Constitutional economics

Last updated

Constitutional economics is a research program in economics 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. [1] 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. 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." [2]

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. [3] 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". [4]


Constitutional economics was popularized by James M. Buchanan, for which he received the 1986 Nobel Memorial Prize in Economic Sciences (pictured here in September 2010) James Buchanan by Atlas network.jpg
Constitutional economics was popularized by James M. Buchanan, for which he received the 1986 Nobel Memorial Prize in Economic Sciences (pictured here in September 2010)

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 for his "development of the contractual and constitutional bases for the theory of economic and political decision-making" in 1986. [5]

Constitutional economics draws substantial inspiration from the reformist attitude which is characteristic of Adam Smith’s vision, and that Buchanan’s concept can be considered the modern-day counterpart to what Smith called “the science of legislation.”

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: [6]

  1. 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.
  2. The second element looks at how rules are distinguishable between individual and collective factors, though Voigt acknowledges this research method is rarely used.
  3. 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.
  4. 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 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.[ citation needed ]

Methodological individualism leads Buchanan to the normative claim that a political theory very similar to that of John Rawls in his seminal 1971 work, A Theory of Justice , 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. [7] Buchanan's argument is similar to a social contract view of government, where individuals agree to place constraints on themselves in exchange for anticipated benefits, [8] Buchanan argued that just as a market transaction occurs through voluntary, mutually beneficial exchange, so with political "exchanges" of rights and authority. [9]

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" [10]

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." [11] 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”. [12]


Buchanan is not the only contributor to normative constitutional economics. Economist Friedrich 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 as the best structure of government. [13] Hayek's main project was the vindication of freedom and establishing criteria for a regime of freedom. [14]

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.[ citation needed ]

Economic analysis of the US Constitution

The generally accepted birth of constitutional economic analysis of US Constitution was Charles Austin Beard's landmark 1913 book An Economic Interpretation of the Constitution of the United States . [15] 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. [16] 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." [17]

Writing in 1987 for the Yale Law School, 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. [18]

As Macey understood Beard a famous and crucial part of the Constitution, separation of powers, 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'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 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 separation of powers 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.[ citation needed ]

Judge Richard Posner emphasized the importance of a constitution for economic development. 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 in common law 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 [are] set by the Constitution". In addition, he argues that "effective protection of basic economic rights promotes economic growth". [19]

Concurrently with the rise of academic research in the field of constitutional economics in the US in the 1980s, the Supreme Court of India for almost a decade had been encouraging public interest litigation 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. [20]

The President of the Constitutional Court of the Russian Federation, Valery Zorkin, 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." [21]

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, which in many transitional and developing countries is completely controlled by the executive.

The latter undermines the principle of checks and balances, instrumental in the separation of powers, as this creates a critical financial dependence of the judiciary. It is important to distinguish between the two methods of corruption 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 officially recognized constitutional economics as a separate academic sub-discipline. [22]


Walter Block 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. [23] 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 to the present, they trace how the state always comes from conquest and exploitation, never consent. The Calculus of Consent , 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. [24]

See also

Related Research Articles

<span class="mw-page-title-main">Friedrich Hayek</span> Austrian–British economist, philosopher, and Nobel Laureate (1899–1992)

Friedrich August von Hayek, often referred to by his initials F. A. Hayek, was an Austrian-British intellectual who made contributions to economics, political science, psychology, intellectual history, philosophy and other fields. Hayek shared the 1974 Nobel Memorial Prize in Economic Sciences with Gunnar Myrdal for work on money and economic fluctuations, and the interdependence of economic, social and institutional phenomena. His account of how prices communicate information is widely regarded as an important contribution to economics that led to him receiving the prize.

Public choice, or public choice theory, is "the use of economic tools to deal with traditional problems of political science". Its content includes the study of political behavior. In political science, it is the subset of positive political theory that studies self-interested agents and their interactions, which can be represented in a number of ways – using standard constrained utility maximization, game theory, or decision theory. It is the origin and intellectual foundation of contemporary work in political economy.

<span class="mw-page-title-main">James M. Buchanan</span> American economist (1919–2013)

James McGill Buchanan Jr. 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 Consent, then developed over decades for which he received the Nobel Memorial Prize in Economic Sciences in 1986. Buchanan's work initiated research on how politicians' and bureaucrats' self-interest, utility maximization, and other non-wealth-maximizing considerations affect their decision-making. He was a member of the Board of Advisors of The Independent Institute as well as of the Institute of Economic Affairs, a member of the Mont Pelerin Society (MPS) and MPS president from 1984 to 1986, a Distinguished Senior Fellow of the Cato Institute, and professor at George Mason University.

