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V.: Moral Rules and/or Constitutional Commitment - Geoffrey Brennan, The Collected Works of James M. Buchanan, Vol. 10 (The Reason of Rules: Constitutional Political Economy) 
The Collected Works of James M. Buchanan, Vol. 10 (The Reason of Rules: Constitutional Political Economy) Foreword by Robert D. Tollison (Indianapolis: Liberty Fund, 1999).
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Moral Rules and/or Constitutional Commitment
In Part 1 of this chapter we demonstrated that the individual who recognizes the temporal interdependence of choice may find it rational to adopt a set of moral rules even with reference to purely private behavior. It should be clear, however, that moral rules designed to constrain future-period behavior become enormously more important in the collective setting. The reference person knows that he is only one member of a group and that collective outcomes emerge from the operation of a specified decision structure. How can limits be placed on the “behavior” of the collectivity as a unit? How can the individual act in t0 to ensure personal survival and security in the many-person world? He will seek to influence not primarily his own behavior in future periods but that of others who will be or will become members of the choosing group. With these considerations the individual may, on quite rational grounds, invest current-period resources in the indoctrination, dissemination, and transmission of a set of general principles or rules that will, generally, influence behavior toward patterns of situational response that are predictably bounded.
We also suggested in Part 1 that an awareness of the multiperiod interdependence of choice may sometimes provide a basis for precommitment, even in the most isolated private-choice setting. The individual may not trust himself as a rational chooser in any moment other than the reflective present. As we indicated, however, there are natural limits on precommitment in private choice, since the individual knows that his own freedom of action is to be constrained.
In a public-choice setting, no such natural limits apply, and the individual has immensely stronger grounds for choosing to impose constitutional precommitments on the behavior of collective entities. As noted earlier in Part 2, the individual at t0 is less capable of predicting the collective response to the choice options predicted to be confronted in future periods than of predicting private, personal reactions. In the former, even if the individual predicts his own preferences accurately, there must remain uncertainty about the response patterns of others. As a general principle, rationality precepts should dictate an inverse relationship between the predictability of future-period “choices” and the desirability of constraining the set of future-period options.7
A second and related argument supports the relatively greater attractiveness of constraints on future-period choices in the collective setting. In strictly private choice, as noted earlier, the individual knows that any precommitment binds his ability to satisfy personal preferences, whatever these may be. There is a trade-off between precommitment and liberty. By contrast, in the public-choice setting, no such trade-off exists, at least in any direct sense. In voting for limits on future-period choice options open to the collectivity as a unit, the individual need not think in terms of restricting the set of personally preferred options at all. The boundaries imposed on the ranges of collective “choices” may be treated as being outside any set of potentially desired outcomes. Such boundaries may be considered applicable only to the potential collective outcomes that might be generated from the expressed preferences of persons other than the reference individual. Clearly, constitutional constraints on the collectivity’s power to act will tend to be treated quite differently than possible precommitments on private behavior.8
Let us return to the example depicted in Figure 5.1. The individual will tend to support a constitutional constraint that will increase the probability that the collectivity, when and if t1 is reached, will generate the a1 rather than the a2 outcome. With such a constraint in place, the individual might select A rather than B in t0, even in the public-choice setting. Consider, as a practical example, a collective choice between paying off and not paying off outstanding public debt. The individual may well express a preference for repayment, hence reducing future tax burdens associated with debt service, if he can be assured constitutionally or otherwise that new debt will not be issued once the old debt is retired. Failing such assurance, the individual may express preference for continued rollover of the old debt.
Constitutional commitments or constraints become means by which members of a polity can incorporate long-term considerations into current-period decisions. In the absence of such constraints, individuals will be led, almost necessarily, to adopt a short-term perspective in politics. We shall discuss some of the practical implications of this short-term perspective in Chapter 6.
Politics Without Rules, I:
In the preceding chapter, we attempted to demonstrate that individual behavior in collective choice is likely to reflect shorter time horizons than comparable behavior in private or individualized choice, and for individually rational reasons. The person who may be willing to wait privately, to behave with prudence in order that he or his heirs may secure the fruits of long-term investment in human or nonhuman capital, may, at the same time, be unwilling to wait collectively, as reflected in expressions through political decision-making institutions. Because of the necessary attenuation of individually identifiable rights or shares in the fruits of collective or governmental “investment,” individual time horizons in politics are shortened. If this underlying hypothesis is valid, it would follow that as modern societies have become increasingly collectivized or politicized, there has been a shift toward a higher discount rate implicit in the allocation of the economy’s resources.
In this chapter we shift our attention to the less abstract and more practical level of real-world politics. But we should stress that we do not go all the way; we dare not enter the realm of historical or descriptive institutional detail. In a sense, our discussion remains abstract in that we examine the predicted workings of idealized models of politics in democracies as these models might be expected to work in confrontation with the problems of modern experience. Analytic models of politics assist us in understanding why these familiar problems persist in modern political life. Such an understanding, however, is a by-product of the primary function of the analysis here, which is to offer support for constitutional rules or constraints on practical political grounds.
Our purpose is to develop the intertemporal theme with the aid of distinct and familiar examples drawn from economic problems of the 1970s and 1980s in the United States and other Western nations. We shall discuss the “high-tax trap,” the “inflation trap,” and the “public-debt trap,” all of which demonstrate the general problem of imprudence in modern democratic polities, different countries having experienced these separate problems in differing degrees of relative importance. The inferences to be drawn for our larger and more comprehensive theme become clear as the analysis is developed; governments can be induced to take the long view only if they are appropriately constrained by constitutional rules that do not now exist. These reasons for rules emerge from an understanding of the workings of modern political economies.
The Social Discount Rate
The discussion in this chapter is related to a long-continuing topic in the theory of economic policy, often treated under the rubric of “social discount rate.” Traditionally, and especially since Pigou’s Economics of Welfare, published early in this century,1 economists have concerned themselves with the normative question, At what rate “should” society discount the future? How “should” the utility of future generations be weighted in the making of present-period decisions? More particularly, economists have asked, Is the interest of future generations sufficiently weighted by discounting at the market-determined rate of return on capital investment, the rate that market institutions install as a parameter for private-investment decisions? Should the collectivity as such make its own investment decisions on the basis of the market-determined rate of discount, and if the market rate is “too high,” should the collectivity, as a unit, replace the market behavior of individuals in all or in part of the investment or capital accumulation activity of the society?
These questions are intrinsically interesting, but for our purposes the implicit assumptions that prompted economists to ask them are more revealing. Almost without exception, the economists who asked these questions assumed that once a satisfactory normative solution could be agreed on, a benevolent government could, and presumably would, implement this solution. Never once did these economists pause to ask themselves whether government, as it is actually observed to operate, could or would implement the “optimal” discount rate that emerges from the careful exercise in normative prescription. In other words, the welfare theorists worked without a positive theory or model of governmental-political behavior, either implicit or explicit.
“Public choice,” the area of research with which we have long been associated, emerged in the 1950s, 1960s, and 1970s to fill this truly awesome gap in normative analysis. Within properly defined limits and appropriately qualified, public choice does offer a positive theory of how politics works or, stated somewhat differently, offers a panoply of theories about the working of politics under different sets of postulated rules and institutions. It is on this analytic structure that our conclusion about the political discount rate is grounded. The “social discount rate” generated in the operation of modern political decision-making institutions will be higher than that rate of time preference exhibited by persons in their private behavior. This statement takes the form of a testable hypothesis; it is not a normative proposition. It may well be that persons exhibit personal time preferences in market behavior that are “too high” when judged against some extraindividual criterion. To make such an argument one must resort to value norms that are not necessary in making the positive statement about relative discount rates in market and political behavior. We can say that the discount rate embodied in the political process is higher than that embodied in the operation of the competitive market without invoking our own private variant of a social welfare function.
The High-Tax Trap
The three main examples we shall introduce are familiar from economic policy discussions of the early 1980s. The “high-tax trap” is a term we shall use to refer to the set of considerations often summarized under “supply-side economics.” Our analysis of this trap, or dilemma, offers a basis for imposing limits on the government’s taxing authority, even in a setting where the taxpayer and the beneficiary groups are largely coincident in membership.2 That is to say, we model government democratically in the sense that it is presumed to be responsive to the demands of citizens both for expanded state services (and transfers) and for lower tax rates. The dilemma emerges here from the disparity in time horizons between the two separate sets of behavior, private and political.
Is it possible to say that tax rates are “too high” except by reference to some value-laden normative criterion that suggests the existence of some “optimal” size of public or governmental outlay relative to the private or market sector of an economy? In a nonevaluative sense, we could say that taxes are “too high” only if everyone expressed agreement on such a proposition, with members of the government (politicians, legislators, and bureaucrats) as well as direct beneficiaries included in the group. But surely the members of the group, the recipients of net transfers in particular, would never agree to any reduction in the size of the public sector, as measured by the amount of outlay and, indirectly, by tax revenues. So it would seem. Without some normative standard for judgment, we would never expect to obtain general agreement on the proposition that governmental outlays are too high.
This proposition is not, however, the same as the statement that tax rates are “too high.” It is at least logically possible that tax rates may be so high that tax revenues are actually lower than they would be at lower rates. In this case, of course, there should be general agreement among all parties on the need for a rate reduction, if not a revenue reduction.
The simple arithmetical relationship between tax rates and total tax revenues came to be widely discussed under the “Laffer curve” rubric in the early 1980s in the United States, since the relationship was brought into political prominence by Professor Arthur Laffer. As many critics pointed out, the relationship was articulated in writings as far back as the time of the Moors, and possibly even the early Greeks. And, indeed, there is little more to the relationship as such than the mathematical properties of a simple functional form. Some such relationship must exist so long as any inverse behavioral response of taxpayers to tax rates is predicted.
Pointing out that such a rate-revenue relationship must exist, however, is not the same as suggesting that modern fiscal systems are described by locations on the “wrong,” or inverse, portion of the schedule or curve, that is, at a position where a decrease in tax rates would increase rather than decrease tax revenues. In some of the journalistic advocacy of “supply-side economics” in the United States of the early 1980s, the arguments seemed to suggest that this position was, indeed, characteristic of the existing fiscal structure.
The initial reaction of public-choice economists is surely to reject the behavioral model that would be required to generate such a position. It would seem impossible that any rationally motivated governmental decision process could have allowed tax rates to reach such levels. Why would rates have been allowed to become so high as to reduce total tax revenues, since such rates would not be to the advantage of taxpayers, program beneficiaries, or politicians? It would seem to be in no group’s interest to sustain such a fiscal structure. Behaviorally, location along the inverse segment of the relevant rate-revenue curve seems bizarre, quite apart from the limited results of empirical studies that also suggest response elasticities that fall far short of those required to generate such results.
The initial reaction of the public-choice economists may, however, be less definitive than at first it seems, and a more sophisticated examination of the political decision matrix within which tax and outlay decisions are made, along with an analysis of individual responses to these decisions, might suggest a plausible scenario that might well produce the position on the “wrong” side of the rate-revenue relationship. The central element in this scenario is the disparity in time horizons between private and public choice.
Let us assume, possibly as a counterfactual, that the fiscal structure is in the position indicated. There is an inverse relationship between tax rates and total tax revenues. Is there any behaviorally meaningful path through which the system might have reached this position?
Let us look first at the utility or preference functions of those who participate in the process from which governmental fiscal decisions emerge. We can, at one extreme, think of all fiscal decisions as being produced by the operation of majority voting rules, with all members of the community equally franchised to participate in the determination of the outcomes. The analysis is sufficiently general, however, to allow for differential powers of collective influence among different groups of constituents. In any case, those persons who participate in the making of collective decisions will wish to make outlays or expenditures through the political unit. They will need such expenditures either to finance “good things” (governmentally financed goods and services and transfers) and/or to line their own pockets or those of their friends and constituents. In either case, we can stipulate that funds, or revenues, are desired by those who participate in collective decision making. Revenues are “goods” in the utility functions of persons who ultimately make fiscal choices, whoever these persons may be.
At the same time, however, the levy of taxes is required for the acquisition of these revenues. (We shall, in this section, ignore the prospects of revenue generation through either money creation or debt issue; these prospects will be discussed in the two following sections.) In some way or another, funds must be extracted from citizens in their private economic roles or capacities. This taxing process will be painful, regardless of the model of governmental decision making that is postulated. In utility-function terminology, taxes or tax rates become “bads” rather than “goods.” In some Utopian sense, persons in collective-decision roles would ideally prefer to spend without having to levy taxes. And the worst of all worlds for these persons would be some requirement that taxes be imposed without any accompanying outlay of funds on desired programs. These results remain true whether or not the taxpayer and the beneficiary groups are fully, partially, or not at all coincident in membership.
Note that to this point, we have said nothing at all about the time dimension. We have not dated the revenue flows the government expects to receive as a result of the imposition of a tax or an increase in the tax rate. We now postulate that those who participate in collective decision making are motivated by short-term considerations, for reasons analyzed in the previous chapter. By “short term” in this application, we mean that fiscal decisions are considered with reference to a time period shorter than that relevant to the private or individualized adjustments to tax-rate changes. We do not need to define the time horizon that informs individual collective choice in more detail than this; we require only that the effective time horizon embodied in governmental fiscal decisions be less extensive than that embodied in taxpayer response to tax-rate changes.
We know, of course, that taxpayer adjustments to tax-rate changes take time. In response to rate increases, persons must seek out and find nontaxable substitutes for the tax base, or at least substitutes that are taxed at differentially lower rates, whether the tax is imposed on a source or a use of income. Persons must shift investment to nontaxed or low-taxed opportunities and must invest in opportunities that are complementary to those directly advantaged. Individuals must learn about, and take advantage of, legal loopholes, which may have to be invented by lawyers and accountants. The whole analysis here depends only on the plausible assumption that in considering the revenue potential of a tax or tax-rate increase, the participant in governmental decision making operates on the basis of a shorter time perspective (a higher discount rate) than the one that describes the adjustment of persons as taxpayers to a posttax equilibrium.
For simplicity, let us postulate that full adjustment to a tax-rate change takes ten years, a period of adjustment that has been informally estimated to be relevant in modern fiscal systems of Western nations. Let us postulate, furthermore, that the time horizon effectively informing the behavior of participants in the making of collective political decisions on taxes (and spending) is five years or less. There are, of course, many reasons to support this postulated disparity in the time perspective for the individuals in the two separate roles, only one of which was discussed at some length in the previous chapter.
Given the postulated discrepancy in time horizons, “political equilibrium” will be established before “taxpayer equilibrium.” That is to say, the individual as a participant in the political decision-making process will try to attain a position where the trade-offs between tax rates and tax revenues faced in fiscal reality, over the relevant time period, are equated with the subjective trade-offs between these two arguments in the utility function. So long as the individual, as a fiscal decision maker, values the “good” measured by increased funds higher than the “bad” measured by the tax rates required to generate such funds, he will “vote for” or support increases in tax rates. Both of these variables will be measured with respect to the period of time over which the funds are anticipated to provide benefits and without direct regard to the period of time that might be required for full taxpayer adjustments. As such, these individual participants in fiscal decision-making processes will be uninterested in the fact that taxpayers will take ten years to attain full equilibrium adjustment to the current tax rates, even when, at another level of consciousness, they may realize that they are the same persons who are involved in the quite separate roles. As political decision makers, individuals are concerned with the flow of revenues from taxes, and with the program benefits therefrom, only for a period of five years or less.
In the illustration here, however, taxpayers will not have made the full behavioral adjustment within five years. From this result follows the simple fact that the government can expect to collect more revenues per period at any given tax rate (above some initial starting rate) within a five-year period than it can expect to collect over the full ten-year sequence.3 Hence, the fiscal process that embodies the shorter time horizon will exploit taxpayers more fully than would a process embodying a time horizon equal to, or longer than, the period of taxpayer adjustment. Taxpayers can be squeezed more fully by a governmental decision process that reflects interest in short-run revenue flows than by a process that incorporates a genuinely long-term perspective. As a familiar nontax example, the OPEC oil cartel was able to exploit oil consumers more before individuals adjusted the size and efficiency of the vehicle fleet than it was able to do after the adjustment took place.
Given sufficient time, of course, taxpayers will adjust to any given tax rate, and the coincidence of political and taxpayer equilibrium must ultimately be attained. In this full equilibrium, two separate conditions must be met. The trade-offs within the calculus of the persons who participate in governmental decision making must be equal, and taxpayers must be fully adjusted to the current tax rate. Such a full-equilibrium position might well be located in the range of the long-term rate-revenue schedule where rates and revenues are inversely related, although the precise location would have to be empirically determined. But the analysis suggests that because the long-term relationship is irrelevant to the political decision process, the generation of a position on the inverse segment of this relationship or schedule is not “collectively irrational,” in that there need be no violation of the precepts of rationality by those who participate in political decision making.
