Customary law as a social contract: International commercial law

Merchants broke the bonds of localized political constraints during the tenth and eleventh centuries to establish the constitutional foundations of international commercial law as we see it today. The medieval “Law Merchant” was an international legal system that governed without the centralized coercive power of the state. In order to see how this was possible, the incentives which led to the merchants community's social contract, as well as the rules and institutional arrangements that the resulting contract produced are examined and explained. A process of legal change evolved, participatory institutions were established to adjudicate disputes and effective incentives were implemented to induce compliance with the resulting judgements. The unwritten social contract established by the medieval business community remains in force to this day. International commercial law is still largely independent of nationalized legal systems, retaining many of the basic (though) modernized institutional characteristics of the medieval Law Merchant. James Buchanan suggested that “Free relations among free men—this precept of ordered anarchy can emerge as principle,” under an appropriately structured social contract. The international Law Merchant provides a historical and modern demonstration that Buchanan is indeed correct. This paper was originally prepared for presentation to the Liberty Fund Conference on “Liberty and the Constitutional Foundations of International Order,” Washington, D.C., July 1991. I wish to thank Randall Holcombe, Kevin Refitt, and the participants in the Liberty Fund Conference for helpful comments and suggestions that led to several revisions.     

Social Change versus Transition: The Political Economy of Institutions and Transitional Economies

The “transition” process in Eastern Europe and the former Soviet Union (EEFSU) was one of the most dramatic non-marginal adjustments in economic systems ever experienced. During the transition process, elements of centrally administered socialism and embryonic market relations co-existed. This made traditional economic theory irrelevant. The purpose of this paper is to discover policy concerns and outcomes that orthodox “transition” literature ignores. Stanfield’s contribution to the economic literature, a cultural-holistic approach of radical institutionalism, makes it possible to understand the “transition” process from a new and more enlightened perspective. Stanfield provides a better understanding of the complexities involved, since the nature of change in the EEFSU is social and ever-lasting, not an end-state in the form of “transition”. Students of transition and of international development would benefit from this novel approach, which dismisses “transition” and substitutes “social change”, as the proper designation and manifestation of what actually took place in EEFSU.     

Institutional competition among jurisdictions: An evolutionary approach

The purpose of this paper is to outline an evolutionary approach to the process of competition among institutions. We shall focus, in particular, on two issues: first, the role of the competitive process as a knowledge-creating process; and, second, the issue of what inferences, if any, can be drawn from the nature of this process regarding the desirability of its outcomes. In discussing both issues we will draw a parallel between ordinary market competition and competition in the realm of institutions. Some clarifying comments in order to narrow down what we mean by “evolutionary approach” and “institutional competition” precede the analysis. The authors wish to thank Richard Wagner for helpful criticism.     

On justifying a minimum welfare state

Since anarchy is not viable, limited government is the best that the realistic libertarian can hope for. But limited government will itself always be threatened by an inherent tendency to transgress its limits. In modern western societies the regulatory and redistributive welfare state is the major threat to a constitution of liberty. However, a “minimum welfare state” which redistributes personal income among its citizens may comply with the same principles of individual liberty and the rule of law that are embodied in the protective state. Since any state, including the minimal state, necessarily incorporates regulation and redistribution and thus is a welfare state of sorts the non-anarchist liberal should turn against welfare state privileges rather than against redistribution and regulation per se. He may even have good reason to go beyond the minimal state to found a “minimum welfare state” if this is instrumental in securing liberty under the rule of law. I am grateful to the Center for the Study of Public Choice, George Mason University for hospitality both during the period in which this paper was written and on other occasions. I am deeply indebted to the people at the Center for their criticisms and comments. As far as this paper is concerned Geoffrey Brennan's and Richard Wagner's comments were particularly helpful. I should also like to acknowledge helpful oral comments from Kevin Mulligan and Philip van Parijs, who of course is much more of an expert on demogrant schemes than I am. I also wish to thank two anonymous referees for their valuable suggestions. The general caveat applies.     

The New Keynesian Phillips Curve and Inflation Expectations: Re-Specification and Interpretation

A theoretical analysis of the new Keynesian Phillips curve (NKPC) is provided, formulating the conditions under which the NKPC coincides with a real-world relation that is not spurious or misspecified. A time-varying-coefficient (TVC) model, involving only observed variables, is shown to exactly represent the underlying “true” NKPC under certain conditions. In contrast, “hybrid” NKPC models, which add lagged-inflation and supply-shock variables, are shown to be spurious and misspecified. We also show how to empirically implement the NKPC under the assumption that expectations are formed rationally. We are grateful to C. D. Aliprantis, Harris Dellas and Arnold Zellner for helpful comments. The questions and comments of an anonymous referee were extremely stimulating. The views expressed are the authors’ own and do not constitute policy of their respective institutions.     

