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4.: Constitutional Contract: The Theory of Law - James M. Buchanan, The Collected Works of James M. Buchanan, vol. 7 (The Limits of Liberty: Between Anarchy and Leviathan) 
The Collected Works of James M. Buchanan, Foreword by Harmut Kliemt, 20 vols. (Indianapolis: Liberty Fund, 1999-2002). Vol. 7 The Limits of Liberty: Between Anarchy and Leviathan.
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As suggested above, postconstitutional contract has occupied the primary attention of economists for the whole period of their independent disciplinary existence. Despite the concentration of effort on the exchange processes, major analytical complexities remain unresolved. What then may we anticipate when we try to conceptualize constitutional contract, that human interaction in which individual rights may be initially defined, where the very rules for interpersonal behavior may be established, where “society,” quite literally, replaces “anarchy”? Once we so much as open up this area for critical examination, is there much surprise in professional economists’ proclivity to commence with the assertion that property rights are well defined? Is there any wonder that a genuine economic theory of law remains undeveloped?1
Strictures should not, however, single out economists. They can with some legitimacy claim exemption; their traditional domain is or should be limited to contract. Perhaps criticism is more appropriately directed at those whose professional emphases are on power relationships among individuals and groups. But political scientists have been reluctant to follow up the leads suggested by Thomas Hobbes. They have devoted much attention to the political obligation of individuals, leaders and followers alike, but relatively little attention to the base positions from which behavioral obligations must be assessed. In its own defense, however, political science can claim to embody a more developed and sophisticated historical sense than economics. Once it is recognized that observed institutions of legal-political order exist only in a historical setting, the attraction of trying to analyze conceptual origins independent of historical process is severely weakened. The temptation becomes strong to assert what is essentially the positivist position that a structure of law, a legal system, a set of property rights, exists and that there is relatively little point in trying to understand or to develop a contractual metaphor for its emergence that would offer assistance in finding criteria for social change. There is merit in this approach, provided that it is not allowed to exclude complementary bodies of analysis. Some of the implications of accepting “law as fact” will be explored in Chapter 5.
In order to discuss or to analyze possible criteria for modifying the structure of rights, however, some understanding of conceptual origins may be helpful. As has been suggested, the problem is one of trying to explain and to understand the relationships among individuals, and between individuals and the government. And for this purpose, various “as if” models of conceptual origins may be necessary, regardless of the facts described in the historical records.2 Stress should be placed on “explanation” and “understanding” since the temptation to introduce normative statement becomes extremely strong at this level of discourse. Precisely because the conceptual origins are discussed independent of observable historical data, the distinction between positive analysis and normative presupposition is difficult to detect.
Must we postulate a basic equality among men in some original setting in order to derive the structure of a free society from rational, self-interested behavior? We have often answered this question affirmatively, even if implicitly. In the process, we have made our whole “theory” of conceptual constitutional foundations highly vulnerable to positivist refutation. In this book, I am attempting to explain how “law,” “the rights of property,” “rules for behavior,” might emerge from the nonidealistic, self-interested behavior of men, without any presumption of equality in some original position—equality either actually or expectationally.3 In this effort, I make no claim to have escaped all normative influences. But I should argue that the approach taken is less normative than the familiar one which says, in effect, that any logical analysis of law should be based on the as if presumption of personal equality. We can substantially strengthen the foundations of freedom if we can succeed in demonstrating that, even among men who are unequal, a structure of legal rights can be predicted to emerge, a structure that retains characteristic elements that we associate with the precepts of individualism. Only after we have done this can we begin to offer constructive criticism of the veritable maze of confusion about constitutional order that abounds at the most basic levels of discussion.
In order to make an analysis of constitutional contract as general as is possible, allowance should be made for the existence of substantial differences among persons in the original conceptual setting. This is not the same as postulating inequality as fact. The analysis should be sufficiently general to be applicable if, in fact, persons should prove to be substantially equivalent. To be avoided is the dependence of the results on some unsupported presumption of natural equality. The degree or measure of inequality will, of course, affect the description of any initial position and the structure of rights that may contractually emerge.
Consider, then, some initial setting in which men are not equals. Following economists’ practice, we can discuss inequality in two separate attributes: (1) tastes or preferences, and (2) capacities.4 It is necessary to avoid explicitly the tendency to slip exclusively into the familiar classification of persons by personal endowments of “goods,” presumably measured in commodity dimensions. This procedure amounts to neglecting the very problems addressed in this chapter, to presuming that individual rights to commodities, to goods, have already been defined.
In the fundamental sense required for the analysis here, an individual possesses no “goods” or “resources.” He can be defined initially by a preference or a utility function on the one hand and by a production function on the other.5 The preference or utility function describes the rates at which the person is willing subjectively to trade off goods (and bads) one against the other. The individual’s production function is less familiar. He will have, inherent in his physiological makeup, a set of capacities (skills, talents, abilities). These capacities, when exercised in a specified environmental setting, define for the individual a potential relationship between inputs (negative goods or bads) and product (positive goods). This relationship is his “production function.”
As noted, persons may differ from each other either in tastes, in capacities, or in both. Or, persons identical in both tastes and capacities may find themselves in environmentally different situations relative to their capacities. A person with mediocre talents may be confronted with ample opportunities to secure positively valued goods while a person with superior talents may face less favorable opportunities. The position attained by a person is dependent on three basic elements: his preferences, his capacities, and his environmental setting. It would be wholly arbitrary to assume that all individuals face identical environmental settings; this would be as indefensible an assumption as that which postulates personal equality in preferences or in capacities.
