Constitutional economics
Encyclopedia
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. 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." It has been characterized as a practical approach to apply of the tools of economics to constitutional matters. 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"..
Specifically, Beard was cynical of the Founding Fathers, seeing the drafters of the Constitution as purely motivated by concerns for personal wealth and affluence. Beard stripped America’s founding of what makes it uniquely moral and noble and developed a history of the founding no different than any other nation in history, one of greed, self-interest, and Machiavellian power politics. Obviously, such a thesis would be unpopular because it reduces America’s saintly image of the Founders to that of selfish, greedy bourgeois-capitalists in the Marxist class struggle. The result, according to Forest McDonald, is that both public and academic audiences did not embrace Beard’s thesis . Today, McDonald says many scholars believe Beard was generally influenced by the growing Marxist thought of the day .
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 in 1986 brought him the Nobel Prize
in Economic Sciences for his "development of the contractual and constitutional bases for the theory of economic and political decision-making."
Buchanan rejects “any organic conception of the state
as superior in wisdom, to the individuals who are its members.” 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.
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.
James Buchanan wrote "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." 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’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."
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 . Just as a market transaction occurs through voluntary, mutually beneficial exchange, so with political “exchanges” of rights and authority . 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 only include people who view the world through economic paradigms or windows, not idealistic, goal-driven paradigms.
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 . 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.
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 which best serve their individual purposes. For Buchanan, the “good” society is one which furthers the interests of individuals, not some independent moral or teleological end.
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 CE specifically. Hayek defends a representative constitutional democracy as the best structure of government . Hayek’s main project was the vindication of freedom and establishing criteria for a regime of freedom . 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 that 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.
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 lower classes . 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 Paper 10, Madison’s famous description of the necessity of factions due to the truths of human nature. 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, 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.
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 further explains that "economics may provide insight into questions that bear on the proper legal interpretation". In the end, as Judge 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."
Concurrently with the rise of academic research in the field of constitutional economics in the U.S. 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.
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."
, 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 optimally facilitate the 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 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 mid-term) economic policy, budget legislation and administrative policies conducted by the government. In 2006, the Russian Academy of Sciences
has officially recognized constitutional economics as a separate academic sub-discipline.
Since many a country with a transitional political and economic system continues treating its constitution as an abstract legal document disengaged from the economic policy of the state, practice of constitutional economics becomes there a decisive prerequisite for democratic development of the state and society.
Van den Hauwe also points out a flaw of this consent-centered government formation which he calls “post-contractual opportunism,” or rent-seeking. Rent-seeking is when groups of individuals have the strong incentive to capture the instruments of political power for personal or communal gain . Van den Hauwe says this is essentially the “Prisoner’s Dilemma” on a national political level. Where the nation contracts to cooperate for the social good, then lobbyists have the incentive to cheat the contract and gain more at the expense of the other contractarians.
Therefore, Van den Hauwe says Buchanan and the cohort of constitutional economists have the strong imperative to find a solution to this problem, as rent-seeking is far from politically “efficient” for the contract. Buchanan’s solution is a Rawlsian social contract, or as Van den Hauwe says, a modified “Prisoner’s Dilemma,” in which the benefits of non-cooperative behavior are reduced. A veil of ignorance or uncertainty would do this, establishing rules under which each individual would desire to follow for both self-interest and the potential of being born into the disadvantaged place.
The final critique of constitutional economics is Hayek’s critique. Within Buchanan’s vision of constitutional economics, methodological individualism removes all possibility of external moral good beyond the aggregate of individual interests. This cannot be just or appropriate. As Aristotle said, it is within human nature for man to insert a moral and teleological element into everything, including politics. To remove this moral, universal end is to deny an essential part of human nature. When Buchanan calls for a Rawlsian organization of the state, not only does he test the limits of what is practical within the limits of politics, he also denies a moral nature within man. Hayek has a point when he says that liberal constitutional democracy is the best form of government when given human nature.
Echoing Hayek, 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 . Somehow, Buchanan arrives at an odd amalgam of Rawl’s large welfare state and Rothbard’s libertarian night watchmen state. Neither Rawls nor Rothbard, nor even the alchemic mix of the two recognizes the realities of human nature. While constitutional economics is a novel approach to political analysis, elements of it, specifically methodological individualism, contradict with the realities of human nature, and therefore make the discipline useful, but far from sufficient for political analysis. Granted, methodological individualism seems to address only individual choice, but Buchanan’s description of it, especially in 1990 and 1962, are rife and explicit with the implication: there cannot be a social good beyond the individual. Other disciplines like political philosophy, ethics, and even theology must precede constitutional economic analysis.