If, however, such a position were reached, and if it were recognized as such, why would political decision makers not react by reducing tax rates? The answer is the reverse side of the tax-rate increase coin. By cutting tax rates, government would find revenues reduced in the time period relevant to those who participate in political decision making. Even a shared presumption that a reduction in tax rates would generate an increased stream of revenues per period, after, say, ten years, would not affect the decision of those who, by our postulate, remain interested in revenue flows only over a five-year sequence. The maintenance of high tax rates would ensure higher revenues over this relevant period. The revenue-enhancing effects of a possible tax cut are long run, not short run.
Within the time perspective of the early 1980s, the critics who opposed the naïve supply-side economic arguments were correct. Tax-rate cuts were predicted to and did reduce revenue flows; budget deficits were increased, especially since outlays were cut very little, if at all. Whether the critics would have been correct within a time horizon allowing for full taxpayer adjustment will never be known, because pressures for tax-rate increases, for short-term revenue reasons, emerged as early as 1982.
This is the setting for what we call the “high-tax trap.” Individuals who participate in the making of political decisions cannot, even if they fully understand the situation they are in, readily escape from this dilemma. Given the absence of constraints on the fiscal proclivities of the collectivity, along with the existing rules and procedures for generating fiscal decisions, the individual who adopts a genuinely long-term perspective in his role as a participant in politics is behaving irrationally. In this setting, the argument for binding constraints on governmental fiscal authority becomes evident. Only if some means can be found to limit the ability of governments (political coalitions) in subsequent periods to depart from a reflectively evaluated and presently preferred long-term fiscal program will the individual participant find it advantageous to support the separate elements in such a program. Only through constitutional change can the institutions of modern politics be adjusted to ensure that, within these institutions, persons will have incentives to act in accordance with what they recognize to be the long-term interest of the community, as well as their own.4
The Inflation Trap
There are many similarities between the high-tax trap and the inflation trap, which we shall analyze in this section. The similarities are readily explained once it is recognized that both traps have essentially the same behavioral basis, which we have summarized as the disparity between the discount rate embodied in the choices made by individuals in their separate roles as public and private decision makers.
The United States, along with other Western countries, found itself caught up in an inflation in the 1970s that seemed to be continuing unabated. The inflation persisted despite the widespread recognition that a national economy operates less efficiently under an inflationary than a noninflationary regime. In a long-term perspective, inflation is clearly not in the interest of any group. But the short-term perspective that informs the decision calculus of those who participate in politics seemed to prevent them from initiating the action that would have been required to restore effective monetary stability.
How did we get into the dilemma? Is there a way out that can be other than temporary? An answer to the first question, which is perhaps essential to any attempt to answer the second, requires that we summarize the history of ideas in economics, at least since the impact of Lord Keynes. We shall do nothing more than sketch the bare outlines.
Keynes was successful in imposing on the mind-set of economists of the middle years of this century an abstract model of a high-unemployment, underutilized economy. And Keynes was surely correct when he noted that the ideas of academicians ultimately influence the actions of politicians. In the initial Keynesian model, demand brings forth supply, and increases in demand sop up underutilized manpower and capital, without creating increases in costs and prices. There are no supply-side constraints in the model, and quite literally, public spending is costless in terms of effectively displaced alternatives. This simple model appeared in the textbooks of all economics students after World War II, including all of those who later became the political leaders and opinion molders of the 1960s and 1970s. And surprisingly, the simple Keynesian model remains in many of the textbooks of the 1980s.
As early as the 1950s, however, there were indications that the Keynesian model is wrong in a critical respect. Supply schedules are not flat, to revert to familiar geometrical reference. Supply curves slope upward. Increases in demand, even in an economy with some or even considerable unused capacity, generate pressures on costs and hence on prices, at least in some sectors, especially if monetary policy is accommodating. This newly found post-Keynesian relationship between inflation and the rate of unemployment was accepted as an empirical reality of the late 1950s and 1960s. Its definitive version was presented by A. W. Phillips in 1958.5
The “Phillips curve” dominated macroeconomic policy discussion during the 1960s. This curve, or relationship, depicts the trade-off between unemployment, on the one hand, and the rate of inflation, on the other. The central idea is that a positive rate of inflation generates a reduction in the rate of unemployment (or an increase in employment). Once the existence of such a trade-off was accepted by economists, they began to temper their earlier enthusiasm for continued increases in aggregate demand to stimulate the economy, but they stayed within the broadly defined Keynesian model by talking about an “optimal” rate of inflation, based on the notion that optimality is attained when the trade-off between inflation and unemployment in the utility function of the political decision maker matches that dictated by the Phillips relationship. A little inflation seemed to be but a small price to pay for increased employment and output.
Things did not quite work out as the economists of the 1960s had foreseen. What the Phillips curve macroeconomists failed to reckon with was the time dimension of the inflation-unemployment trade-off. To be sure, there was empirical evidence that an increase in the rate of unanticipated inflation could generate a temporary increase in employment (a reduction in unemployment). But after a time, employment (and unemployment) seemed to settle back to a natural rate, a rate that was not basically affected by the now anticipated rate of inflation but that was, instead, dependent on structural characteristics of the economy, on such things as the flexibility of labor markets, the spatial location of employment, the skill level of particular employee groups, minimum wage and union restrictions, levels of unemployment, disability, retirement compensation, and a host of like factors. Economists came slowly to learn that no permanent and continuing increase in employment could be sustained by some optimally chosen and maintained rate of inflation.
At this point in our potted macroeconomic history, however, public-choice economists had something to contribute. Once those who participated in the making of governmental decisions had been led to think that a little inflation was the route to higher employment, even if such stimulus proved to be temporary, the same individuals were tempted to repeat the exercise, generating a second round of inflation in exchange for a second short-term, or temporary, increase in employment and output in the economy. The simple logic of short-run response built into the political mechanism seemed to suggest that politically induced inflation would accelerate, at least for many rounds of adjustment.
Such was the state of the macroeconomic game, so to speak, until the mid-1970s. Since the late 1970s, however, more sophisticated models of political-economic interaction have been developed. These models indicate that there may emerge a political-economic equilibrium closely akin to that discussed earlier under the high-tax trap. Politically induced inflation need not continue to accelerate to levels of hyperinflation. A political equilibrium may be reached well short of such levels. An equilibrium of this sort will be attained when the internal trade-off of the participant in political decisions, which embodies the short-term perspective of modern democracy, matches the inflation-employment trade-off dictated by the short-term Phillips relationship, while at the same time the inflation rate is fully anticipated, ensuring that the solution satisfies the long-term Phillips relationship.6
Such a full political equilibrium necessarily satisfies the conditions of the Phillips relationship for both the short and the long term. That is to say, unemployment is at its “natural rate,” but there is also a continuing and fully anticipated inflation. In such an equilibrium, there is no longer any short-term incentive for the governmental decision maker to generate more inflation, and furthermore, individuals are fully adjusted to the rate of inflation that exists.
Unemployment at this full equilibrium is as high as, or possibly even higher than, it would be if there were no inflation at all. To the extent that inflation creates any inefficiency in the economy, the full equilibrium seems clearly to be nonoptimal. It would seem to be in the interests of all persons to reduce or to eliminate the rate of inflation.
A trap exists, however, because any reduction in the anticipated rate of inflation will, according to the short-term Phillips relationship, generate short-term increases in unemployment, as, indeed, the United States witnessed in serious fashion in 1981 and 1982. The participant in political decision making will not normally base decisions on a time horizon sufficiently long to make the reduction or elimination of inflation rational, even if the long-term benefits of such action are completely recognized.
In such a setting, the incentives of the participant in politics can be modified so as to ensure choices based on a long-term perspective only if the discretionary authority of the collectivity is restricted. The political decision maker can act with prudence in investing in long-term disinflation only if he can be assured that political coalitions, in subsequent periods, will not reinflate in response to short-term utility considerations. This general point was widely recognized in the macroeconomic policy discussions in the United States in the early 1980s. But there seemed to be a surprising failure to draw the proper inferences to the effect that constitutional limits on the monetary authority of the collectivity are necessary to resolve the dilemma.
The Public-Debt Trap
Our discussion of the public-debt trap will be brief, since this trap is in most respects identical with the two macroeconomic applications of the public-private discount rate disparity already examined. In analyzing the high-tax trap, we neglected public debt as a source of revenues. The introduction of the public-borrowing option clearly expands the possibility frontier of the participant in political choice.
Even if the effects of public-debt issue are recognized by all members of the polity (which seems a highly questionable assumption, although it is not vital to our argument here), the shortened time horizon in politics will make this financing option preferable to taxation over some initial ranges of outlay unless there are constitutional or moral prohibitions on debt issue. By borrowing the funds with which to finance currently enjoyed “goods,” the participant is postponing the day of payment. Governments can borrow at or below the market-determined rate of interest. But the discount rate that informs politics is higher than the market rate of interest, for reasons already discussed. Hence, the short-term benefits expected from outlays will exceed the short-term costs computed as the present values of anticipated future tax payments discounted at market rates. This calculus remains valid even for the person who realizes that in the long run, a debt-free fiscal structure is preferable to a debt-ridden structure. By forgoing the benefits of debt-financed current spending, however, the person is not able to insure against the long-term tax liability that debt service and amortization imply. A political coalition in periods subsequent to that in which current fiscal choices must be made may wholly undo any effects of current-period fiscal prudence. There is simply no rational basis for an individual to support, to “vote for,” fiscal prudence in the operation of ordinary democratic politics. Public debt will tend to be overextended relative to any plausible long-term arguments for the use of this fiscal instrument. The political equilibrium between debt and tax finance will be distorted in favor of debt, and tax rates will be excessive for the reasons already analyzed, at least by the criterion of the long-term interests of the members of the community.
Precisely the same logic applies, of course, to the possible repayment or retirement of an existing public debt. The participant in ordinary politics may recognize that debt retirement now will benefit the whole community in the long run, but given nonfiscally constrained democratic decision processes, there is no means of guaranteeing that debt retirement now will, indeed, have the long-term effects that are preferred.
As in the two previous examples, incentives that will induce the individual, as a participant in politics, to behave in accordance with his (and the community’s) long-term interest can be provided only through some limitation on the powers of political coalitions (governments) to offset or destroy the effects of long-term “investmentlike” choices that might be made currently.7
Through the analysis of three familiar policy issues from the macroeconomics of the 1980s, we have presented the public-private time discount disparity in stark and simple form. Many other examples could be examined outside the macroeconomic area of inquiry, but only a few will be noted in passing here.
The “punishment dilemma” and the “Samaritan’s dilemma” were examined by one of us in earlier writings.8 Neither of these focuses directly on the time discount discrepancy. Both, however, illustrate the temporal dimensionality issue and point to the need for imposing commitments. In the punishment dilemma, a short-term utility-maximizing strategy dictates weighting the disutility of the punishee or criminal much more heavily than any long-term maximizing strategy would suggest. As a result of short-term maximization, policy tends to “coddle criminals”; crime increases, and we suffer the long-term consequences. A genuinely long-term perspective would suggest increases in both the certainty and severity of punishment, but unless participants in democratic politics could be assured that future political coalitions would not reverse current reforms, the necessary costs of imposing such reforms would continue to outweigh the benefits promised in the longer term.
In the Samaritan’s dilemma, much of the problem of the modern welfare state is explained. A short-term maximizing strategy calls for heeding the obvious sufferings, here and now, of those observed to be needy. Such strategy calls for the financing of assistance, despite the recognition that increased transfer payments generate long-term increases in the number of indigents. A strategy of austerity with respect to eligibility for transfers would increase the ranks of the self-reliant in the long run. But unless the individual who participates in politics today can be assured that such a strategy will be adhered to in the future, the austerity policy applied today may seem unduly callous and cruel.
In this chapter, primarily through the use of three applications from macroeconomic policy, we have tried to demonstrate in practical and relevant terms the basic logic of, or reason for, the imposition of binding constraints or rules on the activities of collective units or governments. The theme of the disparity between the rate of time discount applied in public and in private choice, possibly by the same person, has been used to show that the political concentration on temporary or short-term benefits, a concentration that is inherent in the structure of unconstrained majoritarian politics and also in other nonconstrained governmental decision-making procedures, to the relative neglect of long-term considerations, may produce results that are desired by no person or group of persons in the community—hence, the use of the word “trap” or “dilemma.” In short, the results produced by the short-term perspective in modern politics may be “Pareto pessimal.”
Rules and Justice
“Justice” is a familiar value—if an obscure one in much modern discussion. In this chapter, our purpose is to explore the connection between justice and rules and to offer an understanding of the concept of justice that is both coherent and consistent with the broad constitutionalist-contractarian thrust of our position. Our specific claim is that justice takes its meaning from the rules of the social order within which notions of justice are to be applied. To appeal to considerations of justice is to appeal to relevant rules. Talk of justice without reference to those rules is meaningless. If this claim is accepted, it follows that an acknowledgment of justice as a value carries with it, in and of itself, a reason for rules.
In one sense, this emphasis stands much modern discussion of the relationship between justice and rules on its head. Usually, justice is taken to provide an independent norm in terms of which alternative rules or acts can be evaluated. That is to say, orthodox discussion has been preoccupied with the “justice of rules.” Under our alternative conceptualization, rules become the basis of justice: Rules are logically prior.
It is useful to make, at the outset, a distinction between the notion of “just conduct,” on the one hand, and the notion of “just rules,” on the other. The former involves justice within rules; it deals with justice as a criterion for evaluating behavior within an institutional setting defined by preexisting rules. The latter involves justice among rules; it deals with justice as a criterion for evaluating alternative sets of rules. Although we shall draw this distinction sharply, part of our argument here is that justice as a means of evaluating rules can be usefully viewed as an example of justice within rules. That is, the notion of just conduct—not the notion of just rules—is the central one in our argument. The question of just rules is, we shall argue, appropriately treated as a particular instance of justice within rules.
How, then, is “just conduct” to be defined? Just conduct consists of behavior that does not violate rules to which one has given prior consent. The role of consent involves, as a central piece, the proposition that agreement, either implicit or explicit, is required to legitimize rules. Rules, so legitimized, then become the reference point against which the justice of individuals’ behavior can be assessed.
Once this view is taken, justice is seen to be not so much an external criterion for the evaluation of alternative rules and/or social orders as an intrinsic part of the relevant rule structure. Considerations of justice argue not so much for a wholesale reconstruction and reformation of rules as for a proper understanding of which rules actually prevail and for a reconciliation of conflicts, inconsistencies, and ambiguities among those prevailing rules. Justice is seen to demand a harmonization of the rules and possibly an extension of the domain of rule-governed behavior. Justice is not, however, seen to provide an independent norm on the basis of which ab initio design of ideal rules might be structured. It is consensus that performs that basic normative function. In our conceptualization, rules set the terms of justice, rather than the reverse. For this reason, justice takes on a certain “nonteleological,” history-dependent cast. It is no longer possible to give an account of what justice entails—in terms either of conduct or of the nature of rules—that is entirely general, abstract, and decontextualized. What justice requires depends on what particular rules individuals happen to have agreed to.
We shall begin our discussion with the issue of justice within rules—of what it means to behave justly in the context of a well-established institutional order. In Section III, we shall attempt to explain why considerations of justice, in terms of obedience to prevailing rules, have moral force, more or less whatever those rules happen to be. In Sections IV and V, we shall extend the discussion to the question of justice among rules.
Just Conduct and the Notion of Desert
What does just conduct entail? A common response to this question is that justice consists in persons’ being given their “due”: It is just that each receives whatever he deserves. At first sight, this response seems to beg all the relevant questions; to say that justice is a matter of persons’ being given their deserts can be meaningful only to the extent that their deserts can be independently determined. What exactly, one may ask, does desert entail? How does it arise?
To pose such questions is, however, to begin inquiry in the wrong place—with the most difficult and most general aspects of the problem. Let us begin, instead, with the opposite end of the issue—namely, with cases of manifest injustice in which persons are treated in ways they do not deserve. An obvious example is that of a person punished for a crime he clearly did not commit; in this case, the punishment is deemed “unjust” because the person did not deserve to be punished. Now consider a running race in which the judges, for reasons of pure caprice, decided to award the first prize to the runner who came in fourth. We would say that the runner did not deserve the prize, whereas the fastest runner did. In the absence of any action by the other runners that would lead to their disqualification, the runner who finished the race first could be said to deserve the first prize; any allocation of prizes inconsistent with this would be unjust. The injustice would remain, whether the judges’ decision to reallocate the prize was based on mere caprice or on a systematic preference for some irrelevant characteristic of the participants (such as beauty or racial origin).
What seems characteristic of all such cases is that the injustice springs from a violation of rules—rules that are legitimately expected to be applied by participants or affected parties. Such rules isolate certain considerations that are relevant to the outcome of the event and to the determination of rewards; such rules isolate other considerations that are either explicitly or presumptively irrelevant.
The concept of “desert” is violated when an irrelevant consideration is brought into the reckoning (for example, the plaintiff’s preparedness to have sexual relations with the judge or the color of the runner’s skin) or, no less important, when a relevant consideration is ignored (for example, who actually crossed the finish line first).
