Constitutional economics is a research program in

economics Economics () is the social science that studies the production, distribution, and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics anal ...

and constitutionalism that has been described as explaining the choice "of alternative sets of legal-institutional-constitutional rules that constrain the choices and activities of economic and political agents". This extends beyond the definition of "the economic analysis of constitutional law" and is distinct from explaining the choices of economic and political agents within those rules, a subject of orthodox economics. Instead, constitutional economics takes into account the impacts of political economic decisions as opposed to limiting its analysis to economic relationships as functions of the dynamics of distribution of marketable goods and services. Constitutional economics was pioneered by the work of

James M. Buchanan James McGill Buchanan Jr. (; October 3, 1919 – January 9, 2013) was an American economist known for his work on public choice theory originally outlined in his most famous work co-authored with Gordon Tullock in 1962, ''The Calculus of Consen ...

. He argued that "The political economist who seeks to offer normative advice, must, of necessity, concentrate on the process or structure within which political decisions are observed to be made. Existing constitutions, or structures or rules, are the subject of critical scrutiny."James M. Buchanan, 1986
"The Constitution of Economic Policy,"
Nobel Prize lecture. Constitutional economics has been characterized as a practical approach to apply the tools of economics to constitutional matters. For example, a major concern of every nation is the proper allocation of available national economic and financial resources. The legal solution to this problem falls within the scope of constitutional economics. Another example is to study the "compatibility of effective economic decisions with the existing constitutional framework and the limitations or the favorable conditions created by that framework".

Origins

The term "constitutional economics" was coined in 1982 by the U.S. economist Richard McKenzie to designate the main topic of discussion at a conference held in Washington D.C. Later, McKenzie's neologism was adopted by another American economist, James Buchanan, as a name for a new academic sub-discipline. It was Buchanan's work on this sub-discipline that brought him the

Nobel Memorial Prize in Economic Sciences The Nobel Memorial Prize in Economic Sciences, officially the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel ( sv, Sveriges riksbanks pris i ekonomisk vetenskap till Alfred Nobels minne), is an economics award administered ...

for his "development of the contractual and constitutional bases for the theory of economic and political decision-making" in 1986. Constitutional economics draws substantial inspiration from the reformist attitude which is characteristic of

Adam Smith Adam Smith (baptized 1723 – 17 July 1790) was a Scottish economist and philosopher who was a pioneer in the thinking of political economy and key figure during the Scottish Enlightenment. Seen by some as "The Father of Economics"——� ...

’s vision, and that Buchanan’s concept can be considered the modern-day counterpart to what Smith called “the science of

legislation Legislation is the process or result of enrolling, enacting, or promulgating laws by a legislature, parliament, or analogous governing body. Before an item of legislation becomes law it may be known as a bill, and may be broadly referred to ...

.”

Positive constitutional economics

Within positive constitutional economics, the tools or methods are unique from normal economic tools because of the cross-disciplinary nature of the program. The main tool of positive constitutional economics is "comparative institutional analysis", with four main elements: # The first element examines how certain constitutional rules arose and what factors caused the rules to be developed as a result of aggregated individual inputs. # The second element looks at how rules are distinguishable between individual and collective factors, though Voigt acknowledges this research method is rarely used. # The third element is the possibilities of further constitutional (or rules) change. Any proposed change to constitutional constraints, or rules of constraints, are subject to economic scrutiny for their effects on efficiency and equity. # The fourth element of positive constitutional economics examines the economic effects of developed or modified change to rules.

Normative constitutional economics

Normative constitutional economics focuses on legitimizing the state and its actions as the best means of maximum efficiency and utility, judging conditions or rules that are efficient, and discerning and studying the political systems to maximize efficiency, where the outcome of collective choices are considered "fair", "just", or "efficient". Both Buchanan and

Stefan Voigt Stefan Voigt (born 19 August 1962) is a German economist and one of the Directors of the University of Hamburg's Institute of Law and Economics. He is also a Fellow of CESifo in Munich. Previous positions include chairs at the Philipps-University ...

argue the foundational assumption of normative constitutional economics is that no single individual's goals or values can supersede the value of another's. Therefore, a universal, absolute social norm or goal is impossible. Buchanan viewed politics as a form of exchange, such as when individuals agree to exchange goods. He believed that if people are acting rationally in their own perceived self-interest, and if the decision is voluntary and informed, any such agreement is "efficient" and therefore normatively ought to occur.

