Constitutional economics

Constitutional economics is a research program in economics and constitutionalism that has been described as extending beyond the definition of "the economic analysis of constitutional law" in explaining the choice "of alternative sets of legal-institutional-constitutional rules that constrain the choices and activities of economic and political agents." This is distinct from explaining the choices of economic and political agents within those rules, a subject of "orthodox" economics.^[1]

Constitutional economics studies the "compatibility of effective economic decisions with the existing constitutional framework and the limitations or the favorable conditions created by that framework."^[2] It has been characterized as a practical approach to apply the tools of economics to constitutional matters.^[3] For example, a major concern of every nation is the proper allocation of available national economic and financial resources. The legal solution to this problem falls within the scope of constitutional economics.

Constitutional economics takes into account the significant impacts of political economic decisions as opposed to limiting analysis to economic relationships as functions of the dynamics of distribution of "marketable" goods and services. "The political economist who seeks to offer normative advice, must, of necessity, concentrate on the process or structure within which political decisions are observed to be made. Existing constitutions, or structures or rules, are the subject of critical scrutiny."^[4]

Origins

The term "constitutional economics" was coined in 1982 by the U.S. economist Richard McKenzie to designate the main topic of discussion at a conference held in Washington. D.C. McKenzie's neologism was then adopted by another American economist, James M. Buchanan, as a name for a new academic sub-discipline. It was Buchanan's work on this sub-discipline that brought him the Nobel Memorial Prize in Economic Sciences for his "development of the contractual and constitutional bases for the theory of economic and political decision-making" in 1986. Constitutionalism has been the subject of criticism for its previous ignorance of economic issues but this criticism was taken into account by the development of constitutional economics. Buchanan rejects "any organic conception of the state as superior in wisdom, to the individuals who are its members."^[5]

This philosophical position is, in fact, the very subject matter of constitutional economics. A constitutional economics approach allows for a combined economic and constitutional analysis, helping to avoid a one-dimensional understanding. Buchanan believes that a constitution, intended for use by at least several generations of citizens, must be able to adjust itself for pragmatic economic decisions and to balance interests of the state and society against those of individuals and their constitutional rights to personal freedom and private happiness.^[6]

Constitutional economics draws substantial inspiration from the reformist attitude which is characteristic of Adam Smith’s vision, and that Buchanan’s concept can be considered the modern-day counterpart to what Smith called “the science of legislation.” According to Buchanan the ethic of constitutionalism is a key for constitutional order and "may be called the idealized Kantian world" where the individual "who is making the ordering, along with substancially all of his fellows, adopts the moral law as a general rule for behaviour".^[7]

Buchanan's Nobel lecture quoted the work of the late 19th century Swedish economist Knut Wicksell, who greatly influenced Buchanan's research: "If utility is zero for each individual member of the community, the total utility for the community cannot be other than zero." In epigraph to the chapter of Nobel lecture entitled "The Constitution of Economic Policy" Wicksell states that "whether the benefits of the proposed activity to the individual citizens would be greater than its cost to them, no one can judge this better than the individuals themselves."^[4]

A constitutional economics approach allows for a combined economic and constitutional analysis, helping to avoid a one-dimensional understanding. Buchanan believes that a constitution, intended for use by at least several generations of citizens, must be able to adjust itself for pragmatic economic decisions and to balance interests of the state and society against those of individuals and their constitutional rights to personal freedom and private happiness.

Buchanan introduced rich cross-disciplinary concepts of "constitutional citizenship" and "constitutional anarchy". Constitutional anarchy is a modern policy that may be best described as actions undertaken without understanding or taking into account the rules that define the constitutional order. This policy is justified by references to strategic tasks formulated on the basis of competing interests regardless of their subsequent impact on political structure. At the same time Buchanan introduces the concept of "constitutional citizenship", which he designates as compliance of citizens with their constitutional rights and obligations that should be considered as a constituent part of the constitutional policy. Buchanan also outlines importance of protection of the moral principles underlying constitutional norms.

