlyas the exchanges are made. Competitive institutions, in this perspective, are not instruments to beused to generate efficiency. They are, instead, possible structures, possible rules or sets of rules, thatmay emerge from generalized agreement. The role of the political order, of law, or government, is tofacilitate agreement on institutional arrangements, and to police rights assigned under suchagreements.

In Buchanan (1984) it is argued that Coase, despite his own earlier contribution to what canbe called the subjectivist theory of opportunity cost (see Buchanan 1969, p. 26-29), Coase (1960)presented his argument - through a series of hypothetical and historical examples - largely in terms ofpresumably objectively-measurable and independently-determined harm and benefit relationships. Itis suggested that Coase was, indeed, applying outcome criteria for allocative efficiency to results ofthe exchange process rather than limiting his attention to the process itself. Therefore the wholeanalysis becomes vulnerable to the critique mounted by Cooter (1982) and others who suggest thatthe Coase theorem fails in non-competitive settings. Small-number bargaining settings will necessarilyfail to guarantee efficiency due to the presence of incentives for strategic behavior, independently ofany communication-information failures. In large-number settings, all parties may have free-ridermotivations. In both of the latter cases, interpreted in terms of satisfying outcome criteria forefficiency, free exchange and contract among parties do not necessarily generate an allocation ofresources to their most highly valued uses. "Externalities" that are Pareto-relevant may remain in fulltrading equilibrium. Parties to potential exchanges who are rational maximizers of expected utilitiesmay fail to reach the presumed objectifiable Pareto efficiency frontier.

However, Buchanan contends that if the whole Coase analysis is interpreted in subjectivist-contractarian terms, the critique can be shown to be without substance.

Buchanan (1984) is an explicit attempt to re-interpret the Coase (1960) theorem alongconsistent subjectivist-contractarian (or, if preferred, Austrian-Wicksellian) lines.

If there is no objective criterion for resource use that can be applied to outcomes, as a means ofindirectly testing the efficacy of the exchange process, then as long as exchange remains open and aslong as force and fraud are not observed, that upon which agreement is reached is, by definition, thatwhich can be classified to be efficient. The Coase theorem thus seems to become a tautology. Howcould, in this construction, inefficiency conceivably emerge? Is that which is always necessarilyefficient?

Of course it is not. Already in Buchanan (1959) it was suggested that agreement is the onlyultimate test for efficiency, but that the test doesn't need to be confined in application to theallocative results or outcomes generated under explicitly existing or defined institutional-structuralrules. The agreement test for efficiency may be elevated or moved upward to the stage of institutionsor rules, as such.

The proper role for the normative political economist is that of discovering potential ruleschanges that might yield general benefits and then presenting these changes as hypotheses subject tothe Wicksellian contractual-consensus test. If, when presented a suggested change in rules, agreement among all potentially interacting parties is forthcoming, the hypothesis is corroborated. Thepreviously existing rule is proven to be inefficient. Agreement on a change in the rules within whichexchanges are allowed to take place is a signal that patterns of outcomes reached or predictedunder the previously-existing set of rules are less preferred or valued than the patterns expected tobe generated under the rule-as-changed. Hence, the new rule is deemed more efficient than the old.If disagreement emerges on the proposed rules change, the hypothesis is falsified. The existing rule isclassified as Pareto-efficient. And, given this institutional setting, any outcomes attained under freeand open exchange processes are to be classified as efficient.

Let's consider as an example the classic externality case from welfare economics, the setting inwhich ordinary economic activity within well-defined legal rights imposes noncompensated damageson a sufficiently large number of persons so as to insure failure of a bargained solution due to free-rider motivation. The "uncorrected" outcomes in this setting should still be classified as "efficient" aslong as all members of the relevant community remain free to make intervening offers and bids tothose traders whose activity is alleged to generate the spillover harms. The institutional structure maynot be efficient however. The political economist may hypothesize that general agreement can besecured on some change in institutional structure and that explicit political or governmental decisionrules may come to be accepted by all parties as being preferred to the decision rules of the market.Even though the outcomes reached may still be classified to be "efficient" - given the assignment ofrights, and given the institution of exchange - the institution of voluntary exchange, as ordinarilyunderstood, may not, in this case, be "efficient". This implication may sound somewhat paradoxicalbut for the subjectivist-contractarian it creates no difficulty since he doesn't acknowledge theuniqueness of the resource allocation that is properly classified to be efficient: it depends necessarilyon the institutional structure within which resource utilization-valuation decisions are made.

There is a second seeming paradox. That political-governmental decision rule upon whichagreement is reached, may not require consent of all parties to reach particular outcomes, eitherexplicitly or implicitly. The "efficient" decision rule may be such that specific outcomes need not meetthe consensus test. The analysis contained in Buchanan and Tullock (1962) , which is essentially ananalysis of the choice among political decision-making rules had highlighted the fact that the costs ofreaching agreement increase significantly as the size of the group required to agree is expanded.However, this situation need not imply that the unanimity principle for constitutional changes isinapplicable. The members of the group may be observed to agree on changes in the rules thatproduce results which, when classified by the orthodox Pareto criterion, are clearly "nonoptimal". Inother words, "optimal rules" may generate results that may be classified as nonoptimal.

