Institutional framing and perceptions of fairness

This paper's goal is to construct a positive theory of economic fairness. Using the theoretical schema developed by Hurwicz and others, the paper makes precise the notions of an “institution,” “fairness fraiming,” and “institutional framing.” Four fairness propositions yield an important corollary: the economic environment, the operative institution and history give meaning to the often used FORMAL PRINCIPLE OF DISTRIBUTIVE JUSTICE (“equals should be treated equally, and unequals unequellay, in proportion to relevant similarities and differences”). We support these four propositions and corollary by an analysis of laboratory, survey, and anecdotal evidence. Finally we describe a number of areas for future research. The authors would like to thank Allen Buchanan, James Buchanan, Joel Feinberg, Elizabeth Hoffman, David Schmitz, Linda Schnabel Stizer, Vernon Smith, Richard Wagner, the participants in the Aspen Institute's Conference on “Local Justice and Fair Allocation”, the members of the Industrial Organization Workshop of the Department of Economics at the University of Arizona, and panel participants at the Public Choice Society Meeting for their help and comments at various stages of this paper's preparation. Responsibility for errors is the authors' alone.     

The law and economics of sycophancy

Tullock (in: Rowley (ed) The selected works of Gordon Tullock, Liberty Fund, Indianapolis, pp 399–455, 2005) was skeptical of the presumed economic efficiency of the common law, as adversarialism, apparently inherent to common law procedures, allowed for and was prone to litigiousness. Common law litigations accord to patterns of rent-seeking, as litigants invest ever more resources to assure victory. This paper asks if viable institutional solutions can emerge to resolve the problem Tullock identified. I survey the historical development of the term sycophancy within ancient Greek law as a revealing case study. Though a relatively innocuous pejorative in contemporary parlance, the term’s etymological roots stem from a formative process of ancient legal and institutional change within Athenian Greece. In the wake of specific legal reforms that expanded the scope of governmental authority under Solon (born 638–558 BCE), citizens were given explicit financial incentive to report violators of newly implemented public laws. Thereafter, social stigma surrounding third party legal representation leveraged the term sycophancy in reference to prosecutors motivated by private interests over the public welfare. Forgone social status and eventually formal criminal sanction emerged as offsetting differentials against the incentives of sycophancy.     

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.     

Mitigating the tyranny of public opinion: Anonymous discourse and the ethic of sincerity

Public opinion breeds tyranny by forcing individuals to refrain from voicing their genuine thoughts and feelings. The means used to mitigate such tyranny include the separation of governmental powers, the ethic of tolerance, and the secret ballot. Yet neither individually nor collectively do these devices prevent the emergence and persistence of social taboos. This paper proposes two additional corrective devices. One is an electronic instrument that would enable public officials to deliberate on socially sensitive matters behind a veil of anonymity. The other is an ethic that would enhance the utility citizens derive from truthfulness on political matters. A draft of this paper was discussed at a Liberty Fund Conference on the “Ethical Foundations of Constitutional Order,” held in Arlington, VA, on July 9–12, 1992. Many of the conference participants offered frank criticisms that resulted in improvements. Jerry Harvey read the paper with exemplary care, making no effort to hide his reservations; I benefited greatly from his wise comments. I profited also from two reports commissioned by this journal, both anonymous.     

The French first employment contract: efficient screening device or Kleenex contract?

The controversial novelty in the French Labor Law reform, withdrawn in April 2006, was a contract form under which employers could dismiss young workers on probation without justification. Proponents argued that the reform would improve screening and boost employment whereas opponents dubbed it the “Kleenex contract.” We show that the new contract can produce an incentive to dismiss even suitable workers but that this harmful effect could be mitigated by instituting public ratings of firms according to their propensity to dismiss young workers. Informed workers could then respond to job offers according to firms’ layoff records, which in turn would restore promotion incentives and efficient screening.      

From contract to mental model: Constitutional culture as a fact of the social sciences

This paper develops the concept of constitutional culture—the attitude, thoughts, and feelings about constitutional constraints and the nature, scope, and function of constitutionalism. Constitutional culture is approached as a complex emergent phenomenon bridging Hayekian cognitive and institutional insights. It can be studied as a mental model, a series of expectations and understandings about the constitutional order, how it is, and how it ought to be. The “map” and “model” approach from Hayek’s Sensory Order (1952) is employed to understand how individuals and (cautiously) groups of individuals at the national level approach constitutionalism. This paper goes beyond the more traditional one-size-fits-all approach where all individuals respond uniformly to incentives, as provided by the constitution qua contract. Instead, constitutionalism is tied up in the individual’s vision of the world, that is, what Hayek (1948) labels “the facts of the social sciences.” The paper concludes with four areas where constitutional culture can further the insights of constitutional political economy: comparative political economy, constitutional stickiness, constitutional maintenance, and the new development economics.     