An economics for development and peace: With a particular focus on the thought of Ernst F. Schumacher

Ernst F. Schumacher'sSmall is Beautiful seems thoroughly persuasive even at the turn of the century, as reckless material development is increasingly recognized as a threat to peace. This article describes how his thought was influenced by Mahatma Gandhi. Gandhi's and Schumacher's ways of thinking are considered as alternative development theorees, different from any of those stemming from laissez-faire economics or Marxism. The formulation and proliferation of Schumacher's ideas about intermediate technologies are traced in both Indian and global contexts, to evaluate their sufficiency as bases for development. Moreover, their implications for contemporary economics are discussed, with the assistance of Amartya K. Sen's concepts of “capability,” “sympathy” and “commitment,” which are in clear contrast to the conventional concept of “economic man.” Finally, it is concluded that Schumacher's alternative development theories and practices, as well as Sen's economics, may play important roles in development and peace studies in the 21^st century. I am grateful to William Volgor, Michael McPherson, David Schrom and Mark Kurowski for their helpful suggestions on drafts of this article.     

Emerging from the Hobbesian jungle: Might takes and makes rights

The conflict over scarce resources in the Hobbesian jungle may be avoided if rules of obligation delineating property rights develop along with institutions of governance. One possibility is a “duress contract” as the strongest individual threatens others who agree to enslavement. Thus, “might takes rights.” Alternatively, individuals with similar capacities for violence may enter a “consent contract” establishing rules of obligation and then voluntarily participating in governance. They will not agree to a rights assignment that produces less wealth than they expect through violence, however, so “might makes rights.” A might-takes-and-makes-rights analysis is outlined to explain the continuum of legal institutions and property rights allocations that can evolve between these two extremes of duress and consent. Increasingly finely delineated private property rights tend to evolve under institutions produced by consent contracts, while common pool problems tend to arise near the duress contract end of the spectrum. This paper draws from a larger project on “The Evolution of Law” which has been supported by the Earhart Foundation. Discussions with and comments by Randy Holcombe, Kevin Reffit, and two anonymous referees led to significant improvements in the development and presentation of the arguments, as did discussant comments on a related paper made by Douglas Ginsburg and participants in the Friedrich August von Hayek Symposium on “Competition Among Institutions” in Freiburg, Germany, June 1–4, 1994, sponsored by the International Institute at George Mason University and the Walter Eucken Institute, Freiburg.     

How can constitutions be designed so that politicians who seek to serve “public interest” can survive and prosper?

Distributional politics in modern democracy involves the exploitation of minorities by majorities, and as persons rotate membership, all parties in the “game” lose. This result emerges only becausedifferences in treatment are permissible. If the principle ofgenerality (analogous to that present in an idealized version of the rule of law) could, somehow, be introduced into politics, mutual exploitation could be avoided. The analysis offers support for such policies as (1) flat-rate taxes, (2) equal per head transfers or demogrants and (3) uniform regulation of all industries. The argument here was initially presented as a Liberty Fund Conference talk in July 1992 under the title “Political Ethics as a Criterion for Constitutional Design.” I am indebted to my colleagues Viktor Vanberg, and especially Hartmut Kliemt for helpful comments on an earlier draft.     

The multi-faceted covenant: The biblical approach to the problem of organizations,constitutions, and liberty as reflected in the thought of Johannes Althusius

Modern theories of politics have tended to emphasize either the individual or the state and have left little or no room for mediating institutions. In the postmodern epoch there has been a rediscovery of the complexity of the fabric of civil society involving more than merely the individual and the state. An appropriate systematic theory needs to be developed to accomodate this new understanding. A good starting point is that segment of political theory whose origins lie in biblical political thought. On the eve of the modern epoch at the end of the sixteenth century, an early political scientist, Johannes Althusius, developed his understanding of biblical political thought into a systematic theory of the polity, published asPolitica Methodice Digesta and in other works. Defining politics as “the art of associating men for the purpose of establishing, cultivating and conserving social life among them,” Althusius builds a politics based on communication or sharing of things, services and right (jus) through simple and private and mixed and public association including the family, the collegium, and the particular and universal public associations. His work emphasizes that all politics involves association, covenant and consent, and rejecting the idea of the reified state Althusius offers an important starting point for building a postmodern theory of political and social organization.     

