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

IV.

Contract and Exchange

Rather than plunge directly into the murky discourse suggested by such questions, we shall proceed circuitously by introducing a familiar setting. Ultimately, our interest lies with the participation of individuals in contractual agreement on changes in the most fundamental rules of the socioeconomic-political game in which they live. But a useful analogy is provided by ordinary market exchange, a contractual process in which we all engage and for which economists have well-developed analytic explanatory tools. We need only consider the simplest exchange model: a two-person, two-commodity trade or exchange.

First, let us think of two persons, A and B, each endowed with a bundle containing quantities of two goods or commodities, oranges and apples. For simplicity, let us assume that A initially has all the oranges and that B has all the apples. Both commodities are “goods” in the utility or preference functions of both potential traders, and there is not sufficient abundance in the endowments to satisfy fully the appetites of either person for either commodity. In this setting, trade can be beneficial to both parties. Person A will trade oranges for apples; B will occupy the reciprocal role. The two parties will agree to make exchanges so long as their internal trade-offs between the two commodities differ. When trading stops, at equilibrium, the internal rate of exchange between oranges and apples for A will be equal to that for B and will also be equal to the final terms under which the commodities were exchanged.

This is first-day economics, of course, but we seek here to look at this simple trading process from our contractarian-constitutionalist perspective. The implicitly postulated rules for trade involve the rights of each person to the initial endowments in his possession, along with the prohibitions on force and fraud in dealings. Within these rules, the two traders reached an outcome that can be described by a new endowment, a new imputation or allocation of the two goods between the two parties.

What can we say about the outcomes so attained? We can say that given the initial endowments and the existing rules of the trading game, the outcome is whatever maximizes value. But note that the source of value lies exclusively within the preferences of the persons who trade. There is no external source of evaluation, and trade as such is not merely a means by which some external, independently existing value is achieved. Individuals make their evaluations of the two commodities only as the trading process takes place, and, without trade, there could be no means of determining what value is at all.

Only through trading agreement can maximum value be attained. But note that this is not the same as saying that value is defined by agreement as such. In the process of reaching agreement, the traders are expressing values they place on the commodities. They are not deriving values from agreement; values are, instead, the elements that lead to agreement.

We deal with this matter in such detail here because there seems to be widespread confusion as to the connection between maximum value, or efficiency, and agreement. Professor Jules Coleman, in a well-informed critique of our position, has distinguished between what he calls epistemic and criterial usage of agreement in the definition of efficiency, or maximum value.3 By epistemic usage of agreement, Coleman refers to the instrumental function of the contractual process. Hence, if there did exist some scale of value or valuation external to the traders, the trading process itself might be evaluated in terms of its success or failure in moving toward the maximum on such a value scale. In contrast with the epistemic use, Coleman introduces the criterial usage of agreement, by which he means that value is defined by the agreement per se. In the simple trading process analyzed earlier, we showed that neither of the two uses is involved. No scale of value exists external to the trading process. But in the expression of individual values through which agreement is ultimately reached, the traders are not deriving values from the end state of agreement as such. Their own, individually based values emerge as trade takes place; these values do not reflect feedback from the agreement itself.

The economist, who conceptually observes the trading process and who sees no violations of the basic rules, can assign an “efficient,” or “maximum value,” label to the equilibrium result. In so doing, he is not evaluating the result against any scale external to the participants in the trade, nor is he introducing some value scale of his own. Within the rules, as defined, the trading outcome must always be “efficient,” and there is no way the economist can define an “efficient” allocation independent of trade itself. The economist is forced to bring his own evaluative criteria to bear on the rules of trade rather than on the results of trade.4

[3. ]Jules Coleman, “The Foundations of Constitutional Economics,” in Constitutional Economics: Containing the Economic Powers of Government, ed. Richard McKenzie (Lexington, Mass.: Lexington Books, 1984), pp. 141-55.

[4. ]For an elaboration of the position outlined here, see James M. Buchanan, “Rights, Efficiency, and Exchange,” in Ansprüche, Eigentum und Verfügungsrechte, Arbeitstagung des Vereins für Socialpolitick, Basel, 1983 (Berlin: Duncker & Humblot, 1984), pp. 9-24.