The common law as central economic planning

Central economic planning traditionally has set goals and allocated resources by supplanting the price system with central direction. Planners engaged in industry-by-industry and firm-by-firm decision making, all to achieve predetermined targets. The neoclassical approach to law and economics posits that common law judges engage in a similar activity, in rendering decisions that maximize wealth. A significant feature of this approach is the placement of judges in the position of calculators of comparative values. Neither advocates of central planning nor those of judicial wealth maximizing address or solve the economic calculation problem. The various aspects of that problem hold two implications for common law judges. First, they cannot accomplish the tasks that the neoclassical approach sets out for them. Second, a recognition of the calculation problem leads to a rejection of balancing and the choice of rights-based, bright-line rules that return actual and potential litigants' decisions to the market. An earlier version of this essay was prepared for a Liberty Fund, Inc., Conference on “The Problems of Economic Calculation under Socialism,” New York City, January 26–27, 1986. Some time after the completion of the 1986 draft, I received working papers from Louis De Alessi and Bob Staaf. They were pursuing the same themes that this paper explores, but in a more focused manner. I gained greatly from their work, for it gave me confidence that these ideas are worth pursuing. I thought it appropriate to revisit this paper for a volume in Bob Staaf's memory. I have also benefitted greatly from extended discussions with Andrew Kull and Paul Rubin.     

Natural persons,corporate actors,and constitutions

Extending the concept of efficiency beyond economic markets to social transactions generally, this paper asks the question whether social efficiency might not be better realized by removing the barriers to transactions between political and economic resources. With political rights (i.e. resources) held by natural persons, and economic resources held by corporate actors, such transactions could in principle replace taxation for redistribution, as a more efficient method of redistribution, intrinsic to the socio-political system. Such politico-economic transactions would supplement the primary means of distribution of the social product in an economic system, that is wages for productive labor. In the paper it is argued that this primary means of distribution is increasingly ineffective as the economy becomes increasingly interdependent. This change places an increasing burden on the “second round” of distribution through taxation, and forces consideration of a less defective and more theoretically sound means of supplementary income distribution. Paper was presented at the Organizations, Constitutions, and Liberty conference sponsored by the Liberty Fund, June 21–24, 1990 at the Sheraton Hotel in Crystal City, Virginia.     

Decentralization,agency costs,and the new economic constitution of China

This article examines the evolution of the rules that govern central-local government relations in the Chinese political economy. Although the federalism that accompanied China’s market reforms has substantially facilitated economic growth, it has also created powerful incentives for local authorities to abuse their powers, significantly increasing the agency costs to the central government of maintaining political stability and creating a national market. This article analyzes the institutional design of the nascent Anti-Monopoly Law (AML), known to officials and academics as China’s new “Economic Constitution”. It demonstrates that the major purpose of the AML is to break up the so-called “administrative monopolies”, or bureaucratic fiefdoms over local economies. In contrast to existing academic treatment, it will study the AML in the framework of competition for influence over economic policy between rent-seeking central and local actors. It argues that the AML, despite its stated purposes, is indeed designed to reduce the policy-making powers of the regions to the comparative advantage of the central government. The AML can thus be modeled as a new constitutional contract that the center wishes to enter into with the localities in order to repeal the existing rules of decentralization. It will be further shown that the AML, reflecting the allocation of power in the Chinese state, prioritizes the political imperatives of recentralization over the facilitation of competitive markets.     

International order and individual liberty

This article takes issue with the traditional way of conceptualizing international relations as anarchy. While the “anarchy problematique” has become established wisdom of neorealist (structuralist) international relations theory, neither the historical record, nor the analytical power, of this approach is borne out by closer examination. The elimination of questions concerning individual liberty, and the exclusion from analysis of international and domestic institutions serving this end, have been pursued in the vain hope of formulating a systematic and parsimonious theory of international politics. p ]On the basis of an examination of the post-war era, in which issues of stable democratic regimes and liberal international institutions were of primary importance, this article suggests an alternative approach for the study of international politics. By conceptualizing both the domestic and international systems associal systems, differing in degree and kind of institutionalized behavior, particular attention is directed to the link between individual rights and domestic institutions, as well as to the linkage of domestic and international structures. The metaphor of a “game,” constituted by rules and norms, is particularly helpful in providing an alternative research program. This approach is not only more attuned to political practice, it also allows for the stringent examination of normative questions. In preparing this paper, I was helped by the support of the Liberty Fund and by my research assistant, Rey Koslowski. I also thank colleagues Joe Grieco, Joseph Nye, Michaela Richter, David Spiro as well as two anonymous referees of this journal who provided helpful suggestions. Lawrence B. Simon Professor of Political Science; University of Pennsylvania, Philadelphia, PA 19104-6215.     

The domain of constitutional economics

Constitutional political economy is a research program that directs inquiry to the working properties of rules, and institutions within which individuals interact, and the processes through which these rules and institutions are chosen or come into being. The emphasis on the choice of constraints distinguishes this research program from conventional economics, while the emphasis on cooperative rather than conflictual interaction distinguishes the program from much of conventional political science. Methodological individualism and rational choice may be identified as elements in the hard core of the research program. Paper prepared for Liberty Fund Symposium on “German Ordnungstheorie and American Constitutional Economics” Bonn, 3–6 June 1989.     

