Constitution, Government, Economy – Part 1

Society

The constitution is that set of “top-level rules of the game” that are relatively few, relatively inflexible, general and persist across generations, or periods.

In the extended social order we call society, individual persons are the basic interacting units who attempt to realize their individual objectives, individually and collectively. Some of these objectives or goals can be realized by organizing privately, and others only through collective actions. Organized private activity is called “the market” which meets the private needs of the people. For those goals which require collective action, collective decisions have to be made.

That is what “government” is. In James Buchanan’s view, government is “that complex of institutions through which individuals make collective decisions, and through which they carry out collective as opposed to private activities.” And “politics” according to him “is the activity of persons in the context of such institutions.”

In this view, government is not some supra-individual agency that is separate from individuals which makes decisions for them. Government is “by the people” in the sense that people constitute a government for their own collective purposes.

Economy

Buchanan views the economy in a similar vein. “It is that complex of institutions that emerges as a result of the behavior of individual persons who organize themselves to satisfy their various objectives privately, as opposed to collectively. Thus, the economy and the government are parallel set of institutions, similar in many respects, and, of course, intersecting at many separate points.”

We need to underline the fact that the economy is about individual persons, their individual preferences, their individual goals and objectives. The operative word is “individual” and not some abstract collective.

The salient point in this view of individuals, the economy and government is that people choose to organize collectively to create institutions that help them achieve the goals that they set for themselves. The government is an agent of the people, who are the principals, created by the people to meet their collective goals. As the people’s agent, government is charged with a certain set of duties — and only those duties — that it must perform to the satisfaction of the people. If government fails to discharge that duty, then the people as the principals have the right to replace the government. One can think of the people as the owners of a firm, and the government as managers of the firm hired by the people.

Constitution

The “contract” between the people and government is a set of rules which specifies what the government must do, what resources are available to it to carry out those mandatory duties, and the restrictions on what the government is prohibited from doing. This contract is the “constitution.” This institution is an instrument that defines the relationship between the government and the people, and places the people as the ultimate decision makers who have effective, though indirect, control over the government.

The extended social order we call society is extended in two different senses. First of course it includes not some but all members of society. Second, it is temporally extensive. Overlapping generations of people exist in the social order. Rules that persist over time provide continuity and stability to the social order. The constitution is that set of “top-level rules of the game” that are relatively few, relatively inflexible, general and persist across generations, or periods.

The “constitutional stage” is when the top-level rules are chosen. Once the constitution is chosen, it sets the stage for many consecutive in-period games. In the post-constitutional stage, in-period rules are made which are more flexible for meeting contingencies, more particularized in their operation and less permanent than the constitutional rules. The in-period rules may change from period to period but they have to be consistent with the constitutional level rules.

Unanimity Requirement

Thus the constitutional rules define a large space (or state-space) of possibilities, and the in-period rules generate some specific outcome which identifies which of the many possibilities is actualized. As long as the constitution is based on enduring principles, the constitution does not need to be amended frequently. A constitution is also short since it lays out the foundational rules only. These are inflexible by design. Within that structure of rules, flexible in-period rules can be made as required that are designed to expire in a few years. Only the in-period rules need to be changed to meet the needs of a dynamic world.

For allocative efficiency in any collective venture, the primary condition is unanimity in agreement. If any party to an agreement does not give voluntary consent, it leads to loss of efficiency. This directly implies that the constitution — as the foundational rules — must be unanimously agreed on. To serve the “public purpose”, we first need to define what it means. For it to have any content, the purpose has to be publicly agreed upon. That is, private interests must not dictate the purpose for it to be public.

Only those rules can be included in the constitution that are agreeable to all, and not just to some majority. That means majoritarian voting is inadequate for the purposes of defining the constitutional rule. However, in-period rules can be subject to majoritarian voting (or majoritarian democracy.) These in-period rules, resulting from majoritarian democracy where 50%+1 votes legitimize them, are expected to change as the majorities shift in successive periods.

This 2-stage process of determining rules of the game — the constitutional stage that requires unanimity, and the in-period rules that require only a majority — balances stability and allocative efficiency with flexibility.

Protection of Individual Rights

The constitutional level rules include rules that guarantee and protect (in the sense that they are put beyond the reach of any group, institution, coalition or government) certain rights of individuals. Note that the individual is at the center of these guarantees, not some collective. Next, the collective agrees that there should be a government, an agency whose primary function is to protect those rights of the individual, not some subgroup or coalition of groups.

The starting point of a constitution is therefore to enumerate the rights of citizens and then outline the duty of the government duly constituted to protect those rights. This leads to the details of the structure of the government. Given this motivation for the existence of government, obviously the government has a crucial but a limited role in the extended order of society. Most critically, the constitution has to enumerate the limited powers of the government. This is so because the government is not the sovereign — the supreme ruler or ultimate power.

Types of Government

In a monarchy, the king is the sovereign. His word is the law, and he himself is above the law. In an autocracy, the dictator is the sovereign. In communism, the communist party leaders are sovereign. In a majority-rule democracy, any majority is the sovereign.

In a republic individuals elected by citizens have the power to make laws. So in a sense, we may conclude that there is “rule of law” in republics. But if the elected representatives have the freedom to make any laws that they wish, then it is not a rule of law in any meaningful way. The lawmakers make the laws that suit them, and therefore they are above the law.