With majority rule, or any less than unanimity rule, for political-governmental decisions, thedecision structure can itself be "efficient" while at the same time the particular outcomes attainedunder the structure are to be presumed inefficient, at least in some situations, for those who aredirectly coerced. Buchanan believes that to introduce "transactions costs" as a barrier to theattainment of efficiency confuses rather than clarifies the complex set of issues involved. The severalso-called "transaction costs" barriers to "efficiency" in resource allocation - information andcommunication constraints, free rider constraints, strategic behavior...- can be more appropriatelyanalyzed in the context of hypotheses about institutional reform (Buchanan 1984, p. 23).


D. Refinements and Applications: A Survey of Contributions

14. Foundational Explorations

One of the major discussions in contemporary institutional economics concerns the relation betweenrationality and rule- following. The problem is akin to what philosophers will recognize as anunresolved issue in the history of ethics. As several authors have recognized, the problem was posedat the very beginning of the history of philosophizing about the justification of moral rules, in Plato'sRepublic (McClennen 1990a, p.262). In Plato (1992, p.34-35, Book II, sec.359) Glauconchallenged Socrates to prove that being just is rational even if we suppose that the material rewardsof being just accrue exclusively to the unjust. The story of the ring of Gyges seems to drive a wedgebetween the concept of rational choice and that of choice that respects the usual kinds of moralconstraints. In the language of public goods theory, the challenge is to show that when the materialpayoff of being just is a public good - enjoyed by everyone but its producers - there is neverthelessa hidden private benefit that makes it rational to produce this public good (Schmidtz 1991,p.165).

There appears to be an essential tension between the notion of rational, self-interestedbehavior - as postulated in economics - and the notion of a viable moral order. In the relevantliterature this problem is referred to as the "Hobbesian problem of social order" or simply the"Hobbesian problem".

Vanberg (1993 and 1994) presents an interpretation of the rational choice and rule-followingperspectives which allow their consistent integration into a common theoretical framework. Hayekhad already argued that man is "as much a rule-following animal as a purpose-seeking one" (Hayek1973, p.11). Generally speaking, Vanberg's program can be characterized as a systematic andtransdisciplinary integration of J.M. Buchanan's contractarian perspective with F.A. Hayek'sevolutionary approach, making use of insights from a wide range of fields. The contractarian elementin Hayek's thought has also been identified by Sugden (1993a). The contrast between Hayek's andBuchanan's systems of ideas is highlighted by, e.g., Gray (1990).

Vanberg (1993, p.187) distinguishes maximizing and adaptive forms of rationality and arguesthat an evolutionary perspective using the concept of adaptive rationality "may help to systematicallyaccount for observed behavioral tendencies which appear to defy explanation in standard rationalityterms". This argument is related to Hayek's notion that rule- following is a response to humankind'simperfect understanding of their environment. Rules are not chosen as a result of a full rationalappraisal but can best be seen as more or less reasonable adaptations to a complex world and notnecessarily as optimal in their functioning.

On one occasion, Vanberg argues that rule-following behavior, while relatively unresponsiveto variations in particular situational circumstances, "is quite compatible with choice and "calculation"at the rule-level" (Vanberg 1994, p.16-17), thus suggesting that the problem can be thought of interms of a rational maximizing choice on a metalevel. However, if maximizing itself is subject to, say,information costs, the choice of rule cannot be seen in optimizing terms. There seems to be noalternative to separating the concept of rationality from the notion of optimization. In this way Simondistinguished procedural from substantive rationality (Simon 1976). Simon argued that the orthodoxneoclassical concept of rationality as maximizing implies an unrealistic view of man's cognitiveabilities, of his access to information and his computational capacities. The alternative concept ofrationality which Simon proposes, namely that of bounded, procedural or adaptive rationality, is inessence a theory of behavioural learning, a theory which seeks to understand a person's currentbehaviour in terms of his or her past experience. Simon's theory of human decision making views anactor's choice-behaviour as based on a repertoire of behavioural patterns, routines or programmes.

An extension of the bounded rationality problem has been provided by Ronald Heiner (1983,1990, among others). Formal economics is a theory of perfect choice that assumes agents alwaysmake best decisions based on available information. The latter may itself be inaccurate orincomplete, but no further imperfection enters into the analysis about the agents' ability to decideoptimally. In a sequence of articles, Heiner has made an effort to develop a theory of imperfectchoice which provides an argument for why rational, but imperfect agents may profit from followingrules instead of attempting to maximize advantage on a case-by-case basis.

Heiner's argument is that there is often a gap between an agent's competence at problemsolving and the difficulty of the decision problem faced. Given such a "C-D gap" , which will tend toexist in complex decision problems, agents will be subject to unpredictable errors and mistakes inselecting the most preferred alternative. The extent of these errors possibly means that an agent willdo better by following a simple rule rather than by attempting to maximize in each case. Heiner'sanalysis implies that imperfect agents benefit from being governed by rules adapted only to recurrentsituations and from ignoring relevant, even costlessly available information. The Heiner (1990, p. 39-40) analysis also suggests a basic tradeoff between reaching initial agreement over constitutionalrules and the stability of future compliance to them once they are put into practical application. Thereis a basic tradeoff between ignorance and uncertainty that promote consensus over ex ante rules (i.e.before anyone has had any actual experience living under them), and the reliability of any suchadvance agreement in avoiding rules that turn out destabilizing ex post due to errors that are self-recognized through the very ongoing experience generated by following the rules.

