The Online Library of Liberty

A project of Liberty Fund, Inc.

• Foreword
• Preface
• The Reason of Rules
• 1.: The Constitutional Imperative
• I.: Introduction
• II.: Reasons For Rules
• III.: Rules of Games
• IV.: Rules of the Road
• V.: Rules of the Market Order
• VI.: Rules of Political Order
• VII.: The Importance of Rules
• 2.: The Contractarian Vision
• I.: Introduction
• II.: Noncontractarian Constitutionalism
• III.: Individuals As Sources of Value
• IV.: Contract and Exchange
• V.: Politics In the Exchange Perspective
• VI.: Unanimity As the Contractual Ideal
• VII.: Agreement On Rules and the Veils of Ignorance and Uncertainty
• VIII.: Conclusions
• 3.: The Myth of Benevolence *
• I.: Introduction
• II.: Private Good and Public Good
• III.: Science, Truth, and Politics
• IV.: The Authoritarian Imperative
• V.: Majoritarian Democracy In the Noncontractarian Paradigm
• VI.: The Aim of Politics
• 4.: Modeling the Individual For Constitutional Analysis
• I.: Introduction
• II.: Homo Economicus In Politics: the Argument For Symmetry
• III.: Science and the Empiricist Defense
• IV.: A Methodological Defense of the Differential Interest Model of Behavior
• V.: Social Evaluation and Quasi-risk Aversion
• VI.: Gresham’s Law In Politics
• VII.: Summary
• 5.: Time, Temptation, and the Constrained Future *
• Preface
• Part 1.: Individual Private Choice
• I.: Introduction
• II.: The Ultimate Z ’s
• III.: Preferences For Preferences
• IV.: Past, Present, and Future
• Part 2.: Individual Public Choice
• I.: Introduction
• II.: Society With a History
• III.: Temporal Interdependence
• IV.: An Illustration
• V.: Moral Rules And/or Constitutional Commitment
• 6.: Politics Without Rules, I: Time and Nonconstrained Collective Action
• I.: Introduction
• II.: The Social Discount Rate
• III.: The High-tax Trap
• IV.: The Inflation Trap
• V.: The Public-debt Trap
• VI.: Other Examples
• VII.: Conclusions
• 7.: Rules and Justice
• I.: Introduction
• II.: Just Conduct and the Notion of Desert
• III.: Justice and Promise Keeping
• IV.: Justice Among Rules
• V.: Just Rules, Agreed-on Rules, and Just Conduct
• VI.: Conclusions
• 8.: Politics Without Rules, II: Distributive Justice and Distributive Politics
• I.: Introduction
• II.: Distributive Justice: the Conventional View
• III.: The Constitutional Perspective and Institutional Incidence
• IV.: The Incidence of Unrestricted Majoritarianism
• V.: Tax Rules and Distribution Under Majority Rule
• VI.: Direct Constitutionalism and Distributive Justice
• VII.: Summary
• 9.: Is Constitutional Revolution Possible In Democracy?
• I.: Introduction
• II.: Pareto-superior Change and Wicksellian Unanimity
• III.: Distributional Limits and Prospective Rules
• IV.: Status Quo Entitlements and Distributional Envy
• V.: Constitutional Change and Free Riders
• VI.: The Role of Norms
• VII.: Toward a Civic Religion

I.

Introduction

There is something profoundly unsatisfactory about economists’ introducing their subject matter by reference to the Robinson Crusoe who faces an “economic problem” because he must decide how to allocate his scarce resources (including time) among competing uses. With this introduction, it becomes far too easy to slip from the Crusoe setting into one in which “society” as such also faces the “economic problem” and to jump, almost inadvertently, from analyses of individual utility maximization to direct concern with maximization of value for society.

What is left out in such a pedagogical sequence is the interaction among separate individuals who make up a society. Individuals face choices in a social setting in which the existence and behavior of other persons, along with the institutions that constrain their behavior, are much more important than the physical constraints of nature. Economics is, or should be, about individual behavior in society.

Such behavior is not necessarily “social” in the sense that individuals recognize the existence of reciprocal influence among the actions of directly interacting parties. Individual behavior in large modern societies may be totally impersonal, as exemplified in the idealized models of competitive markets. In the limiting case, all participants respond to exogenously determined parameters: No person exercises any direct influence on another. The outcomes of the complex interdependence of all actors are not available as objects of choice for any actor.

In the limiting case, or in more general settings where at least some part of behavior is explicitly “social,” the rules that coordinate the actions of individuals are important and are crucial to any understanding of the interdependence process. The same individuals, with the same motivations and capacities, will interact to generate quite different aggregate outcomes under differing sets of rules, with quite different implications for the well-being of every participant. The allocation of an individual’s time and energy will be different in a setting where rewards are related to performance and in a setting where rewards are determined by other criteria. At least since the eighteenth century, and notably since Adam Smith, the influence of rules (Smith’s term was “laws and institutions”) on social outcomes has been understood, and this relationship has provided the basis for a central theme in economics and political economy, particularly as derived from their classical foundations.

If rules influence outcomes and if some outcomes are “better” than others, it follows that to the extent that rules can be chosen, the study and analysis of comparative rules and institutions become proper objects of our attention. Without an understanding of how the individuals who make up a social order interact, and how different sets of rules affect these interactions, it is impossible for participants to make informed changes in existing rules or even to behave prudently with respect to the preservation of those rules that have proved essential to the tolerably efficient functioning of the society as such.

What advice can we offer ourselves in our own societies, standing as we do with the benefits of cooperation and the prospects of conflict on either hand? What aspects of our social life should we discard? Where are there “rules of social order”—institutional arrangements governing our interactions—that lead us to affect one another adversely? Where are there forces for harmony that can be mobilized? What rules—and what institutions—should we be struggling to preserve?

These questions represent the area of inquiry we term “constitutional political economy” (in the spirit of the classical political economists, for whom such questions were also central). They are important questions even if they are so widely ignored in modern discourse. And they are not asked in a total intellectual analytic vacuum. They have, indeed, occupied some of the greatest minds in the Western tradition. Unfortunately, much of the accumulated wisdom seems to have fallen between the cracks. Such questions are often considered to be merely ideological, so that the answers are simply matters of opinion on which one view is about as good as any other. There is, to be sure, a considerable range of permissible disagreement. But there is also a procedure for asking the questions and a method of analysis that sets the terms within which debate can range.

The questions themselves, the proper procedures for asking them, the relevant analytic method—these make up the agenda for this book. Our aim in this opening chapter is to set the stage—to hammer in a few pegs on which we can subsequently throw various hats. Specifically, we shall offer a characterization of various sorts of interactions, initially in abstract terms. We shall indicate, again abstractly, the ways in which rules and institutions are relevant to the nature of the interactions that prevail. We shall then relate the various interaction types to different social contexts with which they are often associated. Finally, we shall briefly discuss rules in general and relate some of the insights gained thereby to the social-political-economic setting, which is, of course, our central concern.