Methodological individualism In the social sciences, methodological individualism is the principle that subjective individual motivation explains social phenomena, rather than class or group dynamics which are illusory or artificial and therefore cannot truly explain marke ...

leads Buchanan to the normative claim that a political theory very similar to that of

John Rawls John Bordley Rawls (; February 21, 1921 – November 24, 2002) was an American moral, legal and political philosopher in the liberal tradition. Rawls received both the Schock Prize for Logic and Philosophy and the National Humanities Medal in ...

in his seminal 1971 work, ''

A Theory of Justice ''A Theory of Justice'' is a 1971 work of political philosophy and ethics by the philosopher John Rawls (1921-2002) in which the author attempts to provide a moral theory alternative to utilitarianism and that addresses the problem of distrib ...

'', would best realize individuals' unique goals. Complete with a veil of ignorance and ''a priori'' decisions of social goals, Buchanan says political economy does not have a social engineer or moral purpose but only assists individuals in their search for rules that best serve their individual purposes. For Buchanan, the "good" society is one that furthers the interests of individuals, not some independent moral or teleological end.

James Buchanan's views on the ethics of constitutional citizenship

According to Buchanan, political efficiency, like market efficiency, occurs when all individuals in the community agree to the political structures. Buchanan's argument is similar to a

social contract In moral and political philosophy, the social contract is a theory or model that originated during the Age of Enlightenment and usually, although not always, concerns the legitimacy of the authority of the state over the individual. Social ...

view of government, where individuals agree to place constraints on themselves in exchange for anticipated benefits, Buchanan argued that just as a market transaction occurs through voluntary, mutually beneficial exchange, so with political "exchanges" of rights and authority. Buchanan believed that the ethic of constitutionalism is a key for constitutional order and "may be called the idealized Kantian world" where the individual "who is making the ordering, along with substantially all of his fellows, adopts the moral law as a general rule for behaviour"James Buchanan, The Logical Foundations of Constitutional Liberty, Volume 1, Liberty Fund, Indianapolis, 1999, p. 314 Buchanan introduced the cross-disciplinary concepts of "constitutional citizenship" and "constitutional anarchy". According to Buchanan, "constitutional anarchy" is a modern policy that may be best described as actions undertaken without understanding or taking into account the rules that define the constitutional order. This policy is justified by references to strategic tasks formulated on the basis of competing interests regardless of their subsequent impact on political structure. At the same time Buchanan introduces the concept of "constitutional citizenship", which he designates as compliance of citizens with their constitutional rights and obligations that should be considered as a constituent part of the constitutional policy. Buchanan wrote that "the ethics of constitutional citizenship is not directly comparable to ethical behavior in interaction with other persons within the constraints imposed by the rules of an existing regime. An individual may be fully responsible, in the standard ethical sense, and yet fail to meet the ethical requirement of constitutional citizenship." Buchanan considered the term "constitutionality" in the broad sense and applied it to families, firms and public institutions, but, first of all, to the state. Crucial to understanding Buchanan's system of thought is the distinction he made between politics and policy. According to Buchanan, politics is about the rules of the game, where policy is focused on strategies that players adopt within a given set of rules. “Questions about what are good rules of the game are in the domain of social philosophy, whereas questions about the strategies that players will adopt given those rules is the domain of economics, and it is the play between the rules (social philosophy) and the strategies (economics) that constitutes what Buchanan refers to as constitutional political economy”.

Hayek

Buchanan is not the only contributor to normative constitutional economics. Economist

Friedrich Hayek Friedrich August von Hayek ( , ; 8 May 189923 March 1992), often referred to by his initials F. A. Hayek, was an Austrian–British economist, legal theorist and philosopher who is best known for his defense of classical liberalism. Hayek ...

also wrote extensively on the topic of constitutional economics, even if he did not name constitutional economics specifically. Hayek defends a representative

constitutional democracy Liberal democracy is the combination of a liberal political ideology that operates under an indirect democratic form of government. It is characterized by elections between multiple distinct political parties, a separation of powers into ...

as the best structure of government. Hayek's main project was the vindication of freedom and establishing criteria for a regime of freedom. Hayek was worried by the kind of state that Buchanan/Rawls deemed normative. Hayek thought it necessary for a return to the traditional views of government, human nature, political philosophy, and economics. He believed the Buchanan/Rawls state had the almost inevitable propensity to totalitarianism as the state seeks to maximize individual utility.

