The Economic Theory of Constitutions

What can economists propose in the bleak world of endless cycles? James Buchanan and Gordon Tullock (1962) propose the idea of a constitutional contract. A constitutional contract contains the basic rules on which the potential participants of a polity can agree.

Buchanan was very much inspired by Knut Wicksell (1896) when he wrote chapters on the Constitution in Buchanan and Tullock’s (1962) Calculus of Consent. Wicksell thought that a tax which is imposed by the franchised rich on the dis-enfranchised poor cannot be just. “Just taxation” (the subtitle of Wicksell’s 1896 book) had to be unanimous. Buchanan does not go so far; he does not insist on justice, only on legiti­macy. He writes: “the legitimacy of social-organizational structures is to be judged against the voluntary agreement of those who are to live or are living under the arrangements that are judged” (Buchanan 1999: 288). The legitimate constitutional contract is the basis from which all further arrangements have to start. It opens a perspective for further agreements. “The central premise of individuals as sovereigns does allow for delegation of decision-making authority to agents, so long as it remains understood that individuals remain as principals” (Buchanan 1999: 288). Delegation implies the power to make less than unanimous decisions. Individuals are aware of all the intricacies of less than unanimity decisions as found by Arrow, Black, May, Kramer and others, but they come to the conclusion that less than unanimity can be advantageous within the previously agreed contract. Their yes to less than unanim­ity decisions is encouraged by the veil of ignorance. They may correctly predict the consequences of a collective decision rule, but they are behind the veil of uncertainty and cannot predict whether they will be on the winning or on the losing side of a coa­lition.

Open exit (“to go West”) is an important precondition of the legitimacy of a constitu­tion. However, what should be done if exit is blocked and the problem of the distribution of rights comes up. Musgrave proposes that the constitution framers should solve the distribution issue before they proceed to the allocation issue (Buchanan and Musgrave 2000). Once the problem of a just distribution is solved, the Wicksellian unanimity test may be applied and efficiency may be reached, but not before. However, Musgrave remains silent on how the distribution problem should be solved. To re-introduce welfare economic judgements through the back door would certainly not be a satisfactory way. It would push economic analysis back behind Robbins’s 1932 plea for an economics of choice. The problem is therefore not how to allocate resources, but how to define deci­sion rules for allocating rights in a situation of conflict.

Rae (1969) and Taylor (1969) assume that an individual seeks to avoid having issues imposed on him, which he opposes, but that he favours the imposition of issues he prefers on others so that, on average, preferences can be assumed to be of equal intensity on both sides. Rae and Taylor ask, what rule minimizes the probability of supporting an issue that loses or opposing an issue that wins? The authors show that simple majority is the only rule that satisfies both criteria (Mueller 2003: 136-7).

Brian Barry (1965) illustrates this case in a lucid example: five people occupy a (once closed) railroad car. No sign either allows or prohibits smoking. Under the assumption of equal intensity of preferences and of uncertainty whether one is a smoker or a non­smoker, majority rule is the best decision rule. It maximizes the expected utility of a constitutional decision maker (Mueller 2003).

The Rae-Taylor rule shows that a constitutional contract is also feasible when indi­viduals are locked-in. But simple majority rule becomes more attractive.