Proposed solutions

Is the rent-seeking trap inescapable? By far the most important problem with respect to ensuring the self-enforcing character of a constitutional contract is that it must successfully constrain the power of the state itself.

Substantive restraints versus procedural rules

Generally speaking, substantive constraints on government have been dis­missed as ineffective precisely because of the wide latitude they allow for reinterpretation. Gwartney and Wagner (1988a, pp. 44-9) make a strong case for procedural rules designed to uphold decentralization of governmental powers and to prevent the formation of legislative coalitions. Procedural rules will provide more effective mechanisms for self-enforcement than will sub­stantive restraints on government. In their view, the weakness of substantive restraints derives from the politicization of the Supreme Court and the ease with which legislatures can find alternative ways to implement any given policy. They propose procedural rules requiring larger legislative majorities for legislative action at higher levels of government, thereby diffusing the power of the state to regional and local governments.

Judicial independence

Does independence of the judiciary serve the long-term public good? The traditional view of the purposes of judicial independence has been attacked as naive by law and economics and public choice scholars. Unlike many legal contracts, it is argued, there is no third-party enforcer, external to the con­tract, who can ensure that defectors are caught and forced to comply with the terms of the agreement. Although many countries have a nominally inde­pendent Supreme Court whose purpose is to enforce the constitution, the Supreme Court can only do this imperfectly in most cases, because the judges themselves are not totally immune from political pressures by groups wishing to subvert the original intent of the constitution.

The interest group theory first advanced by Landes and Posner (1975) makes the independent judiciary an integral part of the system of rent seeking engineered by Congress. However, the debate goes on. A very detailed criti­cism of the Landes-Posner theory is contained in Boudreaux and Pritchard (1994), who argue that the theory is seriously deficient and conclude that the United States federal judiciary is truly independent of Congress and the president, and that this independence was designed by the US Constitution’s framers as a means of furthering sound government.

A rule of law in politics

According to Buchanan (1993b) the direction of constitutional reform is obvious. If, somehow, the potential for differential treatment is reduced, so will be the inducement to rent-seeking behaviour. The off-diagonal solutions should simply be made impossible to achieve by the introduction of some rule or norm that prevents participants from acting or being acted upon differently, one from the other. If the off-diagonal attractors are eliminated, then the players operate with the reduced matrix shown in Figure 13.2. Thus the constitutional reform measure modifies the original prisoner’s dilemma game into a reduced setting in which each player, as a member of a political coalition, knows that any choice of an action or strategy must involve the same treatment of all players or constituencies (ibid., p. 3).

Figure 13.2 Modified prisoner’s dilemma

If and to the extent that differential treatment is replaced by equal treat­ment, or by the principle of generality in politics - analogous to that present in an idealized version of the rule of law - mutual exploitation will be avoided and politicians who seek to serve the ‘public interest’ will survive and prosper (ibid., p.

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

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

Veil of uncertainty and/or ignorance versus the availability of exit options Is it possible to specify the conditons under which constitutional agreement may be facilitated in real, non-hypothetical choice situations? Is it possible to modify the constitutional choice setting so as to reconcile divergences in interests? In this respect, two lines of reasoning have been pursued in the contractarian and neo-contractarian literature. The first line of argument fo­cuses attention on the need for a ‘veil of uncertainty and/or ignorance’ as a precondition for an efficient constitution.

Buchanan and Tullock (1962) had to present a convincing positive argu­ment that unanimous consent at the constitutional level was possible at all. How can agreement on rules among persons with potentially conflicting constitutional interests be achieved? The authors’ characteristic way of ap­proaching this issue consists of emphasizing the uncertainty confronting all individuals taking part in constitutional deliberations.

The proposed remedy involves the introduction of some means of ensuring people’s inability reliably to foresee their future particularized interests, as these may be affected by different rules, thereby inducing people to make constitutional choices on some assessment of the general working properties of alternative rules, and divorced from particularized interests. Thus agree­ment is facilitated by whatever increases people’s uncertainty about the particular effects that alternative rules can be expected to have on them. In fact the assumption of a ‘veil of uncertainty’ was also hidden in Buchanan (1993b), discussed above.

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

However, the constitutionalist notion of a veil of uncertainty or ignorance, though useful as an analytical benchmark, is not very practical. It is not clear how genuine uncertainty or ignorance could be achieved in real-world consti­tution formation.

In order to produce an efficient social contract or constitution, delibera­tions must be carried out in a competitive ‘constitutional environment’. This condition will be satisfied if an exit option exists for each contracting party. This conclusion is quite consistent with the Wicksell-Buchanan-Vanberg contractarian consensus test. Only in a competitive setting does unanimous agreement acquire operational substance (normative content).