<span class="mw-page-title-main">Law and economics</span> Application of economic theory to analysis of legal systems

Law and economics, or economic analysis of law, is the application of microeconomic theory to the analysis of law, which emerged primarily from scholars of the Chicago school of economics. Economic concepts are used to explain the effects of laws, to assess which legal rules are economically efficient, and to predict which legal rules will be promulgated. There are two major branches of law and economics; one based on the application of the methods and theories of neoclassical economics to the positive and normative analysis of the law, and a second branch which focuses on an institutional analysis of law and legal institutions, with a broader focus on economic, political, and social outcomes, and overlapping with analyses of the institutions of politics and governance.

The Chicago school of economics is a neoclassical school of economic thought associated with the work of the faculty at the University of Chicago, some of whom have constructed and popularized its principles. Milton Friedman and George Stigler are considered the leading scholars of the Chicago school.

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 economics and political science. This work presents the basic principles of public choice theory.

Spontaneous order, also named self-organization in the hard sciences, is the spontaneous emergence of order out of seeming chaos. The term "self-organization" is more often used for physical changes and biological processes, while "spontaneous order" is typically used to describe the emergence of various kinds of social orders in human social networks from the behavior of a combination of self-interested individuals who are not intentionally trying to create order through planning. Proposed examples of systems which evolved through spontaneous order or self-organization include the evolution of life on Earth, language, crystal structure, the Internet, Wikipedia, and a free market economy.

Law reform or legal reform is the process of examining existing laws, and advocating and implementing change in a legal system, usually with the aim of enhancing justice or efficiency.

Rechtsstaat is a doctrine in continental European legal thinking, originating in Dutch and German jurisprudence. It can be translated into English as "rule of law", alternatively "legal state", state of law, "state of justice", or "state based on justice and integrity".

Constitutional theory is an area of constitutional law that focuses on the underpinnings of constitutional government. It overlaps with legal theory, constitutionalism, philosophy of law and democratic theory. It is not limited by country or jurisdiction.

Budget theory is the academic study of political and social motivations behind government and civil society budgeting. Classic theorists in Public Budgeting include Henry Adams, William F. Willoughby, V. O. Key, Jr., and, more recently, Aaron Wildavsky. Notable recent theorists include Frank R. Baumgartner, Bryan D. Jones, Richard Fenno, Allen Schick, Dennis Ippolito, Naomi Caiden, Irene Rubin, James D. Savage, Thomas Greitens, Gary Wamsley, and Usman W. Chohan. Budget theory was a central topic during the Progressive Era and was much discussed in municipal bureaus and other academic and quasi-academic facilities of that time such as the nascent Brookings Institution.

<span class="mw-page-title-main">Social Choice and Individual Values</span>

Kenneth Arrow's monograph Social Choice and Individual Values and a theorem within it created modern social choice theory, a rigorous melding of social ethics and voting theory with an economic flavor. Somewhat formally, the "social choice" in the title refers to Arrow's representation of how social values from the set of individual orderings would be implemented under the constitution. Less formally, each social choice corresponds to the feasible set of laws passed by a "vote" under the constitution even if not every individual voted in favor of all the laws.

The Virginia School of political economy is a school of economic thought originating at the Thomas Jefferson Center of the University of Virginia in the 1950s and 1960s. Some of its proponents established the Center for the Study of Public Choice at Virginia Tech in 1969, moving it to George Mason University in 1983. The school focuses primarily on public choice theory, constitutional economics, and law and economics.

Justice in economics is a subcategory of welfare economics. It is a "set of moral and ethical principles for building economic institutions". Economic justice aims to create opportunities for every person to have a dignified, productive and creative life that extends beyond simple economics.

<span class="mw-page-title-main">Robert Tollison</span> American economist

Robert D. Tollison was an American economist who specialized in public choice theory.

Consequentialist libertarianism, also known as consequentialist liberalism or libertarian consequentialism, is a libertarian political philosophy and position that is supportive of a free market and strong private property rights only on the grounds that they bring about favorable consequences such as prosperity or efficiency.

<span class="mw-page-title-main">Rule of law</span> Political situation where every citizen is subject to the law

The rule of law is the political philosophy that all citizens and institutions within a country, state, or community are accountable to the same laws, including lawmakers and leaders. The rule of law is defined in the Encyclopedia Britannica as "the mechanism, process, institution, practice, or norm that supports the equality of all citizens before the law, secures a nonarbitrary form of government, and more generally prevents the arbitrary use of power." The term rule of law is closely related to constitutionalism as well as Rechtsstaat and refers to a political situation, not to any specific legal rule.

The rule according to a higher law is a statement which expresses that no law may be enforced by the government unless it conforms with certain universal principles of fairness, morality, and justice. Thus, the rule according to a higher law may serve as a practical legal criterion to qualify the instances of political or economical decision-making, when a government, even though acting in conformity with clearly defined and properly enacted law, still produces results which many observers find unfair or unjust.