Research program
A research program is a coordinated set of projects undertaking related research, often at national or even international level, with government funding....
in economics
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
and constitutionalism
Constitutionalism
Constitutionalism has a variety of meanings. Most generally, it is "a complex of ideas, attitudes, and patterns of behavior elaborating the principle that the authority of government derives from and is limited by a body of fundamental law"....
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. 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." It has been characterized as a practical approach to apply of the tools of economics to constitutional matters. 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"..
Origins
The generally accepted birth of constitutional economics was Charles Austin Beard’s landmark book, An Economic Interpretation of the Constitution of the United States . While most scholars today reject Beard’s overall thesis, he did initiate a new method of economic and political thought that would evolve into contemporary constitutional economics analysis . Beard’s main thesis was that the U.S. Constitution was an economic document created by men who were economically motivated (Voigt 1997). Beard’s work was unique because it was the first economic perspective on what had previously been political, philosophical, and legal topics; Beard set out to create a new history of American law, one founded on economic methodology and analysis distinct from the traditional philosophical, political, and religious interpretations . Like the work of Darwin or Freud, once scholars read and understood Beard, returning to the old methods of analysis was impossible.Specifically, Beard was cynical of the Founding Fathers, seeing the drafters of the Constitution as purely motivated by concerns for personal wealth and affluence. Beard stripped America’s founding of what makes it uniquely moral and noble and developed a history of the founding no different than any other nation in history, one of greed, self-interest, and Machiavellian power politics. Obviously, such a thesis would be unpopular because it reduces America’s saintly image of the Founders to that of selfish, greedy bourgeois-capitalists in the Marxist class struggle. The result, according to Forest McDonald, is that both public and academic audiences did not embrace Beard’s thesis . Today, McDonald says many scholars believe Beard was generally influenced by the growing Marxist thought of the day .
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
James M. Buchanan
James McGill Buchanan, Jr. is an American economist known for his work on public choice theory, for which he received the 1986 Nobel Memorial Prize in Economic Sciences. Buchanan's work initiated research on how politicians' self-interest and non-economic forces affect government economic policy...
– as a name for a new academic sub-discipline. It was Buchanan’s work on this sub-discipline that in 1986 brought him the Nobel Prize
Nobel Prize
The Nobel Prizes are annual international awards bestowed by Scandinavian committees in recognition of cultural and scientific advances. The will of the Swedish chemist Alfred Nobel, the inventor of dynamite, established the prizes in 1895...
in Economic Sciences for his "development of the contractual and constitutional bases for the theory of economic and political decision-making."
Buchanan rejects “any organic conception of the state
State (polity)
A state is an organized political community, living under a government. States may be sovereign and may enjoy a monopoly on the legal initiation of force and are not dependent on, or subject to any other power or state. Many states are federated states which participate in a federal union...
as superior in wisdom, to the individuals who are its members.” 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
Constitution
A constitution is a set of fundamental principles or established precedents according to which a state or other organization is governed. These rules together make up, i.e. constitute, what the entity is...
, 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.
James Buchanan wrote "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." 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’s Nobel lecture quoted the work of the late 19th century Swedish economist Knut Wicksell
Knut Wicksell
Johan Gustaf Knut Wicksell was a leading Swedish economist of the Stockholm school. His economic contributions would influence both the Keynesian and Austrian schools of economic thought....
, 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."
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 . Just as a market transaction occurs through voluntary, mutually beneficial exchange, so with political “exchanges” of rights and authority . 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 only include 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 . 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 utilized. Third, rules can be examined as 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. Finally, 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 . 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
John Rawls
John Bordley Rawls was an American philosopher and a leading figure in moral and political philosophy. He held the James Bryant Conant University Professorship at Harvard University....
in his seminal 1971 work, A Theory of Justice
A Theory of Justice
A Theory of Justice is a book of political philosophy and ethics by John Rawls. It was originally published in 1971 and revised in both 1975 and 1999. In A Theory of Justice, Rawls attempts to solve the problem of distributive justice by utilising a variant of the familiar device of the social...
, 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 which best serve their individual purposes. For Buchanan, the “good” society is one which furthers the interests of individuals, not some independent moral or teleological end.
Buchanan is not the only contributor to normative constitutional economics. Economic polymath Friedrich Hayek
Friedrich Hayek
Friedrich August Hayek CH , born in Austria-Hungary as Friedrich August von Hayek, was an economist and philosopher best known for his defense of classical liberalism and free-market capitalism against socialist and collectivist thought...
also wrote extensively on the topic of constitutional economics, even if he did not name CE specifically. Hayek defends a representative constitutional democracy as the best structure of government . Hayek’s main project was the vindication of freedom and establishing criteria for a regime of freedom . 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 that 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.