There is then a connection between the notion of justice and the existence of prevailing rules. The mere presence of rules is sufficient to establish the relevance of desert, and hence the possibility of just and unjust conduct by participants.
What seems crucial here is the legitimacy of the participants’ expectations that the rules will be followed, whether those expectations are related to the behavior of officials and administrators within the system or to that of other participants. If these expectations truly are legitimate, then individuals who base their conduct on them do not deserve to have them disappointed. The basis of this argument is the observation that rules provide information as to how others, on whose actions one’s well-being depends, will act. One commits oneself to particular actions on the basis of one’s understanding of what others may or may not do. In doing so, one renders oneself vulnerable if others do not behave in the required way, and one will not deserve to be harmed, provided that one’s expectations about others’ conduct are legitimate. The crucial question, then, is, What makes expectations “legitimate”? We shall turn to this matter in the next section.
At this point, we should note simply that when rules do give rise to legitimate expectations, questions of justice necessarily obtrude. In this sense, rules imply the relevance of justice; and just conduct is, at least presumptively, conduct obedient to prevailing rules.
One implication of this argument is worth noting. Suppose, as we argued in Chapter 1, that rules have value because they provide information to each actor about the behavior of others and because they thereby allow each actor to pursue his goals in the light of reasonable expectations about what others will do. On this basis, if rules are administered unjustly or if individuals do not behave in accordance with rules (that is, if individuals behave unjustly in the sense outlined earlier), then rules no longer provide this information. Rules cease to accomplish that function for which they are valued. This argument provides an instrumental defense of justice. The ancient admonition, Let justice be done though the heavens fall, can be construed in this context as the demand that the rules be adhered to, come what may. Justice is valued because it involves independently valued adherence to rules. This rule-following interpretation of justice is quite different from the notion that particular rules are valued because they meet external standards of justice.
Justice and Promise Keeping
So far we have argued that a person who violates a legitimate rule acts unjustly toward those who acted with the expectation that the rule would be followed. The question naturally arises as to what makes a rule, or the expectations a rule gives rise to, legitimate. Under what conditions, in other words, will violating a rule constitute unjust behavior? And what gives the notion of justice, so defined, moral force?
There are no surprises in our answer here. A rule is legitimate, and violations of it constitute unjust behavior, when the rule is the object of voluntary consent among participants in the rule-governed order. Why is this so? Because the provision of consent on a voluntary basis amounts to offering a promise to abide by the rules. Just conduct is conduct in accord with promises given. A person breaks a promise if he acts differently than, for morally proper reasons, those to whom the promise was made believe he will act. The morality of justice is, then, the morality of promise keeping. In this, we do no more than echo Thomas Hobbes:
... it is in the laws of the Commonwealth as in the laws of gaming: whatsoever the gamesters all agree on is injustice to none of them.1
From that law of nature ... there followeth a third; which is this that men perform their covenants made: without which, covenants are in vain and but empty words, and ... we are still in the condition of war. And in this law of nature consisteth the fountain and origin of justice. For where no covenant hath preceded ... every man has right to everything, and consequently no action can be unjust. But when a covenant is made then to break it is unjust; and the definition of injustice is no other than the not performance of covenant. And whatsoever is not unjust is just.2
This formulation raises three questions, however. First, what is it that one’s agreement commits one to do? Second, what are we to understand by “voluntary” agreement, and how does the requirement that the agreement be voluntary affect obligation? Third, how broadly can we interpret “agreement” or “consent” for the purposes of this argument? Let us deal with these questions in turn.
In response to the first, we offer only a minor clarification. When one freely agrees to the rules, one promises to do rather more than pursue what is best for oneself under the terms of the agreement. Specifically, although the rules will typically include instructions as to how violations are to be handled and what punishments are to attach to such violations, and although these instructions are therefore contained within the inclusive agreement, it seems wrongheaded to say that agreement implies only a willingness to accept the defined punishment for violations. Consent is to the rules, and the moral force of promise keeping is such that one is obligated to other players to play by those rules. To violate the rules may sometimes be personally profitable, but it will not be “just,” and it will not become “just” simply by virtue of one’s acceptance of punishment. “Just conduct” will consist in keeping one’s promises to other players, that is, in abiding by agreed-on rules. A player, for example, who punches another with his fist in American football concedes a fifteen-yard penalty. But he also endures the moral opprobrium of having committed an “unjust” act, and it is expected that this purely moral dimension—the player’s sense of justice—will carry weight in moderating his behavior.
It is important to make this point because, in some economists’ discussions of the law, one obtains the impression that choosing whether to abide by the rules is like selecting a drink at a soft-drink machine; that is, one either abides by the rules and pays no penalty or fails to abide by the rules and simply pays the price of so doing, as reflected in the rules. But the legislated punishment is not to be construed simply as the “price” of an alternative course of action; it also symbolizes the fact that a “wrong” has been committed. Making a choice among alternative drinks is a morally neutral act; choosing between legitimate and illegitimate modes of behavior is not morally neutral (at least not if the legitimacy springs from the prior consent of the chooser).
The second question is related to the circumstances under which an agreement may be said to be genuinely voluntary. Clearly, a promise to abide by the rules that is obtained under duress is not binding in the way that a freely offered promise is binding. The victim of a holdup who promises to pay a million dollars from his bank account in exchange for his life does not fail to meet a totally legitimate expectation when he subsequently refuses to pay. In the same way, a starving man who agrees to run inordinate risks for a crust of bread cannot necessarily be held to be bound to the agreement, although he is presumably more bound than he would be had he refused, despite his adversity, to agree. In other words, the moral force of an obligation to keep a promise is blunted (but not necessarily eliminated) if the circumstances surrounding the giving of the promise involve nonvoluntary elements.
We must be careful here not to extend the argument too far. To say, for example, that the agreement is nonvoluntary if the bargaining strengths of the parties to it are not precisely equal seems absurdly restrictive. It seems that only in cases of extreme duress or outright coercion does agreement to the rules not morally bind the players. When A and B agree to marry, for example, we do not normally demand that their bargaining strengths or premarriage “threat strategies” or income positions or beauty or physical strength (or whatever each brings to the marriage) be equal (or even not unduly unequal) before the exchange of vows can be regarded as binding. We do not typically inquire whether A and B had other offers of marriage or could have had such offers. All that is required to give the “covenant” moral force is the absence of extreme duress. Indeed, even the presence of the paternal shotgun is not normally construed to remove the moral obligations entailed in the marriage entirely (and sometimes not to blunt those obligations at all).
It is worth making this point clearly so as to guard against the prospect of admitting alien concepts of “justice” through the back door under the cover of the “voluntariness” constraint. In some literature, the “justice” of abiding by an agreement is made entirely contingent on the justice of the status quo, the latter notion of “justice” usually making appeal to the relative income positions of the parties. We emphasize that the voluntariness of agreement is not to be so construed in our conception. It is only in those circumstances in which a promise would be held to be nonbinding (extracted by force or under conditions of total duplicity by one of the parties) that the requirements of justice, as we have defined it, would be waived.
The third general question raised by this conception of justice involves the issue of how broadly agreement or consent to the rules can be construed. Clearly, in most social contexts, players do not explicitly agree to the rules that apply to their interactions. Drivers do not, for example, construct the rules of the road by explicit consensus. How, then, can considerations of promise keeping be construed to apply in such cases? This question is central and long standing in any “social-contract” theory. Some scholars have sought to establish a presumptive obligation on the part of citizens to abide by the “rules” of a prevailing social order3 on the basis of what “would have been agreed to.”4 To the extent that such obligations can be established, considerations of justice apply. For such purely hypothetical consent, however, the argument seems less than totally persuasive. It is not clear exactly how a person can be bound by promises he has not made, or how a person can be construed to have agreed to rules simply on the grounds that those rules can be presumed to make him better off.
Tacit, or implicit, consent, however, is another story. Tacit consent can be construed to be given to rules of a game by participants when they voluntarily participate. The mere fact of participation obligates each participant, as if by an explicit promise, to abide by the rules, provided that the participants have a genuine option not to participate if they so choose. Failure to abide by the rules would then be to treat other participants “unjustly.” Participants’ expectations that others will play by the rules become “legitimate” by virtue of the voluntariness of participation by all players. If, for example, a person asked to join an existing poker game and was permitted entry, he would seem to be no less obligated by considerations of justice to obey the rules than the other players, who had given explicit consent.
A similar point can be made with respect to another important group of “participants” in the social order—those who administer the rules. Again, we do not require the explicit agreement of judges, umpires, and enforcers on the structure of the rules in order to argue that these agents would be acting “unjustly” were they to violate or modify the rules in accordance with personal preferences. Those who administer a race presumably accept the rule that the first person across the finish line will win. Those who administer the legal system purport to be acting within the rules of that system. Those who enter the “game” in either case do so on the basis of an understanding of the rules, and in some sense the existence of rules amounts to an implicit promise made by administrators to all participants (actual and potential) that the rules will be administered faithfully.
If participation in a sporting event or parlor game—either as a player or as an administrator, judge, or enforcer—is sufficient to obligate all parties to abide by the rules, by virtue of considerations of justice can we not extrapolate such obligation to all social settings? Whether or not we can depends on whether individual participants in a given social order can be construed to be voluntary participants. For administrators of the rules and for those who voluntarily join (free immigrants, for example), the obligation seems clearly applicable. For general citizens, voluntariness of participation is not so clear. The problem is, of course, that participation amounts to playing the “only game in town.” There may be no effective alternatives. Even in this case, however, there is some sense in which violation of the rules is “unjust” to other participants. Just what this sense is deserves some attention. Suppose that A, B, ..., N are participants in a game the rules for which have been decided unilaterally by Z. Suppose, furthermore, that these rules have traditionally been observed—that A, B, ..., N have played by them for some time. If A were now to inflict harm on B by breaking the rules, would we not say that B did not deserve to be harmed? Would not A’s harming B be unjust in this sense? Would not B’s reasonable expectation that A would continue to hold by the rules be a legitimate basis for B’s conduct? Does not the mere fact that such rules have prevailed for a long time contribute to the legitimacy of B’s expectations? If so, rules may be considered to be given tacit consent simply by virtue of their history or regular observance—even if there is no effective option to not playing and participation is involuntary in that sense. Of course, such tacit consent as a source of obligation to abide by existing rules does not imply quiescence toward efforts to change the rules. But this is a matter we shall discuss below.
Where does all this leave us with respect to the relation between rules and justice? It indicates that prevailing rules, simply by virtue of their existence, project an aura of justice. Behavior that contravenes prevailing rules amounts to unjust treatment of other participants in the social arena, because the others have legitimate expectations that all persons will behave in accordance with the rules. The legitimacy, not the reasonableness, of the expectations is crucial, and this legitimacy arises because, and to the extent that, participation in the activities governed by the rules is, or can be construed to be, voluntary. Voluntary participation amounts to agreement to the rules. It constitutes a tacit promise to abide by prevailing rules, and the breaking of such a promise is equivalent to unjust conduct because it involves treating others in ways in which they do not deserve to be treated.
Justice among Rules
Although the discussion of just conduct set out in the preceding two sections has some affinities with notions in contemporary social philosophy, it is not the most common approach to “justice.” Typically, justice is introduced as a criterion for evaluating alternative rules or institutions. This criterial usage of justice characterizes many strands of normative political and social theory—from natural law to modern theses advancing the norms for “distributive” and “social” justice.5 It is, in this sense, much more common to think of justice constraining rules than to think of rules constraining justice.
In this section, we advance the proposition that the business of deciding what rules are just—that is, of deriving a meaning for justice as a criterion of choice among rules—is a particular instance of decision making within prevailing rules. Such an argument requires the recognition that the decision as to what the rules shall be is itself made in the context of more abstract rules that apply to the choice among rules. We shall call rules at this more abstract level meta-rules. Then it follows from our earlier discussion that rules are just if agreed-on meta-rules dictating their selection have been observed.
Although this is an entirely natural extension of the Hobbesian position, we here part company with Hobbes, at least in the strict sense of Hobbes’s exposition. In Hobbes’s view, the notion of an “unjust law” is meaningless. “No law,” he claims, “can be unjust. The law is made by the sovereign power, and all that is done by such power is warranted and owned by every one of the people; and that which every man will have so, no man can say is unjust.”6 But as Hobbes’s discussion makes clear, all this is contingent on individuals’ agreement on the principle of sovereign authority. It is the more abstract agreement on the structure of civil order that makes the law derived under that structure “just.” And so it is for us—for the essence of the constitutionalist approach is that political action (including the making of laws) be conducted according to certain rules (or meta-rules). A “just law” is then a meaningful concept; it is one that is derived under agreed-on institutions or, equivalently, one that does not violate agreed-on rules under which those institutions operate.
It is important to recognize that we are here weakening the requirements for just conduct. Hitherto, conduct was described as just if it did not violate agreed-on rules related to that conduct. Now, conduct is also considered to be just if it does not violate just rules (defined as rules emerging under agreed-on meta-rules). Since the meta-rules in question may not require agreement on rules directly, an “agreed-on rule” and a “just rule” are distinct concepts. We may not require a rule to be agreed on for it to be binding, provided that the rule in question emerged under agreed-on meta-rules.
The distinction between agreed-on rules and just rules—the recognition that agreement can be applied at different levels of abstraction—somewhat complicates the discussion of the requirements of justice. This is an issue we shall attempt to clarify in Section V. At this point, we shall address a different issue, which is related to the connection between abstraction and voluntariness. That is, since justice within rules is contingent on the rules having been voluntarily agreed to, we must make some sense of the notion of voluntary agreement at the more abstract, meta-rule level. What does it mean to refer to a meta-rule as the subject of voluntary consent? What, for example, would involuntary consent involve at that meta-rule level?
In fact, the shift to more and more abstract levels of discourse serves to modify concern about the voluntariness of agreement—at least in one major sense. One can, of course, in principle imagine direct physical coercion being applied by one agent to others at the meta-rule level. But one has to ask whether the application of force is at all likely. At the extreme level, where the thick Rawlsian veil of ignorance is drawn and individuals are totally uncertain as to their future positions, individuals have no interests to defend. Any reason that any one of them has for preferring one set of rules over another will be a reason for all others to prefer that set of rules as well. In what sense would, or could, any individual find reason to coerce others?
Moreover, we must bear in mind that the agents at this abstract level wish to secure agreements voluntarily, and for good reason: It is the capacity of such voluntary agreements to establish moral obligations that drives the whole “constitutional exercise.” Agents desire a stable institutional order so that they will have an appropriate context in which to pursue their (imagined) future life plans. If a forced agreement will not serve to legitimate the rules, it will not establish a moral obligation to abide by the rules; so forceful extraction of agreement has no point.
Furthermore, reference to extreme need, and more general concerns about relative positions in the constitutional status quo that might be taken to offend the “voluntariness” requirement, also seems irrelevant at this most abstract level. If individuals are totally ignorant as to their future positions, they have no separately identifiable interests; there is a fundamental equality of position. It seems impossible that agreements reached in such a context could reflect unacceptable differences in status quo positions. Accordingly, however exactly one might wish to express the requirements for voluntariness in agreements reached, all such requirements appear to be met to an increasing extent as one moves to higher and higher levels of abstraction in the rule formation exercise. This fact represents a possible major justification for the whole “constitutionalist” approach.
Just Rules, Agreed-on Rules, and Just Conduct
The central argument in the previous section was that justice among rules is simply a case of justice within rules once removed. By implication, justice among meta-rules is a matter of justice within meta-meta-rules, and so on. In this sense, justice within rules becomes the paradigmatic case. Any appeal to considerations of justice in an interaction is an appeal to agreements made with respect to that interaction or to agreements made with respect to the rules under which that interaction takes place.
This line of reasoning requires us to clarify the distinction between rules that are “just” in the sense defined (that is, rules that emerge from voluntarily agreed-on procedures for determining rules) and rules that are agreed on. We must also point out that our paradigmatic notion of just conduct, or justice within the rules, entails an extension of our definition of just conduct to include conduct that is obedient both to agreed-on rules and to just rules, as defined.
To amplify what is at stake here, we shall offer a simple example. A tennis match of some significance is in its fifth and final set. Individual A is leading 5-4, and B is to serve. Suddenly, the umpire announces a change in the rules: The net is to be raised one foot. Could not B legitimately complain that this rule change is “unjust,” that he does not deserve to be treated in this way? or that A does not deserve an unanticipated advantage? Following the reasoning set out in the previous two sections, it would indeed seem that A and B are being treated unjustly. The rules to which they tacitly agreed when they decided to participate have been changed. They have not implicitly promised to obey the new rule, so they cannot be accused of unjust behavior if they violate it. On the contrary, the rule to which A implicitly agreed has been violated in A’s favor: B has been treated unjustly.