Thus, maintaining allegiance to previously agreed social rules can be a far more difficultchallenge than reaching initial agreement about which rules to begin following - especially if the initialagreement was achieved under a veil of ignorance about the practical consequences of applyingrules to future conditions.

15. Contractarianism and Evolutionism

In the modern research programme of Constitutional Political Economy two strands of thought aresystematically interwoven: a subjectivist-contractarian strand, of Austrian-Wicksellian origin, on theone hand, and an evolutionistic strand, which essentially works out the implications that follow fromPopperian evolutionary epistemology for the issues of socio-economic-political organization.

For recent discussions of contractarianism, and apart from Buchanan's and Vanberg's owncontributions, reference is made to Binmore (1990) , Hardin (1990), Sugden (1990) and Mueller(1990). Jules Coleman (1990) contains a valuable comparison of Buchanan's form of contractarianism with that of the philosophers John Rawls and David Gauthier. Sugden (1993a) outlines aprocedural or contractarian formulation of rights. Gaus (1991) sketches an account of politicalauthority and democracy that depicts them as responses to our moral disagreements and our inabilityto rationally resolve them on their merits.

The constitutional contract is often interpreted as a device to overcome the hypothetical stateof anarchy (see, e.g., Buchanan, 1975). How can, in a pre-constitutional setting that lacks anyinstitutional forms, an unanimous agreement on the rules and the agency enforcing the rules beimagined to emerge? Witt (1992) conceptualizes the problem in game-theoretic terms and exploresthe logical basis of the dilemma that turns up in this context. While the protective agency has to beendowed with sufficiently powerful coercive means to prevent anyone breaking the social contract,this concentration of power may itself induce a violation by making the protective agency usurp itspower.

The implications of subjectivism are equally remarkable. Traditionally, the subjectivists parexcellence within economics were the Austrians. Vanberg (1994, Chap.13) has consistently workedout the implications of subjectivism for the theory of organized, collective action. The normativefocus is shifted from endstates or outcomes, as such, to the process through which these outcomesor endstates emerge. The relevant question becomes whether the process by which outcomes andendstates are brought about can reasonably be assumed to reflect the preferences of the individualsconcerned, as revealed in their actual choice behavior. Thus the approach is incompatible withcriteria that - as is true for Benthamite utilitarianism - are individualistic in the sense of measuring thegoodness of social matters in terms of individual utilities, but do so without reference to individuals'choices. It can be characterized as choice-individualism, as opposed to the utility-individualism thatunderlies the whole tradition of the concept of a social welfare function.

Vanberg clearly recognizes that the true problem with the agreement-criterion is not that it istoo demanding but, instead, that it has too little normative content. A criterion needs to be specifiedwhich allows one to distinguish between constraints that are judged to render the respectiveindividual choices involuntary, and those that do not. His analysis reaches the conclusion that aconsistent normative-individualist approach needs to rely on a combined and simultaneous application of a purely procedural, rule-oriented, as well as a substantive, avoidance/exit-cost criterion. Theavoidance/exit cost perspective arguably provides a more operational specification of thecontractarian norm than the notion of a hypothetical contract to which Buchanan (1975, 1977) aswell as Rawls (1971) appeal. The exit perspective is consistently followed by, e.g.Lowenberg andYu (1992) and Mbaku (1995).

The evolutionistic strand of thought in fact consists of a complex set of more or lessinterrelated theses some of which are more controversial than others. The least problematicalingredient is reflected in the idea, related to Hayek's "limits of reason"-insight, that, in the realm ofrules and institutions no less than in other areas, we can never know ex ante what the best solutionsto our problems will be, if alone - as Popper has pointed out in his critique of historicism - becausewe cannot know today what we will know tomorrow. In fact, we cannot know ex ante what ourfuture problems will be. Therefore, we need to rely at least to some extent on the explorativepotential of open-ended, competitive processes and on the kind of experience that accumulates intrial and error learning. But there is no reason to expect that what survives necessarily coincides withwhat is desirable in the sense of being responsive to the interests and preferences of the personsinvolved. It would seem entirely unfounded to expect an unqualified evolutionary process generallyto produce such favourable conditions. On the other hand, a recognition of "the limits of our reason"should not imply that we cannot say something about the kinds of conditions and process-characteristics that enhance responsiveness to the interests and preferences of the persons involved. Indeed,creating and maintaining such conditions has to be the primary task for deliberate constitutionaldesign. There is room for both evolutionary learning and constructive design, not only as compatible,but also as indispensible and complementary elements of an appropriate socio-economic-politicalorder. This insight leads Vanberg to develop the notion of "constitutionally-constrained evolution (orcompetition)", a combination of deliberate design and evolutionary learning: the design of aframework of meta-rules - the idea of a meta-constitution - within which efforts in constitutionalconstruction are subject to a kind of evolutionary competition that promises to make selections infavour of rules that serve the interests of the respective constituencies. The programme culminates ina theory of institutional competition among jurisdictions viewed as a knowledge-creating discoveryprocess (Vanberg and Kerber 1994; Vanberg 1994, p.284).