Consider two individuals who are wholly isolated from each other; each on his separate island with no social contact. Each man would attain a personal behavior equilibrium, as determined by the interaction among his utility function, his basic or inherent capacities to convert input into output, and the natural environmental setting that he confronts. There would be no easy means of judging which of these two Robinson Crusoes is more favorably situated, or which one secures more “welfare.” This two-Crusoe world is, of course, purely anarchistic. There is no law, and there is no need for a definition of individuals’ rights, either property rights or human rights. There is no society as such. Nonetheless, this two-Crusoe world provides a useful starting point from which to begin consideration of the world where personal conflict may emerge. Suppose that the persons, whom we shall name A and B, no longer exist in complete isolation, but that, instead, they now find themselves in some spatially limited area, on the same island. This change, in itself, need not modify the preferences of either person, although such an effect should not be ruled out. The environmental setting of each person will, however, almost surely be modified. In the absence of law, each person will now consider the other as a part of the environment that he faces. The effects of this upon the rate at which bads may be transformed into goods may take on several patterns.
In a world of scarcity, mutual exploitation of the natural environment insures that, for each person, the terms-of-trade with his own environment are worsened relative to those confronted in the isolated setting where one person, alone, faces this environment. In effect, the natural environment becomes “common property,” and the familiar reciprocal externality relationships emerge. Most economists would perhaps tend to stop the analysis at this point with little or no consideration of the remaining possibilities. But a second, and very different, sort of influence may operate. If production is not simultaneous with actual consumption of goods, individuals may store goods for future use. In this situation, the presence of B may prompt A to devote effort, a bad, to concealing hoards, and to defending and protecting these hoards from predation by B. Since this effort might otherwise have been used to produce goods directly, A’s net rate of transformation is adversely affected by this necessity for defense.
An offsetting effect may, however, work in the other direction. Because of the presence of B, A now has available to himself a new opportunity. He may secure goods that were not available to him in the strict Crusoe setting. If B is known to be producing, and storing, goods, A may find that locating and taking these stocks from B is more productive than producing similar goods on his own. This effect, if it should predominate, tends to shift A’s production function in a favorable manner. Once the prospects for defense and predation are recognized, it is clear that individuals may differ in their talents for these activities and that such differences need not be directly correspondent to their relative capacities as direct producers. Furthermore, individuals may differ in their tastes for defense-predation efforts relative to direct production efforts.
It is, of course, impossible to consider the effects of B’s presence on A without, at the same time, considering the effects of A’s presence on B. The two persons are necessarily in a reciprocal interaction; their behavior is interdependent even if there is no social structure within which interdependence takes place. As indicated in Chapter 2, this sort of interaction may be analyzed in externality terms, even if we are working with a model without law and rights of property. It is useful to think of the reciprocal external diseconomy model in which each person’s behavior imposes harm on the other. Consider, first, the behavior of A in producing goods in the environment that is shared, but without overt dispute. That is to say, let us postulate initially that A and B allow each other to attain private adjustment independent of disturbance. Each man uses his talents as best he can to maximize utility on the assumption that the other will not take stocks from him and that he, in turn, will not take stocks from the other. This is strictly an arbitrary starting point, and it will not represent a final equilibrium in the interaction sequence. In figure 4.1, this no-conflict position is placed at the origin. Note that, at this position, A and B need not have equal quantities of the good, nor need they be accepting equal quantities of the bad to secure the position indicated. For purposes of illustration, let us assert that at the origin, A is exerting six units of effort (a bad) to get, in the net, ten units of bananas (a good), while B is exerting five units of effort in getting twelve units of good.
This arbitrary starting point does not qualify for a behavioral equilibrium because, in this position, each person has some incentive to initiate conflict, to engage in predatory activity vis-à-vis his cohort. Figure 4.1 shows that, if A thinks that B will remain in the position at the origin, he will initiate predatory action to shift toward position Y. Conversely, B will be motivated to try to reach position X. The reactions of A to every level of B’s activity in defense-predation is shown by the ridge line, RA. Similarly, B’s reaction to every level of defense-predation by A is shown by the ridge line, RB. Equilibrium in this purely anarchistic setting is attained at E. At this point, neither person has an incentive to modify his behavior privately or independently. In this equilibrium, each person may be expending some share of his efforts in defending his stocks from the other, another part in taking stocks of the other, and another part in producing goods directly. The position of independent adjustment equilibrium describes the outcome or result that could be predicted in a genuinely anarchistic order. The distribution has been called the “natural distribution” by Winston Bush, and the two-person model may, of course, be extended to apply in a many-person setting.6
I have emphasized in several places that there is no presumption of equality among persons in this independent adjustment or natural equilibrium. A second important principle is that this position cannot itself be attained contractually. Until this natural equilibrium is itself attained, there is no basis from which persons can negotiate contracts, one with another. The generation of this independent adjustment equilibrium is, therefore, the precontractual stage of social order, if indeed we can use the word “social” at all here.
There are no property rights in the strict sense of this term in the equilibrium so described. The position does, nonetheless, have certain stability characteristics, both for “society” and for the individual participant. There is no incentive for any person to modify his own behavior in the absence of exogenous shocks. In this equilibrium, therefore, each person knows with some degree of certainty what his own final command over ultimate consumable goods will be. Each person will, as noted, be expending resources in defending acquired stocks and in securing stocks initially acquired by others. But his net asset position, his final command over goods, will be predictable within relatively narrow limits. Chaos does not seem the appropriate descriptive word to apply to this genuinely anarchistic equilibrium if its meaning is taken to include unpredictability. Something akin to “property,” therefore, emerges from the noncontractual struggle in anarchy. Individuals achieve identifiable bases from which it becomes possible to make contracts.