Yet such a conclusion may well be premature. We must ask whether the rule change in question has been made in accordance with the recognized meta-rules. Suppose, for example, that a properly constituted body, say, the World Tennis Federation, has decided to raise the net in the game of tennis by appropriate adherence to its own rules of procedure. To take the simplest case, suppose that the decision is made some time in advance and is to take effect at midnight on New Year’s Eve, 1985, and that the match between A and B is the final of the 1985 Australian Tennis Championship, held under World Tennis Federation rules and occurring on New Year’s Eve. The match has taken rather longer than expected, and at 4-5 in the fifth set with B to serve, midnight strikes. In this case, since A and B were aware of the prospective rule change and the possibility that the match would last until midnight, both A and B can reasonably be held to be bound by the new rules.
If, however, the World Tennis Federation did not announce the rule change in advance and the umpire was simply notified by cable of the rule change at midnight, then neither A nor B could be construed to be bound by the new rule by virtue of direct implicit agreement. But if the federation’s actions were procedurally “just”—that is, obedient to agreed-on meta-rules governing its behavior in determining the rules—then the rule change would not be a violation of justice. The prevailing meta-rules would have been faithfully applied. The point here is that A and B are to be seen as tacitly accepting not just the rules of the game but also the meta-rules—indeed, a whole sequence of rules of various degrees of abstraction. The mere existence of such meta-rules testifies to the prospect that rules may be changed, and any change obedient to these meta-rules is presumptively just. The prospect of rule change is something that players agree to face, much like changes in the weather. Unlike changes in the weather, however, rule changes are the result of human activity and hence come under the scrutiny of “justice.” The question at issue is whether rule makers, in changing the rules, violate legitimate expectations, and the answer is that they do not, provided that they follow the relevant meta-rules. The requirement that no rule change ever occur is one possible meta-rule, but if it is not the prevailing meta-rule a blind following of the meta-rule forbidding rule change would be unjust. If, for example, the umpire refused to alter the height of the net, in spite of a clear specification in the meta-rules that he do so, B would receive an undeserved advantage and A would lose an advantage he did not deserve to lose.
This is a matter of some account in political-economic contexts. Consider the case in which government action creates change in the income of a specified group by means of some regulation restricting entry into a particular industry. Now suppose that after a time government removes such protective regulation. Individuals will lose income, and the individuals who lose will not necessarily be those who gained in the first place. Those who purchase New York taxi medallions and stand to lose if the number of medallions is increased are not necessarily those who benefited from the introduction of medallions. The case is sometimes made in this connection that the government action is “unjust,” either in removing the regulation or perhaps in introducing the regulation in the first place. Similarly, the charge is occasionally made that when governments do pay compensation to the victims of policy changes, such action is unjust to taxpayers who must foot the bill.
In the justice within rules perspective, however, none of these claims is necessarily valid. Provided that government action in each case is itself obedient to the prevailing and accepted rules governing public-sector conduct, there is no violation of precepts of justice. As a matter of fact, modern political arrangements seem to be such that those who allocate public revenues can allocate them more or less as they choose or as political considerations suggest, in which case, the government simply cannot in such contexts violate principles of justice. To argue that government action is unjust is to claim that it violates agreed-on rules of public conduct. That is simply the way arguments about justice must properly proceed.
Now, it may be that the rules are unclear, as they often are in social contexts. There is some question, for example, as to whether regulation may in some situations amount to a “taking” and hence violate existing constitutional rules. There is also some question as to whether judicial interpretation may, in some cases, amount to a change in the rules and, in this sense, raise the issue of what role the courts properly exercise in the whole institutional order. Furthermore, certain rules may overlap with others at the same level of abstraction and indicate rather different behavioral restrictions. In all such cases, justice requires clarification of the rules and reconciliation of ambiguities. One major clarification along these lines involves the recognition of the level of abstraction at which agreement is to be applied. But the grammar of arguments about justice at least seems clear.
One other possible ambiguity should be addressed. What are we to make of the status of agreements made outside the structure of rules? Clearly, when the set of individuals party to the agreement includes all the individuals who compose the political order, such agreements cannot conceivably violate precepts of justice. But when these sets of people are different, such agreements may be unjust. That is to say, the agreed-on rule structure may preclude certain sorts of agreements.
It is important to make this point in order to clarify the status of simple two-person market exchange in our conception. The parties to that exchange agree voluntarily to its terms. If one party subsequently fails to live up to those terms, he is presumptively acting unjustly toward the other party. But this presumption of unjust conduct can only be that—for it may be that the more inclusive set of constitutional rules explicitly precludes small-number voluntary transactions of various sorts or otherwise establishes obligations that conflict with those imposed in small-number transactions. Consider, for example, the case in which the firms in an industry form a cartel by means of an agreement, voluntarily entered into, the object of which is to restrict entry into the industry, reduce output, and raise prices. Suppose, now, that one of the parties to that agreement reneges on the terms, cuts prices, and makes substantial profits at the other firms’ expense. Is that cartel breaker acting “unjustly” with respect to other firms in the industry? Surely yes. Yet in doing so, the firm is also ceasing to act unjustly with respect to consumers of the firm’s product, if the more inclusive set of constitutional rules constrains restrictions on cartel deals. Considerations of justice here conflict, precisely as they would if A made separate agreements with B and C that for unexpected reasons turned out to be in conflict. But whereas in the case of ordinary agreements that conflict, considerations of justice do not indicate which agreement should be decisive, there is a distinct presumption in the cartel case that the constitutional rules should be decisive. In this sense, some amplification of Hobbes’s characterization is in order. Although it remains true that “whatsoever the gamesters all agree on is injustice to none of them” (emphasis added), this does not rule out the possibility that the gamesters are acting “unjustly” in a more global sense. Whether or not that is so will depend, however, on the same basic principle—namely, whether the gamesters have prior, more inclusive agreements with other agents that are, or ought to be, overriding.
In this chapter, our aim has been to offer an account of the nature of justice that spills naturally out of our constitutionalist-contractarian perspective. We have specifically defined justice in terms of conduct that does not violate agreed-on rules. One major implication of this approach is that justice is not a “primary” concept. Rather, it is derived from two logically prior notions: first, that agreements carry moral obligations to abide by the terms of those agreements; and second, that appeals to justice take place within an institutional context that serves to assign justice its meaning.
The approach also suggests a grammar of “justice” arguments. In particular, appeals to justice are appeals to matters of fact, as well as value. What are the rules that govern particular areas of conduct? Were those rules agreed to, or can they be construed to have been agreed to? These are questions of fact. There remains, of course, the value question of the extent to which agreements should bind the agreers. But this issue cannot, as a general matter of principle, be decided by considerations of justice. Justice becomes relevant only when the force of voluntary agreement is taken as given.
We should finally emphasize the restrictive purpose of this chapter. Our central aim has been to relate the notion of justice to the rules of social order. The nature of the argument, however, has made it necessary to skirt perilously close to areas of deep philosophical inquiry for which our own claims to competence are, at best, marginal. We should therefore make clear the absence of any putative claim to have made a positive contribution to the analysis of justice itself.
The central point is important, however, to the overall thrust of our argument and, in our view, to a proper understanding of the concept of justice. Any discussion of justice, whether by learned philosophers or common people, takes for granted that the interaction of persons in society occurs within a structure of rules. Appeals to the considerations of justice are appeals to those rules. In this sense, once justice is deemed a desirable attribute of conduct or of social order, there is established an indirect “reason of rules”—and an independent demand for a constitutionalist or rule-focused perspective on social life.
Politics Without Rules, II:
In Chapter 7 we discussed the connection between rules and justice. We argued that a meaningful discussion of justice presupposes the existence of rules and that a just outcome emerges when the relevant rules have been followed.
Such a view of justice is not common, in either economic or broader circles. Orthodox conceptions of justice invoke the notion of distributive justice, or “equity.” In this view, the justice or injustice of an outcome is held to be an intrinsic property of the outcome itself and to be context independent. To determine whether one social outcome is more “just” than another, one need merely investigate the relative positions of individuals in each. Relative positions are typically measured by reference to individuals’ incomes or wealth, although sometimes consumption of, or access to, certain “crucial” consumption items (for example, health, housing, food, or education) can be regarded as a superior basis for comparison.
It is not our objective here to criticize this familiar conception of distributive justice; in what follows, we shall take the normative relevance of “equality,” or “less inequality,” somehow construed, as given. Our concern is, rather, to examine the concept of distributive justice from the constitutional perspective. Our task is to ask, given the normative judgment that equality is desirable, what set of institutional arrangements are likely to be most conducive to securing that “equality” (or “less inequality”). Are there any reasons for believing that the political order will generate a more nearly equal distribution of income than a free market would generate (as seems to be commonly assumed)? What “rules” of political order are likely to generate more “equitable” outcomes?
Before we address these issues, however, it is important to recognize that in posing them we adopt a perspective on distributive justice very different from the orthodox one. We shall therefore begin our discussion by attempting to characterize the orthodox approach and by showing how the constitutional view raises additional, crucial issues. We shall also indicate what is, in our judgment, analytically incoherent about the orthodox conception.
Distributive Justice: The Conventional View
Characterizing the normal conception of distributive justice involves posing and attempting to answer the question, How should total product be distributed? All possible distributions of some aggregate are considered, and some criteria are used to select the “best.” A common analogy is the division of a pie among contending children, each of whom is presumed to want more pie. Consider, for example, a simple two-person community, composed of persons J and K. In terms of simple geometry, the set of possible distributions is given by the line JK in Figure 8.1. Niggardly nature presents the community with an aggregate OJ (equal to OK), which can be given all to J (at point J) or all to K (at point K), respectively, or distributed between J and K in various proportions. We represent the distribution as the ratio of J’s share to K’s share; at E, for example, we can depict this ratio as the slope of the ray from the origin to E, SE. Alternative measures of the distribution might be the difference between SE and unity (that is, equality), or the variance of levels or the amount assigned to the poorer individual (at E,OM) or something more complex. It is normally more or less presumed that, ceteris paribus, equality is best. In this abstract characterization it is perhaps difficult to justify anything other than equality (though it may not be a trivial matter to justify equality either).
Economists and others typically argue that this characterization is inadequate in two significant respects. First, the pie does not present itself as an aggregate. Rather, it comes already sliced, the size of the slices being determined by the relative productive capacities of individuals. That is, there is a point on the JK line (let it be Q in Figure 8.2:) that represents a sort of status quo point from which redistribution via some means must occur. Second, as redistribution occurs, the size of the pie changes. The general presumption is that as we move away from Q, the pie shrinks at an accelerating rate as “excess burden” arises on both the tax and the transfer side of the redistributive process. Accordingly, the relevant possibilities frontier becomes something like UV in Figure 8.2: Only points on UV are feasible; points on JK other than Q are not. Armed with this concession to reality, the normative analysis becomes one of “trading off” pie size against pie distribution, and the famous “equity-efficiency” conflict emerges. The “policy problem,” then, presents itself in two dimensions: first, that of organizing the operation of policy instruments so that the cost in terms of pie forgone in achieving the ideal distribution is minimized; and second, that of determining how much distributive justice should be sacrificed in order to keep the pie as large as possible.
The Constitutional Perspective and Institutional Incidence
There are several things wrong with this typical characterization of distributive justice. Consider first the conceptual philosophical issues. As a way of reflecting abstractly on one’s distributive objectives—as a way of giving content to the notion of distributive justice—the conjectural model is perhaps innocent enough. It seems natural to pose the question, “If I were assigned the task of dividing the pie, what should I do?” But this question presupposes that questions of distributive justice do, in fact, present themselves this way. It suggests that distributions are chosen by some single agent, or by some decision rule.
But distributions are not chosen. Social outcomes, with their distributional characteristics “built in,” emerge from a complex interaction of individual agents, each pursuing his own ends and each connected to others under a set of prevailing rules. Of course, it is conceivable that the prevailing rules could be such that outcomes (or specific distributions) would be chosen by a single agent. Totally despotic orders are not unknown. Is this the implicit model of politics that moral and social philosophers presume in dealing with questions of distributive justice? This model of politics does, indeed, seem to be what economists have in mind when they carry abstract philosophizing to the “relevant” policy level. But if the distribution is chosen by a despot, the model of Figure 8.1 is entirely inadequate. The relevant social setting will now involve three persons, not two. In addition to J and K, who are claimants on the aggregate pie, there is H, who is to do the cutting and allocating. If we model H as we do J and K, treating all as having conflicting demands for pie, then H will appropriate the entire pie for himself. If, on the other hand, we presume H to have altruistic concern for J and K, then, on the assumption of behavioral symmetry, we must model J and K likewise. The set of feasible distributions in Figure 8.1 is reduced from JK to LL’, since distributions outside those limits will involve voluntary transfer between the parties to secure L and L’. In the same way H can be presumed to transfer to J and K up to the limits of his charitable impulses, just as if all the output had accrued to H in the first place. In other words, any conceptualization of the distributive-justice problem in terms of the unilateral choice of a distributive outcome effectively presupposes that the status quo distribution is one in which the chooser owns everything. This manner of setting up the problem virtually guarantees that distributive justice will be infeasible. Moreover, any minimal-state, free-market distribution such as Q in Figure 8.2 seems certain to be more equitable than that required to make redistribution possible. Considerations of distributive justice would, therefore, seem to argue persuasively in favor of rules that would deny the power to transfer to political institutions altogether.
The immediate response to this criticism is, of course, that the despot model is not presupposed. Assigning political agents the power to make transfers is not the same as assigning them an unqualified right to the use of the revenue from which transfers are to be made. Political agents cannot simply make transfers to themselves. But if this is so, we must ask why. We must, in other words, trace how political agents are constrained in the distribution of the pie. And the relevant constraints here are not the familiar “economic” ones having to do with how the size of the pie changes when the level of public transfer activity increases. The relevant constraints are those embodied in the rules of the political game that shape the magnitude and pattern of transfers. To put the point more generally, different institutional arrangements, ranging from those embodied in some Nozickean “minimal state” to those characterized by the modern welfare state, where explicit restrictions on the power to transfer are absent, will generate different patterns of distributive outcomes. The problem of practical politics is to choose a feasible institutional arrangement that will generate a distributional pattern most congruent with the requirements of distributive justice.
The central point here is a familiar one in the context of efficiency analysis. So-called market-failure problems (attributable to public goods, generalized externalities, and monopoly elements in private-goods supply), although sufficient to indicate the presence of unrealized gains from exchange, are now widely recognized as constituting an inadequate normative case for government intervention in market processes. There is no necessary presumption that simply because markets are imperfect, political processes will work better. On the contrary, as public-choice theory reminds us, there are very good reasons for doubting the capacity of political processes to achieve Pareto optimality. The normatively relevant comparison is between two imperfect institutions. The mere observation that one institution or the other is imperfect—that markets “fail”—is simply not sufficient to establish a case for government “intervention.” So much is accepted, at least in principle, although the point seems to require continual reiteration.
In the realization of distributive justice, however, there is a precisely analogous point, though it seems hardly to have been noted. The point is this: It is not enough to lament the distribution that emerges from—or is presumed to emerge from1 —a freely operating market. One must show that the effect of the political process on the distribution is in the direction of equality. Or, to put the question most starkly, is movement toward equality institutionally feasible? It is ironic that despite the extensive literature on distributional policy, this basic question is almost never posed, let alone answered.2 The virtue of the constitutional perspective is that it places this question firmly at center stage. It does so by shifting the domain of normative inquiry from the set of imaginable income distributions to the set of feasible institutional arrangements from which income distributions will emerge.
What seems to us necessary here is a set of “institutional incidence exercises.” Consider, for example, a familiar tax incidence exercise in orthodox public finance. Suppose that the “policy maker” is conceived to have access to several taxes: an excise on beer, a land tax, and a corporate profits tax. In the conventional setting, we might, for example, ask, What are the distributional consequences of imposing the beer tax rather than an equirevenue land tax? We trace the distributional implications of this tax substitution in terms of the “burdens borne” by various groups (consumers of beer, specific factors in the beer industry, etc.) and burdens reduced for others. Only then is it possible to apply the normative criteria of distributive justice to decide whether the tax substitution is desirable and what mixture of tax instruments is “best.” With the tax instruments available, only certain distributions are feasible and none of them may correspond to the ideal. As we have emphasized, this approach is inadequate because it ignores the fact that any such tax choice emerges out of a political process in which “distributive justice” will be secured only if it serves the interests of those who are decisive in the political game. The approach, however, does recognize that not all distributions are feasible and that the distributional implications of alternative policy instruments must be traced before any normative recommendations can be offered. There is, at least, the recognition that alternative taxes rather than alternative distributions are the objects of normative evaluation. Here, we extend that recognition to a more appropriate level of discourse. Rather than focusing on the distributional implications of alternative taxes, we focus instead on the distributional implications of alternative sets of rules. In that sense, our concern is with the “incidence” of alternative institutions.
