Governments and Constitutions

  • Randall G. Holcombe


The previous chapter developed a theory of rights that showed how, in an exchange setting, people would find it in their interest to claim rights and how others would find it in their interests to observe them. A structure of rights and of social interaction could thereby arise purely as a result of exchange. Even in the most primitive of societies, individual exchange accounts for only a small fraction of the rights that people can exercise. Most rights are dictated by social and governmental institutions that specify which people are entitled to what rights. These institutions are the outcome of an exchange process like that described in the previous chapter. This chapter extends the exchange model to describe how governments are established, how the rights of various individuals are determined, and how constitutions are developed as an integral part of any government.


Social Contract Exchange Model Constitutional Rule Bargaining Process Monopoly Power 
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  1. 1.
    Charles A. Beard, An Economic Interpretation of the Constitution (New York: Macmillan, 1913), argues that the U.S. Constitution was written in a manner that protected the wealth of its authors. This is much more of a direct economic motivation than the more public-spirited idea of writing a constitution to promote the wealth of nations, and Beard’s hypothesis has remained controversial.Google Scholar
  2. Robert A., McGuire and Robert L. Ohsfeldt, “Self-Interest, Agency Theory, and Voting Behavior: The Ratification of the United States Constitution,” American Economic Review 79, No. 1 (March 1989), pp. 219–234 consider this same issue.Google Scholar
  3. 2.
    Thomas Hobbes, Leviathan (New York: E.P. Dutton, 1950, orig. 1651).Google Scholar
  4. 3.
    F. A. Hayek’s discussion on the use of knowledge in society was intended to show why market economies are more productive than centrally planned economies, but Hayek’s argument applies to slave societies as well. See Hayek’s “The Use of Knowledge in Society,” American Economic Review 35, No. 4 (September 1945), pp. 519–530.Google Scholar
  5. 4.
    See Steven N. S. Cheung, “Transaction Costs, Risk Aversion, and the Choice of Contractual Arrangements,” Journal of Law & Economics 12, No. 1 (April 1969), pp. 23–42, for a discussion of the efficiency aspects of arrangements of this type.CrossRefGoogle Scholar
  6. 5.
    The resulting bargain must at least be one in which both persons gain relative to a natural distribution that would exist without the agreement. This idea of a natural distribution was developed in Winston C. Bush, “Individual Welfare in Anarchy,” Chapter 1 in Gordon Tullock, ed., Explorations in the Theory of Anarchy (Blacksburg, Va.: Center for Study of Public Choice, 1972),Google Scholar
  7. is used in James M. Buchanan’s The Limits of Liberty (Chicago: University of Chicago Press, 1975),Google Scholar
  8. and is explored in greater detail by David Gauthier, Morals By Agreement (Oxford: Clarendon Press, 1986).Google Scholar
  9. 6.
    Often, such enduring agreements are more a part of social norms than political agreement, although they still are likely to be the outcome of at least implicit agreement. How else would norms become established? See Robert Sudgen, “Spontaneous Order,” Journal of Economic Perspectives 3, No. 4 (Fall 1989), pp. 85–97,CrossRefGoogle Scholar
  10. and Jon Elster, “Social Norms and Economic Theory,” Journal of Economic Perspectives 3, No. 4 (Fall 1989), pp. 99–117, for a discussion.CrossRefGoogle Scholar
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    James M. Buchanan and Gordon Tullock, The Calculus of Consent (Ann Arbor: University of Michigan Press, 19620, and John Rawls, A Theory of Justice (Cambridge, Mass.: Belknap, 1971).Google Scholar
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    Gordon Tullock, The Social Dilemma (Blacksburg, Va.: University Publications, 1974), discusses similar issues and arrives at similar conclusions. See especially his discussion on pp. 7–8.Google Scholar
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    James S. Coleman, Foundations of Social Theory (Cambridge, Mass.: Harvard University Press, 1990), p. 53.Google Scholar
  14. 10.
    Even within societies, the strong have been able to use the threat of violence to enforce the rights to which they believed they were entitled. See, for example, E. Adamson Hoebel, The Law of Primitive Man: A Study in Comparative Legal Dynamics (Cambridge, Mass.: Harvard University Press, 1954), especially Chapter 7 and his discussion of Comanche law.Google Scholar
  15. 11.
    Robert Nozick, Anarchy, State, and Utopia (New York: Basic Books, 1974) models government as built on the natural monopoly characteristic of the production of protective services,Google Scholar
