Introduction

The term ‘constitutional economics’ or ‘constitutional political economy’ was introduced in the 1970s to designate a distinct strand of research that emerged from the somewhat older public choice branch of economics.¹ In the 1990s, constitutional economics developed into a major research programme.

However, the subject matter is not new. Broadly conceived, constitutional economics is an important component of a more general revival of the classi­cal approach. It draws substantial inspiration from the encompassing theoretical perspective and the reformist attitude that were characteristic of Adam Smith’s vision. Buchanan’s constitutional political economy can be considered the modern-day counterpart to what Smith called ‘the science of legislation’, an academic enterprise that seeks to bring closer together again the economic, social, political, philosophical and legal perspectives that were once part of the study of ‘moral philosophy’.

One might be tempted to characterize constitutional political economy simply - and somewhat narrowly - as ‘the economic analysis of constitu­tional law’. It cannot be denied that the examination of real-world constitutions using the perspective of modern constitutional political economy is an inter­esting exercise and may provide a kind of test for the usefulness of this approach. Reference can be made to several interesting case studies.² How­ever, such a definitional strategy may tend to be somewhat misleading. The use of the term ‘constitutional’ in the self-description of the subdiscipline is largely metaphorical. Constitutional economics as a research field comprises but is at the same time broader than, ‘the economic analysis of constitutional law’.

Constitutional economics as a scientific subdiscipline is characterized by a particular kind of orientation in social analysis. 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 explain the working properties of alternative sets of legal-institutional-constitutional rules that constrain the choices and ac­tivities of economic and political agents. The emphasis is on the rules that define the framework within which the ordinary choices of economic and political agents are made. Thus constitutional economics analysis involves a ‘higher’ level of inquiry than orthodox economics. It examines the choice of constraints as opposed to the choice within constraints. Thus the constitu­tional economist has nothing to offer by way of policy advice to political agents who act within defined rules. On the other hand, the whole exercise is aimed at offering guidance to those who participate in the discussion of constitutional change. Constitutional economics offers a potential for norma­tive advice in constitutional matters, whereas orthodox economics offers a potential for advice to the practising politician.

A preliminary illustration may be drawn from the economics of monetary policy. Events in the European Monetary System, on the one hand, and monetary disintegration in the former Soviet Union, on the other, have re­vived interest in the question of how to design and choose a monetary regime for both parts of Europe that ensures monetary stability. The constitutional economist is not directly concerned with determining whether monetary ease or monetary restrictiveness is required for furthering stabilization objectives in a particular setting. However, he/she is directly concerned with evaluating the properties of alternative monetary regimes (such as complete monetary union versus currency competition).³

Of course, there exists a whole set of subdisciplines that all draw some attention to the legal-political constraints within which economic and poli­tical agents choose.

One of the leading journals of the subdiscipline is Constitutional Political Economy (CPE). Some intuitive understanding of what constitutional poli­tical economy is all about can be gained from explaining the logic behind the logo of this journal, which is drawn from Greek mythology. The logo is a representation of the familiar Homeric account of how Ulysses heard the sirens singing, and survived (Kliemt and Brennan, 1990). Ulysses wanted to hear the exquisite voices of the sirens. He was passing close by and, 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 ever closer to the rocks where the sirens were located. The ship would be wrecked and he would be unable to continue his journey.

Formally, Ulysses faced a problem of time inconsistency in his optimal plan. His optimal plan was to listen to the sirens and then continue his journey. But this was time-inconsistent because, once he had embarked on the plan by listening to the sirens, he would not have been able to implement the later part of the plan, the rest of his journey. By contrast, a time-consistent optimal plan is one that specifies a sequence of actions (A_t, A_{t +} 1, A_t+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 time period the action specified by the plan.

The time inconsistency arises because the sirens affect Ulysses’ prefer­ences. His perception of the best action changes in the middle of the plan and this leads him to deviate from the original version. Ulysses implemented his optimal plan by denying himself freedom at the later stage of the plan. Having instructed his men to tie him to the mast and to ignore any orders to do anything other than 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 rules that constrain 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 be destructive of 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 constitutional political economy (Buchanan, 1990, p. 3), the principal issue for constitutional political economy is that of forming a mutually agreeable constitution for social arrangements among a community of persons. Ulysses is therefore to be seen not merely as a single actor but more particularly as representing society as a whole, and the mast and rope are to be identified as the rules by which ordered society is governed.

As Kliemt and Brennan (1990, p. 125) point out, some care must be taken in interpreting any such image. Following the individualist methodology, ‘social action’ must be decomposed into the actions 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 procedures because this is the price each must pay to restrict the conduct of others.

Moreover, in the setting with which constitutional economics is concerned, there is no external technology available that is totally effective or that is not excessively costly. The tools of enforcement and maintenance must 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, we must search out rules which so order individuals’ behaviour that it is individually profitable for most people to keep and enforce those rules most of the time. The gains from violation should not be too great. The analysis of the kind of rules and the associated institutional apparatus that exhibit these properties represents a centrepiece of constitutional political economy as an area of inquiry.