The Incidence of Unrestricted Majoritarianism
In this and the ensuing sections, we shall attempt to derive the pattern of distributional outcomes that can be expected to emerge under majority rule, subject to a variety of institutional restrictions.3 Our object in doing this is to take political institutions more or less as we know them and ask, first, whether there is any theoretical presumption that political processes tend to generate greater “distributive justice” than, say, a predominantly market-oriented regime; and second, what restrictions on the operation of political institutions seem likely to be conducive to the pursuit of “distributive justice.” Throughout, we shall deal with an extremely simple, highly abstract model of majority rule.
Specifically, we shall consider a simple three-person community, composed of persons A, B, and C.4 All three vote, and all are assumed to cast their votes in accordance with their interests.5 There is no altruism; all aim to maximize their own real incomes.6 We define the length of a period to be the length of time between elections, so there is by definition one election each period. Finally, in order to focus solely on the distributional consequences of majority rule, we assume that the only thing government does is make transfers; that is, we abstract from any provision of public goods that the government may undertake.7 Because we wish to focus on the distributions that emerge, we shall depict all outcomes as a triplet of the form [a, b, c], where a is the total income of A, b the total income of B, and c the total income of C.
Consider, on this basis, the conceptual benchmark represented by the distribution under an entirely “free” market order. No transfers, either public or private, occur. This distribution will reflect individuals’ differing productive capacities, preparedness to take risks, propensities to accumulate, and differing histories. Therefore, we would not expect this outcome to reflect distributional equality, in general. We denote this “free-market outcome” by the vector M = [ma, mb, mc], where mi is the ith individual’s market income. Without loss of generality, let A be the richest and C the poorest, so that ma > mb > mc. The total of the m’s is national income more or less as conventionally measured.
Let us now introduce the prospect of governmental transfer, assuming that majority rule is the only operative constraint. As a point of departure, consider the case in which all transfers are “lump sum,” that is, total income can be redistributed at will without loss. Aggregate money income (and the aggregate wealth stock) are totally unaffected by the transfer process. On this basis, suppose initially that B and C form a decisive coalition. Then, clearly, they will rationally take all of A’s income (and wealth). To do otherwise would be to forgo income that the majority could costlessly appropriate and would prefer to have. The outcome will then be of the form L = [0, lb, lc], where lb + lc = YM. Note that no such outcome is stable. Outcome L can be defeated at the next election by a coalition between, say, A and B involving an outcome of the form J = [ja, jb, 0], where jb > lb, and ja + jb = YM; or alternatively by a coalition between A and C involving an outcome of the form K = [ka, 0, kc], where kc > lc and ka + kc = YM. Some such coalition in which two of the three parties are made better off must always exist. The situation here is the familiar one in public-choice theory (and in game theory) in which every possible outcome can be defeated under majority rule by some other. No outcome is inherently stable. Rather, we would expect continuous “cycling” as the composition of the decisive majority coalition changed. Nevertheless, whatever the precise identity of the majority coalition, all outcomes here will exhibit the same characteristic feature: the income of the minority member will always be driven to zero. Transfers will always be pushed to the confiscatory level.
We should note that parties to a prevailing majority coalition have an incentive to form binding agreements to maintain the coalition, for by entering such an agreement each majority member avoids a fifty-fifty chance of receiving a zero income in the next period. Of course, it would not be rational to refuse unilaterally to break the coalition. One could then lose only if one’s current partner decided to break the agreement. Despite the continuous pressure for a coalition to break down, however, the possibility that a particular minority will be exploited systematically over a long sequence of electoral periods cannot be ruled out.
Three general points should be noted about this simple model. First, given the assumption that all transfers are lump sum, it is clear that the “benchmark” pretax, pretransfer income distribution is of no significance at all. Each individual has an expected average income over any sequence of electoral periods of 1/3YM. No one is intrinsically “richer” than anyone else. Differential labor productivities or differential propensities to save or take risks exercise no influence at all on the distributional outcome, not even as some relevant point of departure. No one can properly be said to “own” anything, except what he can extract from the political process itself. And what the individual does extract is his only for the duration of the current electoral period. Here, the simple pie-carving analogy is perfectly proper. There is a fixed pie, and it is up for grabs.
Second, because the precise composition of the decisive majority at each point is unpredictable, each individual naturally has the same expected income over any future electoral sequence, namely 1/3YM. In itself, this equalization of expected incomes can be interpreted as a major step toward distributive justice, as normally construed. The equality of expected income, however, has to be evaluated in light of the fact that there will be, at any point in the electoral sequence, one party that has zero income. Moreover, there is the possibility that particular coalitions may turn out to be stable over many elections, in which event the same party will face totally confiscatory transfer policy for substantial periods. Given this fact, the failure of standard criteria of distributive justice to address distributions of fluctuating parameters seems a major inadequacy. The impact of majoritarian political process on distributive justice in this simple model remains rather unclear.
Third, the assumption of lump-sum transfers is highly unrealistic. The level of income generated under the majoritarian system will necessarily be reduced by the revolving ownership rights. Consider, for example, the incentives for A, currently a party to the majority coalition, to accumulate capital assets when he recognizes that there is at least a one-in-three chance that he will be the exploited minority in the next election and have his assets confiscated. Incentives to acquire skills that add to labor income, to take risks, or to pursue entrepreneurial opportunities are substantially muted by the fact that the individual expects to reap only a fraction of the attendant benefits. Furthermore, securing membership in the majority coalition is a privately profitable activity. If, as seems likely, the time and energy individuals devote to becoming part of the decisive coalition have positive value when used in alternative ways, the expenditure of such time and energy is a net loss to the community. Such losses fall under the rubric of “rent-seeking” losses and are being increasingly recognized as major sources of inefficiency in contexts where institutional structures create opportunities for private gain that do not involve increased production.8
All this implies that transfers can be “lump sum” only in a very narrow sense. It may, in any period, be profitable for the prevailing majority to confiscate all the minority’s income and assets, but in making plans for future electoral periods, all agents can be expected to bear in mind the prospect that they themselves will be minority members and that their assets will be confiscated. Therefore, there will be much less available for confiscation than there otherwise would be. In particular, the sum of posttax-transfer incomes will be significantly less than YM at all points in the electoral sequence.
In light of this fact, all may well be better off in the expected sense if restrictions are placed on taxes and transfers in order to limit redistribution from the minority to the majority at any point. Moreover, such restrictions would have a presumptively desirable distributional consequence in that the distribution would be less inequitable at each point in the electoral sequence. We shall therefore turn, in Section V, to a brief examination of various possible restrictions that might be imposed on the tax-transfer process.
Tax Rules and Distribution under Majority Rule
Retaining the basic model of majority rule set out in the previous section, we shall proceed to examine the nature of distributional outcomes that emerge from political process in the presence of fiscal restrictions of various types, assuming that tax-transfer operations generate “excess burdens” and generalized efficiency losses for the community. We shall consider, in turn, restrictions imposed on the taxing process and the transfer process, adding an additional restriction at each turn. First, we shall suppose that the constitution restricts the taxing authorities to a single-rate income tax, no other restrictions being applied. Then we shall add the requirement that the income tax be levied at a uniform proportional rate on all individuals. We shall add the further restriction that transfers be paid in equal per capita amounts, in the form of a “demogrant.” Finally, we shall consider a direct constitutional selection of the tax-rate-transfer level.
Flat-rate income tax
Suppose that the majority is restricted to the use of a flat-rate tax on money income in imposing taxes on the minority. That is, although only minority members pay the tax, there is a well-defined tax base, money income, and a single rate applied equally to all minority group members. The significance of this restriction is twofold. First, the single-rate restriction is important because it prevents the majority from levying a tax that discriminates over inframarginal units of the minority members’ money income. Just as a discriminating monopolist can charge higher prices on inframarginal units of product and thereby secure some of the value of the consumer surplus otherwise accruing to the purchaser, so a taxing authority can appropriate some (and in the limit all) of the citizens’ consumer surplus by means of an appropriately regressive tax.9 The requirement of a uniform tax rate across all units of an individual’s income rules out any such prospects.
Second, the requirement that taxes be levied on money income explicitly rules out the power of the majority to confiscate the minority’s asset holdings—something that would be feasible under a wealth tax, for example. Income from assets can be taxed at the same rate as income from other sources, but the assets themselves remain more or less inviolable.10
Several things follow from these restrictions on the tax side. First, there will be, for each individual, a maximum amount of revenue, R*i, that can be obtained from him through the flat-rate income tax. Second, there will be for each individual an associated minimal income level, ni, which he secures, posttax, when faced with the maximum revenue tax rate. Third, we know that the taxing process will inflict net losses on taxpayers, over and above the revenue collected, as individuals are induced by the tax to substitute tax-free leisure for income.
These claims can be readily justified analytically,11 but it is perhaps necessary here only to provide an analogy. We can think of the majority as owning a monopoly right in the sale of the minority’s factor services. The maximum tax revenue obtainable corresponds to the maximum monopoly profit from the sale of those services, and the minority’s minimal income can be thought of as the cost borne by the monopolist of providing those services and accruing to the basic productive factors (in this case, the minority). The excess burden is then analogous to the efficiency losses associated with monopoly.
On this basis, it is clear that the decisive majority will always apply the revenue-maximizing tax rate to the minority’s income. To do otherwise would be to forgo transfers that the majority coalition could obtain. This will not, however, drive the minority’s net money income to zero; tax rates will necessarily fall short of 100 percent. To apply a tax rate in excess of the revenue-maximizing rate will, by definition, reduce the revenues available for transfer to the majority. At the same time, the majority will never willingly impose taxes on itself, because taxes involve an excess burden. Even if the revenue were to be returned to the taxpayer group in lump-sum form, the group would still receive less than would be required to compensate for the imposition of the tax.
Consider, for example, the case where A is in the minority, and B and C are in the majority. Then A will face the revenue-maximizing tax rate and receive a net total income of na, whereas B and C will pay no taxes and will receive R*a to divide between them in some proportion. That is, the resultant outcome will be JA = [na, mb + Sb, mc + Sc], where Sb + Sc = R*a. Analogously, when B is the minority, the outcome will be JB = [ma + S’a, nb, mc + S’c], where S’a + S’c = R*b. The result would be equivalent if C were the minority.
As in the case of unrestricted majoritarianism, we cannot predict which majority coalition will prevail. No outcome exists that cannot be defeated under majority rule. “Cycling” can be expected, as the identity of the decisive coalition continuously shifts. Such cycling is here bounded, however, in the sense that no one’s income can be reduced to a level below ni. Obversely, the best that any group can conceivably do is to receive maximum revenue from both of the other groups. This is, of course, unlikely, but a majority member may have to consent to be taxed in order to provide sufficient revenue to bribe another group to join the majority coalition. Suppose, for example, that JA prevails and that the maximum revenue R*a is split equally between B and C. Then A will seek to form a coalition that is best for himself. If there is more maximum revenue to be obtained from B than C (that is, R*b > R*c), A will attempt to form a coalition with C. In order to do so, however, he may need to pay C more than R*b (if R*b < ½R*a, for example), and A will therefore have to pay some positive tax himself.
Because of the revolving cycles and the general distributional indeterminacy involved here, it is difficult to specify exactly what the expected income will be for each group over the long electoral sequence. However, we can make certain general remarks. First, unlike the case of unrestricted majoritarianism, differential productivity, thrift, and so forth will exercise some influence on the expected distribution because the minimal income that each will receive when in the minority can be expected to reflect basic income-earning capability. There is, then, some substantive meaning here in the notion that some are richer than others. Second, and as in the unrestricted case, the effect of government transfer activity seems likely to be in the direction of equalizing expected incomes. In general, we expect the maximum revenue obtainable from any group to be positively related to the tax-free income of that group. If so, the amount the poorest can expect to receive in transfers will exceed the amount the richest can expect to receive as transfers in absolute terms (and hence a fortiori as a proportion of pretax total income). The net effect is to condense the distribution of expected income over the long electoral sequence, but not to equalize it. In this sense, unrestricted majoritarianism generates expected income that is closer to equality; on the other hand, at each point in the electoral sequence, the observed distribution of income will be more nearly equal in the presence of the tax restriction than in its absence. And, of course, the aggregate of incomes will be predictably higher.
Uniform proportional income tax
We now add to the previous tax restrictions the requirement that taxes be uniform across taxpayers. Under this restriction, the majority must face the same tax rate on money income that the minority faces. However, since there are no restrictions on the use of tax revenues, the majority will rationally appropriate all tax revenues for itself; no transfer at all will be paid to the minority. Accordingly, there will still be cycling in this case. No particular majority coalition will be intrinsically stable, for any outcome can always be confronted with another that is preferred by two of the three individuals.
If it were not for the presence of excess burden in the tax system, this case would not differ from unrestricted majoritarianism. Uniform nondistorting taxes would be imposed by the majority so as to appropriate all the income of each individual. Revenues would then be divided in some proportions strictly among majority coalition members. In other words, the requirement of tax uniformity, in the absence of distortions within the tax system, does not constrain outcomes in any way. But because the tax system does distort—because it imposes an excess burden on majority members that increases at the margin with the tax rate—the majority will not rationally push the tax rate to its maximum revenue limits. Rather, the majority coalition will push taxes to the point where the cost to itself of the marginal dollar raised, including the excess burden imposed on majority members, is exactly one dollar. It is relatively simple to see that this will imply taxation at a rate lower than that required to generate maximum revenue from the minority. Specifically, let us consider tax-rate increases in the neighborhood of that maximum revenue level. An increase in the tax rate adds only a small amount to the net revenue collected from the minority (and hence to the net transfer received by the majority members) but adds substantially to the excess burden of taxation that majority members themselves face.
Specifically, the cost to individual i of raising an additional dollar of revenue consists of two elements: the individual’s share of the tax revenue and the marginal excess burden he faces. That is, Ci = ri + (dWi/dR), where ri is i’s share in the marginal dollar of tax revenue raised. Under a proportional money income tax, ri is simply the ratio of i’s money income to aggregate money income. It is clear that dWi/dR tends to infinity as we approach the revenue maximum, because dR becomes zero at the maximum revenue level. Therefore, the marginal cost to i of an additional dollar of transfer also rises to infinity at maximum revenue. If each majority member shares equally in the tax proceeds (that is, each majority group receives half of each dollar of revenue received), each group will desire a tax rate at which Ci takes the value ½.
Since ri is larger for those with larger money incomes, and given that money income and total income are positively related, tax rates will be predictably lower when the rich are in the majority coalition than when the poor are. The poor therefore will lose relatively less when in the minority than the rich will lose when in the minority. Furthermore, although tax rates will in general be lower than in the nonuniform case, aggregate revenue will tend to be higher than in the nonuniform case since all must pay taxes. This means in turn that gross transfers will be larger.
In summary, the poor will tend to do rather better under the uniformity restriction: They will receive larger transfers on average than in the nonuniform case when in the majority and pay lower taxes when in the minority. The requirement of tax uniformity works in favor of greater redistribution on average and yet toward smaller variation over the long electoral sequence in the fortunes of any individual. The richest can do less well and the poorest less badly over the electoral cycle.
This is an important result and merits some emphasis. The requirement of tax uniformity in the presence of majority rule (without any corresponding uniformity restrictions on the transfer side) leads to a more equitable outcome, both in terms of expected income and in terms of the outcome at any point in the electoral cycle, than emerges in the absence of the uniformity requirement.
Uniform proportional income tax plus demogrant
Consider now the case in which uniformity restrictions are imposed on both the tax and the transfer side of the budget. The transfer uniformity is taken to require that revenues be divided equally among all citizens, in the form of an individual payment to all. Each group therefore receives thirty-three cents of each dollar of tax revenue raised. Uniformity on the tax side is defined, as in the preceding section, to involve a proportional income tax levied at the same flat rate on all individuals.
Given these restrictions, there will be some desired tax rate for each individual. This rate will be lower for any individual the higher his income, because he will be contributing a higher pro rata share of any dollar of tax revenue raised. In fact, any individual with income above the average will desire a zero tax rate—and hence a zero demogrant. Such an individual will contribute to revenue raised in proportion to his share of national income and will receive in return a per capita share enduring a net loss. Obversely, an individual with less than average income will desire a positive tax rate, one at which the cost to him of raising an additional dollar of revenue, including the marginal excess burden, will be equal to his per capita share of one-third. Clearly, the lower the individual’s income, the higher will be the desired tax rate (and concomitantly tax revenue and demogrant). Here we have no cycles. Preferences over the single parameter t can be arrayed along a single spectrum, and majority rule will lead to the median income earner, in this case B, being decisive in determining the tax rate to be applied. There is no scope for a decisive coalition between A and C, because given the restrictions on taxes and transfers there is no arrangement that will make both A and C better off: A wants lower tax rates, C higher ones. Hence, the tax rate levied will be the tax rate desired by the median-income individual. As we have indicated, only if income of the median-income earner is less than average will he desire positive transfers; and he will desire more transfers the lower his income is. The extent of redistribution will depend, therefore, on the extent to which the income distribution is skewed toward the lower end.