Institutional competition has been analyzed from a variety of perspectives. Wiseman (1990)argues that analysis of voice and exit dimensions of a fiscal constitution is a means of appraising theefficiency of social arrangements. Marlow (1992) argues that one's view toward the design of voiceand exit options is affected by one's perception of the appropriate size of government. It isrecognized that the design of voice and exit options in the fiscal constitution exerts a predictableinfluence on policy. Sinn (1992) analyzes competition among governments on the basis of a modelthat views countries as clubs.

Evolutionary themes are further explored in the following contributions. Parisi (1995) containsa sophisticated outline of a theory of spontaneous law. Wohlgemuth (1995) contrasts the neoclassical and the market-process conceptions of economic and political competition and develops analternative agenda for many fields of public choice. Gruner (1995) examines evolutionary stability ofsocial norms in a formal socioeconomic equilibrium model. The institutional evolution of the IcelandicCommonwealth (930-1264 AD) is discussed in Solvason (1993).

It has almost become a commonplace to state that game-theoretic notions and approachescapture essential elements of the evolutionary paradigm. Most of the arguments can be related torepeated coordination (Warneryd 1990), Prisoner's Dilemma (see Axelrod 1984) or hawk-dove(Sugden 1989) games. Generally speaking, the extension of the market analogy to the constitutionallevel, i.e., to the rules and institutions within which market coordination takes place, is notcorroborated by the game-theoretic analysis of invisible-hand processes. This analysis does notwarrant the conclusion that invisible-hand processes will operate to generate efficient results, exceptunder a highly restrictive set of conditions. This point is illustrated by, e.g., Warneryd(1990).Warneryd (1990) discusses the evolutionary game-theoretical approach to the emergence ofconventions, i.e., institutions that solve recurrent coordination problems. It is argued that conventionsmay be said to minimize transaction costs, but that they need not be efficient.

16. Compliance, Renegotiation, Secession

Constitutional preferences, like any other preferences, can be assumed to embody two conceptuallydistinct components, an interest-component and a theory-component. Rational actors will havereasons to be concerned, not only about the interest dimension, but also about the theory dimensionin constitutional choice.

Both concerns have certain implications for the kinds of "procedural constraints" that can beexpected to facilitate actual agreement, implications that need not be in perfect accordance.

So far as the interest dimension is concerned, it has been a central tenet of constitutionalpolitical economy at least since Buchanan and Tullock (1962) that constitutional deliberations musttake place behind a "veil of uncertainty" in order for a constitution to be efficient. The prospects forreaching constitutional agreement are enhanced by whatever tends to increase persons' uncertaintyabout the particular effects that alternative rules can be expected to have on them, that is, bywhatever tends to thicken the veil. The veil notion can be seen as a summary label for factors that,by increasing uncertainty, tend to alleviate potential conflicts in constitutional interests.

It should be noted that potential knowledge-based disagreement obviously requires theopposite cure. The prospects of agreement on desirable or efficient rules and the prospects foradopting such rules are enhanced, not by creating uncertainty, but, on the contrary, by raising thelevel of mutually-shared information and knowledge on the general working properties of alternativerules. The Buchanan-Tullock "veil of uncertainty" and the Rawlsian "veil of ignorance" are assumedto render persons uncertain or ignorant about their particularized interests while not inhibiting theircapability accurately to anticipate the general effects of potential alternative rules. In other words,their constitutional theories are supposed to be perfect and non-controversial. Informationalproblems with regard to the general working properties of rules do not exist.

This section is concerned with the interest dimension,i.e., with the difficulties involved in anyattempt to achieve agreement on rules among persons with potentially-conflicting constitutionalinterests. Moreover, once agreement has been achieved, the agreement must be enforceablebecause each individual has a subsequent incentive to defect from the cooperative agreement.

It is recaIled that in the contractarian and neo-contractarian literature two lines of reasoninghave been pursued which focus central attention on the interest-component in constitutional choicewith a view toward modification of the constitutional choice setting so as to reconcile potentialdivergences. Both are concerned with the general problem of constitutional efficiency and survivability.

The first line of argument, which is discussed in this section, focuses attention on the need for a"veil of uncertainty" as a precondition for an efficient constitution. The second line of argumentadopts an exit (entry) perspective.

Though Rawls's idea of constitutional choice "behind the veil of ignorance" and Buchanan'snotion of "conceptual agreement" cannot be expected to provide a workable criterion upon whichactual normative judgements on existing social arrangements could be based, they do serve a usefulheuristic function by directing attention to the question of whether - based on our generalunderstanding of the nature of human choice - it can be plausibly assumed that some existing set ofrules could have been voluntarily agreed upon by all participants at some original stage of decision.

A notion that is typically used in this respect in contractarian theories is fairness. Fairness canbe induced by two independent factors: (1) uncertainty, as has been indicated already, and (2) theconcern for stability, which will be discussed below.

In real-world settings persons are typically not totally ignorant about their particularconstitutional interests. But they are not perfectly certain about these interests either. They typicallyfind themselves behind a veil of uncertainty that prevents them from accurately anticipating theparticular ways in which they will be affected by the prospective working properties of alternativerules.

The veil's "thickness" may vary, depending on certain characteristics of the actual choicesituation. As the veil's "thickness" increases so will the prospect of achieving agreement.