If those forms of organizing society are unacceptable to all (that is, unanimously unacceptable), then we consider a constitutional republic. In a constitutional republic, the people are not the sovereign unlike in a democracy; nor are the elected representatives of the people the sovereign, unlike in a republic. In a constitutional republic, the constitution is the sovereign, and the people have the freedom to choose their representatives who are constrained by the constitution to make only those laws that is consistent with the constitution.

By design, a constitutional republic does not admit a paternalistic government. The people are presumed to be mature enough to be capable of choosing their representatives in government. They cannot therefore simultaneously be considered to be incapable of managing their day to day affairs. Most importantly, the people are presumed to make their private choices without interference by the government, however well-meaning. That is, there is no cause for government intervention into the economy.

In this conception of the government, it is not the role of the government to manage or “develop” the economy. The development of the economy emerges out of the workings of that complex of institutions that the people voluntarily create to meet their private objectives, individually and collectively.

We should note that the government cannot develop an economy for a simple reason: it is not even theoretically possible. No institution or agency can manage or control a large, modern, complex economy. Attempting to manage an economy (centralized planning) is not just futile but as has been demonstrated wherever it has been tried, to fail disastrously.

What then is the role of the government with regards to the economy? First and foremost, it has to ensure that the conditions for the efficient working of the economy are obtained. These conditions include the protection of private property, freedom to trade, freedom of individuals to contract with others, to enforce those contracts, and create a dispute resolution mechanism.

What is the role of the government with regard to the society? The first thing is to ensure the freedom of the individual. The individual in a well-ordered society has to be free from coercion from others, including coercion from the government. Is coercion ever justified? Coercion is justified only to the extent that the individuals in society freely and unanimously agree to it. This agreement will be forthcoming in case the benefits to the individuals exceed the costs.

This implies that the government may not coerce anyone to achieve some goal defined as “the public good.” The problem with “the public good” lies with its definition. There are as many definitions of “the public good” as there are people, and all of them are potentially mutually incompatible.

For anything to be “the public good”, the minimal requirement is that every member of the public agree to it. In other words, only such a thing can be considered “the public good” that enjoys unanimous consent. For someone to agree on “the public good”, clearly the private benefit of that has to exceed the private costs because only then would that someone volunteer consent. This also means that where “the public good” is defined by some private interest, then it cannot be “the public good” by definition. When private interests dictate “the public good”, it amounts to coercion which is unethical and immoral.

The most important concern in the context of “the public good” is that the government must be prohibited from defining it. That’s because “the public good” is most often abused and becomes an instrument for the government to cater to narrowly defined private interests.

Erecting a barrier between the private interests of some and what is in the interests of every individual of society is a fundamental function of the constitution. That is, the constitution has to debar the government from passing any law that discriminates among individuals. This is “the generality principle”: that all laws must be equally applicable to all, and no laws should be allowed that apply differentially to people based on some identifiable characteristics such as caste, religion, etc.

A government which has the power to make discriminatory laws is, paradoxically, a weak government. Special interests would then have the motivation to bend the government to its will. For instance, if the government could make special provisions for people of caste A, then that would mobilize caste A people to bring down the government in case their caste-related provisions are not made. But if the government is prevented by the constitution from giving special treatment to any caste, then it would be pointless to engage in the zero-sum game of seeking special treatment by anyone.

But what about “disadvantaged people?” As certain as death, the fact is that not all individuals in society are equally capable of helping themselves. Some need help in the form of charity from their fellow beings. The operative phrase is “from their fellow beings.” That does not, and should not, imply that the government has any business in making transfers to some individuals in society at the expense of other individuals. Taking from one to give to another under the threat of violence (violence is promised on those who don’t pay taxes) is not charity but coercion.

Charity, both in the case of the giver and the receiver, is a personal matter. It is a private matter because its effects are private and there are no spillovers (externalities, in other words) to uninvolved third parties. How much charity to give and to whom is as private a matter for an individual as is his choice in all his other bilateral trades. The government has no role in dictating to an individual what to trade with whom, and similarly has no role in dictating how much to give and to whom.

The constitution must prohibit the government from engaging in any form of foreign or domestic “charity”. (“Charity” because the word is rendered meaningless when violence and coercion is involved in the act, as it necessarily does when the government gets in on the act.) Certainly, privately the citizens should be free to collectively organize charitable institutions and help the needy. The government’s role is limited to, as in all other cases, the prevention of fraud and deception under the guise of charity.

The necessary corollary of this constitutional bar on government charity is that foreign “charitable organizations” should also be prohibited because no self-respecting, self-sufficient society should have to depend on the charity of foreigners.

The prohibition against the government engaging in charity derives from a general rule which applies to a range of specific cases. The rule is that third parties have no role in transactions that involve only two parties and which don’t have any spillover effects (negative or positive) on third parties. If A wants to trade with B, and the trade does not cause any harm to anyone else, then no one, especially the government, should interfere in the trade.

If it’s not the government’s role to “develop the economy”, or to “help the needy”, or to “morally improve the society”, what then is the role of the government?

That I shall take up in the part 2 of this post. Should the government run railways, airlines, hotels, hospitals, bakeries, schools, educational institutions, and produce a variety of goods and services that the economy can produce on its own? The short answer is no.

We will address those and other points in subsequent posts.