In contrast with the earlier cases, then, the pattern of transfers in this case is entirely determinate and emerges identically at every point in the electoral sequence. The extent of such redistribution depends solely on the difference between mean and median income. Whereas the focus of normative analysis is on the variance of the income distribution, or some equivalent measure of inequality, the extent of redistribution under majority rule, so restricted, depends solely on the degree of skewness. In other words, majority rule, with uniformity restrictions on both tax and transfer sides, serves to connect redistribution to the wrong parameter. Changes in the distribution of income that are essentially irrelevant to redistributive ethics can generate substantial changes in the pattern of political transfers, whereas changes in the income distribution that are of considerable normative significance may either leave the extent of transfers from rich to poor unchanged or alter them in a “perverse” direction. Some simple comparative static results from our three-person analysis suffice to support these claims. Suppose, for example, that the income of the poorest falls, ceteris paribus. Then average income will by definition also fall. Median income will remain unchanged, however, so the extent of transfers will fall. Obversely, if the income of the poorest rises, ceteris paribus, transfers will rise. Consider, on the other hand, an increase in median income, ceteris paribus. In this case, transfers will fall, even though the relative share of the poorest in the total pie has declined. Of course, some changes in the income distribution will generate changes in the transfer pattern that are consistent with the dictates of distributive justice as conventionally interpreted. For example, as the income of the richest increases or decreases, ceteris paribus, the level of transfers will rise or fall. But as we have shown, the simple median voter model does not generate patterns of political redistribution that are an appropriate expression of what distributive justice requires.
Direct Constitutionalism and Distributive Justice
The central message of the institutional incidence analysis undertaken in the previous two sections is that ordinary majoritarian politics is a highly imperfect mechanism for securing distributive justice—at least as distributive justice is normally conceived. Two types of problems seem to be associated with majority rule. The first is one of distributional indeterminacy. The implementation of political transfers will always be such that the direction of transfer is away from the minority and toward the decisive majority, and the poorest cannot be expected to be in the decisive majority any more often than anyone else. Therefore, although the poorest can expect to be net beneficiaries of the political roulette wheel in the long run, the fact that political transfers will regularly flow in a perverse direction is one to be reckoned with. Exactly how one should evaluate a sequence of systematically variable distributional outcomes is not a question to which social philosophers or normative policy analysts have given much attention. Nonetheless, it should be clear that without some answer to this question majoritarian institutions cannot generally be evaluated in terms of criteria for distributive justice. Is an income stream that varies randomly over time as “just” as a stream that yields income equally in each period? If not—and specifically, if the constant stream is to be preferred—there seems a good prima facie case for restricting majority rule in some way to produce, if possible, more stable distributional outcomes.
One way of restricting majority rule to achieve a determinate distribution is to require uniform proportional taxes and disbursement of revenues on an equal per capita basis. If such restrictions are imposed, however, a second problem with majority rule emerges: The transfer pattern generated will be insensitive to ethically relevant considerations. Specifically, the level of transfers will be perversely responsive to changes in the level of income of the poorest. Indeed, there is no guarantee that transfers will occur. Any transfers that do occur, of course, will be such as to benefit the poorest most of all. This is a direct concomitant of the restrictions imposed—that taxes be levied in proportion to income and that revenues be paid on an equal per capita basis. Nevertheless, majority rule does not seem capable of determining a level of transfers that is ethically appropriate or sensitive to the relevant parameters of the distribution.
It may, of course, be argued that the highly austere model of political process used in the foregoing sections is so remote from “real-world democracy” that nothing of any relevance can be concluded. Though fully conceding the starkness of the simple majoritarian model used, we reject the criticism. The object is to investigate the nature of the pressures on distributional outcomes that arise from electoral processes. Those pressures necessarily reflect the nature of the institutional setting, of which electoral competition under simple majority rule is a major (and many would argue predominant) feature. The danger of less formal treatment of democratic institutions is that one can become captivated by the prevailing political religion. There is, of course, much talk of distributive justice in the political rhetoric. The substantive issue is whether there is any reason to believe that distributive justice will be secured.
Given the simple model of majority rule we have developed, the answer is at best equivocal. Majority rule may be able to secure a more equitable outcome in the income distribution and may do so at tolerable cost. Majority rule, however, seems likely to work much better in this respect if constrained by the requirement of uniform proportional taxation. Such a requirement promotes more equitable outcomes in that it restricts the advantages to a decisive coalition of richer individuals in organizing large-scale transfers toward themselves, while restricting to a lesser extent the analogous advantages for the poorer. In all such cases, however, because transfers flow often enough in the “wrong” direction, the cost of securing any net redistribution in an expected sense is rather high—and seemingly unnecessarily so. For example, in cases 1 and 2 of Section V, it seems likely that all parties would receive larger returns if there were an agreement to secure the average distributional outcome at every point in the electoral sequence. This could also be construed to have purely distributional advantages. In a Rawlsian maximin setting, where no individual knows to which group he will belong, an arrangement that generates the expected distribution at every point has the advantage of entirely precluding the outcome in which the poorest are the exploited minority. Given the maximin criterion, this characteristic would seem to be decisive.
Might, then, some directly constitutional transfer arrangement be distributionally superior? If, in some quasi-Rawlsian setting behind the veil of ignorance at the constitutional level, individuals can be presumed to have well-defined preferences in relation to future income distributions and to transfer policies that might be implemented to constrain those distributions, why not seek to institute those policies at the constitutional level? Suppose, for example, that a uniform proportional tax rate is to be levied and that the resultant revenues are to be expended in equal per capita grants. Also suppose, however, that the tax rate (and hence grant level) were not determined by the median voter under majority rule but, instead, the tax rate (or the grant level) were selected constitutionally. Transfer policy would cease to be a matter for in-period political determination; the pattern of government grants would, instead, be part of the rules of the game.
There are four points to be made about such an arrangement. First, and somewhat surprisingly, the demogrant system is not necessarily as efficient a means of achieving a given expected distributional outcome as the uniform tax alternative examined in Section V.2. That is, reductions in the variance of the poorest’s income stream over the electoral cycle are achieved at some loss in aggregate income. The reason for this seems to be that requiring transfers to be paid to all individuals increases the total revenue requirement of the transfer level that the poorest insists on when in the decisive coalition, and does so sufficiently to offset the disadvantages to the poor when in the minority. Recall that in the model discussed in Section V.2, tax rates are lower when there is a coalition of the richest than when there is a coalition of the poorest, so the disadvantages to the poor from being in the minority are already somewhat moderated. In any event, to achieve the same expected income for the poorest via a demogrant system does require a higher tax rate and hence larger excess burdens than in the case where transfers are restricted to majority members, even though the poorest will be in the exploited minority some of the time.
Second, and on the other side of the ledger, the constitutional demogrant system obliterates incentives to expend resources in an attempt to ensure that one is part of the decisive coalition, incentives that exist whenever majoritarian cycles prevail. If political rent seeking of this type is at all large (which, as we have already argued, it could very well be), then the lower excess burdens on the tax side in a majoritarian system restricted only by the requirement of uniform proportional taxes may well be more than offset. In this event, efficiency considerations favor the explicit constitutional transfer package.
Third, although it seems natural to refer to such an arrangement as “constitutionally determined transfer,” there is something rather misleading about such terminology. There is, after all, no sense in which these policies would “redistribute” resources or income among persons. Rather, the constitutional order would involve a set of property rights in which each individual genuinely “owned” only a portion of the product that the labor embodied in his person generated. On the other hand, each would own an equal share of some portion of the product that the labor embodied in other persons generated. The government could not be taken to be transferring income from the rich to the poor—by virtue of gratuitous altruism, hatred of the rich, or any other aspect of “Robin Hoodism.” The arrangement would simply be part of the institutional structure under which individuals’ basic property rights were defined and enforced. In fact, this is perhaps not so different from current institutional arrangements in Western democracies. Citizens do, by virtue of the prevailing powers of the state, make claims on the personal productivity of other individuals—claims the state legitimizes and effects through the tax-transfer system. The crucial difference between what is here suggested and what currently prevails is that under the constitutional alternative, the claims individuals make on one another under state aegis would be uncontingent, not varying according to fluctuating electoral fortune. The rights that citizens possessed by virtue of such constitutional arrangement of taxes and transfers would then be no different from other things they could properly construe as owning. At this point, notions of distributive justice and formal justice (as examined in Chapter 7) overlap. Because distributive justice considerations are applied to the rules rather than merely to outcomes, and because these considerations are endorsed and applied under constitutional consensus, the outcomes emergent under rules satisfy the requirements of “distributive justice,” whatever the characteristics of the distribution of income those outcomes may exhibit at any given time.
Finally, once it is recognized that criteria of distributive justice are applicable to the choice among rules rather than some imagined choice among imaginable distributional outcomes, one cannot simply presume that the set of rules most conducive to distributive justice will be ones that “transfer” income. It is certain that economists generally approach the issue of redistributive policy with a strong predilection for cash transfers as the most efficient form of securing desired distributions. But this proposition may not be true once the domain of discourse shifts from selection of the desired distribution toward the institutional structure from which desirable distributions may emerge.
There could be all sorts of rule changes that promoted greater equity in the pattern of emergent outcomes. In basketball, for example, we could diminish the natural advantages of tall players either by raising the height of the basket by five feet or by attempting to handicap tall players explicitly in some way (say, by weighting goals scored by the inverse of the height of the scorer). It is not obvious that the latter scheme would be more just, in any acceptable meaning. In the same way, rule changes in social affairs need not involve explicit redistribution through political process to secure more equitable outcomes. In light of our analysis of transfer patterns under simple majority rule, it would hardly be surprising if more efficient routes to distributive justice could be found.
The central object of this chapter has been to examine the question of distributive justice through constitutional eyes. Our point of departure has been the observation that the “benevolent despot” model of political processes is totally inadequate for the purposes of discussing distributive justice, just as it is in other pieces of normative social analysis. We cannot adequately characterize governments as “choosing” among alternative distributions. Rather, distributions emerge from the complex interaction of autonomous agents, all making individual choices under a given set of rules. The evaluation of alternative distributions is to be seen as a preliminary step only, as a piece of abstract normative theorizing, which of itself is incapable of revealing anything at all about policy-relevant matters. What is required is an examination of the way changes in the rules under which individuals interact change the pattern of distributive outcomes. Such examination we call “institutional incidence analysis.”
The analytic core of this chapter contains just such an institutional incidence analysis for an extremely simple model of majority rule. We make alternative assumptions about the excess burdens generated by taxes and transfers and examine the distributional effects of imposing various restrictions on the ways taxes can be levied and transfers paid. The general conclusion to be derived from this analysis is that majority rule is at best a highly imperfect means of pursuing distributive justice. Majority rule either generates cycles (that is, is basically distributionally indeterminate) or, when appropriately restricted, generates a specific pattern of transfers that is perversely responsive to normatively relevant changes (say, to changes in the income of the poorest).
All this suggests the possibility of lifting the determination of the redistributive or transfer budget out of the jurisdiction of in-period majoritarian politics and making it a matter of explicit constitutional compact. This can, of course, be done. But a constitutional decision to embed some transfer operations in the general rules of the game cannot be presumed. Expected effects on the distribution of income will presumably be relevant in the choice among alternative sets of rules, and rules generating more nearly equal patterns of distribution may, ceteris paribus, be preferred. Chosen rules, however, need not involve “handicapping” the more successful players. There is available, at the constitutional level, a wider set of options, and the means chosen for achieving more equitable outcomes need not necessarily involve interpersonal transfers.
The analysis here, to be sure, falls short of being definitive. It does, we believe, nevertheless point in the right direction. Traditional discussions of distributive justice are hopelessly remote from the real world of distributive politics. Indeed, crucial political constraints are typically ignored altogether, and the institutional feasibility of distributive justice is brushed aside as an irritating minor technicality. This may be an acceptable procedure for the moral philosopher, but for the social analyst it is totally inadequate. Our object here has been to expose that inadequacy and to indicate the sort of inquiry required to fill the void.
For present purposes, it seems clear that faith in the capacity of ordinary majoritarian processes to generate equitable patterns of distribution is naïve indeed. In the absence of rules designed to restrict the operation of majoritarianism in particular ways, almost anything goes. Equality in an expected sense emerges only because of the intrinsic unpredictability of the future pattern of political coalitions, and what remains to be distributed in the world of “politics without rules” cannot be anything but small.
Is Constitutional Revolution Possible in Democracy?
This book is an extended essay in persuasion. We have tried to offer logical bases for imposing constraining rules on the political actions of persons, including ourselves, as present or potential actors in political roles. We hope that our arguments for the desirability of accepting a “constitutional attitude” have been convincing, both in the abstract analysis and in the practical applications of this analysis. Widespread acceptance of such an attitude is a prerequisite of genuine constitutional reform. We would, however, be naïve in the extreme if we failed to acknowledge major barriers to the achievement of any shift in the basic rules of political order. This chapter is devoted exclusively to analysis and discussion of these barriers.
It is, we presume, evident that we must answer the question of the chapter’s title affirmatively. If we did not, the discourse of this book, and of much of our work elsewhere, would have to have been driven by purely aesthetic purpose. In one sense, we share a moral obligation to hold fast to the faith that persons organized in a polity can reform the rules by which and under which they live. Any other belief, it seems to us, would be a counsel of despair. This faith in the potential for reform must, nonetheless, be distinguished from constructive analysis of the difficulties of escaping the dilemmas we confront. If analysis of these difficulties were to yield wholly negative results, faith in any potential for reform might be sorely shaken. We need, if at all possible, to present a scenario in which genuine constitutional change takes place through the activities of men and women we can all recognize. If people were saints or angels, the dilemmas we face would never have emerged in the first place.
We should also emphasize the relevance of the last two words in this chapter’s title. We examine prospects for constitutional revolution in democracy, which means not only that our attention is limited to democratic polities but, more important, that constitutional change is required to be “democratic” in the sense that it must emerge from the internal workings of politics in which the whole electorate potentially participates, rather than from the dictates of certain “divinely qualified” persons either within or outside the community. We use the phrase “divinely qualified” here because any discrimination among persons with respect to the formation of the basic rules of social order must be legitimated by reference to some external supraindividualistic criterion.
This limit to our analysis excludes from consideration all nondemocratic revolutions, constitutional or otherwise. Such revolutions are always possible, even in countries that have long been accustomed to democratic procedures of governance. A group of persons—a military junta, a single party leadership, a ruling committee, an elitist establishment—seizes power and imposes its will on all persons outside the dominating group. It is relatively easy to model constitutional-institutional reform in this fashion, which amounts to saying that it is easy to play at being God. The academic scholar-scientist, in particular, may be tempted to play such a role by imagining that he holds the revolutionary reins of power. In this dream world, the scholar-scientist can make his own idealized suggestions for constitutional change while still under the guise of participation in an ongoing dialogue with his fellows.
The issue we face is much more difficult than that involved in playing God. Our concern is with the prospect of securing general agreement on changes in the basic rules of the political game, even on the part of persons and groups who seem to be relatively advantaged under existing institutional arrangements. In other terms, our concern is with prospects for noncoercive and voluntary resolution of the generalized social dilemma that seems to describe modern politics. Honest diagnoses suggest that the dilemma is real, and throughout this book, we have taken these results to be stipulated.1 We do not live in the best of all possible constitutional worlds, and here we examine the possibility of escaping into a different one.
Pareto-Superior Change and Wicksellian Unanimity
We shall begin by making a summary detour through some fundamental principles of theoretical welfare economics, specifically through the Paretian criterion for the justification of a change or move. Pareto supplied a classification scheme, in which all possible social “situations,” “positions,” or “states” belong to one of two mutually exclusive sets. The first set includes all nonoptimal, or inefficient, positions; the second includes all optimal, or efficient, positions. The latter set consists of all nondominated positions, with dominance being defined for all persons in the relevant community.2 No change can be made from a Pareto-optimal position to any other position without at least one person in the community being harmed. A nonoptimal position is one from which some change can be made in such a fashion that at least one person is benefited and no one is harmed. This purely definitional classification scheme then allows us to say, formally, that there must exist at least one position within the Pareto-optimal set that can be attained by change from any position in the nonoptimal set, a change that will harm no one. Such a change is defined as Pareto superior.
At this purely formal level, we need not be concerned about the precise meaning of a “social state,” “position,” or “situation.” In the orthodoxy of modern welfare economics, a “social state” has been defined almost exclusively in terms of an imputation (allocation or distribution) of endowments and/or goods among persons. Needless to say, such an outcome, or end-state, usage of the Pareto criterion is inappropriate for our purposes in this book and elsewhere, but this concluding chapter is clearly not the place for an extended critique of end-state methodology. In this discussion, the Pareto criterion is applicable to rules, or institutional arrangements within which persons act to generate patterns of outcomes.