The variables that affect the veil's thickness can to some extent be manipulated and rational actorscan take deliberate measures designed to put themselves behind a thicker veil, thereby enhancing theprospects of realizing potential gains from constitutional agreement.

In this respect the following observations are made.

The degree of uncertainty is, in part, a function of the sort of rules that are underconsideration. The essential dimensions here are the generality and the durability of rules. The moregeneral rules are and the longer the period over which they are expected to be in effect, the lesscertainty persons can have about the particular ways in which alternative rules will affect them. Theywill therefore be induced to adopt a more impartial perspective and, consequently, they will be morelikely to reach agreement. The veil of uncertainty works by moderating the differences amongidentifiable constitutional interests, thus inducing fairness or impartiality and facilitating agreement inconstitutional choice.

There is an additional factor through which fairness can be induced, independent from the uncertainty factor, but working in the same direction. This factor is the concern for stability. Thepossibility of realizing gains by operating under constitutional constraints is not just a matter ofsecuring some initial agreement; it is also a matter of a sufficient level of ongoing agreement, of continuing acquiescence in an ongoing co-operative arrangement. Stability refers to the viability of aconstitutional arrangement over time. Rational actors can be expected to take considerations ofstability into account when engaging in constitutional choice. To the extent that fairness and stabilityare interrelated, the concern for stability will induce a concern for fairness or impartiality even inpersons who may be perfectly aware of the particular effects that alternative rules will have on them.It is not the uncertainty about one's own particular position that will induce impartiality, but theanticipation that a constitutional arrangement is unlikely to be stable if it is only designed to serveone's own particular interests.

How precisely are stability and fairness interrelated? Two aspects of the stability problemshould be distinguished. They are not always sufficiently separated in discussions on the issue: thecompliance problem and the renegotiation problem.

First, in order for a constitutional arrangement to be stable over time it has to command a sufficientlevel of compliance.

However, compliance with rules is certainly not a direct function of their fairness. The fact thatrules are perceived as fair by the relevant group of persons does not, per se, guarantee a willingnessto comply with those rules. The compliance problem results from the fact that there may be potentialgains from defecting. Whether such gains exist or not is not per se dependent on the fairnessproperties of the arrangement. To the extent that such gains exist, a compliance or unilateraldefection problem is present even with perfectly fair rules.

Second, constitutional arrangements should also command a sufficient level of ongoing agreement. A constitutional agreement that favors particular interests may be achievable under "suitable"conditions, but such agreement can be expected to be less robust with regard to potential changes incircumstances than fair arrangements. Unfair arrangements may tend to give rise to the renegotiationproblem. It is especially with regard to renegotiation rather than with regard to compliance that theconcern for stability can be expected to induce a concern for fairness. There is a much more directrelation between the fairness issue and renegotiation than there is between fairness of rules andcompliance with rules.

For further discussion on the foregoing and related issues, reference is made to the followingcontributions.

Several fundamental issues relating to the problem of constitutional stability are discussed inOrdeshook (1992). Twight (1992) assesses the extent to which consensuality is likely tocharacterize the process of constitutional revision. Theoretival and empirical grounds are providedfor concluding that non-consensual constitutional revision is often the rule rather than the exception.The endogeneity of politically relevant transaction costs and their manipulation by self-interestedpolitical actors in a post-constitutional environment are central to the analysis. The theory of constitutional maintenance is equally examined in Niskanen (1990).

Constitutional renegotiation may end in impasse. Young (1994) examines the politicaleconomy of secession. Special reference is made to the case of Quebec. The author explains whysecessionist movements have not been successful in industrialized welfare states, even when thestructural preconditions are largely present, as in cases like Scotland and Belgium. A formal analysisof constitutional secession clauses using game theory is made in Chen and Ordeshook (1994).

17. The Common law and Its "efficiency"

Buchanan (1977) criticized Posner (1972) for its failure to make the vital distinction between thetwo functional roles in which lawyers may find themselves: Posner appears to offer potential adviceand counsel to future judges and legislators alike. But, recalls Buchanan, the judge should not changethe basic law because by such behavior he would be explicitly abandoning the role of jurist for thatof legislator. In his role of jurist he should enforce existing law instead of enacting new legislation.Buchanan referred explicitly to Leoni's (1961) distinction between law and legislation. It followsfrom Buchanan's argument that there is no justification at all for a judicial introduction of the putativeefficiency norm, presumably to be imposed independently of the political process. This view isimplied by the adoption of the subjectivist-contractarian consensus or unanimity rule as a benchmarkfor efficiency. The normative economist can advance alternative sets of rules as a hypothesis to betested in the political exchange process, but he should never be allowed to take the arrogant stanceof suggesting that this or that set of institutions is or is not more "efficient".

In a similar vein De Alessi and Staaf (1991) argue that the law and economics view of thecommon law as an efficient process that promotes the evolution of efficient rules through an auction-like mechanism is flawed because it fails to cope with the problem of aggregating preferences. Theyargue that the belief that the efficiency of the common law is enhanced by assigning disputed rightsso as to lower transaction costs is also flawed. The common law provides a form of unanimity byallowing individuals to contract around the rule and provides order by maintaining transitivity,through the use of precedent, in the application of the rule to new situations.