Disarmament and the Emergence of Property Rights
In natural equilibrium, each person uses resources to defend against and to attack other persons. Each person would be better off if some of these resources could somehow be turned to the direct production of goods. The most basic contractual agreement among persons should, therefore, be the mutual acceptance of some disarmament. The mutual gains should be apparent to all parties.7
This may be illustrated with reference to the interaction depicted in figure 4.1. By the definition of ridge lines, or lines of optima, we know that the indifference contours for A are vertical along RA, while those for B are horizontal along RB. Hence, at E, we know that the indifference contours intersect at right angles, in the manner shown by IA and IB. We know, further, that the indifference contours for A are concave to the left, while those for B are concave downward. This is because of the fact that the ideal position for A is at Y, where B makes no effort to defend stocks or to take stocks from A, and that the ideal position for B is the comparable one shown at X. In these configurations, the Pareto-superior region, that which includes positions reflecting mutual gains by comparison with E, lies to the southwest, indicated directionally by the arrow in figure 4.1. Positions that embody mutual gains must involve lower outlay on defense-predation for both parties. Suppose that an agreement is reached to move to position L. Note precisely what this agreement embodies. The contract is one of bilateral behavioral exchange. Individual A agrees to give up some share of his own defense-predation effort in exchange for a related behavioral change on the part of individual B. There is no incentive for either person to take this behavioral change unilaterally, and there is nothing in the initial agreement, as such, which requires or even induces any acceptance by the other of the legitimacy of either person’s command over goods, either in the preagreement or postagreement stage. Mutual acceptance of “ownership rights” is not a part of this preliminary disarmament agreement. On the other hand, by negotiating such an initial agreement to limit defense and predation, “law” of a sort has now emerged. The two persons accept limits to their own freedom of action, to their own liberty. The first leap out of the anarchistic jungle has been taken.
Conquest, Slavery, and Contract
In the discussion of anarchistic interaction to this point, I have assumed implicitly that all persons will exist as independently acting defenders and predators both prior to and after a natural equilibrium is attained. If personal differences are sufficiently great, however, some persons may have the capacities to eliminate others of the species. In this instance, the natural equilibrium may be reached only when the survivors exercise exclusive environmental domain.
The complete elimination of other persons may not, however, be the most preferred course of action by those who possess superior capacities. Even more desired might be the state in which those who are “weak” are allowed to exert effort in producing goods, after which the “strong” seize all, or substantially all, of these for their own use. From this setting, the disarmament contract that may be negotiated may be something similar to the slave contract, in which the “weak” agree to produce goods for the “strong” in exchange for being allowed to retain something over and above bare subsistence, which they may be unable to secure in the anarchistic setting.8 A contract of slavery would, as other contracts, define individual rights, and, to the extent that this assignment is mutually accepted, mutual gains may be secured from the consequent reduction in defense and predation effort. This may seem to represent a somewhat tortuous interpretation of slavery as an institution, but it is explicitly designed to allow the analytical framework developed here to be fully general.9
Trading Equilibrium and Direct Production
Economists who are familiar with the geometrical construction of figure 4.1, and the underlying postulates, will recognize that the minimal restrictions imposed on the locations and shapes of the indifference contours do nothing toward insuring that a final post-trade position where all gains are exhausted will be coincident with the origin, which describes the allocation or result that would obtain in the absence of all defense and predation effort. This direct-production position, in which each person retains for his own use those goods that he himself produces, given his own capacities, his tastes, and his environmental situation, may or may not be Pareto-superior to the natural equilibrium at E; and even if the direct-production position should qualify as Pareto-superior it need not lie along the contract locus which would be generated by trading among the two parties.
The relationship between E, the position of equilibrium attained in the absence of law, and the origin, that position attained when each man keeps all that he produces, is important because of the dominant role that has been assigned to the latter in the historical discussions of property rights, notably those discussions in the natural-law tradition, and especially as represented in the theory of John Locke. In the conceptual origins of contract that have been developed here, there is no fundamental distinction between the position which allows persons to retain goods privately produced and any other position. The only distinguishable position, prior to contract, is that shown in the natural equilibrium at E.10
If the direct-production position is Pareto-superior to E, by which we mean only that both parties secure higher utility levels in the former position than in the latter, there may well be a strong attraction toward settling the negotiations at this point, even if the direct-production position does not qualify as falling along the strict contract locus. There are two related reasons for this. In the first place, initial agreements on limiting behavior would not be likely to take place in terms of finely tuned marginal adjustments. Instead, a once-and-for-all quantum leap might be suggested, without the tedious bargaining required for sophisticated adjustment. In this sense, any position within the lozenge confined by the indifference contours would qualify for a settlement prospect. Among this large set of Pareto-superior positions, those which seem the most likely candidates for agreement will possess Schelling-point characteristics. Positions which qualify here are those that are simple and known to all parties and which will tend to be selected in the absence of information and communication between the interacting parties.11 An agreement to eliminate all predatory behavior might be a plausible outcome under this setting, in which case each person’s production from the natural environment that he confronts becomes his “property” in some positive sense. The law might begin to take on positive features in a manner akin to that rationalized by John Locke.
The predominant role that has been assigned to the direct-production position may be based on the implicit assumption of natural equality among men. If we allow interpersonal differences to exist in the natural state, however, there is no assurance that the position attained in the anarchistic equilibrium, depicted at E in figure 4.1, is Pareto-inferior to the direct-production position at the origin. The latter position need not lie within the lozenge enclosed by the indifference contours drawn through E. At least one of the two persons may be better off, in utility terms, in anarchistic equilibrium than he would be if required to depend exclusively on his own production efforts (as in the slavery example noted). This outcome might emerge if the two persons were widely different in the ability to produce goods, either from a difference in natural capacities or from a difference in environmental situations. Also, such an outcome might arise if one person retains moral inhibitions against predation while the other does not, or even if one person values liberty of action so highly that he willingly sacrifices protection of goods produced.