Ethics of constitutional citizenship

James Buchanan wrote that "the ethics of constitutional citizenship is not directly comparable to ethical behavior in interaction with other persons within the constraints imposed by the rules of an existing regime. An individual may be fully responsible, in the standard ethical sense, and yet fail to meet the ethical requirement of constitutional citizenship."^[8] Buchanan considered the term "constitutionality" in the broad sense and applied it to families, firms and public institutions, but, first of all, to the state.

Buchanan emphasised that public policy cannot be considered in terms of distribution, but is instead always a question of the choice over rules of the game that engender a pattern of exchange and distribution. Buchanan is largely responsible for the rebirth of political economy as a scholarly pursuit.^[9] Buchanan's work in public choice is often interpreted as the quintessential case of economic imperialism. However, as Amartya Sen has pointed out,^[10] Buchanan should not be identified with economic imperialism. Sen states that Buchanan has done more than most to introduce ethics, legal political thinking, and indeed social thinking into economics.^[11]

Crucial to understanding Buchanan's system of thought is the distinction he made between politics and policy. Politics is about the rules of the game, where policy is focused on strategies that players adopt within a given set of rules. “Questions about what are good rules of the game are in the domain of social philosophy, whereas questions about the strategies that players will adopt given those rules is the domain of economics, and it is the play between the rules (social philosophy) and the strategies (economics) that constitutes what Buchanan refers to as constitutional political economy”.^[12]

In 1990, Buchanan, along with a few other budding constitutional economists, launched the journal Constitutional Political Economy with the purpose of further researching and developing the discipline. Buchanan wrote the vanguard article entitled "The Domain of Constitutional Economics", establishing the bounds of the emerging study and cementing the various topics he developed in 1962 and 1986. Buchanan gave a technical definition of constitutional economics as the research program directed at the rules of institutions in which individuals make choices, along with the process of creating these rules. While ordinary economic inquiry focuses on the choices within the rules or the constraints imposed on the individuals, constitutional economics aims at the actual rules themselves, the choice among constraints. Individuals agree to place constraints on themselves in exchange for anticipated benefits, a similar to a social contract view of government.^[13] Just as a market transaction occurs through voluntary, mutually beneficial exchange, so with political "exchanges" of rights and authority.^[14]

With this theory, politics becomes a form of exchange and is therefore worthy of economic analysis, thus establishing the formal beginning of constitutional economics. By the end of the article, Buchanan enters philosophical territory, almost verging on skepticism, saying that each individual must perceive phenomena through his particular "window" and agreement is impossible when everyone views reality from different windows. Due to radical individualism, constitutional economics can include only people who view the world through economic paradigms or windows, not idealistic, goal-driven paradigms.

Positive constitutional economics

Within positive constitutional economics, the tools or methods are unique from normal economic tools because of the cross-discipline nature of the program. The main tool of positive constitutional economics is "comparative institutional analysis", with four main elements.^[15] The first element examines how certain constitutional rules arose and what factors caused the rules to be developed as a result of aggregated individual inputs. The second element looks at how rules are distinguishable between individual and collective factors, though Voigt acknowledges this research method is rarely used.

The third element is the possibilities of further constitutional (or rules) change. Any proposed change to constitutional constraints, or rules of constraints, are subject to economic scrutiny for their effects on efficiency and equity. The fourth element of positive constitutional economics examines the economic effects of developed or modified change to rules.

All economic analysis seeks to maximize efficiency, and constitutional economics is no exception. In the market, individuals maximize efficiency when both parties perceive a personal benefit, mutual exchange, and when resources go to their highest valued use. The political process is one of exchange, only unlike the market, the resources exchanged are political, not material or financial. Therefore, political efficiency is political consent, or when all individuals in the community agree to the political structures.^[16] Constitutional economics mimics a traditional contractarian political economy in its focus on the contract, or consent, between the governed and government. However, consent follows efficiency in markets while efficiency follows consent in politics.

Normative constitutional economics

Normative constitutional economics focuses on legitimizing the state and its actions as the best means of maximum efficiency and utility, judging conditions or rules that are efficient, and discerning and studying the political systems to maximize efficiency, where the outcome of collective choices are considered "fair", "just", or "efficient". Once again, Buchanan dominates the normative discussion of constitutional economics, specifically how methodological individualism affects economic analysis.

