Monday, January 14, 2013

'Could these rules have emerged from agreement by participants in an authentic constitutional convention?'

That question is quoted from the 1986 Nobel Prize Lecture of James Buchanan. It is standard practice on this blog for entries to take the form of questions and answers, but this is the first time my question is a quote.

James Buchanan, an outstanding economist, died last week. There have been many tributes published, some of which are included in a collection published by Alex Tabarrok on Marginal Revolution.

Buchanan emphasized the importance of asking the right questions. He implied that economists were answering the wrong questions when they recommended what policy reforms should or should not be made without considering the preferences of citizens as revealed through political processes.

What did Buchanan mean by 'agreement by participants in an authentic constitutional convention'? The convention is a thought experiment. Its focus is on reforming the rules of the game in ways that are in the potential interest of all players. Agreement implies unanimity – the participants perceive that the rules further their interests. Participants expect the constitutional rules to be in place for a long time, so they are placed behind 'a veil of uncertainty' as to their own predicted interests. Constitutional rules have to be workable in a political system in which the players have the interests and frailties of ordinary humans.

In the prize lecture Buchanan asked a question which is unfortunately just as relevant now as when he asked it. He asked whether the debt-financing regimes of modern Western democratic polities could have emerged from agreement by participants in an authentic constitutional convention. His answer:
'It is almost impossible to construct a contractual calculus in which representative of separate generations would agree to allow majorities in a single generation to finance currently enjoyed public consumption through the issue of public debt that insures the imposition of utility losses on later generations of taxpayers'.
On that basis, Australian economists should not complain too loudly that our politicians have tended to be somewhat obsessed over the last year or so with moving government budgets back to balance. An authentic constitutional convention might see the simplicity of a balanced budget rule as having a lot of merit in helping politicians to resist temptation.

 I had forgotten, until a few days ago, that James Buchanan and Gordon Tulloch (B&T) had written about the concept of 'the good society' in the final chapter of The Calculus of Consent (first published in 1958). I was particularly interested to re-read what they had written in the light of discussion of 'the good society' on this blog and in Free to Flourish.

B&T's starting point is that widespread acceptance of moral principles that are necessary for harmonious social life does not guarantee that individuals will not behave badly to gain unfair advantage over others. They then ask:
'Should the social order be organized to allow moral deviants to gain at the expense of their fellows? Or instead, should the institutional arrangements be constructed in such a way that the "immoral" actor can gain little if at all, by his departure from everyday standards of behaviour?'
The answer they provide is that the relevant choice among institutions is that of 'selecting that set which effectively minimizes the costs (maximizes the benefits) of living in association'. In the political arena, as in other aspects of life, rules of the game need to take account of the potential for the players to attempt to exploit one another by diverging from accepted standards of moral behaviour.

The question which Buchanan asked at the end of his Nobel lecture defines the continuing question of social order. It should be an inspiration to everyone:
'How can we live together in peace, prosperity, and harmony, while retaining our liberties as autonomous individuals who can, and must, create our own values?'

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