When the direct-production position is not Pareto-superior to E, positive property rights to goods directly produced will not emerge from conceptual contractual agreement. Something other than an agreement on mutual limits to behavior is required to leap from the Hobbesian jungle in this case. Such an agreement on limits must be accompanied by a transfer of goods or endowments before a contractual settlement can be reached, and property rights positively established.
This may be illustrated with a different geometric construction, although still within the confines of a two-party model. In figure 4.2, effort is measured along the ordinate, and goods along the abscissa. Individual A is either favorably situated or is more capable of producing goods than individual B. The production function for A, if he is not interfered with by B, is shown by the curve Pa, which lies along the abscissa for an initial range, indicating that A can secure some goods without an outlay of effort. Individual B, by contrast, faces a much more unfavorable direct-production prospect. In the absence of all interference from A, he faces the production function shown by Pb. The direct-production position, that represented by the origin of the earlier figure 4.1, is attained when A attains point Ea’ and when B attains point Eb’. In the situation where no rights of property are assigned, B may well find that his most productive expenditure of effort lies in predation, in stealing goods that are produced by A. If A undertakes no defense or protection effort, the anarchistic production function faced by B might be like that depicted by Pb’, along which B would move to position Eb. This activity on the part of B would, of course, modify the situation faced by A. He would, privately, face the production function shown by Pa’, if he undertakes no responsive action. In order to illustrate the relevant relationships in a diagram like figure 4.2, we shall assume that A does not find it advantageous to respond to B’s predation. A’s new equilibrium position would be that shown at Ea. Since we have assumed that A undertakes no defense or protection efforts, his actual production function is not modified, but he is producing a portion of his goods for B. The anarchistic equilibrium is that position indicated by the two points Eb and Ea in figure 4.2. It is clear that, for B, this is a more favorable situation than that which he attains when property rights are assigned in goods that are directly produced. Hence, B would never agree to the direct-production position. Contractual arrangements must include something over and beyond limits to behavior. In this setting, A might achieve B’s agreement to respect an assignment of rights to goods that are produced privately or independently if he transfers to B some initial quantity of goods or endowments. One such transfer can be depicted on figure 4.2 by the amount T, as indicated. If this is transferred to B, his direct production function shifts to Pb’’, and his attainable private production equilibrium to Eb’’, which is on a higher utility level than Eb. The production function for A is shifted leftward by the initial transfer, to that shown by Pa’’, but the attainable equilibrium along this function at Ea’’ is superior in utility terms to Ea, the anarchistic result. Upon this transfer, B will agree to respect the assigned own-product of A and A will agree to similarly respect the assigned own-product of B. Positive rights may be established, once the initial transfer has taken place to bring the two parties into a setting where the direct-production assignment is, in fact, Pareto-superior to anarchistic equilibrium.
Despite the extremely simple and abstract nature of the geometrical models presented, the conclusions are significant for an understanding of the conceptual emergence of individual rights. The analysis demonstrates that there is no necessary basis for any initial agreement that will simply acknowledge the rights of persons to retain those stocks of goods that they can wrest from the natural environment by their own labor. Something other than the utility function employed in standard economic theory must be introduced in order to provide an explanatory foundation for a structure of property law that legitimizes individuals’ (families’) claims to stocks actually produced by their own efforts and independently from interference from others. Nowhere in the analysis am I denying the possible existence of internal behavioral constraints that may serve to inhibit man’s seizing stocks of goods produced by others or invading physical domain initially inhabited by others. I remain agnostic on this as on many other aspects of human nature. My emphasis here is that such constraints, if they do exist, are over and beyond those normally introduced in economic behavioral models. With this proviso, the result stated becomes important. To secure an initial agreement on positive claims to goods or to resource endowments, some transfer of goods or endowments may be required. That is to say, some “redistribution” of goods or endowments may have to take place before a sufficiently acceptable base for property claims can be established. As the simple two-person model indicates, there may be many such redistributions that will meet the minimal requirements. Once any of these transfers takes place, if one is required, and/or behavioral limits are mutually accepted, positive rights of persons in stocks of goods or in resource endowments capable of producing goods may be settled. From this base, trades and exchanges in the postconstitutional stage already discussed can be implemented. These trades may, in utility terms, shift all persons to positions that overwhelmingly dominate either the natural equilibrium in anarchy or that distribution of goods and endowments that is settled on the initial establishment of positive individual rights.
Defection and Enforcement
To this point, attention has been concentrated on the conceptual bases for the formation of an initial social contract. The analysis has been aimed at isolating and identifying the mutuality of gain to be secured from a primal disarmament agreement accompanied, if necessary, by some unilateral transfers of goods or endowments. In this initial inclusive contract, all parties gain from the potential elimination of socially wasteful outlays on defense and predation. At the immediate postcontract stage, persons claim positive rights in stocks of goods, in resource endowments, and in specific spheres of activity. To this point, we have implicitly assumed that the set of rights agreed to will be respected by all participants.
This assumption cannot, of course, be justified. Even at this most elementary level of examination, the problem of enforcing contractual agreements must be introduced. Straightforward utility maximization will lead each person to defect on his contractual obligation if he expects to be able to accomplish this unilaterally. This may be illustrated in figure 4.3 (a duplicate of figure 2.1), which presents a two-by-two matrix for the two-person example. We are interested only in the net payoffs received by each of the two parties, A and B, in each of two possible positions. Each party has two behavioral options; he may keep his agreement, which amounts to respecting the defined rights of the other person. This is the action indicated by the 0 row and column of the matrix. Or, alternatively, each person may abide by no agreement and act strictly in narrow self-interest. This option is defined by the V row and column. If both persons take the V option, and refuse to abide by contracts made, the result is equivalent to that which was described earlier as the natural anarchistic equilibrium. If both persons respect the terms of contract, both are better off, and the 00 result in figure 4.3 represents the contractually agreed-on set of rights discussed earlier.