Vanberg (1994) clearly recognizes that the true problem with the agree­ment criterion is not that it is too demanding but, rather, that it has too little normative content. A criterion needs to be specified which allows one to distinguish between constraints that are judged to make the respective indi­vidual choices involuntary, and those that do not. Vanberg’s analysis reaches the conclusion that a consistent normative-individualist approach needs to rely on a combined and simultaneous application of a purely procedural, rule-oriented, as well as a substantive, avoidance/exit cost criterion. The avoidance/exit cost perspective arguably provides a more operational specifi­cation of the contractarian norm than the notion of a hypothetical contract to which Buchanan (1975, 1977) as well as Rawls (1971) appeal.

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

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

Federalism, once again

The strengthening of regional and local government relative to national gov­ernment has been advocated by many scholars as an effective way to restrain the growth of legislative redistribution. The existence of separate jurisdic­tions with some protected powers within a constitutional federation inhibits coercive behaviour by the government. Such an arrangement facilitates migration at low cost between federal subregions and thereby enhances com­petition between these subregions. The resulting mobility forces competitive governmental units to supply public goods in preferred quantities and to ‘price’ them broadly in line with relative marginal evaluations.

The foregoing is related to the Tiebout effect (Tiebout, 1956), which says that individuals will sort themselves across communities in accordance with their preferences for the packages of taxes and public goods provided in each community. The ability of the owners of property rights to move to compet­ing jurisdictions protects them from potential rent appropriation by a coercive government. Therefore, it is argued, a federalist constitution can effectively constrain the power of the state. In a federal system, citizens seeking political relief can vote with their feet.

The preceding paragraphs suggest that post-contractual exit opportunities might be characterized in terms of Tiebout competition between different political groupings. If the constitution permits mobility and political plural­ity, it will help establish and maintain a competitive political post-constitutional environment.⁷

Notes

1. A classic overview of public choice theory is contained in Mueller (1989).

2. Thus Backhaus (1995) contains an analysis of constitutional guarantees of basic rights and procedures, illustrated by three constitutions, the American Constitution of 1789 as amended in 1792, the German Basic Law of 1949 and the Dutch Basic Law of 1983. In addition, reference can be made to several case studies. Holcombe (1991) analyses the role of constitutional rules as constraints on government using three US constitutions: the Articles of Confederation (1781), the Constitution of the United States and the Confederate Consti­tution. Geoffrey Brennan and Jose Casas Pardo (1991) examine the Spanish constitution (1978). Sobel (1994) analyses the evolution of two international constitutions: the League of Nations Covenant and the United Nations Charter.

3. See, for example, Hefeker (1995); for some general reflections, see Eichengreen (1994).

4. The problem of time inconsistency has perhaps most notably been investigated in the context of central bank monetary policy; see in this connection the contributions of Barro and Gordon (1983a and 1983b). For a survey of subsequent elaborations and variations upon the same theme, see, for example, Walsh (2001, ch. 8, pp. 321-84).

5. In The Power to Tax, Brennan and Buchanan argue that the existence of potentially huge rent-seeking costs constitutes one of the important arguments for predicting that all rational individuals, behind a veil of ignorance, would seek to constrain exploitation by revenue­maximizing government to the maximum possible extent. The only way of doing so is to minimize the rents that accrue from ‘governing’ - that is, by constraining Leviathan so that its surplus is minimal. Government ‘surplus’, or the income that accrues to government for discretionary use, is defined as S = R - G, that is, the excess of revenue collections over spending on specified uses. Since G = aR, S = (1 - α)R, where a is the proportion of total revenues to be spent on specified public goods and services (Brennan and Buchanan, 1980 [2000], ch. 2).

6. For what may now well become a standard general and formal treatment of the principal­agent model, see Laffont and Martimort (2002).

7. On the significance of the substitutability between intergovernmental competition for fiscal resources and explicit constitutional constraints on governmental taxing power, once the possibility of federalization is introduced, see Brennan and Buchanan, 1980 [2000], ch. 9. These authors’ emphasis is on federal assignment as a means of ensuring that individuals have available options as among the separate taxing-spending jurisdictions, and on the effect that the potential exercise of these options has on the total fiscal exploitation in the system. Total government intrusion into the economy should be smaller, ceteris paribus, the greater the extent to which taxes and expenditures are decentralized, the more homoge­neous are the separate units, the smaller the jurisdictions, and the lower the net locational rents. (ibid., p. 216).

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