Constitutional Economic Analysis of the US Constitution
Writing for Yale Law School, Jonathan Macey synthesizes the history of constitutional economic analysis applied to the U.S. Constitution. Macey offers a different analysis of the US Constitution and responds critically to Charles Beard’s view of the Constitution .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 lower classes . 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 Paper 10, Madison’s famous description of the necessity of factions due to the truths of human nature. 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, 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 PosnerRichard Posner
Richard Allen Posner is an American jurist, legal theorist, and economist who is currently a judge on the United States Court of Appeals for the Seventh Circuit in Chicago and a Senior Lecturer at the University of Chicago Law School...
emphasized the importance of a constitution for
economic development
Economic development
Economic development generally refers to the sustained, concerted actions of policymakers and communities that promote the standard of living and economic health of a specific area...
. 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
De facto
De facto is a Latin expression that means "concerning fact." In law, it often means "in practice but not necessarily ordained by law" or "in practice or actuality, but not officially established." It is commonly used in contrast to de jure when referring to matters of law, governance, or...
in common law
Common law
Common law is law developed by judges through decisions of courts and similar tribunals rather than through legislative statutes or executive branch action...
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 further explains that "economics may provide insight into questions that bear on the proper legal interpretation". In the end, as Judge 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."
Concurrently with the rise of academic research in the field of constitutional economics in the U.S. in the 1980s, the Supreme Court of India
Supreme Court of India
The Supreme Court of India is the highest judicial forum and final court of appeal as established by Part V, Chapter IV of the Constitution of India...
for almost a decade had been encouraging public interest litigation
Public interest litigation
In Indian law, Public Interest Litigation OR जनहित याचिका means litigation for the protection of the public interest. It is litigation introduced in a court of law, not by the aggrieved party but by the court itself or by any other private party...
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
De facto
De facto is a Latin expression that means "concerning fact." In law, it often means "in practice but not necessarily ordained by law" or "in practice or actuality, but not officially established." It is commonly used in contrast to de jure when referring to matters of law, governance, or...
practical application of the methodology of constitutional economics.
The President of the Constitutional Court of the Russian Federation
Constitutional Court of the Russian Federation
The Constitutional Court of the Russian Federation is a high court which is empowered to rule on whether or not certain laws or presidential decrees are in fact contrary to the Constitution of Russia...
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."
Russian school
The Russian school of constitutional economics was created in the early twenty-first century with the idea that the 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 judiciaryJudiciary
The judiciary is the system of courts that interprets and applies the law in the name of the state. The judiciary also provides a mechanism for the resolution of disputes...
, which in many transitional and developing countries is completely controlled by the executive
Executive (government)
Executive branch of Government is the part of government that has sole authority and responsibility for the daily administration of the state bureaucracy. The division of power into separate branches of government is central to the idea of the separation of powers.In many countries, the term...
.
The latter undermines the principle of “checks and balances”, instrumental in the separation of powers
Separation of powers
The separation of powers, often imprecisely used interchangeably with the trias politica principle, is a model for the governance of a state. The model was first developed in ancient Greece and came into widespread use by the Roman Republic as part of the unmodified Constitution of the Roman Republic...
, as this creates a critical financial dependence of the judiciary. It is important to distinguish between the two methods of corruption
Political corruption
Political corruption is the use of legislated powers by government officials for illegitimate private gain. Misuse of government power for other purposes, such as repression of political opponents and general police brutality, is not considered political corruption. Neither are illegal acts by...
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 optimally facilitate the 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 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 mid-term) economic policy, budget legislation and administrative policies conducted by the government. In 2006, the Russian Academy of Sciences
Russian Academy of Sciences
The Russian Academy of Sciences consists of the national academy of Russia and a network of scientific research institutes from across the Russian Federation as well as auxiliary scientific and social units like libraries, publishers and hospitals....
has officially recognized constitutional economics as a separate academic sub-discipline.
Since many a country with a transitional political and economic system continues treating its constitution as an abstract legal document disengaged from the economic policy of the state, practice of constitutional economics becomes there a decisive prerequisite for democratic development of the state and society.
Criticisms of Constitutional Economics
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 CE as a study cannot exist . Unlike the market, consent is not the foundation of politics. 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, then constitutional economics as a discipline cannot exist.Van den Hauwe also points out a flaw of this consent-centered government formation which he calls “post-contractual opportunism,” or rent-seeking. Rent-seeking is when groups of individuals have the strong incentive to capture the instruments of political power for personal or communal gain . Van den Hauwe says this is essentially the “Prisoner’s Dilemma” on a national political level. Where the nation contracts to cooperate for the social good, then lobbyists have the incentive to cheat the contract and gain more at the expense of the other contractarians.