By 1988, Buchanan's thought had matured since his speech in 1986. Both Buchanan and Stefan Voigt argue the foundational assumption of normative constitutional economics is that no single individual's goals or values can supersede the value of another's. Therefore, a universal, absolute social norm or goal is impossible. Since politics is a form of exchange, when individuals agree to exchange goods, they are acting rationally in their own perceived self-interest if the decision is voluntary and informed. With these criteria, any such agreement is "efficient" and therefore normatively ought to occur.

Methodological individualism leads Buchanan to the normative claim that a political theory very similar to that of John Rawls in his seminal 1971 work, A Theory of Justice, would best realize individuals' unique goals. Complete with a veil of ignorance and a priori decisions of social goals, Buchanan says political economy does not have a social engineer or moral purpose but only assists individuals in their search for rules that best serve their individual purposes. For Buchanan, the "good" society is one that furthers the interests of individuals, not some independent moral or teleological end.

Hayek

Buchanan is not the only contributor to normative constitutional economics. Economic polymath Friedrich Hayek also wrote extensively on the topic of constitutional economics, even if he did not name constitutional economics specifically. Hayek defends a representative constitutional democracy as the best structure of government.^[17] Hayek's main project was the vindication of freedom and establishing criteria for a regime of freedom.^[18]

Hayek was worried by the kind of state that Buchanan/Rawls deemed normative. Hayek thought it necessary for a return to the traditional views of government, human nature, political philosophy, and economics. He believed the Buchanan/Rawls state had the almost inevitable propensity to totalitarianism as the state seeks to maximize individual utility. People would soon be at the mercy of para-government bureaucracy of the provision-state.

Hayek cautions his readers against rashly launching into the kind of state Rawls and Buchanan conceive, saying individual choice cannot be the only determining factor in the choices of constraints, and the actual structure of the rules or constraints (the constitution) must conform to what Buchanan would label a supra-individual goal. For Hayek, liberal constitutional democracies are the best way to achieve the goal of individual freedom, equality, opportunity, and efficiency for three reasons. First, constitutions codify pre-existing (presumably efficient) law. Second, they place explicit constraints on government to prevent totalitarianism. Finally, they preserve law and order for the polis. All of this is within the framework of a moral and teleological order.

Economic analysis of the US Constitution

The generally accepted birth of constitutional economic analysis of US Constitution was Charles Austin Beard's landmark 1913 book An Economic Interpretation of the Constitution of the United States.^[19] While most scholars today reject Beard's overall thesis, he initiated a new method of economic and political thought that would evolve into contemporary constitutional economics analysis.^[20] Beard's main thesis was that the U.S. Constitution was an economic document created by men who were economically motivated.^[20]

Writing in 1987 for the Yale Law School, Jonathan Macey synthesizes the history of constitutional economic analysis applied to the US Constitution. Macey offers a different analysis of the US Constitution and responds critically to Beard's view of the Constitution.^[21]

Beard said the US Constitution was the product of a wealthy bourgeois class seeking the retention of personal wealth, even to the point of exploiting the lower classes.^[19] Beard even goes so far as to say that a famous and crucial part of the Constitution, separation of powers, was actually a means of allowing hegemony of resources in the hands of the rich few. Macey could not disagree more; he argues that the Constitution and separation of powers were created to hinder aggregate political and economic power. He points to Federalist No. 10, James Madison's famous description of the necessity of factions due to the truths of human nature.

Separation of powers

Macey says this conception of human nature is essentially economic. If government is not separated into distinct powers, the possibility of extensive rent-seeking threatens the efficiency of the government. Self-interested groups or individuals will lobby to political powers for their goals, possibly leading to injustice or inefficiency. In Macey's interpretation of Madison, the separation of powers channels lobbyists into the competitive, more efficient market by raising transaction costs so much that private market means are less expensive than appealing to the various separate powers of government.

Macey demonstrates how constitutional economics can be applied to constitutions. Rather than looking at the political or philosophic intentions of the founders, the constitutional economist looks at a constitution through economic eyes, considering the incentives, choices, allocations, and other economics factors within the political rules of a constitution. Traditionally, the creation of factions has been interpreted as a brilliant political move to separate power and prevent hegemony of the state. Macey agrees but adds a caveat. He maintains a real economic incentive to factions existed which compelled the Founders to separate government.