Economic analysis of the US Constitution

The generally accepted birth of constitutional economic analysis of US Constitution was

Charles Austin Beard Charles Austin Beard (1874–1948) was an American historian and professor, who wrote primarily during the first half of the 20th century. A history professor at Columbia University, Beard's influence is primarily due to his publications in the ...

's landmark 1913 book '' An Economic Interpretation of the Constitution of the United States''.Beard, Charles A. (1913). ''An Economic Interpretation of the Constitution of the United States'', New York: Macmillan Publishing Co, Inc. While most scholars today reject Beard's overall thesis, he initiated a new method of economic and political thought that would evolve into contemporary constitutional economics analysis.Voigt, Stephan (1997). ''Positive Constitutional Economics: A Survey'', Public Choice, 90(1/4): 11–53). Beard's main thesis was that the U.S. Constitution "was essentially an economic document based upon the concept that the fundamental private rights of property are anterior to government and morally beyond the reach of popular majorities." Writing in 1987 for the

Yale Law School Yale Law School (Yale Law or YLS) is the law school of Yale University, a private research university in New Haven, Connecticut. It was established in 1824 and has been ranked as the best law school in the United States by '' U.S. News & World ...

, Jonathan Macey synthesizes the history of constitutional economic analysis applied to the US Constitution. Macey offers a different analysis of the US Constitution and responds critically to Beard's view of the Constitution. As Macey understood Beard a famous and crucial part of the Constitution,

separation of powers Separation of powers refers to the division of a state's government into branches, each with separate, independent powers and responsibilities, so that the powers of one branch are not in conflict with those of the other branches. The typi ...

, was actually a means of allowing hegemony of resources in the hands of the rich few. Macey could not disagree more; he argues that the Constitution and separation of powers were created to hinder aggregate political and economic power. He points to Federalist No. 10,

James Madison James Madison Jr. (March 16, 1751June 28, 1836) was an American statesman, diplomat, and Founding Father. He served as the fourth president of the United States from 1809 to 1817. Madison is hailed as the "Father of the Constitution" for h ...

's argument of the necessity of factions due to what he saw as truths of human nature.

Separation of powers

Macey demonstrates how constitutional economics can be applied to constitutions. Rather than looking at the political or philosophic intentions of the founders, Macey viewed the constitution through economic eyes, considering the incentives, choices, allocations, and other economics factors within the political rules of a constitution. Traditionally, the creation of factions has been interpreted as a political move to separate power and prevent hegemony of the state. Macey agrees but adds a caveat. He maintains a real economic incentive to factions existed which compelled the Founders to separate government. Macey argued that if government is not separated into distinct powers, the possibility of extensive

rent-seeking Rent-seeking is the act of growing one's existing wealth without creating new wealth by manipulating the social or political environment. Rent-seeking activities have negative effects on the rest of society. They result in reduced economic effic ...

threatens the efficiency of the government due to self-interested groups or individuals lobbying to political powers for their goals. In Macey's interpretation of Madison, the

channels lobbyists into the competitive, more efficient market by raising transaction costs so much that private market means are less expensive than appealing to the various separate powers of government. Macey the quantifies legislation on a standard supply-demand curve, where the demand is the interest groups’ desire for laws and the supply is the legislation’s provision. He argues that separation of powers shifts the supply curve left, raising the price and decreasing the quantity of legislation.

Legal approach

Judge Richard Posner emphasized the importance of a constitution for

economic development In the economics study of the public sector, economic and social development is the process by which the economic well-being and quality of life of a nation, region, local community, or an individual are improved according to targeted goals and ...

. He examines the interrelationship between a constitution and the economic growth. Posner approaches constitutional analysis mainly from the perspective of judges, who constitute a critical force for interpretation and implementation of a constitution, thus—''

de facto ''De facto'' ( ; , "in fact") describes practices that exist in reality, whether or not they are officially recognized by laws or other formal norms. It is commonly used to refer to what happens in practice, in contrast with '' de jure'' ("by l ...