The numbers in the cells are utility indicators for the two persons, with the left-hand numbers indicating utility levels attainable for A, the right-hand numbers those attainable by B. As the numbers indicate, each person has an incentive to defect on the agreement provided that he expects to be able to do so unilaterally. If A defects, while B respects A’s rights, the result is in Cell III, which is the most preferred of all positions shown for A. Similarly, if B defects, while A respects B’s rights, a Cell II result emerges, which is the most favorable of all positions for B. The situation is analogous to the classical prisoners’ dilemma in game theory.12 Any positive structure of rights is, therefore, extremely vulnerable to defection if continued adherence to the contractual basis depends on voluntary and independent “law-abiding.” In our illustration, A can obtain three units of utility by defaulting unilaterally from the result in Cell I; individual B can gain four units by defaulting unilaterally and securing a result in Cell II. And if both persons defect, the system lapses back into a Cell IV outcome, and ultimately to the anarchistic equilibrium discussed.
In the simplified two-person interaction illustrated, however, it is surely plausible to suggest that rationality precepts will direct each person to adhere to the initial contractual terms. Each person will recognize that unilateral defection cannot succeed and that any attempt to accomplish this would plunge the system back into a position that is less desirable for everyone than that which is attained upon adherence to contract. As the payoffs or utility indicators in figure 4.3 suggest, neither A nor B would allow the other person to defect and get away with it. Once a defection has occurred, the other party can improve his own position by bringing the system back to the Cell IV position.
It is important to recognize explicitly the behavioral motivation that lends stability to the contractual solution in the two-person setting. Each person may respect the agreed-on assignment because he predicts that defection on his part will generate parallel behavior by the other party. Each person realizes that his own behavior influences the subsequent behavior of the other person and does so directly.
It is precisely this aspect of the interaction that is modified, in kind, as we shift from a two-person to a many-person setting. As more parties are added to the initial contractual agreement, in which an assignment of rights is settled, the influence of any one person’s behavior on that of others becomes less and less. As an element inhibiting individual defections on an initial contract, this influence tends to disappear completely after some critical group size is reached. In large-number groups, each individual rationally acts as if his own behavior does not influence the behavior of others. He treats others’ behavior as a part of his natural environment, and he adjusts his behavior accordingly. In this large-number setting, man ceases to be a “social animal” at least in this explicit behavioral sense. This setting remains analogous to an n-person prisoners’ dilemma, but it is one in which fully voluntary compliance with contract, or law in any form, cannot be predicted. Each person has a rational incentive to default; hence, many persons can be predicted to default and the whole agreement becomes void unless the conditions of individual choice are somehow modified.13
This relationship between voluntary adherence to mutually accepted rules of social interaction, whether these be ethical standards or property-rights assignments, and the size of the interacting group is familiar, but it does have specific relevance to our analysis here.14 The problem of enforcing any original contract becomes more difficult in large than in small groups. Any set of property rights, any legal structure, becomes more vulnerable to violation, and hence requires more than proportionate outlay on enforcement in large groups than in small. In respect to the conceptual origins of law and contract, this relationship alone suggests that contractual or quasi-contractual arrangements commence among individuals (families) that are involved in relatively small-number settings, with movement toward more inclusive contractual order taking the form of arrangements among smaller groups. These complexities are important, but they need not occupy our attention here.
If individual parties to an initial contract in which property assignments are established mutually acknowledge the presence of incentives for each participant to default and, hence, recognize the absence of viability in any scheme that requires dependence on voluntary compliance, they will, at the time of contract, enter into some sort of enforcement arrangement. Individuals’ claims to stocks of goods and endowments will be accompanied by some enforcement institution that will be aimed to secure such claims.15 The nature of this enforcement contract or institution must be carefully examined. Each person will receive some benefit from the assurance that his established claims will be honored by others in the community. And there are mutual gains to all parties from engaging in some joint or collectivized enforcement effort. Enforcement of property claims, of individuals’ rights to carry out designated activities, qualifies as a “public good” in the modern sense of this term.
Enforcement is, however, different from the more familiar examples of public goods in several essential respects.16 In order to be effective, enforcement must include the imposition of physical constraints on those who violate or attempt to violate the rights structure, on those who break the law. It is this characteristic that creates problems. There is no obvious and effective means through which the enforcing institution or agent can itself be constrained in its own behavior. Hence, as Hobbes so perceptively noted more than three centuries ago, individuals who contract for the services of enforcing institutions necessarily surrender their own independence.
Consider, say, a hundred-man community. In the absence of enforcement, let us say that B violates the contract that settles all property claims. He does so by stealing goods from or by interfering with the designated personal liberties of A. The latter will, of course, have some incentive to react privately by a counterattack on B. But if this becomes the general pattern of behavior, the system rapidly degenerates toward the precontractual position of anarchistic equilibrium.17 Individuals C, D, E, ..., however, have no direct interest in punishing B for stealing from or interfering with A. They have an indirect interest insofar as such punishment makes their own claims more secure, but unless they make such a connection in their own conception of enforcement, they may be reluctant to approve particularized punishment. This problem may be handled by an agreement by all persons on the purchase of the services of some external enforcing agent or institution that will, in all particular cases, take the enforcing-punishment action required. The “public good” is the generalized security of rights or claims, and not the particular enforcement action which produces this security.