Saying, then, that a generalized social dilemma exists amounts to classifying the existing rules of the socioeconomic-political game as nonoptimal, or inefficient. And if we insist on noncoercive and voluntary agreement, we restrict “efficient” or “optimal” to the Pareto meaning. This tells us, in turn, that if our diagnosis of the presence of a dilemma is correct, there must be Pareto-superior changes that are possible. If the rules are nonoptimal, there must be reforms that will benefit everyone.
If we translate the formal Pareto scheme into Wicksellian terms, we can say that if a genuine dilemma exists, it must be conceptually possible to make some change on which all persons in the community could agree. Unanimous agreement on some proposed change in the rules must be at least conceptually possible. Critics might immediately suggest that unanimous agreement smacks of utopian absurdity, at least in terms of practicable implementation. In our view, however, criticism of this sort amounts to putting things the wrong way around. The relevance and applicability of the Wicksellian-Paretian criterion as a benchmark on which analysis and discussion of constructive constitutional reform must be based are in no way challenged by such criticism. If we are consistent in our determination to limit analysis to prospects for internal change, for “democratic” reform of political arrangements, there is no alternative criterion for the evaluation of proposals.
Distributional Limits and Prospective Rules
There are obvious limits on the range of possible Paretian-Wicksellian changes from any defined status quo. This point can be seen most clearly if we shift to the more orthodox setting and define the status quo position as an imputation of valued goods among separate persons in the community. To the extent that a proposed change involves a purely distributional shift, it cannot be classified as Pareto superior, even as a conceptual possibility, if “goods” are defined to include all that persons value. (Of course, if the distribution were defined in terms of physically measurable commodities, Pareto-superior changes might be made.) If we think of some value-numeraire, any change from an initial distribution must reduce value for at least one person, whose agreement could then never be secured. That is to say, if a proposed change involves “taking away” valued goods from some person or persons and “giving to” others, the change could never be accepted voluntarily by those who would be harmed in the process.
A direct implication of this elementary point is that constitutional revolution, in the sense discussed here, would be impossible in a democracy if this revolution were conceived as a fundamental shift in the distribution of commonly valued goods and services or in the distribution of claims to such goods and services.
This distributional restriction on the scope of constitutional change may initially seem quite severe. This impression is misleading, however, and tends to be fostered by the total absence of realism in the definition of any status quo position as a distribution of goods. It is necessary to keep in mind that our concern is not with potential changes in specific end states, or outcomes, even if such changes were within the realm of the possible. If the relative positions of individuals in sociopolitical order are described by an imputation of valued goods, services, and claims, distributional reallocation must characterize any change. (No one would expect poker players to divvy up the chips after the game had been played.) Our focus is rather on the potential for changes in the rules or institutions of social order. These rules provide the framework within which patterns of distributional end states emerge from the interaction of persons (players) who play various complex functional roles. The precise distributional effects of a change in the rules on any identified person or group at any point in time may be difficult if not impossible to predict. A status quo defined only in terms of the rules (the laws and institutions) within which persons act is conceptually very different from a status quo described by a particular distribution of valued goods and claims. (The poker players may all agree on a change in the rules for future play, regardless of the rules under which play has proceeded during earlier rounds of the game.)
Let us digress, briefly, by noting that the proclivity of mathematical economists to force all analysis into mathematically tractable forms has done serious damage to clarity of thought with respect to the end-state-rules distinction. It has proved relatively easy, mathematically, to define distributions of goods in vector language. But how could a status quo be described mathematically if what exists is a set of rules that constrain but do not determine individual choices that, in turn, generate patterns of distributional outcomes? End states lend themselves to mathematical manipulation; processes do not.
Changes in rules are prospective in their distributional implications, whereas changes in observed distributions themselves are necessarily retrospective, with reference to the choice behavior of the persons who act to generate the results. Changes in rules that can lay any claim at all to consensual agreement can, at best, modify personal expectations about future distributional patterns. Rule changes cannot modify observed distributions as such, unless, of course, such changes are applied ex post facto.
An example of the distinction is provided by normative tax theory. A collective decision to levy a progressive tax on incomes is a change in fiscal rules. Despite the distributional consequences that might be predicted, such a decision may conceptually be agreed to by all persons in the community, particularly if there is a time lag between the agreement and actual levying of the tax. An individual would know that if he chose to earn income, this income would be taxed at progressive rates. But contrast this with a collective decision to levy a tax on wealth. In this case, persons who have accumulated wealth have made prior choices under other rules. A change in fiscal rules of this sort violates all criteria of “fairness” and could never lay claim to Pareto superiority, even as satisfying a purely conceptual criterion.
Acknowledgment of the prospective nature of any change in rules that qualifies as Pareto superior carries important implications for the design of proposals for reform. To the extent that proposed changes in rules explicitly embody time lags between approval and implementation, the ability of persons who are potentially affected to predict with accuracy the impact on their own identifiable positions must be reduced. Prospective rules introduce uncertainty into the calculus of those who participate in the decision making, and this uncertainty increases with the length of the time lags.
The temporal element becomes even more significant when it involves the duration or permanence of the proposed rules change. To the extent that persons who must choose among rules do so in either the knowledge or the expectation that any alternative, once chosen, is to remain in effect over an extended sequence of periods, they will be less able to predict how particular rules will affect their relative positions over the same sequence. The logical basis of the differentiation between the decision rule for making changes in the constitution (amendment procedures) and the decision rule for making choices within given constitutional rules lies in the recognition of this temporal distinction.
Proposals for changes in rules that are known to be or expected to be short-lived, even if adopted, are more predictable with respect to their distributional impacts. Hence, agreement on short-lived change may be more difficult to secure. Indeed, the meaning of “rule” implies quasi-permanence; a game whose rules were changed with every round of play would be little different from a game without any rules.3
In their book The Calculus of Consent (1962), James Buchanan and Gordon Tullock used the prospectiveness and permanence properties of constitutional rules as the essential means by which an individual can construct a bridge, of sorts, between short-term, identifiable private interest and long-term, nonidentifiable self-interest, which then becomes “public interest.”
The construction has a close affinity to the somewhat more familiar Rawlsian veil of ignorance.4 In the Rawlsian framework, the individual has a moral obligation to choose among principles of justice as if he were behind a veil of ignorance. And at a different level of analysis, the stance so depicted is held to describe empirically widely held notions about justice. That is to say, persons “should” try to adopt the veil-of-ignorance position, and, furthermore, persons do embody some such stance when they seriously consider, and talk about, basic rules for sociopolitical order. The Buchanan-Tullock derivation is, in comparison with the Rawlsian, less demanding on individuals in that, at least in the limit, they are forced by the circumstances of the choice setting to adopt a stance that is equivalent to the veil of ignorance. Because of the inherent uncertainties about their own positions, persons must, on rational self-interest grounds, use criteria akin to the fairness precepts outlined by Rawls. The effect of uncertainty is to mitigate substantially any purely distributional aspects of genuine constitutional choice.
Status Quo Entitlements and Distributional Envy
A second major hurdle to be surmounted in generating consensus on basic constitutional reform is indirectly related to the distributional aspects discussed in Section III and, in one respect, exists precisely because the requisite limits of distributional uncertainty cannot be attained. Realistically, we must recognize that persons will not, and cannot, make constitutional choices behind a veil of complete ignorance, owing either to their inabilities to adopt the moral stance urged on them by John Rawls or to the impossibility of designing institutional circumstances sufficient to make such a stance rational on strict self-interest grounds. To some residual extent, distributional implications of any proposed change in rules can be predicted, including the prediction of differential impacts on identifiable individuals and groups. This fact alone would seem to stymie consensual constitutional reform from the start. Must the question posed in this chapter’s title be answered negatively?
This barrier to potential agreement is not nearly as serious as it may at first seem. The necessary presence of some predictable distributional impact of any proposal for change will thwart general agreement on any simple version of the proposal. But at this point it is useful to recall the earlier detour into Paretian-Wicksellian welfare analytics. If the status quo set of rules is, indeed, nonoptimal, or inefficient, there must exist potential agreement on some change in structure. The working out of such an agreement, even for conceptual evaluative purposes, may, however, require a complex network that includes various compromises, side payments, compensations, bribes, exchanges, trade-offs—a network aimed precisely at offsetting the predictable adverse distributional properties of the proposed changes. If particular persons, as individuals or as members of groups in the economy, foresee distributional harm as a result of the implementation of a simple change in the rules, the designers-proposers must work out additional elements of a “package deal” that will change the results.
The problem here is not one of difficulty in locating the necessary elements of a complex constitutional “exchange” that will promise net benefits, ex ante, to all participants. There may be many such packages that would command general assent, especially when there are major overall gains to be made by a change in institutional-constitutional structure. The discovery of such mutually beneficial proposals, best considered as complex exchange propositions, is the proper task of the specialist in political economy.5 The problem worthy of our attention here concerns the willingness of those who may be direct beneficiaries of structural change to pay the compensations that may be required to secure general agreement.
The problem can be stated differently. All parties in the political community may be unwilling to accept the status quo distribution of entitlements generated under the operation of existing rules. This distribution of entitlements may not be acceptable to many persons as the appropriate starting point from which genuine constitutional reform is to be made. That is to say, there may be no way to get from “here” to “there” until prior agreement is reached on the “here” and the embodied distribution of rights that exist.
Consider land reform in a developing country as an example (and purely as an example, since we make no claim to competence in the analysis of comparative efficiencies of alternative institutional arrangements in such situations). Let us stipulate that there is general agreement among all persons in the community that land reform will increase the overall efficiency of the national economy, efficiency being objectively measured in dollars of gross national output or product. From this fact, it would seem to follow that some reform proposal, in a complex package deal, could be worked out on which everyone could be brought to agree. Such a proposal would have to include compensation to existing owners of extensive landholdings that would be sufficient to secure their acquiescence to a change in ownership patterns. To finance such compensation payments, however, prospective landholders and/or taxpayers generally would have to sacrifice some purchasing power, some share of their net promised benefits. This result might seem less desirable to these groups than the result achieved by a simple “taking” of the landed estates. Despite the acknowledged net gains from the land reform, persons who themselves would be in the net beneficiary groups might remain unwilling to finance the necessary payments to existing landowners, on the grounds that status quo holdings are “unjust.” This attitude, and behavior stemming from it, might prevent any consensus from being reached on constitutional change, even with the widespread knowledge that such a change would generate major overall efficiency gains.
The prevalence of such an attitude toward patterns of holdings, or rights, in the status quo will, of course, depend in part on the individually estimated prospects for successful alternative avenues through which change can be implemented. Respect for the status quo distribution of entitlements and, hence, willingness to pay the compensation required to attain consensus on change depend critically on whether the allegedly “unjust” entitlements and claims can be changed without the voluntary agreement of existing holders of such entitlements being obtained. The temptation to confiscate privately held capital values overtly through the exercise of power by dominating political coalitions is always present.
Perhaps even more important, the expected value of gains from politically orchestrated “taking” may remain positive, and differentially higher than the expected gains from genuine constitutional change, for many persons who are not at the time, but may expect to be, members of political coalitions capable of carrying out confiscatory action. Indeed, the problem discussed here may be most extreme in those situations in which “political property rights” are most uncertain.
In our land reform example, many persons may consider existing holdings to be “unjust” and hence appropriately subject to overt confiscation (to nondemocratic constitutional change in the terms of our reference in this chapter), but at the same time these persons may be uncertain as to their own potential voice in governmental-political decisions. Despite this uncertainty, however, they may be unwilling to support any scheme that will allow some politically orchestrated “buyout” of existing holdings. The situation of the nominal owners of the estates in the status quo may be similar even if on the other side of the issue. If these nominal owners acknowledge their impotence in the face of identifiable opposition coalitions, they might voluntarily agree to structural rearrangements that include much lower net compensation than straightforward market-value estimates might produce. On the other hand, if these holders maintain confidence in their power to influence political outcomes, they may demand compensation in excess of what other members of the political community will finance, especially given the estimated threat potential that members of the second group think they possess. The impasse that may arise in such settings is analogous to the problem that arises in market transactions when ownership rights to potentially tradable goods are not well defined and legally protected.6
The land reform example should not be taken for more than that, an example. Many other examples, such as slavery in the American South in the 1850s, might have been selected. The central point is that ambiguity and uncertainty about the distribution of political rights under a set of constitutional rules may inhibit or even totally prevent changes in these rules, despite a general acknowledgment that such changes would improve welfare. Nondemocratic change in the form of violent revolution or civil war might become the alternative to consensual reform in such settings.
The barrier to genuine constitutional reform analyzed in this section varies in significance with the perceived “legitimacy” and “effectiveness” of the existing political constitution, the status quo set of rules. To the extent that this constitution commands little respect, in part because it is seen to fail in its function of limiting the scope of both governmental and private intrusions into what are widely held to be protected spheres of activity, the direct-confiscation alternative to Pareto-superior or consensual change may seem to offer higher present value to most citizens. The somewhat ironic result is that it may be much easier for a country to achieve genuine constitutional revolution if its citizenry has long adhered to a “constitutional attitude,” fostered by a historical record during which limits on the power of governments have proved effective at least to a degree. If there has been a widely acknowledged separation between “law” and “legislation,” to use Hayek’s terminology,7 or between “constitutional” and “postconstitutional”-“in-period” choices, or between “changes in rules” and “play within defined rules,” the willingness of persons to seek somewhat different and more inclusive processes of decision making to change rules, as opposed to processes for political action within existing arrangements, is increased. Conversely, it may be difficult to achieve basic constitutional change in a political setting where governments are seen to have been effectively unlimited in power and authority. Why should an unlimited majority coalition, either existing or potential, ever seek constitutional change through consensus when the same results can be achieved at lower cost?
In these respects, it would presumably be easier for the United States, or any political structure characterized by an effective division of power, to effect changes in its political structure than it would be for the United Kingdom or any parliamentary democracy in which political authority is concentrated in a single legislative assembly.
Constitutional Change and Free Riders
The barriers to constitutional reform discussed in Sections III and IV are significant. We should not underestimate either the distributional implications of any change in structure, with their feedback effects on potential consensus, or the effects of uncertainties in the political status quo. Nonetheless, it could be argued that these barriers to reform are less important than the one to be discussed in this section, one that is much more difficult to supersede in any normatively predictive sense.
We refer to the general problem of “publicness,” in the formal welfare-economics meaning of the term, and to the behavioral implications of this characteristic, which are often summarized under the rubric “free rider.” In its most comprehensive forms the question is, How is “public good” produced? How is “public bad” avoided? How is collective action motivated other than via the private interests of individuals?
It is relatively easy to conceptualize or model a small group of players in an ongoing game considering possible changes in the rules of play, the rules that describe the game itself. But what is the analogue in the larger, more comprehensive sociopolitical “game” in which there are literally millions of players? Who are to take upon themselves the personal burden of designing provisional proposals for basic changes in the rules when the promised benefits accrue publicly, that is, to all members of the political community, and with no differentially identifiable residual claims to the promised “social” profits? What is the constitutional equivalent of the patent law, which guarantees a special, even if limited, monopoly privilege to the inventor and which, in turn, offers incentives for creative effort by all potential inventors? What is the political-constitutional equivalent of entrepreneurial profits, the search for which drives the economy and motivates attempts to locate higher-valued ways of organizing production and combining resources, both within and across markets, broadly defined?
Can general rules be changed in a deliberative process of collective choice, even if there are acknowledged possibilities of Pareto-superior reforms? And if not through deliberative choice, how can general rules be modified? Must we resign ourselves to the acceptance of one of what seem to be only two alternatives? Must we acknowledge that changes in basic institutions can be imposed only nondemocratically, by a group seeking to promote its own interests, the alternative avenue of “reform” that we have refused to discuss in this chapter? Or failing conscious constitutional change and eschewing nondemocratic “reform,” must we fall back on slow, unconscious, and unintended processes of social-cultural evolution, with little more than pious hope that such changes as do occur will lead us toward rather than away from a set of arrangements that might be conceptually evaluated to be Pareto optimal?
Confronted with questions like these, the economist seems likely either to despair or to avoid relevant thought altogether by playing mathematical games. An economic model of behavior that lays any claim at all to predictive power must rely on the uniformity of human nature summarized in Homo economicus, or economic self-interest objectively defined. Such a model of behavior has served economists well; the model in all its variations explains much of what we know about the political-governmental sphere of human action in addition to the much more that we know and can explain about human action in market relationships. This economic model yields meaningful predictions; testable hypotheses can be derived about the organization and functioning of political parties, coalitions, committees, pressure groups, governmental agencies, and legislatures. Hypotheses about how bureaucrats behave, how budgets are constructed, how regulation operates—these and others emerge from application of the central Homo economicus postulate. But all such hypotheses rest, finally, on the explanatory power of this self-interest motivational assumption. The professional economist must look at the governmental-political process as driven by the same forces that drive the market process; even when analysis incorporates the recognition that self-interested behavior is not nearly so amenable to simple modeling in political as in market choice.