Property as an economic concept: reconciling legal and economic conceptions of property rights in a Coasean framework

Adopting a simplistic view of Coase (J Law Econ 3:1–44, 1960), most economic analyses of property rights disregard both the key advantage that legal property rights (that is, in rem rights) provide to rightholders in terms of enhanced enforcement, and the difficulties they pose to acquirers in terms of information asymmetry about legal title. Consequently, these analyses tend to overstate the role of “private ordering” and disregard the two key elements of property law: first, the essential conflict between property (that is, in rem) enforcement and transaction costs; and, second, the institutional solutions created to overcome it, mainly contractual registries capable of making truly impersonal (that is, asset-based) trade viable when previous relevant transactions on the same assets are not verifiable by judges. This paper fills this gap by reinterpreting both elements within the Coasean framework and thus redrawing the institutional foundations of both property and corporate contracting.     

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.     

Courts at work: Bankruptcy statutes,majority rule and private contracting in England (17th–18th century)

Rather than evolving as a platform for renegotiation and debt discharge, as on the Continent, English bankruptcy emerged as a liquidation-only procedure after majority arrangements among creditors were banned in 1621. Over the course of the 17th and 18th centuries, the courts then developed an alternate, private-law set of rules on the basis of the old English trust and the Composition agreement, which belonged of the medieval cross-European Law Merchant. The main advantage of this little-known institution was its perpetual character and the flexibility of its governance, and its main drawback was obviously the requirement of voluntary initial adhesion. Symmetrically, under the Continental model, collective action was easier to obtain but it did not extend beyond the doors of the court. The discussion brings forward two further themes: the symmetry between adjudication and voluntary adhesion to a collective contract; and the capacity of judges to invent new legal concepts out of diverse set of existing rules, rather than through the simple, bottom-up approach usually emphasised by the literature on the Common Law tradition.     

Solving coordination failure with “all-or-none” group-level incentives

Coordinating activity among members is an important problem faced by organizations. When firms, or units within firms, are stuck in bad equilibria, managers may turn to the temporary use of simple incentives—flat punishments or rewards—in an attempt to transition the firm or unit to a more efficient equilibrium. We investigate the use of incentives in the context of the “minimum-effort,” or “weak-link,” coordination game. We allow groups to reach the inefficient equilibrium and then implement temporary, flat, “all-or-none” incentives to encourage coordination on more efficient equilibria. We vary whether incentives are positive (rewards) or negative (penalties), whether they have substantial or nominal monetary value, and whether they are targeted to a specific outcome (the efficient equilibrium) or untargeted (apply to more than one outcome). Overall, incentives of all kinds are effective at improving coordination while they are in place, but there is little long-term persistent benefit of incentives—once incentives are removed, groups tend to return to the inefficient outcome. We find some differences between different kinds of incentives. Finally, we contrast our results to other recent work demonstrating greater long-term effectiveness of temporary incentives.      

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.     

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.     

Buchanan’s constitutional political economy: exchange vs. choice in economics and in politics

This article discusses the methodological foundations of Buchanan’s constitutional political economy. We argue that Buchanan is a constitutional economist because he is an economist or a political economist. In other words, Buchanan is a constitutional economist—he insists on the necessity of focusing on constitutions and to analyze the “rules of the social game”—because he defines economics as a science of exchange. Buchanan’s definition of economics is not only specific, it is also opposed to the definition of economics that other economists retain and, above all, opposed to the definition of economics that many public choice theorists use. The latter have, in effect, adopted the Robbins 1932 definition of economics as a science of choice that Buchanan criticizes and rejects. Buchanan’s constitutional economics can be a branch of public choice only under certain conditions.

Out of a slave contract: the analysis of pre-Hobbesian anarchists in the Old Testament

Buchanan’s constitutional economics takes social conflict (the ‘Hobbesian jungle’, ‘Hobbesian anarchy’) as the starting point for the analysis of social contract. Buchanan argues that in the presence of social conflict either some social contract (e.g. some system of formal laws) or some generally shared moral precepts are needed to resolve the predicament that social conflict presents. The present paper argues that a social conflict model also served the Old Testament as an analytical starting point. However, contrary to both standard theological interpretation and Buchanan’s explicit claims, I argue that the Old Testament had already made an attempt to model ‘Hobbesian anarchy’ in order to approach social conflict in an essentially modern, non-metaphysical manner. I argue that figures like Adam and Eve or Jacob, in the tradition of Hobbesian anarchists, questioned godly authority and the associated imposed, authoritarian, metaphysical social contract. In this way, one can detect a modern, contractarian constitutional economics in pre-Enlightenment literature (and in Genesis, specifically) in direct contrast to Buchanan’s claims.     

An index of political support for decentralization: the Spanish case

This paper presents a method to make measurable what was not: the discourses of politicians regarding decentralization. For this purpose, we develop a “matrix of arguments” and a set of indexes, and apply them to provide a snapshot of the politicians’ views on the “General Law of Budgetary Stability”, a landmark for the process of decentralization in Spain.