Embedded economics: The irrelevance of Christian fictive domestic economy

When reading the New Testament, the modern historically-minded interpreter would do well to keep in view that early Christian traditions emerged in the advanced agrarian societies of the first-century, eastern Mediterranean. In these societies, kinship and political institutions, roles, and norms determined economic and religious institutional behavior. That is, religious and economic structures were always embedded in either the kin group or the political group. Hence, to understand the “economic” assumptions and behaviors described in the New Testament, the interpreter must develop scenarios that fit the document’s historical and social context; the alternative is a necessarily anachronistic and ethnocentric reading. This essay articulates some basic perspectives entailed in historically and culturally sensitive interpretations of Old Testament and New Testament passages dealing with “economics”. The methodology employed here is a broadly based “social scientific criticism,” focusing on reading theory and cultural anthropology.     

The economics of “Certaine Lewd and Ill-Disposed Persons”: Comment on Leeson

In The Invisible Hook, Peter T. Leeson explores “the hidden economics of pirates.” The implications of his work are many, and there are several clear ways in which scholars can build on his insights. First, exploring piracy helps us better understand the rent-seeking societies of mercantilist Europe. Second, public and private policy toward pirates helps us better understand the institutions and organizations that emerge in order to govern and manage common resources. Third, the nearly universal condemnation of pirates by religious authorities and political leaders as well as the association of pirates with the demonic and satanic suggests further directions for research into the interactions between ideology, politics, and economic institutions.     

In or out: efficient inclusion of installations in an emissions trading scheme?

Regulators around the world are currently considering national emissions trading schemes (ETS) as cost-effective instruments to reduce greenhouse gas emissions. In the process, they are confronted with numerous design issues. The coverage of installations in an ETS is one such issue. While “blanket coverage” that includes all industrial emitters of greenhouse gases in an economy has some intuitive appeal, and seems equitable, it does not take into full account all the costs related to the extent of coverage. This paper shows that an alternative approach of “partial coverage” based on benefit–cost analysis can achieve the same emission reduction outcome at lower social cost. The approach is based on maximizing the benefits from inclusion of installations in an ETS at the same time as taking all relevant transaction costs into account. A broad definition of transaction costs is used, which covers the regulatory costs to the government as well as regulatory costs imposed on covered installations. We find that particularly for relatively modest emissions reduction targets the cost savings of a “partial coverage” compared to “blanket coverage” are significant.     

Understanding economic change: the impact of emotion

In this paper we aim to conceptualize the involvement of emotion in the processes of institutional emergence and change. The starting point of our proposal is the theory of change that has been developed by Douglass North since the 1990s and has recently culminated in the publication of “Understanding the process of economic change” (2005). We agree with North in considering change as an endogenous process which starts in the individual mind through a modification of mental models and beliefs. However, notwithstanding the value that North attributes to the cognitive components of change, his approach assigns no specific role to emotion. Based on recent findings on emotions and their contribution to the process of thought, we will suggest how North’s approach may be extended in order to explore some basic mechanisms of the interaction between institutions and feelings.     

Detrimental externalities, pollution rights, and the “Coase theorem”

This paper, which builds on Chipman (The economist’s vision. Essays in modern economic perspectives, 131–162, 1998), analyzes a simple model formulated by Hurwicz (Jpn World Econ 7:49–74, 1995) of two agents—a polluter and a pollutee—and two commodities: “money” (standing for an exchangeable private good desired by both agents) and “pollution” (a public commodity desired by the polluter but undesired by the pollutee). There is also a government that issues legal rights to the two agents to emit a certain amount of pollution, which can be bought and sold with money. It is assumed that both agents act as price-takers in the market for pollution rights, so that competitive equilibrium is possible. The “Coase theorem” (so-called by Stigler (The theory of price, 1966) asserts that the equilibrium amount of pollution is independent of the allocation of pollution rights. A sufficient condition for this was (in another context) obtained by Edgeworth (Giorn Econ 2:233–245, 1891), namely that preferences of the two agents be “parallel” in the money commodity, whose marginal utility is constant. Hurwicz (Jpn World Econ 7:49–74, 1995) argued that this parallelism is also necessary. This paper, which provides an exposition of the problem, raises some questions about this result and provides an alternative necessary and sufficient condition.     