It should be evident, however, that the basic analytics of “positive public choice” cannot be readily extended to explain changes in the basic rules of political order that are necessarily “public” in scope. The individual actor in the positive public-choice model does not act contrary to his defined self-interest, even if it is not so easily defined as some of the simplistic exercises might suggest. To the extent that “investment” in institutional analysis, design, argument, dialogue, discussion, and persuasion is costly in a personal sense, the individual of the orthodox model will forgo such investment in favor of more immediate gratification of privately directed desires. Why should anyone do “good”? There is no way that economists who stay within the strict limits of the discipline can respond to such a question; they cannot manipulate utility-maximizing actors so as to offer a satisfying response.
The Role of Norms
Economists have great difficulty in moving beyond the rather simplistic, if powerful, models of human behavior grounded in self-interest motivation. We claim no exception to this generalization about our disciplinary peers. Nonetheless, anyone who diagnoses the plight of modern democracy in terms of the existence of a social dilemma described by a set of nonoptimal rules must give up in despair, become a revolutionary, or go beyond the models of utility maximization, nontautologically defined. To hold out hope for reform in the basic rules describing the sociopolitical game, we must introduce elements that violate the self-interest postulate.
If persons do not behave in accordance with their own economic self-interest, objectively defined and measured, on what basis do they act? The hard-nosed positive economist mounts an effective critique of peers in the other social sciences and in social philosophy when they are challenged to produce an alternative model with predictive content. The economist is well equipped to recognize mush for what it is, and when noneconomists hypothesize that persons want to “do good,” he quickly detects the absence of predictive content. To make such hypotheses operational, even at the level of analytic discourse, additional definition is necessary. What, precisely, do persons do when they “do good”? If individuals differ widely in their conceptions of “good,” attempts by each to “do good” amount to little more than random deviations from behavior modeled on self-interest postulates.
If the alternative hypotheses are to carry predictive weight, they must be amended to state something like the following: “People want to do good or to take right actions, and they share a single conception of what is good or right.” The commonality of the norm, at least over a large number of persons, is a necessary feature of any operationally useful theory of choice or action that moves beyond the strict individualistic models.8
Applied to the problem at hand, which is that of deriving some conceptual explanation of why individuals might be expected to seek out, design, argue for, and support changes in the general rules of the sociopolitical order when, by presumption, such behavior would be contrary to identifiable self-interest, it is necessary to resort to some version of “general interest” or “public interest” as the embodiment of a shared moral norm. That is to say, persons must be alleged to place positive private value on “public good” for the whole community of persons, over and beyond the value placed on their own individualized or partitioned shares.9 Furthermore, this “public good” that is privately valued must be that state of affairs defined by the interaction of freely choosing individuals, rather than some transcendental notion derived from God or Karl Marx.
If, however, individuals do, indeed, place a positive value on the shared conception of “public good,” the economist-critic can then ask the straightforward question, How could a community made up of such persons ever find itself in the social dilemma that has been diagnosed? Why would a community of such persons ever need a change in the rules of the game, or why is there a need for any rules at all? The appropriate response is equally straightforward. To hypothesize that persons place positive value on a shared “public good,” defined as indicated, does not in itself imply anything at all about this evaluation relative to that placed on the furtherance of individuals’ private economic interests. The economists’ explanatory model reasserts itself at this point and suggests the presence of a necessary trade-off between “public good” and “private good” in the choice calculus of any person who maximizes utility. From this elementary point it follows that the observed degree of “public regardingness” in behavior will depend on the relative costs as these emerge in the institutional setting.
It is precisely here in the argument, or so it seems to us, that a categorical distinction must be made between choices confronted within or under an existing set of rules and choices confronted among alternative sets of rules themselves. In the first of these two settings, that of postconstitutional or in-period choice, the relative costs of choosing courses of action that further the shared “public good” may simply be too high, relative to the increment in “public good” promised to result from such action, to shift behavior significantly away from economic self-interest. In the second choice setting, by contrast, the costs of furthering “public good” may be significantly lower, so much so that the same person who behaves in accordance with narrowly defined self-interest within the given set of rules may well behave in accordance with precepts of shared norms when making genuinely constitutional choices.
The categorical difference here stems from the meaning of general rules, the generality referring to their application to all members of the body politic. The principle is an elementary one in theoretical welfare economics and in the theory of public finance, and it has been widely recognized, especially since it was emphasized by Baumol in Welfare Economics and the Theory of the State.10 Nonetheless, the principle is often overlooked in otherwise sophisticated discussion. A good example is the discussion of public and private charity. Many who have opposed governmental transfer programs refer to the opportunity persons have, in their private capacities, to make charitable transfers to the needy. These critics then go on to infer that arguments in support of governmental transfer programs must arise from a desire to impose coercive taxation on those who would not voluntarily make charitable transfers. Some such motivation is probably present in many of the arguments, but these critics overlook the distinction made here to the effect that persons may, in a collective setting in which their actions are generalized, voluntarily agree to transfer schemes that involve costs to them that would never be borne in a private institutional situation. An individual might voluntarily agree to a tax-transfer scheme that imposes a net individual cost of one hundred dollars, if he knows that all other, similarly situated persons will also bear net costs of one hundred dollars each. The same individual, however, may contribute only fifty dollars, or less, to privately organized schemes having the same purpose in the absence of the political program.
The nature of rules changes ensures that all persons in the political community will be involved similarly, at least in one meaning of the term. (All players are required to play by the same rules, whether these rules are those that now exist or those that might exist after a change.) In considerations of proposals for a change in the rules, therefore, there is much less conflict between what can be called “private” and what can be called “public” advantage. An individual cannot, in nearly so direct a sense, set off his own private gain against public gain as he might do in purely private market choice or in political choice made within ordinary majoritarian institutions for decision making. In either of the latter two decision settings, the behavior of a person in generating “public bad” or in failing to produce “public good” might be motivated strictly by the opportunity to secure private gain. Such an opportunity might not really exist, at least directly, in the genuinely constitutional-choice setting.
The free-rider dilemma that emerges in constitutional choice is of a sort quite different from what enters the choice settings just noted. In constitutional choice, free ridership refers largely to the potential absence of individualized interest in general rules rather than to the presence of any directly contrasting nongeneral or private interest, where nongenerality itself ensures the differentiality. As we have noted, some such identifiable private interest may remain in any constitutional choice; it may not be possible to design proposals for constitutional change that will place persons behind sufficiently thick veils of uncertainty. Nonetheless, a shared moral norm in such a setting has much less “work to do” than it might in a nonconstitutional setting.
Toward a Civic Religion
In this chapter, we have discussed three major barriers to constitutional reform in democratic social order. The thrust of our argument has been that these barriers can be overcome. We do not, however, underestimate the task Western democracies face, and we do not want to seem unduly optimistic. We are asking no less than that the basic rules of the socioeconomic-political game be changed, rules that have been in place for decades, and that these changes be made peacefully while the game continues to be played under the old rules. This order is a tall one indeed, and we should be under no delusion that a constitutional revolution will simply emerge, in revolutionary fashion, without a conscious investment of effort.11
Our efforts, in this book and elsewhere, are aimed largely at the academic constituency, at our peers in the social sciences, law, and philosophy. And it is here that we must begin, especially if we accept Keynes’s dictum about the influence of academic scribblers. It is naïve to think that practicing politicians and practical individuals become constitutional statesmen without some coherent set of ideas provided by academe, either before or along with political articulation.
The first step is the achievement of some measure of academic consensus on diagnosis. We must come to agree that democratic societies, as they now operate, will self-destruct, perhaps slowly but nonetheless surely, unless the rules of the political game are changed. In the United States in particular, there seem to be modest grounds for hoping that such a consensus is in the process of construction, notably with respect to the fiscal and monetary rules, which have been the subject of much discussion in the 1970s and 1980s. There is increasing awareness that something other than ordinary politics will be required to generate fiscal and monetary discipline, that a regime is needed that will function in the acknowledged long-term interests of all participants in the body politic. The search for, and discussion of, alternative fiscal and monetary rules has begun.
In more general terms, this book is an expression of the hope that a new “civic religion” is on the way to being born, a civic religion that will return, in part, to the skepticism of the eighteenth century concerning politics and government and that, quite naturally, will concentrate our attention on the rules that constrain governments rather than on innovations that justify ever expanding political intrusions into the lives of citizens. Our normative role, as social philosophers, is to shape this civic religion, surely a challenge sufficient to us all.
We must redesign our rules, and our thinking about rules, with the ultimate aim of limiting the harm that governments can do, while preserving the range of beneficial governmental-collective activities. We plead with our fellow academicians to cease their proffering of advice to this or that government or politician in office. Good games depend on good rules more than they depend on good players. Fortunately for us all, and provided that we understand the reason of rules in the first place, it is always easier to secure agreement on a set of rules than to secure agreement on who is or is not our favorite player.
This book is set in Minion, a typeface designed by Robert Slimbach specifically for digital typesetting. Released by Adobe in 1989, it is a versatile neohumanist face that shows the influence of Slimbach’s own calligraphy.
This book is printed on paper that is acid-free and meets the requirements of the American National Standard for Permanence of Paper for Printed Library Materials, z39.48-1992. (archival)
Book design by Louise OFarrell, Gainesville, Fla.
Typography by Impressions Book and Journal Services, Inc., Madison, Wisc.
Printed and bound by Worzalla Publishing Company, Stevens Point, Wisc.
[7. ]Ron Heiner has developed a theory of constraints based on the predicted vulnerability of actors to false interpretations of signals. The analysis is extended to behavioral rigidities in nonhuman species. See Heiner’s “Uncertainty, Rules, and Behavior: A Theory of Behavior and Evolution as the Resistance to Unreliable Complexity” (Brigham Young University, 1981, mimeographed).
[8. ]The relationship works both ways, of course. Although, as suggested, an individual may be more willing to impose limits on the range of collective outcomes as a means of securing protection against the impositions of others, the same individual may, and for much the same reasons, be more willing to use the agency of the state as a means of imposing his will on others. The reformers who secured adoption of the constitutional prohibition on the use of alcohol in the United States did not consider themselves to be restricting their own behavior.
[1. ]A. C. Pigou, The Economics of Welfare, 4th ed. (London: Macmillan, 1932).
[2. ]The basis for imposing tax limits that emerges from the argument here is quite different from the one we offered on the basis of a contrasting political model in our earlier book, The Power to Tax (Cambridge University Press, 1979). There, we stated that taxes tend to be “too high” because of the revenue-maximizing proclivities of government, which was modeled as one player in a two-player game with taxpayers. In that analysis, there was no dilemma aspect such as is examined here, and the set of questions concerning the time horizon for adjustment did not arise.
[3. ]In terms of simple geometry, this result becomes immediately apparent. Although we shall not depict it here, the short-run “Laffer,” or rate-revenue, curve above the initial tax rate will always lie outside the long-run, or full-adjustment, curve.
[4. ]In collaboration with a colleague, one of us has developed the “high-tax trap” analysis in some detail. See James M. Buchanan and Dwight R. Lee, “Tax Rates and Tax Revenues in Political Equilibrium,” Economic Inquiry 20 (July 1982): 344-54; “Politics, Time, and the Laffer Curve,” Journal of Political Economy 90 (August 1982): 816-19; and “The Simple Analytics of the Laffer Curve” (paper presented at the 38th Congress of the International Institute of Public Finance, Copenhagen, August 1982).
[5. ]A. W. Phillips, “The Relation Between Unemployment and the Rate of Change in Money Wage Rates in the United Kingdom, 1861-1957,” Economica 25 (November 1958): 283-99.
[6. ]See Finn E. Kydland and Edward C. Prescott, “Rules Rather Than Discretion: The Inconsistency of Optimal Plans,” Journal of Political Economy 85 (June 1977): 473-91.
[7. ]For analysis of the debt dilemma along lines that are in many respects similar to those presented here, see James M. Buchanan, “Debt, Demos, and the Welfare State” (paper presented at a conference on the welfare state, Civitas, Gesellschaft zur Forderung von Wissenschaft und Kunst, Munich, West Germany, October 1983).
[8. ]See James M. Buchanan, The Limits of Liberty (University of Chicago Press, 1975), ch. 8; and Freedom in Constitutional Contract (College Station: Texas A&M University Press, 1977), ch. 12.
[1. ]Thomas Hobbes, Leviathan (1651) (New York: Everyman Edition, 1943), part 2, ch. 30, p. 185.
[2. ]Ibid., p. 74.
[3. ]As is the object in Hobbes, Leviathan.
[4. ]As in the writing of John Rawls and others in the “justice as fairness” tradition. See John Rawls, A Theory of Justice (Cambridge, Mass.: Harvard University Press, 1971).
[5. ]We discuss distributive justice in constitutional perspective in Chapter 8.
[6. ]Hobbes, Leviathan, part 2, ch. 30, p. 185.
[1. ]Presumption is all that is possible in economies where the public sector absorbs one-third to one-half of total product and where unmeasured effects of collective activity via regulation ripple throughout the economy and influence the income distribution in untold ways.
[2. ]For a notable exception, see Dan Usher, The Economic Prerequisite to Democracy (Oxford: Basil Blackwell, 1981).
[3. ]For a very general examination of some of the redistributional implications of majority rule, see James M. Buchanan, “The Political Economy of Franchise in the Welfare State,” in Capitalism and Freedom: Problems and Prospects, ed. Richard T. Selden (Charlottesville: University Press of Virginia, 1975), pp. 52-77.
[4. ]These “persons” can be conceived as standing for completely homogeneous groups of equal size.
[5. ]This assumption is by no means unexceptionable, as we have argued elsewhere. See Geoffrey Brennan and James Buchanan, “The Logic of the Levers” (Center for Study of Public Choice, Fairfax, Va., 1983, mimeographed). It does, however, follow conventional public-choice practice and is highly convenient here.
[6. ]In Chapter 4, we attempted to justify this assumption as an analytically appropriate tool.
[7. ]This assumption is a “fudge.” A market order requires institutions to protect property rights and enforce contracts, and such institutions require access to resources in order to function. Taxes will then not be zero in the absence of transfers. However, it is useful to assume that there are no taxes in the zero-transfer case.
[8. ]For extended treatments of this phenomenon, see James M. Buchanan, Robert D. Tollison, and Gordon Tullock (eds.), Toward a Theory of the Rent-Seeking Society (College Station: Texas A&M University Press, 1980).
[9. ]See Geoffrey Brennan and James Buchanan, The Power to Tax (Cambridge University Press, 1980), ch. 3, for a detailed exposition of this point.
[10. ]Under inadequate indexing provisions, inflation makes it possible for taxing authorities to appropriate part of the real value of the assets themselves (by driving the net-of-tax real rate of return below zero). Here, we assume that monetary authorities are constitutionally restricted from engineering inflation for redistributive purposes, or at least are independent of in-period political pressures. See Brennan and Buchanan, Power to Tax, chs. 5 and 6.
[11. ]See, for example, ibid., chs. 3 and 4.
[1. ]For earlier, related analyses that were more diagnostic, see James M. Buchanan, The Limits of Liberty (University of Chicago Press, 1975); also see Gordon Tullock, The Social Dilemma (Blacksburg, Va.: University Publications, 1974).
[2. ]For what is perhaps the most concise statement of the Pareto classification scheme, see Ragnar Frisch, “On Welfare Theory and Pareto Regions,” International Economic Papers, 9 (London: Macmillan, 1959), pp. 39-92.
[3. ]For a careful and comprehensive treatment of the significance of time lags in a constitutional calculus, see Antonio Pinto Barbosa, “The Constitutional Approach to the Fiscal Process: An Inquiry into Some Logical Foundations” (Ph.D. diss., Virginia Polytechnic Institute and State University, 1975).
[4. ]John Rawls, A Theory of Justice (Cambridge, Mass.: Harvard University Press, 1971).
[5. ]See James M. Buchanan, “Positive Economics, Welfare Economics, and Political Economy,” Journal of Law and Economics 2 (October 1959): 124-38; reprinted in James M. Buchanan, Fiscal Theory and Political Economy (Chapel Hill: University of North Carolina Press, 1960), pp. 105-24.
[6. ]For a discussion of this point, see James M. Buchanan, The Limits of Liberty (University of Chicago Press, 1975), ch. 2.
[7. ]F. A. Hayek, Law, Legislation and Liberty, 3 vols. (University of Chicago Press, 1973, 1976, 1979).
[8. ]We are indebted to David Levy for calling our attention to this point. See his paper “Towards a Neo-Aristotelian Theory of Politics: A Positive Account of Fairness” (Center for Study of Public Choice, Virginia Polytechnic Institute, December 1981, mimeographed).
[9. ]Howard Margolis has attempted to formalize such a model. His difficulties in so doing illustrate the magnitude of the task. See his Selfishness, Altruism and Rationality (Cambridge University Press, 1982).
[10. ]William J. Baumol, Welfare Economics and the Theory of the State (Cambridge, Mass.: Harvard University Press, 1952).
[11. ]In our opinion, great damage has been and is being done by modern economists who argue, indirectly, that basic institutional change will somehow spontaneously evolve in the direction of structural efficiency.