The Limits of Liberty: Between Anarchy and Leviathan

James M. Buchanan.
Buchanan, James M.
(1919- )
Display paragraphs in this book containing:
First Pub. Date
Indianapolis, IN: Liberty Fund, Inc.
Pub. Date
Foreword by Hartmut Kliemt.

Chapter 3Postconstitutional Contract:
The Theory of Public Goods


In this chapter I shall discuss in more detail the 3b category in the conceptual schemata. This category includes the many-party agreements, the genuine "social contracts," that may take place after (1) individual rights are assigned in constitutional contract, and (2) all gains-from-trade in strictly private or partitionable goods are realized. The analysis may be summarized under the rubric "theory of public goods" defined in an inclusive sense. The basic analytical material is familiar to modern economists, but the setting for the discussion may be sufficiently novel as to warrant further consideration.


I have modified the logical order suggested by the schemata itself. This would place conceptual constitutional contract which embodies the definition and assignment of individual rights ahead of and prior to postconstitutional contract, which embodies trade among persons in both private and public goods after rights have been defined and mutually accepted. I have reversed the order of analysis for didactic purposes. The theory of postconstitutional contracting and exchanging, whether this be the theory of trade in private goods (the domain of orthodox microeconomic theory) or the theory of trade in public goods, is less complex than that of constitutional contract. Indeed it is largely because the complexities of the latter are ignored or assumed away that we are able to develop sophisticated and rigorous analyses of the second set of personal interactions.


Except for an introductory paragraph in the following section, I am also neglecting the most important category of postconstitutional contract itself, the exchange of private or partitionable goods and services. In part this omission stems from the familiarity of this theory. But, more importantly, this apparent gap in the treatment is justified by my larger purpose in this book. The orthodox theory of exchange in private goods is not itself the source of major confusion about the role of the state. The same cannot be said of the complementary theory of public goods.


As an additional limitation, the emphasis will be on postconstitutional "social contracting" in its purest form. I shall not treat the interesting analytical and practical issues that arise when consumption jointness and/or nonexclusion efficiencies suggest many-party bargains over groups that are smaller than the membership of the total community, a membership which is assumed to be set exogenously.*35 That is to say, neither fiscal federalism nor the theory of clubs will be examined.*36 Discussion of these issues, intrinsically interesting as they are, would distract attention from those problems in many-person social contract which I want to discuss in this book.


In this chapter I shall continue to work within what is essentially a timeless model; contracts are assumed to be immediately carried out, and by the same persons who enter the agreement.

Market Failure and the Free-Rider Problem


If individual rights are well defined and mutually accepted by all parties, persons will be motivated voluntarily to initiate trades in partitionable goods and services, those that are characterized by full or quasi-full divisibility among separate persons or small groups. That is to say, markets will emerge more or less spontaneously out of the self-interested behavior of individuals, and the results will be beneficial to all members of the community. The potential gains-from-trade will be fully exploited, and all persons will be better off than they would have been by remaining in their initial postconstitutional positions, with well-defined endowments and capacities imbedded in a structure of legally binding human and property rights. The genius of the eighteenth-century moral philosophers (notably Mandeville, Hume, and Smith) lay in their discovery and application of this simple principle, which has been variously elaborated in modern economic theory, the principle which, directly or indirectly, served as the basis for organizing the institutions responsible for post-Enlightenment economic progress in the Western world.


A critical feature of the spontaneous and efficient order of markets is the two-party contractual setting which serves to reduce agreement or transactions costs to minimal levels. Trades are consummated when terms are established, and only two persons need agree explicitly. Furthermore, the fact that two-party exchanges are linked in a network of alternative options facilitates rather than retards agreement on terms. Increased numbers multiply the potential alternatives available to individual buyers and sellers and narrow the ranges of dispute inside particular exchanges and between specific trading partners.*37


The thrust of the modern theory of public or collective-consumption goods is the demonstration that markets fail to emerge and to produce tolerably efficient results when potential contracts require the simultaneous agreement of many parties. Neither of the efficiency-generating elements of private-goods markets is present in the pure public-goods model. Agreement or transactions costs are much higher because of the large number of persons who must be brought into the same bargain or exchange. And this inclusiveness itself tends to eliminate potential alternatives for participants, alternatives which narrow the range over which terms of trade might settle. The basic behavioral contrast between private-goods exchange and public-goods exchange is often pointed up by reference to the "free-rider problem" in the latter, although this terminology is itself somewhat misleading.


