November 29, 2021

Constituting Constitutional Economics

“As Smith himself put it: ‘Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice.'” ~ Alexander William Salter

Last time we framed the quest for good governance as constitutional political economy in action. Now we’re going to explore how constitutional political economists think about constitutions.

A constitution sets the ground rules for politics. Post-constitutional politics means competition among political stakeholders for determining public policy. Constitutional politics means the rules underpinning the political process are up for grabs. Sports analogies work well here. Picking the rules of basketball–proscribing traveling, double dribbling, and some kinds of bodily contact, for example–is like constitutional politics. Playing basketball with the goal of winning is like post-constitutional politics.

Constitutional politics can be more pacific or more contentious than post-constitutional politics. It might be more pacific because political actors don’t have a very clear idea of what procedures best fit their narrow self-interest. After all, self-interest often depends on the rules of the game, which haven’t yet been chosen. Thus it should be easier to secure agreement to rules that benefit citizens in general, rather than particular interest groups. This is a standard “veil of ignorance” argument.

But constitutional politics can also be more contentious than post-constitutional politics. Oftentimes political stakeholders know all too well what kinds of rules are best for their self-interest. Getting those rules in place matters a lot, since eventual policy depends on constitutional rules. When many stakeholders from opposed coalitions think this way, things can get ugly.

Discovering the constitutions that most effectively promote the general welfare is the prescriptive part of constitutional political economy, also called constitutional economics. It relies just as much on political philosophy and ethics as it does on economic reasoning. To paraphrase James Buchanan, this branch of constitutional economics lies “between predictive science and moral philosophy.” Explaining why stakeholders chose a constitution is the descriptive part of constitutional political economy. Familiar economic models of property rights, bargaining, and conflict are more relevant here.

Constitutions aren’t just for governments. All organizations–businesses, churches, fraternities, universities–have a constitution. Constitutional economists study these other constitutions, too. But it’s true we spend more time and effort analyzing government constitutions than non-government constitutions. There’s a simple reason for this: the stakes are much higher.

A government has a monopoly on the use of force within its territory. In other words, the state is the only entity that gets to initiate violence to resolve its disputes. The massive coercive asymmetry between a government and its citizens makes getting the constitution right very important. If the rules create an arbitrary and overly powerful government, governors will oppress the governed. There’s a delicate balance between setting up a government that can preserve social harmony and unwittingly creating a government that is itself the greatest threat to social harmony. James Madison put it best in Federalist 51: “In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place oblige it to control itself.”

The wealth and poverty of nations often hinges on the quality of their governments. This in turn depends on the effectiveness of its constitution. We judge constitutional effectiveness by two measures. The first is the constraining feature of constitutions. The second is the coordinative feature of constitutions.

Constitutions constrain when they take certain actions off the table. Consider the First Amendment to the U.S. Constitution, which protects the right of free speech. Some groups want to use the law to restrict permissible speech by other groups. The desire for censorship is even greater when the groups are political rivals. The First Amendment prevents this kind of predatory politics: no matter how large the majority in the censoring group, it may not use the legal system to punish others for what they say. The First Amendment effectively removes this as an option.

Constitutions coordinate when they help improve the interactions of the public with the government, and parts of the government with each other. Traffic lights are an example of a coordinating rule. It’s arbitrary that green means go and red means stop. There’s nothing inherently virtuous about driving when the light is green and stopping when the light is red. The benefit of the rule is the order it creates on the streets. At the constitutional level, checks and balances and the separation of powers work similarly. We usually view these features of the U.S. Constitution through the lens of constitutional constraints. But it’s just as important to view them through the lens of constitutional coordination. By specifying which branches of government are responsible for what activities under specific circumstances, the Constitution sets the “rules of the road.” This makes it easier for public agents to avoid “colliding” with each other.

Let’s use another sports analogy to make this clearer. You could say the rules of basketball prevent players from all forms of movement with the ball other than dribbling. The rules take motions off the table. While this isn’t wrong, it’s also not the whole story. It’s better to think about dribbling as one of the essential constituting features of basketball. The game doesn’t make sense unless we keep in mind both the constraining and coordinative features. What’s true of basketball is also true of government.

Constitutions matter a great deal for national prosperity. Economics since Adam Smith went through an incredible cycle of discovering, then forgetting, then remembering the importance of effective and responsible government for long-run growth. Private property, freedom of contract, and the rule of law are among the most important institutions for wealth creation. Or, as Smith himself put it: “Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice.”

Here’s the tricky part: how do we get an effective and responsible government?

The government will be effective and responsible when the constitution promotes protective and productive governance and impedes predatory governance. Getting the constitution right–coming together and deciding on rules for rule-making–surely matters. But just as surely it isn’t all that matters. If that’s all it took, the world’s ineffective and irresponsible governments could’ve just copied the U.S. Constitution. It’s not like the text is hard to find!

How much and under what conditions constitution-writing matters is one of the most important questions in constitutional economics. But to understand it, we need to specify more concretely the kinds of problems constitution-writing is supposed to solve. Once we understand those problems, we’ll have a better idea how much conscious constitutional craftsmanship can accomplish.

This article, Constituting Constitutional Economics, was originally published by the American Institute for Economic Research and appears here with permission. Please support their efforts.