Redistribution and constitutional political economy

Economists since Pareto have sought to demonstrate that governmental redistribution to assist the poor increases overall welfare in society. This paper addresses the general issue of redistribution but focuses on two recent efforts to justify redistribution in the context of constitutional political economy. It is argued below that income insurance and other proposed rationale for redistribution overlook or minimize information and incentive problems endemic in all governmental programs to assist the poor. Two reasons for opposing legislated redistribution are discussed—the first rooted in pragmatic considerations, the other based on principle. The conclusions are twofold: (1) purported justifications for redistributive policies are inconsistent with methodological individualism, and (2) it is problematic as to whether imposing such an obligation on the public-at-large even at the constitutional level will improve the welfare of the poor and the non-poor.     

The political economy of constitutional restraints

Constitutions are multidimensional objects with non-trivial implications on the structure of the political environment and, therefore, on the policy outcomes. This paper models constitutions as sets of “restraints” on the authority’s choice freedom (absolute and democracy restraints). We argue that even if both kinds of restraints seem to be serving the same purpose (increase social welfare), “democracy restraints” prolong the “life” of a constitution while “absolute restraints” not. We moreover use the proposed way of modelling constitutions in order to explain the dominance of intermediate (in terms of tightness of “democracy restraints”) constitutions in the real world.     

The political economy of constitutional choice: a study of the 2005 Kenyan constitutional referendum

Recent studies of the linkages between the wealth of nations and the institutions of governance suggest that concentrating political power in a monarchy or a ruling coalition impedes economic growth and, moreover, that while power-diffusing reforms can enhance the wellbeing of society in general, opposition by groups benefiting from the status quo is predictable. In November 2005, Kenyans rejected a proposed constitution that, despite promises made by their new chief executive, would not have lessened the powers of the presidency. Using a unique, constituency-level dataset on the referendum vote, we estimate a model of the demand for power diffusion and find that ethnic groups’ voting decisions are influenced by their expected gains and losses from constitutional change. The results also highlight the importance of ethnic divisions in hindering the power-diffusion process, and thus establish a channel through which ethnic fragmentation adversely impacts economic development.     

Principles of political economy

As a guide to efficient social organization, neo-classical economics is deficient in two major ways. First, it uses simplifying assumptions about the decision-environment which destroy its possible relevance to an understanding of decision situations in the real world: notably in its inability to embrace the unknowability of the future and the subjectivity of human decisions. Second, it specifies the nature of policy-relevant choice in too restrictive a fashion to explain the major (constitutional and political) choice-situations inherent in any system of social organization. A more satisfactory intellectual construct can be derived from a political economy-public choice model. This follows broadly the contractarian-liberal model developed notably by Buchanan and Brennan, but envisages a much more thoroughgoing rejection of neo-classical (Paretian) concepts. Thenew political economy would identifyefficiency with the ability of the citizen to constrain government-as-leviathan in a context of multi-level choice. The opportunity-cost situation of citizens-as-choosers is specified by reference to their ongoing possibilities of usingvoice to change unsatisfactory institutional constraints orexit to escape their consequences. The model is used to appraise the constitutional characteristics of fiscal federalism. I am indebted to the Center for Study of Public Choice, George Mason University and the Centre for Research on Federal Financial Relations, Australian National University, for the provision of facilities. Colleagues at both institutions also provided valuable advice and comment.     

The constitutional political economy of virtual worlds

In virtual worlds, a social order able to coordinate the actions of tens of thousands of people emerges in a non-predetermined but designed way. The central puzzle the developers of such worlds have to solve is the same political economists face: to establish a well-functioning set of rules allowing for the thriving of the regulated community. The purpose of this paper is to provide a discussion of the particularities of the constitutional political economy of virtual worlds: their institutions, the prevalent beliefs of the players, and their organizations. The main reason why we should care about doing research on virtual worlds is the huge potential for research in virtual worlds. Virtual worlds present a middle ground in the debate between the greater control of laboratory experiments and the higher external validity of the field. Besides being an important cultural phenomenon per se, they emerge as the researchers’ tool to conduct experiments on a truly social level with tens of thousands of subjects. To show the usefulness of such environments for research in political economy in an exemplary but concrete fashion, the paper also presents some findings difficult to be produced elsewhere: data on an astonishingly high percentage of altruistic behavior in a Hobbesian natural state drawn from a dictator game played online.     

The contractarian constitutional political economy of James Buchanan

Constitutional political economy was the field in which James Buchanan devoted the most effort and to which he made the largest contribution. Although his finely grained arguments cannot be easily summarized, the main developments and central line of reasoning can be covered in a single paper, because his research relied upon a single framework, which continually reappears and is further developed as his thinking matured. The goal of this paper is to analyze how his ideas emerged and were used to develop a very rich constitutional political economy.     

Visible and invisible order. The theoretical duality of Smith's political economy

The aim of the paper is to show that Adam Smith elaborated a distinctive image of nature related to economic discourse. In Smith, visible events (or interdependencies) must be connected to invisible principles which, in particular, should provide an explanation of the self-coordination processes (especially that of market). In a broad sense, this approach was adopted by a number of disciplines in Smith's time (especially the sciences of life), which focused the analysis of the organization of complex systems. Moreover, the conceptual pair (visibility and invisibility) is connoted in terms of theoretical duality, and the paper attempts to demonstrate how such duality is reproduced in Smith's economic categories.     