In an idealized sense, the enforcing institution is necessarily external to the parties that reach agreement in the initial contract. The analogy to a simple game may be helpful. Two boys mutually acknowledge some division of marbles between them, and they seek to play a game. Each boy may know, however, that his opponent will have a strong incentive to cheat unless he is closely monitored. They agree and appoint a referee or umpire, inform him about the specific rules under which they choose to play, and ask that he enforce adherence to these designated rules. This is precisely the functional role assigned to the state in its law-enforcement task. The state becomes the institutionalized embodiment of the referee or umpire, and its only role is that of insuring that contractual terms are honored.
This analogy exposes a recurrent fallacy in many discussions of property rights and of the role of the state in enforcing these rights. Enforcement of claims is categorically different from defining these claims in the first place. Claims are conceptually agreed upon by all parties in the constitutional stage of social contract. The state is then called upon to monitor these claims, to serve as an enforcing institution, to insure that contractual commitments are honored. To say that rights are defined by the state is equivalent to saying that the referee and not the players chooses both the initial division of the marbles and the rules of the game itself.
The Protective State and the Productive State
The distinction between the constitutional and the postconstitutional stages of social contract allows us to interpret the state, the collective agency of the community, in two separate roles. Failure to keep these roles distinct, in theory or in practice, has produced and continues to produce major confusion. At the constitutional stage, the state emerges as the enforcing agency or institution, conceptually external to the contracting parties and charged with the single responsibility of enforcing agreed-on rights and claims along with contracts which involve voluntarily negotiated exchanges of such claims. In this “protective” role, the state is not involved in producing “good” or “justice,” as such, other than that which is embodied indirectly through a regime of contract enforcement. Explicitly, this state cannot be conceived as some community embodiment of abstract ideals, which take form over and beyond the attainment of individuals. This latter conception is and must be foreign to any contractarian or individualistic vision or model of social order. Nonetheless, because of each person’s interest in the security of his agreed-on rights, the legal or protective state must be characterized by precepts of neutrality. Players would not consciously accept the appointment of a referee who was known to be unfair in his enforcement of the rules of the game, or at least they could not agree on the same referee in such cases. “Fairness” or “justice” may emerge, therefore, in a limited sense from the self-interest of persons who enter the enforcement contract. It will not emerge from the acceptance of overriding ideals for society at large.
This legal or protective state, the institutions of “law” broadly interpreted, is not a decision-making body. It has no legislating function, and it is not properly represented by legislative institutions. This state does not incorporate the process through which persons in the community choose collectively rather than privately or independently. The latter characterizes the functioning of the conceptually separate productive state, that agency through which individuals provide themselves with “public goods” in postconstitutional contract. In this latter context, collective action is best viewed as a complex exchange process with participation among all members of the community. This process is appropriately represented by legislative bodies and the decision-making, choosing process is appropriately called “legislation.” By sharp contrast, the protective state which carries out the enforcement task assigned to it in constitutional contract makes no “choices” in the strict meaning of this term. Ideally or conceptually, enforcement might be mechanically programmed in advance of law violation. The participants agree on a structure of individual rights or claims that is to be enforced, and violation requires only the findings of fact and the automatic administration of sanctions. A contract or a right is or is not violated; this is the determination to be made by “the law.” Such a determination is not “choice” in the classic sense that the benefits of one alternative are weighed against opportunity costs (the benefits foregone). “The law,” enforced by the state, is not necessarily that set of results which best represents some balance of opposing interests, some compromise, some median judgment. Properly interpreted, “the law” which is enforced is that which is specified to be enforced in the initial contract, whatever this might be.
I am not, of course, suggesting that ambiguities are wholly absent or that the actual enforcement task of the state is purely mechanistic. These aspects should not, however, distract attention from the characteristic and central feature of the enforcement contract, which is designed to implement the detection of violation and the punishment of violators of explicitly accepted and well-defined rights and claims. As noted, “the law” steps beyond the bounds of propriety when it seeks, and explicitly, to redefine individual rights. If, indeed, the state is conceived in this sense, genuine choice is involved since the benefits and costs of various schemes for redefinition would have to become relevant.
From nothing more than this brief and introductory discussion, much of the modern confusion can be appreciated. Appropriately, the judiciary, as an element of the enforcement structure, is independent of the choice-making arm of the collectivity, the legislature. However, as the judiciary itself violates the terms of its own contract by explicitly engaging in legislation, in genuine “social choice,” its independence from choice-making rules has been properly brought into question. The legal or protective state, as such, is not “democratic” in the sense that collective decisions are reached through some voting process, whether this be majority voting or otherwise. In determining the facts of contractual agreement, plural rather than individual or unitary judgments may be invoked, and these may be combined in many ways. In many jurisdictions, all members of a jury must be in agreement before a verdict can be established. Appellate courts may require only a simple majority. In all such instances, however, it should be clear that plurality rules are nothing other than devices aimed at producing somewhat more accuracy in a final finding of fact. With genuine choice-making, “accuracy” is not an appropriate descriptive word. Genuine collective choice may be rational or irrational; benefits and costs may or may not be properly weighed one against the other. But choices cannot, in themselves, be accurate or inaccurate, since it is values that are at issue, not facts.
Rules as Indirect Rights
To this point in the discussion of constitutional contract, we have assumed that agreement is reached on the limits to behavioral interaction and on the positive set of claims to endowments of goods, accompanied by some enforcement contract with the protective state. In an all-private-goods world, this would be the end of it. Trades and exchanges among persons in postconstitutional stages would more or less naturally emerge, as discussed in Chapter 3. However, when we allow for the presence of jointly shared collective or public goods and services, the collectivity as the productive state and its rules for operation must be taken into account. The political constitution, which in our context is only one aspect of the broader constitutional contract, becomes important here, and the rules for making collective decisions concerning the provision and the cost-sharing of public goods must, themselves, be settled at the ultimate constitutional stage of negotiation. It would, as noted in Chapter 3, be of relatively little moment to define an individual’s nominal claims to goods only to leave these claims fully vulnerable to unconstrained political exploitation.