'' in

common law In law, common law (also known as judicial precedent, judge-made law, or case law) is the body of law created by judges and similar quasi-judicial tribunals by virtue of being stated in written opinions."The common law is not a brooding omniprese ...

countries—creating the body of constitutional law. He emphasizes the importance of constitutional provisions "in setting broader outer bounds to the exercise of judicial discretion". Thus, a judge, when trying a case, is guided firstly by the spirit and letter of the constitution. The role of economics in this process is to help "identify the consequences of alternative interpretations" of the constitution. He then explains that "economics may provide insight into questions that bear on the proper legal interpretation". In the end, as Posner emphasizes, "the limits of an economic approach to deciding constitutional cases reset by the Constitution". In addition, he argues that "effective protection of basic economic rights promotes economic growth". Concurrently with the rise of academic research in the field of constitutional economics in the US in the 1980s, the

Supreme Court of India The Supreme Court of India ( IAST: ) is the supreme judicial authority of India and is the highest court of the Republic of India under the constitution. It is the most senior constitutional court, has the final decision in all legal matters ...

for almost a decade had been encouraging

public interest litigation The chief instrument through which judicial activism has flourished in India is public interest litigation (PIL) or social action litigation (SAL). ''Public interest litigation'' (PIL) refers to litigation undertaken to secure public interest and de ...

on behalf of the poor and oppressed by using a very broad interpretation of several articles of the Indian Constitution. The former Chief Justice of Indonesian Constitutional Court, Jimly Asshiddiqie, also published his book "Konstitusi Ekonomi" (2010) in promoting the idea of Economic Constitution. This is a vivid example of a ''de facto'' practical application of the methodology of constitutional economics. The President of the Constitutional Court of the Russian Federation,

Valery Zorkin Valery Dmitrievich Zorkin (russian: Вале́рий Дми́триевич Зо́рькин) is the first and the current Chairman of the Constitutional Court of the Russian Federation. Zorkin was born on 18 February 1943 in Konstantinovka, ...

, made a special reference to the educational role of constitutional economics: "In Russia, the addition of such new academic disciplines as constitutional economics to the curricula of university law and economics departments becomes critically important."

Russian school

The Russian school of constitutional economics was created in the early twenty-first century with the idea that constitutional economics allows for a combined economic and constitutional analysis in the legislative (especially budgetary) process, thus helping to overcome arbitrariness in the economic and financial decision-making. For instance, when military expenses (and the like) dwarf the budget spending on education and culture. Constitutional economics studies such issues as the proper national wealth distribution. This also includes the government spending on the

judiciary The judiciary (also known as the judicial system, judicature, judicial branch, judiciative branch, and court or judiciary system) is the system of courts that adjudicates legal disputes/disagreements and interprets, defends, and applies the law ...

, which in many transitional and

developing countries A developing country is a sovereign state with a lesser developed industrial base and a lower Human Development Index (HDI) relative to other countries. However, this definition is not universally agreed upon. There is also no clear agreem ...

is completely controlled by the

executive Executive ( exe., exec., execu.) may refer to: Role or title * Executive, a senior management role in an organization ** Chief executive officer (CEO), one of the highest-ranking corporate officers (executives) or administrators ** Executive di ...

. The latter undermines the principle of checks and balances, instrumental in the

, as this creates a critical financial dependence of the judiciary. It is important to distinguish between the two methods of

corruption Corruption is a form of dishonesty or a criminal offense which is undertaken by a person or an organization which is entrusted in a position of authority, in order to acquire illicit benefits or abuse power for one's personal gain. Corruption m ...

of the judiciary: the state corruption (through budget planning and various privileges being the most dangerous), and the private corruption. The former makes it almost impossible for any business to facilitate the optimal growth and development of national market economy. In the English language, the word "constitution" possesses a whole number of meanings, encompassing not only national constitutions as such but also charters of corporations, unwritten rules of various clubs, informal groups, etc. The Russian model of constitutional economics, originally intended for transitional and developing countries, focuses entirely on the concept of constitution of a state. This model of the constitutional economics is based on the understanding that it is necessary to narrow the gap between practical enforcement of the economic, social, and political rights granted by the constitution and the annual (or midterm) economic policy, budget legislation and administrative policies conducted by the government. In 2006, the

Russian Academy of Sciences The Russian Academy of Sciences (RAS; russian: Росси́йская акаде́мия нау́к (РАН) ''Rossíyskaya akadémiya naúk'') consists of the national academy of Russia; a network of scientific research institutes from across t ...

officially recognized constitutional economics as a separate academic sub-discipline.