Sir Edward Coke and the struggle for a new constitutional order

Modern struggles to form constitutional orders based on liberal principles are fraught with risk. There may be little in the way of private reward for those who lead the struggle. Such things as free markets, property rights protection amd freedom to contract are public goods. Ideology is apparently important. At the same time, the successful leader must be equipped with a number of scarce skills, including knowledge of markets and how they operate. Lessons learned from England's 17th century constitutional revolution tell us that constitutional entrepreneurs do emerge. Sir Edward Coke, England's most eminent lawyer of that period, was such a person. Over his lifetime, Coke led an intellectual and political struggle based on his belief that fundamental law came from the people, that kings and parliament were subservient to Common Law and the Magna Charta. These were to be the basis of England's constitution. Coke's legal decisions and arguments contain far more than mere assertion. They reflect impressive understanding of the market process, monopoly restrictions, free trade, and the fundamental force of freedom to contract. His leadership, fueled by an ideological commitment, was coupled with extraordinary intellect. The author expresses appreciation for helpful comments and criticisms to William Breit, Robert Ekelund, Roger Meiners, Robert Staaft, Robert Tollison, Richard Wagner and an anonymous referee of this journal.     

Foundational explorations for a normative theory of political economy

I set out an individualistic and pragmatic choice framework for a normative theory of political economy, and argue that, given pluralism with respect to individual ends, a consensus on any political or economic institution presupposes that it is perceived to serve as a public means to private ends. Concerning the crucial question of the distribution of the benefits that political and economic cooperation can make possible, I argue that the various models typically employed—those pertaining to competitive market interaction, decision making under uncertainty, bargaining theory, and social choice theory—fail to provide for a stable consensus, i.e., one that is resistant to non-compliance and renegotiation. Since, however, such instabilities are mutually disadvantageous, these approaches fail to establish how rational individuals can capture all the gains that cooperation makes possible. Appealing to a modified version of the social-psychological construction that Rawls introduces in chapter 8 ofA Theory of Justice I argue that stability is a function of a perceived sense of mutual concern. I conclude by arguing that Rawls own egalitarian/efficiency principle gives natural expression to such a concern, and thus can serve as the object of a stable consensus.     

Behavioral political economy: A survey

In explaining individual behavior in politics, economists should rely on the same motivational assumptions they use to explain behavior in the market: that is what Political Economy, understood as the application of economics to the study of political processes, is all about. In its standard variant, individuals who play the game of politics should also be considered rational and self-interested, unlike the benevolent despot of traditional welfare economics. History repeats itself with the rise of behavioral economics: Assuming cognitive biases to be present in the market, but not in politics, behavioral economists often call for government to intervene in a “benevolent” way. Recently, however, political economists have started to apply behavioral economics insights to the study of political processes, thereby re-establishing a unified methodology. This paper surveys the current state of the emerging field of “behavioral political economy” and considers the scope for further research.     

International emissions trading in a political economy

We examine whether the international emissions trading (IET) scheme can reduce global emissions in a political economy framework. Countries act noncooperatively when choosing the tradable emission permits and the environmental tax. The formulation of environmental policies is influenced by interest groups. Our results show that the effect of IET on global emissions depends crucially on which policies are influenced by lobbying activities. In the case where only environmental taxes are influenced by lobbying, IET tends to reduce global emissions when the capitalists’ political power is strong and, surprisingly, when the environmentalists’ political power is weak.     

Sustainability of Austrian public debt: a political economy perspective

Sustainability of Austrian public debt is investigated in the context of political objectives such as stabilizing the business cycle, increasing chances for being re-elected and implementing the ideologies of political parties. Several tests indicate that Austrian fiscal policies were sustainable in the period 1960–1974, while from 1975 on, public debt grew much more rapidly. The development of public debt in Austria seems to be driven not primarily by ideology, but by structural causes and a shift in the budgetary policy paradigm. We find some empirical evidence that governments in Austria dominated by one party run higher deficits than coalition governments. There are no indications of a political business cycle.     

The ethical foundations of constitutional order: A conventionalist perspective

This paper presents a conventionalist or modified contractarian perspective on constitutional and legal theory as a platform from which to address five important questions about the connections between critical morality and constitutional order. It finds that natural law and critical morality are inappropriately linked to constitutions and laws, but that there is nonetheless a clear moral dimension to all law. Furthermore even though law is explained as a function of human agreements, the very process of agreement commits law to an inherent set of standards which distunguish laws based on agreement from those which rest on coercion. These standards are more familiarly known as the principles of the rule of law.     

Passports for sale: The political economy of conflict and cooperation in a meta-club

Some of the member states of the European Union sell citizenship or residence to wealthy foreign investors. We analyze these “golden-passport” programs as a study in the political economy of conflict and cooperation in an international meta-club. Seen through the lens of club goods theory, the EU is a club of nations, each of which can be interpreted as itself a club. Each single nation reserves the right to govern the admission of new individual members into its own club, and new members automatically benefit from the EU wide meta-club good. We characterize the unique equilibrium when individual clubs that may differ in membership size are free to choose the terms on which they admit members, and evaluate it from the point of view of the wellbeing of the set of clubs as a whole. We identify club size and benefits as well as differences in cost externalities as the key determinants. We also consider how the set of clubs as a whole can respond to the economic inefficiency problems such a situation creates.     

Tax competition and the political economy of public employment: a model for Austria

In this work, we simulate the effects of the tax autonomy of the Austrian states on the levels of public employment in each state. We show that depending on the strength of the public sector lobby, tax autonomy would require a reduction of employment in the public sector of between 25 and 35% of the current level. We also show that tax autonomy increases welfare levels by 1–1.5%; that is, the positive change in the disposable income of the workers more than offsets the welfare loss resulting from the lower provision of public goods. Finally, we show that the reduction of public employment is superior in terms of welfare to an alternative scenario in which employment levels are held constant but the wage levels in the public sector are adjusted.