An earlier work, The Calculus of Consent, written jointly with Gordon Tullock, was devoted largely to an analysis of the constitutional choice among rules for making collective decisions. In that analysis, Tullock and I assumed implicitly that individual participants in constitutional deliberations over alternative rules faced uncertainty concerning their own interests in future collective decisions. Nonetheless, we did not question the independent establishment of their ultimate rights and claims to property, human and nonhuman, beyond the range of collective-decision rules. As I have suggested, this approach was an extension and application of orthodox economic methodology, which has tended to neglect the critical problems of establishing individual rights. This book differs from The Calculus of Consent in this fundamental respect; here I am trying to analyze the initial contract that assigns rights and claims among persons. This difference allows collective-decision rules to be interpreted in a somewhat modified setting, namely, as an integral part of a more inclusive contract rather than a strictly political constitution superimposed on some previously negotiated settlement. In the earlier book, we argued that the criterion of acceptability or efficiency lay in agreement, in unanimity. Further, we argued that insofar as participants remain uncertain as to their own specific roles in subsequent operation under the rules chosen, they would tend to reach agreement on reasonably “fair” and “efficient” working rules.18 We did not postulate initial equality among individuals in property rights or in capacities, but our presumption of uncertainty served to generate a plausible basis for agreement on rules for collective action.
In the model incorporated here, by comparison, I allow quite explicitly for personal inequality in the natural equilibrium, the anarchistic base from which primal disarmament contracts are conceptually negotiated. As the analysis in the earlier parts of this chapter indicated, however, the establishment of positive claims to stocks of goods or endowments may not be possible until and unless some unilateral transfers are made. This potential for transfer allows us to introduce an additional dimension of adjustment which may possibly facilitate the reaching of agreement among parties in contract. When we recognize that the rules for collective decision-making at the postconstitutional stage are also to be settled as a part of the initial contract, we have available yet another dimension for adjustment.
Consider the calculus of an individual whose position in anarchistic equilibrium is not significantly worse than that which he expects to secure under a simple disarmament agreement. When he also recognizes the problems of enforcement, including those which involve constraining the enforcing agent, this individual may be quite reluctant to enter into the basic social contract at all. Suppose, however, that one of the many clauses in a proffered contractual settlement states that “public goods” are to be financed by progressive income taxes, and that the person in question has either higher-than-average expected demands for public goods or lower-than-average income-wealth expectations. This proposed part of the larger social contract now represents, for this person, a positive supplement to the set of claims that he might otherwise secure from the unamended disarmament agreement. The collective decision rules present him with something akin to additional “rights” and upon which he may place a positive value. He may be motivated to enter into the constitutional contract under such conditions, even without a unilateral transfer of goods, although this would be an alternative means of making the proposal attractive to him.
The Constitutional Mix
The inclusive constitutional contract embodies elements that may appear in alternative combinations or mixes. The terms must include, first of all, some statement of limits on the behavior of any person with respect to the positions of other persons in the community. This element was referred to earlier in this chapter as the disarmament contract. As they enter genuine society from anarchy, persons lay down their arms; they accept rules governing their own behavior in exchange for the like acceptance of such rules on the part of others. Secondly, the basic contract must define the positive rights of possession or domain over stocks of goods, or more generally, over resource endowments capable of producing final goods. These endowments include human capacities (the rights to one’s own person which have been widely discussed in the theory of property), as well as nonhuman factors, including domain over territory. These ownership rights or claims may simply reflect the pattern of possession established directly when interpersonal interferences are eliminated, which we have called the direct-production imputation, but, as the analysis disclosed, certain “exchanges” of resource endowments or goods and behavioral constraints may be necessary before clearly acknowledged ownership imputations are possible. Along with the limits on behavior and the rights of ownership, the inclusive constitutional contract must also make explicit the terms and conditions of enforcement. This set of terms will specify in detail the operation and limits of the protective state that is established as the enforcing agent. Finally, the basic contract must define the rules under which the collectivity must operate in making and in implementing decisions concerning the provision and financing of “public goods.” This set of terms will specify in detail the operation and the limits of the productive state, the legislative aspect of collective organization. The rules and institutions of this productive state may, in themselves, incorporate several dimensions. The contract should indicate the allowable range over which collective action may take place. That is to say, some restrictions on the type of goods to be provided and financed collectively must be included. At least in some rough sense, the dividing line between the private and the public or governmental sector of the economy should be settled in the basic constitution. Within these defined limits, allowable departures from unanimity in reaching collective decision should be specified. Such departures need not, of course, be uniform over all decisions. Institutions for cost-sharing, that is, tax institutions, may also be imbedded in the inclusive constitutional structure.
It is not my purpose here to develop criteria for efficiency in constitutional contract in any specific setting. The mix among the various elements in this inclusive settlement will be functionally related to several identifiable characteristics of the community of individuals. This will include the size of the membership itself as well as the environmental setting. The features of the anarchistic natural equilibrium, whether or not this is ever actually realized, will influence the relative positions of individuals and groups in the final constitutional settlement. The degree as well as the distribution of the inequalities among persons will be important in this respect. Individuals may differ, and may be thought to differ, in relative capacities to produce goods and to secure gains by predation on their fellows. These differences, along with differences in individuals’ tastes for productive and predatory activities, will have predictable effects on the initial settlement. Expectations about demands for publicly provided goods and services along with expectations about relative income and wealth levels will also affect individuals’ willingness to accept rules for collective action.
