Constitutional economics

Constitutional economics is a research program in economics and constitutionalism that has been described as extending beyond the definition of 'the economic analysis of constitutional law' in explaining the choice "of alternative sets of legal-institutional-constitutional rules that constrain the choices and activities of economic and political agents." This is distinct from explaining the choices of economic and political agents within those rules, a subject of "orthodox" economics.^[1] Constitutional economics studies the "compatibility of effective economic decisions with the existing constitutional framework and the limitations or the favorable conditions created by that framework."^[2] It has been characterized as a practical approach to apply of the tools of economics to constitutional matters. ^[3] 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.

Constitutional economics takes into account the significant impacts of political economic decisions as opposed to limiting analysis to economic relationships as functions of the dynamics of distribution of “marketable” goods and services. "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".^[4]

Origins

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. McKenzie’s neologism was then adopted by another American economist – James M. Buchanan – as a name for a new academic sub-discipline. It was Buchanan’s work on this sub-discipline that in 1986 brought him the Nobel Prize in Economic Sciences for his "development of the contractual and constitutional bases for the theory of economic and political decision-making."

Buchanan rejects “any organic conception of the state as superior in wisdom, to the individuals who are its members.” This philosophical position is, in fact, the very subject matter of constitutional economics. A constitutional economics approach allows for a combined economic and constitutional analysis, helping to avoid a one-dimensional understanding. Buchanan believes that a constitution, intended for use by at least several generations of citizens, must be able to adjust itself for pragmatic economic decisions and to balance interests of the state and society against those of individuals and their constitutional rights to personal freedom and private happiness.

Buchanan introduced rich cross-disciplinary concepts of "constitutional citizenship" and "constitutional anarchy". 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 also outlines importance of protection of the moral principles underlying constitutional norms.

James Buchanan wrote "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." ^[5] 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.

Buchanan’s Nobel lecture quoted the work of the late 19th century Swedish economist Knut Wicksell, who greatly influenced Buchanan’s research: "If utility is zero for each individual member of the community, the total utility for the community cannot be other than zero". In epigraph to the chapter of Nobel lecture entitled "The Constitution of Economic Policy" Wicksell states that "whether the benefits of the proposed activity to the individual citizens would be greater than its cost to them, no one can judge this better than the individuals themselves."^[4]

There is an important opinion of Ludwig Van den Hauwe that 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”^[6].

The growing public interest in the theory and practice of constitutional economics has already spawned specialized academic periodicals, such as Constitutional Political Economy^[7] (established in 1990).

Legal approach

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 further explains that "economics may provide insight into questions that bear on the proper legal interpretation". In the end, as Judge 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."^[8]

Concurrently with the rise of academic research in the field of constitutional economics in the U.S. 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. This is a vivid example of a de facto practical application of the methodology of constitutional economics.^[9]

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."^[10]

Russian school

The Russian school of constitutional economics was created in the early twenty-first century with the idea that the 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 optimally facilitate the 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 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 mid-term) economic policy, budget legislation and administrative policies conducted by the government. In 2006, the Russian Academy of Sciences has officially recognized constitutional economics as a separate academic sub-discipline. ^[11]

Since many a country with a transitional political and economic system continues treating its constitution as an abstract legal document disengaged from the economic policy of the state, practice of constitutional economics becomes there a decisive prerequisite for democratic development of the state and society.

See also

• Arthashastra
• Civil society
• Constitutionalism
• Constitutional law
• Institutional economics
• Independence of the judiciary
• James M. Buchanan
• Justification for the state
• Law and economics
• Legal reform
• Public Interest Litigation
• New political economy
• Rule of Law

Notes

1. ^ Ludwig Van den Hauwe, 2005. "Constitutional Economics II," The Elgar Companion to Law and Economics, pp. 223-24.
2. ^ Peter Barenboim, 2001. "Constitutional Economics and the Bank of Russia," Fordham Journal of Corporate and Financial Law, 7(1), p. 160.
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. ^ ^{a b} James M. Buchanan, 1986. "The Constitution of Economic Policy," Nobel Prize lecture.
5. ^ Buchanan, J. Logical Formulations of Constitutional Liberty. Vol. 1. Indianapolis, 1999. P. 372.
6. ^ Ludwig Van den Hauwe, 2005. "Constitutional Economics II," The Elgar Companion to Law and Economics, pp. 223-24.
7. ^ http://www.springerlink.com/content/102866/?sortorder=asc&p_o=61
8. ^ Posner R., 1987. "The Constitution as an Economic Document," George Washington Law Review, 56(1), pp. 4-38. Reprinted in J. W. Ely, ed., 1997, Main Themes in the Debate over Property Rights, pp. 186-220.
9. ^ 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.
10. ^ 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]
11. ^ 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)

References

• McKenzie, Richard, ed., 1984. Constitutional Economics, Lexington, Mass.
• Backhaus, Jürgen G., ed. The Elgar Companion to Law and Economics:

Farina, Francesco, 2005. "Constitutional Economics I," pp. 184-222.

Van den Hauwe, Ludwig, 2005. "Constitutional Economics II," pp. 223-38.

• James A. Dorn, 2004. "Creating a Constitutional Order of Freedom in Emerging Market Economies," Economic Affairs, 24(3), pp. 58–63. Abstract.
• Brennan, Geoffrey and James M. Buchanan, 1985. The Reason of Rules: Constitutional Political Economy , Chicago. In The Collected Works of James M. Buchanan, Vol. 10, chapter links, Library of Economics and Liberty.
• Buchanan, James M., 1974. The Limits of Liberty: Between Anarchy and Leviathan. Chicago. In The Collected Works of James M. Buchanan, Vol. 7. Chapter links at left menu, Library of Economics and Liberty.
• _____, 1986. "The Constitution of Economic Policy," Nobel Prize lecture, reprinted in American Economic Review, 77(3), pp. 243-250.
• _____, 1987. "constitutional economics," The New Palgrave Dictionary of Economics, v. 1, pp. 585–88.
• _____, 1990a. "The Domain of Constitutional Economics," Constitutional Political Economy, 1(1), pp. 1-18. Also as at 1990b & [1].
• _____, 1990b. The Economics and the Ethics of Constitutional Order, University of Michigan Press. Description & chapter links.
• _____ and Gordon Tullock, 1962. The Calculus of Consent. University of Michigan Press. Chapter-preview links.
• Constitutional Political Economy. Description and abstract links.
• Frey, Bruno S., 1997, "A Constitution for Knaves Crowds out Civic Virtues," Economic Journal, 107(443), pp. 1043-1053.
• Hayek, Friedrich A., [1960] 2011. The Constitution of Liberty: The Definitive Edition, v. 17, The Collected Works of F A. Hayek, Chicago. Description and preview.
• _____. Law, Legislation and Liberty, Chicago:

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.

• Mueller, Dennis C., 2008. "constitutions, economic approach to,' The New Palgrave Dictionary of Economics, 2nd Edition. Abstract.
• Persson, Torsten, and Guido Tabellini, 2005. The Economic Effects of Constitutions. Description and chapter links.
• Sutter, Daniel, 1995. "Constitutional Politics within the Interest-Group Model," Constitutional Political Economy, 6(2), p p. 127-137.
• "Economics and the Rule of Law" The Economist (2008-03-13).
• Voigt, Stefan, 1997. "Positive Constitutional Economics: A Survey," Public Choice, 90(1-4), pp. 11-53.
• Hernando de Soto, "Law connects", International Bar News, December 2008