Aranson (1992) highlights another problem: in the neoclassical approach to law andeconomics, the common law judges, in rendering decisions that maximize wealth, are placed in theposition of calculators of comparative values. However, this task confronts the courts with aninsoluble economic calculation problem, analogous to the problem faced by central economicplanners. Therefore, courts should prefer to stay as close by as they can to a rights-basedjurisprudence.

Wagner (1992) argues that social processes regarding the formation of rules should beassessed in terms of their ability to provide a framework of stable rules guaranteeing the stability ofexpectations and allowing people to plan their economic activities. The dichotomy between statutoryand common law is overdrawn, because both derive from the same source in a setting where thereare no longer polycentric sources of competing authority, since the contemporary nation-state -presumably Wagner has the United States of America in mind - has the capacity to absorb allalternative sources of authority into itself.

More radically Benson (1992) argues that the government-backed common law system ismore likely to adopt inefficient rules than a genuine customary law system. Though he recognizes thatmuch of common law was simply a codification of the basic norms common to Anglo-Saxonsociety, Benson recalls that common law was also royal law and that even during its earliest periodsof development some aspects of it were legislated and imposed by authoritarian kings. Furthermore,when a government's judges make new law through precedent, it becomes enforceable law foreveryone in the society whether it is a mutually beneficial law or not. Common law precedents arebacked by the coercive power of the state, and therefore, they take on the same authority as statutelaw.

Yandle (1991) develops a vision of the Common Law as an "organic" Constitution, reflectingevolved social norms, a result that causes ordinary people to accept the authority of judges.

18. Studies in the History of Ideas

There now is a fair number of review articles on Buchanan's thought. Besides those alreadymentioned, reference can be made to Congleton (1988), Brennan (1987 and 1990) and Yeager(1990).

In Germany, institutional analysis has a long and autonomous tradition, which has not beengiven proper international recognition. This applies especially to the neoliberal Ordnungstheorie, ofwhich Walter Eucken is generally acknowledged to be the leading representative. Leipold (1990)examines the methodological and theoretical similarities and differences between Eucken'sOrdnungstheorie and Buchanan's Constitutional Economics. Though there is no tradition of pluralismin German history, some German thinkers developed ideas which came remarkably close to laterEnglish and American pluralists. This development, particularly as exemplified in the work of GeorgBeseler, Otto Gierke and later Hugo Preuss, is dealt with in Dreyer(1993).

Aranson (1991) argues for the coherence of Calhoun's political thought, when read in the lightof modern public choice theory and contrary to earlier interpretations.

Madison's Constitutional Political Economy is carefully examined in Dorn (1991). James Madisonwas instrumental in the design, ratification, and implementation of the American Constitution. He alsowas the major force behind the Bill of Rights. It is in the light of these accomplishments that Madisonhas been called "The Founding Father". Because he focused on the rules or principles of a liberalorder rather than on the outcomes, James Madison can properly be viewed as a pioneeringconstitutional political economist. Drawing on the political theory of Locke and the economic theoryof Smith, Madison successfully combined the two to form a coherent theory of constitutionaleconomics. Adopting a self-interest postulate, he showed that social and economic order are bestachieved by allowing open competition to prevail under a rule of law protecting private property andfreedom of contract. Thus, he clearly recognized the close relation between political order andeconomic order, and he anticipated many of the themes in the public choice/constitutional economicsliterature.

One of the insights of Madison and other framers of the U.S. constitution was that a bicamerallegislature might function as a device to limit the power of legislative coalitions. The idea was thateach house would be elected differently and consequently would represent different interests. Therequirement of a simultaneous majority in both houses in order for legislation to be enacted wouldthen guarantee a broad social consensus. It should be noted that the differences between the twochambers have been eroded subsequently. However, the argument for bicameral legislatures onefficiency grounds and the urge that the two houses be elected by radically different methods, was atthe theoretical level revived in this century by Tullock (see Tullock and Buchanan 1962, Chap.16,written by Tullock; see also Tullock 1987).

Elazar (1991) argues that the work of an early political scientist, Johannes Althusius, whodeveloped his theory of the polity on the eve of the modern epoch at the end of the sixteenthcentury, offers an important starting point for building a postmodern theory of political and socialorganization. Althusius (1991) is a collection of excerpts from his Politica Methodice Digesta(1603/1614).

Sir Edward Coke's role as a constitutional entrepreneur in 17th Century England is highlighted inYandle (1993).

19. Variations on Hayekian Themes

Constitutional Political Economy shares much of the spirit of Hayek's inquiry into the interrelationbetween the order of rules and the order of actions, and of his message that changes in the order ofrules are the principal means by which we can hope to improve the socio-economic-political orderunder which we live (Vanberg 1994, passim). It will come as no surprise, then, that severalcontributions elaborate explicitly on Hayekian themes. Buchanan's personal recollections of F.A.Hayek are set out in Buchanan (1992).