The most significant point that emerges from this very general discussion is the interdependence among the several elements in the constitutional mix. Contrary to orthodox economic methodology, the rights of persons to property, the rights to do things privately and individually with physical resources, cannot be treated in isolation from those rights which are indirectly represented by membership in a collectivity that is constitutionally empowered to make decisions under predetermined rules. Consider, for example, the position of a person who holds nominal ownership rights to an income stream from a scarce and highly valued resource (human or nonhuman). This private ownership claim may be tempered by the membership rights in the collectivity, the governmental institutions of the community, that are held by other persons, membership rights that may offer other persons some indirect claims on the differentially higher income stream in question. This is not to suggest that the specific constitutional mix chosen need be the most efficient. As noted in Chapter 3, all parties might have gained by an initial transfer of claims with substantially greater stability of nominal ownership claims.
This approach allows us to look somewhat differently and in a positive manner at the perplexing issue of income-wealth redistribution. Under certain constitutional structures, those persons who are relatively “poor” do not properly claim, on the basis of overriding ethical norms, a share in the economic returns or assets of those who are relatively “rich.” They may claim some such share indirectly on the basis of commonly held membership in collectively organized community under specified constitutional contract. The relatively “rich,” in their turn, may legitimately expect their “private rights” to be respected and honored, and violations of these rights enforced, only as a component part of the more inclusive contractual arrangement which predictably requires that they pay differentially higher shares in those goods and services provided jointly for the whole community.19 In this larger and more inclusive contract, all individuals and groups should find it advantageous to adhere to the rules established, to respect the claims as tempered, and to conduct themselves in such fashion as to attain maximum individual liberty within the constraints of acceptable order.
[1. ]A development of significance in the 1960s and 1970s has been the emergence of the “economics of property” as a field of intense scholarly interest, along with the parallel introduction of more economic theory and more economists into the curricula of law schools. The primary emphasis of this movement has been, however, the influence on individual behavior exerted by the institutional or legal setting within which such behavior takes place. This emphasis is, in itself, praiseworthy, and it has yielded and will continue to yield useful scientific results. By contrast with this, however, relatively little emphasis has been placed on the possible explanations for the emergence of the observed institutions in the first place. See relevant footnotes to Chapter 2.
[2. ]See S. I. Benn and R. S. Peters, The Principles of Political Thought (New York: The Free Press, 1959), p. 377.
[3. ]It is in the expectational sense that the approach taken here differs sharply from that taken in The Calculus of Consent. In that book, individuals were assumed to be sufficiently uncertain about their positions under the operations of decision rules as to make them enter the negotiation stage as equals in at least this one respect.
[4. ]For an analysis of the different implications of inequality in these separate attributes, see my paper, “Equality as Fact and Norm,” Ethics 81 (April 1971): 228-40.
[5. ]Note that we are removing the restrictions imposed by the no-production model analyzed briefly in Chapter 1.
[6. ]See Winston Bush, “Income Distribution in Anarchy.” See also Winston Bush and Lawrence Mayer, “Some Implications of Anarchy for the Distribution of Property,” mimeographed (Center for Study of Public Choice, Virginia Polytechnic Institute and State University, Blacksburg, Virginia, 1973).
[7. ]This derivation of the conceptual origins of property has been advanced by several social philosophers. It was developed by Aegidius Romanus in the thirteenth century, and was elaborated with surprising sophistication by Hugo Grotius in 1625. On these contributions, see Schlatter, Private Property, pp. 57f., 128-32.
[8. ]In terms of the model of figure 4.1, the natural equilibrium for one of the two persons would clearly be less desirable than the position at the origin, where, by assumption, he is allowed to retain what he produces.
[9. ]For a different and more general discussion of the emergence of slavery, see Mancur Olson, “Some Historic Variations in Property Institutions,” typescript (University of Maryland, 1967).
[10. ]If there is something inherent in the nature of man that inhibits theft, the natural equilibrium and the origin on figure 4.1 would coincide.
[11. ]See Thomas C. Schelling, The Strategy of Conflict (Cambridge: Harvard University Press, 1960).
[12. ]For a generalized discussion which extends the dilemma to many social interactions, see Gordon Tullock, The Social Dilemma.
[13. ]The divergence between individual utility-maximization and group interest is characteristic of many other situations in addition to that which involves adherence to law in the narrow sense of the term.
[14. ]For a general discussion, see my “Ethical Rules, Expected Values, and Large Numbers,” Ethics 76 (October 1965): 1-13.
[15. ]The necessity for including enforcement provisions in the initial agreement distinguishes the social contract from other contracts which are made within the framework of a legal order. John C. Hall emphasizes that the recognition of this feature of social contract is central to the ideas of both Hobbes and Rousseau. See John C. Hall, Rousseau: An Introduction to His Political Philosophy (London: Macmillan, 1973), pp. 86-92.
[16. ]This point will become clear in the more general discussion of Chapters 7 and 8.
[17. ]Historically, the state’s more general role in criminal law emerged from its early role as enforcer of the process within which private quarrels were settled, by physical combat or otherwise. See Henry Maine, Ancient Law.
[18. ]In this respect, as noted earlier, our approach had considerable affinity with that of John Rawls, who has attempted to derive general principles of justice in a similar manner. Rawls’s earlier papers appeared in the 1950s, but his work is presented in detail in his book A Theory of Justice.
[19. ]For a more detailed examination, see my paper “The Political Economy of the Welfare State,” Research Paper No. 808231-1-8 (Center for Study of Public Choice, Virginia Polytechnic Institute and State University, June 1972).