  16. but Murray Rothbard, For a New Liberty (New York: Macmillan, 1973) argues that protective services could be produced in a competitive setting.Google Scholar
  17. 12.
    Harold Demsetz, “Why Regulate Utilities?” Journal of Law & Economics 11 (1968), pp. 55–65, explains how this can be the case with utilities that produce in natural monopoly markets.CrossRefGoogle Scholar
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    This point is made in the very insightful analysis of politics by Murray Edelman, The Symbolic Uses of Politics (Urbana: University of Illinois Press, 1964).Google Scholar
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    Douglass C. North, Structure and Change in Economic History (New York: W.W. Norton & Company, 1981), and “Ideology and Political/Economic Institutions,” Cato Journal, Spring/Summer 1988, 8, 15–28.Google Scholar
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    See, for examples, James B. Kau and Paul H. Rubin, “Self-Interest, Ideology, and Logrolling in Congressional Voting,” Journal of Law & Economics 22 (October 1979), pp. 365–384,CrossRefGoogle Scholar
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  24. North’s concept of legitimacy is explored and extended by Justin Yifu Lin, “An Economic Theory of Institutional Change: Induced and Imposed Change,” Cato Journal 9, No. 1 (Spring/Summer 1989), pp. 1–33.Google Scholar
  25. 16.
    William A. Niskanen, “Conditions Affecting the Survival of Constitutional Rules,” Constitutional Political Economy 1, No. 2 (Spring/Summer 1990), pp. 53–62, discusses some conditions affecting the survival of constitutional rules, and wonders why they seem to last as long as they do. This discussion suggests that long-term stability of constitutional rules benefits those in power, at promoting at least some degree of longevity.CrossRefGoogle Scholar
  26. 17.
    R. G. Holcombe, “A Contractarian Model of the Decline in Classical Liberalism,” Public Choice 35, No. 3 (1980), pp. 260–274, discusses Buchanan’s device of renegotiation from anarchy at greater length.CrossRefGoogle Scholar
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    Robert Nozick, Anarchy, State, and Utopia (New York: Basic Books, 1974).Google Scholar
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    Charles M. Tiebout, “A Pure Theory of Local Expenditures,” Journal of Political Economy 64 (October 1956), pp. 416–424.CrossRefGoogle Scholar
  29. 24.
    Knut Wicksell, “A New Principle of Just Taxation” (1896), pp. 72–118Google Scholar
  30. in Richard A. Musgrave and Alan T. Peacock, eds., Classics in the Theory of Public Finance (New York: St. Martin’s Press, 1967).Google Scholar
  31. 25.
    Leland B. Yeager, “Rights, Contract, and Utility in Policy Analysis,” Cato Journal 5, No. 1 (Summer 1985), pp. 259–294, criticizes modern contractarians generally, and Buchanan in particular, for the use of conceptual agreement to signify agreement when actual agreement could never take place.Google Scholar
  32. 27.
    See Randall G. Holcombe, “Non-Optimal Unanimous Agreement,” Public Choice 48, No. 3 (1986), pp. 229–244, for a discussion of unanimous agreement under less-than-unanimity rule.CrossRefGoogle Scholar
  33. 30.
    Conceptual agreement in contractarian theories has been criticized by Leland B. Yeager, “Rights, Contract, and Utility in Policy Analysis,” cited above. In some societies, agreement may have been more direct. For example, Harold J. Berman, Law and Revolution: The Formation of the Western Legal Tradition (Cambridge: Harvard University Press, 1983) suggests that in cities formed in Europe in the 1050–1150 time period, it was common for all residents to collectively affirm their agreement with the city rules.Google Scholar
  34. 31.
    William A. Niskanen, in several works, modeled bureaucratic output as the result of a bargaining process between a bureau and its sponsor. See “The Peculiar Economics of Bureaucracy,” American Economic Review 58 (May 1968), pp. 293–305, Bureaucracy and Representative Government (Chicago and New York: Aldine-Atherton, 1971), and “Bureaucrats and Politicians,” Journal of Law & Economics 18 (December 1975), pp. 617–643. While it is a different bargain, the modelling philosophy of this chapter is the same.Google Scholar
  35. 33.
    Increasing government monopoly power as a result of increased security of incumbents is discussed by Randall G. Holcombe and James D. Gwartney, “Political Parties and the Legislative Principal-Agent Relationship,” Journal of Institutional and Theoretical Economics 145, No. 4 (December 1989), pp. 669–675.Google Scholar
  36. 34.
    Randolph S. Bourne, War and the Intellectuals (New York: Harper & Row, 1964), called war the health of the state.Google Scholar

Copyright information

© Randall G. Holcombe 1994

Authors and Affiliations

  • Randall G. Holcombe
    • 1
  1. 1.Florida State UniversityTallahasseeUSA

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