The benefit principle is a concept in the theory of taxation from public finance. It bases taxes to pay for public-goods expenditures on a politically-revealed willingness to pay for benefits received. The principle is sometimes likened to the function of prices in allocating private goods. In its use for assessing the efficiency of taxes and appraising fiscal policy, the benefit approach was initially developed by Knut Wicksell (1896) and Erik Lindahl (1919), two economists of the Stockholm School. Wicksell's near-unanimity formulation of the principle was premised on a just income distribution. The approach was extended in the work of Paul Samuelson, Richard Musgrave, and others. It has also been applied to such subjects as tax progressivity, corporation taxes, and taxes on property or wealth. The unanimity-rule aspect of Wicksell's approach in linking taxes and expenditures is cited as a point of departure for the study of constitutional economics in the work of James Buchanan.


  1. Ludwig Van den Hauwe, 2005. "Constitutional Economics II," The Elgar Companion to Law and Economics, pp. 223–24.
  2. James M. Buchanan, 1986. "The Constitution of Economic Policy," Nobel Prize lecture.
  3. Christian Kirchnez, The Principles of Subsidiary in the Treaty on European Union: A Critique from a Perspective of Constitutional Economics, 6 TUL. J.INT’L. & COMP. L. 291, 293 (1998)
  4. Peter Barenboim, 2001. "Constitutional Economics and the Bank of Russia," Fordham Journal of Corporate and Financial Law, 7(1), p. 160. Archived 2011-07-19 at the Wayback Machine
  5. "James M. Buchanan Jr. - Facts".
  6. Voigt, Stephan (1997). "Positive Constitutional Economics: A Survey," Public Choice, 90(1/4): 11–53).
  7. Buchanan, James M. (1988). "Contractarian Political Economy and Constitutional Interpretation," The American Economic Review, 78(2): 135–39.
  8. Van den Hauwe, Ludwig (1999). "Constitutional Economics," in The Elgar Companion to Law and Economics Second edition, edited by J. Backhaus. Edward Elgar Publishing Limited: Cheltenham, UK.
  9. Buchanan, James M. (1990). "The Domain of Constitutional Economics," Constitutional Political Economy, 1(1): 1–18.
  10. James Buchanan, The Logical Foundations of Constitutional Liberty, Volume 1, Liberty Fund, Indianapolis, 1999, p. 314
  11. Buchanan, J. Logical Foundations of Constitutional Liberty. Vol. 1. Indianapolis, 1999. p. 372.
  12. "Where Economics and Philosophy Meet: Review of The Elgar Companion to Economics and Philosophy with responses from the authors", The Economic Journal, 116 (June), 2006
  13. Hayek, Friedrich A. (1973). Law, Legislation, and Liberty, Chicago: The University of Chicago Press.
  14. Hayek, Friedrich A. (1960). The Constitution of Liberty, Chicago: The University of Chicago Press.
  15. Beard, Charles A. (1913). An Economic Interpretation of the Constitution of the United States, New York: Macmillan Publishing Co, Inc.
  16. Voigt, Stephan (1997). Positive Constitutional Economics: A Survey, Public Choice, 90(1/4): 11–53).
  17. Beard, Charles (1935) [1913]. An Economic Interpretation of the Constitution of the United States. MacMillan. p. 324.
  18. Macey, Jonathan R. (1987). "Competing Economic Views of the Constitution," Faculty Scholarship Series, 56(50): 50–80.
  19. Posner R., 1987. "The Constitution as an Economic Document," George Washington Law Review, 56(1), p p. 4–38. Reprinted in J. W. Ely, ed., 1997, Main Themes in the Debate over Property Rights, pp. 186–220.
  20. Jeremy Cooper, Poverty and Constitutional Justice, in Philosophy of Law: Classic and Contemporary Readings, edited by Larry May and Jeff Brown, Wiley-Blackwell, UK, 2010.
  21. Valery Zorkin, Twelve Theses on Legal Reform in Russia in The World Rule of Law Movement and Russian Legal Reform, edited by Francis Neate and Holly Nielsen, Justitsinform, Moscow, 2007]
  22. Peter Barenboim, Natalya Merkulova."The 25th Anniversary of Constitutional Economics: The Russian Model and Legal Reform in Russia, in The World Rule of Law Movement and Russian Legal Reform", edited by Francis Neate and Holly Nielsen, Justitsinform, Moscow (2007)
  23. Block, Walter and Thomas J. DiLorenzo (2000). "Is Voluntary Government Possible? A Critique of Constitution Economics," Journal of Institutional and Theoretical Economics 156(4): 567–82.
  24. Campbell, William (1988). “Constitutional Economics: Ancients vs. Moderns,” The Heritage Foundation, Speech given July 27, 1988. Washington D.C.


Farina, Francesco, 2005. "Constitutional Economics I," pp. 184–222.
Van den Hauwe, Ludwig, 2005. "Constitutional Economics II," pp. 223–38.
1973. v. 1. Rules and Order. Description and chapter-preview links.
1976. v. 2. The Mirage of Social Justice. Description and chapter-preview links.
1979. v. 3. The Political Order of a Free People. Description and chapter-preview links.