Criticism

Walter Block Walter Edward Block (born August 21, 1941) is an American Austrian School economist and anarcho-capitalist theorist. He currently holds the Harold E. Wirth Eminent Scholar Endowed Chair in Economics at the School of Business at Loyola Universit ...

and Thomas DiLorenzo criticize the possibility of constitutional economics as a science. They maintain that politics cannot be equated with the market and therefore, as a study, it cannot exist. They maintain that unlike the market, consent is not the foundation of politics, and that politics is driven by violent, historically bellicose, coercion. Therefore, they believe that the constitutional economic method only clouds the discussion of public choice and political economy. Buchanan, Voigt, Macey, and even Beard all implicitly assume that politics is the exchange of political "goods", a strong social contract view. But for Block and DiLorenzo, politics is one powerful group coercing free rides from a weaker group. From the

Roman Empire The Roman Empire ( la, Imperium Romanum ; grc-gre, Βασιλεία τῶν Ῥωμαίων, Basileía tôn Rhōmaíōn) was the post-Roman Republic, Republican period of ancient Rome. As a polity, it included large territorial holdings aro ...

to the present, they trace how the state always comes from conquest and exploitation, never consent. ''

The Calculus of Consent ''The Calculus of Consent: Logical Foundations of Constitutional Democracy'' is a book published by economists James M. Buchanan and Gordon Tullock in 1962. It is considered to be one of the classic works from the discipline of public choice in ...

'', a foundational text for constitutional economics, bears much of their attack. If they are correct that no state has been or can be voluntary and that voluntary government is inherently contradictory, constitutional economics as a discipline cannot exist. William Campbell explains the weakness of constitutional economics in its assumption that the goal of a regime must be efficiency, individual liberty, and libertarian rights, not morality or super-individual good.Campbell, William (1988). “Constitutional Economics: Ancients vs. Moderns,” The Heritage Foundation, Speech given July 27, 1988. Washington D.C.

References

Sources

* Asshiddiqie, Jimly, 2010. ''Economic Constitution'', Kompas, Jakarta, 2010.
Peter Barenboim, Constitutional Economics and the Bank of Russia, in Fordham Journal of Corporate and Financial Law, 7(1), 2001, p. 160

Ezhegodnik konstitutsionnoy ekonomiki 2019 / ''2019 Yearbook of Constitutional Economics'' / (A Collection of Articles). Edited by Alexei Liverovsky and Gadis Gadjiev. Compiled by Alexei Liverovsky and Pyotr Barenboim. — Moscow, LOOM Publishers, 2019
(the book is in Russian). .
Ezhegodnik konstitutsionnoy ekonomiki 2018 / ''2018 Yearbook of Constitutional Economics'' / (A Collection of Articles). Edited by Suren Avakian, Pyotr Barenboim, and Valentina Komarova. Compiled by Pyotr Barenboim. — Moscow, LOOM Publishers, 2018
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: Van den Hauwe, Ludwig, 2005. "Constitutional Economics II," pp
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* James A. Dorn, 2004. "Creating a Constitutional Order of Freedom in Emerging Market Economies," ''Economic Affairs'', 24(3), pp. 58–63
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Library of Economics and Liberty Liberty Fund, Inc. is an American private educational foundation headquartered in Carmel, founded by Pierre F. Goodrich. Through publishing, conferences, and educational resources, the operating mandate of the Liberty Fund was set forth in an un ...

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The New Palgrave Dictionary of Economics ''The New Palgrave Dictionary of Economics'' (2018), 3rd ed., is a twenty-volume reference work on economics published by Palgrave Macmillan. It contains around 3,000 entries, including many classic essays from the original Inglis Palgrave Dictio ...

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Gordon Tullock Gordon Tullock (; February 13, 1922 – November 3, 2014) was an economist and professor of law and Economics at the George Mason University School of Law. He is best known for his work on public choice theory, the application of economic thinki ...

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The Constitution of Liberty ''The Constitution of Liberty'' is the magnum opus of Austrian economist and 1974 Nobel Memorial Prize in Economic Sciences recipient Friedrich A. Hayek. First published in 1960 by the University of Chicago Press, the book is considered Hayek’s c ...

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The Economist ''The Economist'' is a British weekly newspaper printed in demitab format and published digitally. It focuses on current affairs, international business, politics, technology, and culture. Based in London, the newspaper is owned by The Eco ...

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