Streit (1993) brings out clearly how Hayek's approach to the social sciences, especially toeconomics, is rooted in his epistemological position, particularly as he set it out in Hayek (1952).Butos and Koppl (1993) outline a theory of expectations based on Hayek's cognitive theory. Thecentral tenet of the theory, which is intended to have both policy implications and testable empiricalcontent, is that economic expectations will serve as reliable guides to action only when certain"filtering conditions", i.e. certain constitutional constraints such as the atomicity of the market processand the stability of the rules governing that process are satisfied. A failure of either condition createsa loose "system constraint" and thus a loose link between environment and expectation, as the theoryof "Big Players" illustrates. Big Players, of which central bankers are a prototypical example,introduce a wedge between epistemic knowledge and social reality. The theory highlights theconnection between the choice of constraints and its epistemic consequences. The Big Player theoryalso suggests a possible direction for future empirical work in a Hayekian tradition. Within theadopted framework "neoclassical" economics and "radical Keynesianism" may be seen in a sense aslimiting cases. When certain filtering conditions are in place, the results of the market process may bedescribed by "neoclassical" models of rational maximizing and action will seem predictable at least atsome aggregate level. To the extent that these conditions fail, the market process will be influencedby animal spirits and the like and action will seem unpredictable to the observing economist. Thusthe evolutionary logic of Hayekian economics provides the general theoretical foundations for specialempirical theories, such as the Big Player theory, which may identify the precise causes andconsequences of observed deviation from the neoclassical model.

It is to be regretted that the recently developing literature on, say, monetary constitutionalismhas largely failed to incorporate these Hayekian insights. Recent events in the European MonetarySystem on the one hand and monetary disintegration in the former Soviet Union on the other haverevived interest in the question of how to design and choose a monetary regime that ensuresmonetary stability for both parts of Europe. Even among economists who are otherwise consideredstaunch advocates of laissez-faire policy, money is still regarded as the prime and uncontroversialexample of a good that has to be provided by government. Buchanan (1962), accepting the premisethat money is a public good that can only be provided by government, derives its optimal propertiesfrom a constitutional perspective. In the same vein Spinelli and Masciandaro (1993) argue for aconstitutionalization of the target of monetary stability in Italy.

Hefeker (1995) has argued that the objective of monetary stability can be achieved either bycomplete monetary union or by currency competition and that both regimes may be viable solutionsdepending on the circumstances. His paper makes the case for monetary union in Western Europe,even though he recognizes that monetary union is no alternative for Eastern Europe and the formerSoviet Union.

We believe that the critical examination and evaluation of the properties of alternativemonetary regimes constitutes one of the most interesting and exciting lines of future research withinthe field of Constitutional Economics.

Choi (1993) offers a critical evaluation of Hayek's "atavism of social justice" thesis, suggestingan alternative explanation for the widespread demands for social justice in contemporary society,based on the analysis of the nature of entrepreneurship and its tendency to incite envy.

Tuerck (1995) re-interprets Hayek's theory of mind in the light of contemporary philosophy ofartificial intelligence.

20. Towards a Constitutional Economics of the Firm

Vanberg (1992) compares four theoretical approaches to the study of organizations that can beidentified in the relevant literature: the goal paradigm, the exchange paradigm, the nexus of contractsparadigm, and the constitutional paradigm. It is argued that the latter provides the more fruitfultheoretical perspective in that it reconciles an individualist methodology with an account oforganizations as corporate actors, as units of collective action.

In search of a more decisive argument in the controversy concerning alternative forms ofownership of firms and allocation of capital, Pelikan (1993) complements and qualifies the standardincentive argument by an argument considering a less well explored factor: the competence withwhich firms are organized and managed. Alternative forms of ownership of firms are assessedaccording to their impact on this competence. The general conclusion is that private and tradableownership of firms is a necessary condition for efficiency of supply. The competence argumentstrengthens the neoliberal defense of private ownership and market competition. It is in allocating theauthority to organize supply to agents of high relevant competence, and in demoting from thisauthority agents of low competence, that private and tradable ownership of firms is shown to haveits decisive comparative advantage.

Kiser (1994) rationalizes public enterprise by analyzing the constitutional choice betweenprivate and public ownership of production arrangements. Arguing that results depend on who doesthe choosing, the article compares choices by self-governing citizens with choices by self-directedgovernmental officials. The resulting institutional theory identifies four conditions that cause citizens tofavor public over private ownership: natural monopoly, output and process invisibilities, theproduction of consumer necessities, potential producer moral hazard. None of the conditions refersto the standard concept of economic efficiency, which guides most economic comparisons of publicand private enterprise.

Langlois (1995) argues that Hayek's theory of spontaneous order can in fact include the caseof such apparently purposive and extramarket forms as the business firm. In other words, Hayek'stheory of the market as a spontaneous order has implications for the theory of the firm that themainstream Coasean approach has yet fully to absorb. Langlois picks up a number of suggestions inHayek's evolutionary theory of social institutions and uses them to draw a picture of the firm that issomewhat different from that drawn by neoclassical transaction-cost analysis. In the Hayekianpicture, firms and markets are both systems of rules of conduct. Both are systems for economizingon knowledge in the face of economic change, albeit quite different kinds of knowledge and change.Moreover, there is a sense in which the firm exists not in order to centralize control over knowledgebut - like the market - precisely to decentralize the use of knowledge. In the end, it is argued that thefirm is no model for political planning for one very simple reason: the firm does not plan.