Factions and separated powers raise transaction costs of mobilizing political support beyond what interest groups can pay if they rely on private, non-governmental means. Macey even graphs the quantity of legislation on a standard supply-demand curve, where the demand is the interest groups’ desire for laws and the supply is the legislation’s provision. Separation of powers shifts the supply curve left, raising the price and decreasing the quantity of legislation. Macey admits that though the US Constitution is imperfect, he does vindicate it from the purely material accusations of Beard. He examines a political system of constraints using standard economic methods.

Legal approach

Judge Richard Posner emphasized the importance of a constitution for economic development. He examines the interrelationship between a constitution and the economic growth. Posner approaches constitutional analysis mainly from the perspective of judges, who constitute a critical force for interpretation and implementation of a constitution, thus — de facto in common law countries — creating the body of constitutional law. He emphasizes the importance of constitutional provisions "in setting broader outer bounds to the exercise of judicial discretion". Thus, a judge, when trying a case, is guided firstly by the spirit and letter of the constitution. The role of economics in this process is to help "identify the consequences of alternative interpretations" of the constitution.

He then explains that "economics may provide insight into questions that bear on the proper legal interpretation." In the end, as Posner emphasizes, "the limits of an economic approach to deciding constitutional cases [are] set by the Constitution." In addition, he argues that "effective protection of basic economic rights promotes economic growth."^[22]

Concurrently with the rise of academic research in the field of constitutional economics in the US in the 1980s, the Supreme Court of India for almost a decade had been encouraging public interest litigation on behalf of the poor and oppressed by using a very broad interpretation of several articles of the Indian Constitution. This is a vivid example of a de facto practical application of the methodology of constitutional economics.^[23]

The President of the Constitutional Court of the Russian Federation, Valery Zorkin, made a special reference to the educational role of constitutional economics: "In Russia, the addition of such new academic disciplines as constitutional economics to the curricula of university law and economics departments becomes critically important."^[24]

Russian school

The Russian school of constitutional economics was created in the early twenty-first century with the idea that constitutional economics allows for a combined economic and constitutional analysis in the legislative (especially budgetary) process, thus helping to overcome arbitrariness in the economic and financial decision-making. For instance, when military expenses (and the like) dwarf the budget spending on education and culture. Constitutional economics studies such issues as the proper national wealth distribution. This also includes the government spending on the judiciary, which in many transitional and developing countries is completely controlled by the executive.

The latter undermines the principle of checks and balances, instrumental in the separation of powers, as this creates a critical financial dependence of the judiciary. It is important to distinguish between the two methods of corruption of the judiciary: the state corruption (through budget planning and various privileges being the most dangerous), and the private corruption. The former makes it almost impossible for any business to facilitate the optimal growth and development of national market economy. In the English language, the word "constitution" possesses a whole number of meanings, encompassing not only national constitutions as such but also charters of corporations, unwritten rules of various clubs, informal groups, etc.

The Russian model of constitutional economics, originally intended for transitional and developing countries, focuses entirely on the concept of constitution of a state. This model of the constitutional economics is based on the understanding that it is necessary to narrow the gap between practical enforcement of the economic, social, and political rights granted by the constitution and the annual (or midterm) economic policy, budget legislation and administrative policies conducted by the government. In 2006, the Russian Academy of Sciences officially recognized constitutional economics as a separate academic sub-discipline.^[25]

Since in many countries with transitional political and economic systems, their constitutions are often treated by the ruling elite as abstract legal documents totally disconnected from the economic policy of the state, the practice of constitutional economics becomes there a decisive prerequisite for the democratic development of both the state and society.

Criticisms

Not all scholars embrace constitutional economics. Walter Block and Thomas DiLorenzo make a strong criticism of constitutional economics as even a possible science. They maintain that politics cannot be equated with the market and, therefore, as a study, it cannot exist.^[26] They maintain that unlike the market, consent is not the foundation of politics, and that politics is driven by violent, historically bellicose, coercion. Therefore, they believe that the CE method only clouds the discussion of public choice and political economy. Buchanan, Voigt, Macey, and even Beard all at least implicitly assume that politics is the exchange of political "goods", a strong social contract view.