Therefore, Van den Hauwe says Buchanan and the cohort of constitutional economists have the strong imperative to find a solution to this problem, as rent-seeking is far from politically “efficient” for the contract. Buchanan’s solution is a Rawlsian social contract, or as Van den Hauwe says, a modified “Prisoner’s Dilemma,” in which the benefits of non-cooperative behavior are reduced. A veil of ignorance or uncertainty would do this, establishing rules under which each individual would desire to follow for both self-interest and the potential of being born into the disadvantaged place.
The final critique of constitutional economics is Hayek’s critique. Within Buchanan’s vision of constitutional economics, methodological individualism removes all possibility of external moral good beyond the aggregate of individual interests. This cannot be just or appropriate. As Aristotle said, it is within human nature for man to insert a moral and teleological element into everything, including politics. To remove this moral, universal end is to deny an essential part of human nature. When Buchanan calls for a Rawlsian organization of the state, not only does he test the limits of what is practical within the limits of politics, he also denies a moral nature within man. Hayek has a point when he says that liberal constitutional democracy is the best form of government when given human nature.
Echoing Hayek, 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 . Somehow, Buchanan arrives at an odd amalgam of Rawl’s large welfare state and Rothbard’s libertarian night watchmen state. Neither Rawls nor Rothbard, nor even the alchemic mix of the two recognizes the realities of human nature. While constitutional economics is a novel approach to political analysis, elements of it, specifically methodological individualism, contradict with the realities of human nature, and therefore make the discipline useful, but far from sufficient for political analysis. Granted, methodological individualism seems to address only individual choice, but Buchanan’s description of it, especially in 1990 and 1962, are rife and explicit with the implication: there cannot be a social good beyond the individual. Other disciplines like political philosophy, ethics, and even theology must precede constitutional economic analysis.
See also
- ArthashastraArthashastraThe Arthashastra is an ancient Indian treatise on statecraft, economic policy and military strategy which identifies its author by the names Kautilya and , who are traditionally identified with The Arthashastra (IAST: Arthaśāstra) is an ancient Indian treatise on statecraft, economic policy and...
- Civil societyCivil societyCivil society is composed of the totality of many voluntary social relationships, civic and social organizations, and institutions that form the basis of a functioning society, as distinct from the force-backed structures of a state , the commercial institutions of the market, and private criminal...
- ConstitutionalismConstitutionalismConstitutionalism has a variety of meanings. Most generally, it is "a complex of ideas, attitudes, and patterns of behavior elaborating the principle that the authority of government derives from and is limited by a body of fundamental law"....
- Constitutional lawConstitutional lawConstitutional law is the body of law which defines the relationship of different entities within a state, namely, the executive, the legislature and the judiciary....
- Institutional economicsInstitutional economicsInstitutional economics focuses on understanding the role of the evolutionary process and the role of institutions in shaping economic behaviour. Its original focus lay in Thorstein Veblen's instinct-oriented dichotomy between technology on the one side and the "ceremonial" sphere of society on the...
- Independence of the judiciary
- James M. BuchananJames M. BuchananJames McGill Buchanan, Jr. is an American economist known for his work on public choice theory, for which he received the 1986 Nobel Memorial Prize in Economic Sciences. Buchanan's work initiated research on how politicians' self-interest and non-economic forces affect government economic policy...
- Justification for the stateJustification for the stateThe justification of the state is a term that refers to the source of legitimate authority for the state or government. Typically, a justification of the state explains why the state should exist, and what a legitimate state should or should not be able to do.There is no single, universally...
- Law and economicsLaw and economicsThe economic analysis of law is an analysis of law applying methods of economics. Economic concepts are used to explain the effects of laws, to assess which legal rules are economically efficient, and to predict which legal rules will be promulgated.-Relationship to other disciplines and...
- Legal reform
- Public Interest LitigationPublic interest litigationIn Indian law, Public Interest Litigation OR जनहित याचिका means litigation for the protection of the public interest. It is litigation introduced in a court of law, not by the aggrieved party but by the court itself or by any other private party...
- New political economyNew political economyNew political economy students treat economic ideologies as the phenomenon to be explained. Thus, Charles S. Maier suggests that a political economy approach: interrogates economic doctrines to disclose their sociological and political premises....in sum, [it] regards economic ideas and behavior...
- Rule of LawRule of lawThe rule of law, sometimes called supremacy of law, is a legal maxim that says that governmental decisions should be made by applying known principles or laws with minimal discretion in their application...