Adelstein (1991) draws upon the contractarian distinction between constitutional andoperational levels of personal choice and an evolutionary analysis of the growth of firms to illuminatethe complex issues surrounding the emergence of large-scale economic organization in the UnitedStates in the years since 1870.

21. Redistribution

There have been two recent attempts to provide a rationale for redistribution within the scope ofconstitutional political economy. Hartmut Kliemt (1993b) argues that redistribution can beinstitutionalized at the constitutional level to attain a "minimum welfare state" without violating basicprinciples or incurring risks beyond those that are present in the minimal state itself. Joachim Wessels(1993) describes a situation in which individuals may unanimously agree to transfer income at theconstitutional stage on the grounds that redistribution provides income insurance. Both are criticized,invoking the usual arguments, by Pasour (1994).

22. European Integration

Streit and Mussler (1994) analyze the changes in the economic constitution of the EuropeanCommunity since its foundation in 1958. It is argued that as far as the economic constitution isconcerned, the Treaty of Maastricht is dominated by traits which are characteristic of modernwelfare states. The editors of Constitutional Political Economy took (Vibert 1995) as a starting pointto devote the 1996 Vol. 7 No. 4 issue of their journal to the theme Europe: A Constitution forthe Millennium. This special issue includes articles by (Buchanan 1996, p. 253-256), (Blankart1996, p. 257-265) , (Frey 1996, p. 267-279) , (Holcombe 1996, p. 281-291), (Mueller 1996, p.293-302), (Ostrom 1996, p. 303-308), (Sobel 1996, p. 309-316) and (Vaubel 1996, p. 317-324).

23. Other and Related Subjects

A constitutional approach to international private law is contained in Schmidtchen and Schmidt-Trenz (1990).

Constitutional issues concerning transition in Eastern Europe and the former Soviet Republicsare discussed in Sunstein (1991), Apolte (1995) and Ordeshook and Shvetsova (1995).

Brunetti and Weder (1994) argue that establishing strategies for the control of statediscretionary power is a crucial precondition for overcoming credibility problems and generatinglong-term economic growth in less developed countries.

Kratochwil (1992) suggests an alternative approach to the study of international politics. Acritical examination of the Clean Water Act from a constitutional perspective is contained in Meinersand Yandle (1992).

Pauly (1994) examines the concept that social insurance for medical care may represent akind of constitutional choice.

Kuran (1993) argues that public opinion breeds tyranny by forcing individuals to refrain fromvoicing their genuine thoughts and feelings. Several devices to cope with the emergence andpersistence of certain social taboos are discussed.

Lipford (1992) applies constitutional economics to the constitutions and rules that governseven of the eight largest U.S. Christian denominations.

A positive theory of economic fairness is constructed in Mark Isaac, Mathieu and Zajac (1991).Public debt repudiation is analyzed, using Jefferson's model in Gunter (1991).

E. Conclusions

24. Conclusions

Throughout the writing of the present article we constantly had in mind the editors' aim of providingthe readers of the Encyclopedia of Law and Economics with a well-informed overview of the existing literature. Some readers may find that our strategy of favouring "comprehensiveness" at theexpense of "structure" has to some degree distracted from the flow of argument. However, we arereasonably confident that the unifying theme underlying the whole will be clear. The various subdisciplines of Public Choice, Law-and-Economics, Constitutional Political Economy and others allrepresent, as opposed to the independence-isolation of economics, a return of economics to itsappropriate legal foundations. But this theme only loosely connects the subparts and sections of thisarticle. In fact the four subparts and even most of the subsections can be read largely independently.This can only add to the reader's convenience

Admittedly, and strictly from the title, the "Public Choice" element was somewhat neglected,relative to the "Constitutional Political Economy" element. This bias is explained by our ownpriorities, but only in part. It was Buchanan himself who in the 80s changed the name of his researchprogram to constitutional economics. Early on, Buchanan had made it clear that he regarded thetraditional approach to economic policy advice based on welfare economics as a scientificallyflawed and politically alarming development. Welfare economics draws its conclusions from acomparison of the working properties of real markets with idealized criteria. Then, confronted withthe inefficiencies of reality compared to the idealized model, the market failure approach proceeds tosuggest alternative measures which consist in real government interventions which are assumed toeliminate the inefficiencies. Thus, welfare economics runs the danger of becoming a "nirvanaapproach" (Demsetz 1969), meaning that it fails to identify the relevant alternatives for drawing itsconclusions. First, in judging the real economy in order to arrive at policy advice, the relevantalternative is not an idealized market but "another" real economy, one that would emerge under adifferent set of constraints. This means one has to compare alternative institutional arrangements, inmarkets and the polity, and their outcomes. Second, such a comparison requires a criterion that isequally apt in evaluating the economic as well as the political order, that is a non-ideal, internalstandard of comparison. For Buchanan, democratic consent provides this kind of criterion (Pies1996, p. 26).

Despite its general direction towards a comparison of alternative institutional arrangements,large parts of the public choice literature seem like an empirically oriented welfare economic analysisof the political sector and use the welfare-economic concept of normative efficiency as a benchmark, thus more or less duplicating the "nirvana approach". The term "constitutional economics"clearly distanced Buchanan's paradigm from those parts of the public choice literature that makewelfare economic efficiency the measure of all things. The term more adequately describes the topicof his institutional, rules-directed analyses.

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