Existence of a competitive equilibrium in a one sector growth model with heterogeneous agents and irreversible investment

Summary. We prove existence of a competitive equilibrium in a version of a Ramsey (one sector) model in which agents are heterogeneous and gross investment is constrained to be non negative. We do so by converting the infinite-dimensional fixed point problem stated in terms of prices and commodities into a finite-dimensional Negishi problem involving individual weights in a social value function. This method allows us to obtain detailed results concerning the properties of competitive equilibria. Because of the simplicity of the techniques utilized our approach is amenable to be adapted by practitioners in analogous problems often studied in macroeconomics. Received: September 13, 2001; revised version: December 9, 2002 RID="*" ID="*" We are grateful to Tapan Mitra for pointing out errors as well as making very valuable suggestions. Thanks are due to Raouf Boucekkine and Jorge Duran for additional helpful discussions. We also thank an anonymous referee for his/her helpful comments. The second author acknowledges the financial support of the Belgian Ministry of Scientific Research (Grant ARC 99/04-235 “Growth and incentive design”) and of the Belgian Federal Goverment (Grant PAI P5/10, “Equilibrium theory and optimization for public policy and industry regulation”). Correspondence to: C. Le Van     

Experienced Utility as a Standard of Policy Evaluation

This paper explores the possibility of basing economic appraisal on the measurement of experienced utility (utility as hedonic experience) rather than decision utility (utility as a representation of preference). Because of underestimation of the extent of hedonic adaptation to changed circumstances and because of the “focusing illusion” (exaggerating the importance of the current focus of one’s attention), individuals’ forecasts of experienced utility are subject to systematic error. Such errors induce preference anomalies which the experienced utility approach might circumvent. The “day reconstruction method” of measuring experienced utility is considered as a possible alternative to stated preference methods. JEL classifications: D63, Q51     

Corporate social responsibility and the ‘game of catallaxy’: the perspective of constitutional economics

The paper examines the issue of corporate social responsibility (CSR) from the perspective of constitutional economics, focusing on the distinction between a political community’s constitutional choice of the rules of the “market game,” and the market players’ sub-constitutional choice of strategies within these rules. Three versions of CSR-demands are identified and discussed, a “soft,” a “hard”, and a “radical” version. The soft version is concerned with the issue of how “socially responsible” corporations ought to play the market game within existing rules. The hard version is about how the rules of the market ought to be changed in order to induce “socially responsible” corporate behavior. And the radical version questions the compatibility of CSR and the logic of the market game, calling in effect for adopting some alternative economic regime.

Robust political economy

This paper introduces the idea of “robust political economy.” In the context of political economic systems, “robustness” refers to a political economic arrangement's ability to produce social welfare-enhancing outcomes in the face of deviations from ideal assumptions about individuals' motivations and information. Since standard assumptions about complete and perfect information, instantaneous market adjustment, perfect agent rationality, political actor benevolence, etc., rarely, if ever actually hold, a realistic picture and accurate assessment of the desirability of alternative political economic systems requires an analysis of alternative systems' robustness. The Mises-Hayek critique of socialism forms the foundation for investigations of robustness that relax ideal informational assumptions. The Buchanan-Tullock public choice approach complements this foundation in forming the basis for investigations of robustness that relax ideal motivational assumptions. JEL Code B53, P16, P26     

Breaking the mould: an institutionalist political economy alternative to the neo-liberal theory of the market and the state

The paper criticises the currently dominant neo-liberal discourseon the role of the state and proposes an alternative approachthat will allow us to overcome its shortcomings, especiallyits inadequate analyses of the role of institutions and politics.It argues that the central problem with the neo-liberal frameworklies not in its excessively anti-interventionist policy conclusions,as some of its critics believe, but in the very ways it envisagesthe modus operandi of the market, the state, institutions andtheir interrelationships. The paper then discusses how we mayconstruct the alternative approach of ‘institutionalistpolitical economy’.     

Distribution dynamics and convergence in Latin America: A non-parametric analysis

This paper examines the dynamics of income distribution and convergence in Latin America during the period 1960 to 2000. Our results, based on the intradistribution dynamics approach, reveal a “twin peaks” dynamics, which echoes findings reported for the OECD, the Asia Pacific Basin and worldwide. Notable differences, however, are found between the income dynamics in Latin America and in these other regions. Further, our findings indicate that physical capital investment and health capital serve to explain Latin America’s “twin peaks” polarization. Other factors, such as geographical proximity, trade openness and human capital, are also found to help explaining it to some extent. We gratefully acknowledge the helpful comments and suggestions of the referee.