But for Block and DiLorenzo, politics is one powerful group coercing free rides from a weaker group. From the Roman Empire to the present, they trace how the state always comes from conquest and exploitation, never consent. The Calculus of Consent, a foundational text for constitutional economics, bears much of their attack. If they are correct that no state has been or can be voluntary and that voluntary government is inherently contradictory, constitutional economics as a discipline cannot exist.

William Campbell explains the weakness of constitutional economics in its assumption that the goal of a regime must be efficiency, individual liberty, and libertarian rights, not morality or super-individual good.^[27]

See also

• Constitutionalism
• Constitutional law
• Institutional economics
• Independence of the judiciary
• James M. Buchanan
• Justification for the state
• Law and economics
• New political economy
• Rule of Law

Notes

References

• Asshiddiqie, Jimly, 2010. "Economic Constitution", Kompas, Jakarta, 2010.
• McKenzie, Richard, ed., 1984. Constitutional Economics, Lexington, Mass.
• Backhaus, Jürgen G., ed. The Elgar Companion to Law and Economics:

Farina, Francesco, 2005. "Constitutional Economics I," pp. 184-222.

Van den Hauwe, Ludwig, 2005. "Constitutional Economics II," pp. 223-38.

• James A. Dorn, 2004. "Creating a Constitutional Order of Freedom in Emerging Market Economies," Economic Affairs, 24(3), pp. 58–63. Abstract.
• Brennan, Geoffrey and James M. Buchanan, 1985. The Reason of Rules: Constitutional Political Economy , Chicago. In The Collected Works of James M. Buchanan, Vol. 10, chapter links, Library of Economics and Liberty.
• Buchanan, James M., 1974. The Limits of Liberty: Between Anarchy and Leviathan. Chicago. In The Collected Works of James M. Buchanan, Vol. 7. Chapter links at left menu, Library of Economics and Liberty.
• _____, 1986. "The Constitution of Economic Policy," Nobel Prize lecture, reprinted in American Economic Review, 77(3), p p. 243-250.
• _____, 1987. "constitutional economics," The New Palgrave Dictionary of Economics, v. 1, pp. 585–88.
• _____, 1990a. "The Domain of Constitutional Economics," Constitutional Political Economy, 1(1), pp. 1-18. Also as at 1990b & .
• _____, 1990b. The Economics and the Ethics of Constitutional Order, University of Michigan Press. Description & chapter links.
• _____ and Gordon Tullock, 1962. The Calculus of Consent. University of Michigan Press. Chapter-preview links.
• Constitutional Political Economy. Description and abstract links.
• Frey, Bruno S., 1997, "A Constitution for Knaves Crowds out Civic Virtues," Economic Journal, 107(443), p p. 1043-1053.
• Hayek, Friedrich A., [1960] 2011. The Constitution of Liberty: The Definitive Edition, v. 17, The Collected Works of F A. Hayek, Chicago. Description and preview.
• _____. Law, Legislation and Liberty, Chicago:

1973. v. 1. Rules and Order. Description and chapter-preview links.

1976. v. 2. The Mirage of Social Justice. Description and chapter-preview links.

1979. v. 3. The Political Order of a Free People. Description and chapter-preview links.

• Mueller, Dennis C., 2008. "constitutions, economic approach to,' The New Palgrave Dictionary of Economics, 2nd Edition. Abstract.
• Persson, Torsten, and Guido Tabellini, 2005. The Economic Effects of Constitutions. Description and chapter links.
• Sutter, Daniel, 1995. "Constitutional Politics within the Interest-Group Model," Constitutional Political Economy, 6(2), p p. 127-137.
• "Economics and the Rule of Law" The Economist (2008-03-13).
• Voigt, Stefan, 1997. "Positive Constitutional Economics: A Survey," Public Choice, 90(1-4), p p. 11-53.
• Hernando de Soto, "Law connects", International Bar News, December 2008

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