In a simple two-party trade in divisible goods, each participant is aware that the behavior of his trading partner is directly dependent on his own action. If you have oranges and I have apples, and I want some of your oranges, I know that my desires can be met only by giving up apples, by paying some price. I can scarcely expect you to offer me oranges independent of my own behavior, nor could I expect to pick up the oranges without you invoking rights of proprietorship. If I try this, or try to renege on a contract that I have made, I cannot expect to escape the costs that result from a breakdown in exchange. There is no way I can expect to get the oranges without cost. The behavioral setting for exchange or contract in indivisible or public goods is dramatically different. Suppose that many persons (1, 2, ..., n) want something done, some "good" that is completely nonrival in usage. David Hume's example of the drainage of the village meadow is illustrative.*38 Suppose that each of the many villagers knows that the drainage would prove beneficial to him personally if the costs were shared equally among all members of the group. Even more desirable for an individual, however, would be the situation in which the meadow is drained by others, allowing the individual to escape without making any contribution. Each person will be motivated to refrain from voluntary initiation of action here to the extent that he expects his own behavior to be independent of that of other participants in the potential social interaction.


Each person has an incentive, therefore, to try to become a "free rider," one who secures the benefits of the jointly consumed good or service without participating fully in the sharing of its costs. As noted above, this "free-rider" terminology is somewhat misleading in that it suggests strategic behavior on the part of the individual participant. Strategic behavior designed to conceal from others the individual's true preferences for the public good will take place, however, only if the group is itself small and if the individual recognizes that his own behavior can affect others. With large numbers, the behavioral setting is quite different, although the results are similar. Here the individual participant does not behave strategically vis-à-vis his fellows; he treats their behavior as a part of his environment, and he does not consider that his own action can exert any influence on that of others in the sharing group. In this setting, the individual maximizes his utility by refraining from making an independent contribution toward the provision and the financing of the commonly shared good or service. In either case, some of the potential gains-from-trade that are available to all members of the group will not emerge spontaneously, even if individual initial rights are well defined and enforced. Exchanges in genuinely public goods will not be consummated voluntarily in the same institutional framework that facilitates exchanges in private goods.*39

Exchange and Unanimity


Ordinary exchanges in private goods can be described as taking place under implicit unanimity. That is to say, if a buyer and a seller agree on terms, an exchange takes place and all members of the community outside this two-party relationship acquiesce in the outcome. Explicit agreement is not required on the part of these outsiders, and if any of this group should have desired to interfere with any observed exchange, he had the option of offering more favorable terms to either buyer or seller. So long as the spillover or external effects produced by the exchange are not significant, two-party trading under such implicit unanimity satisfies criteria for efficiency.*40 If, however, the characteristics of the goods are such that all members must participate explicitly in efficient sharing arrangements, the unanimity required becomes much more formidable. All persons must explicitly agree on the trading terms. Efficiency may require that the whole collectivity of persons be organized as an inclusive unit for implementing public-goods exchanges.


Knut Wicksell was the first scholar to recognize that a rule of unanimity for reaching collective decisions provides the institutional analogue to two-person trade in strictly private or partitionable goods.*41 The inclusive coalition of traders that is required to exploit fully all potential surplus will not, however, emerge naturally or spontaneously from the private, utility-maximizing behavior of persons who find themselves in a pure public-goods interaction. This remains true even if we ignore the agreement-transactions costs reflected in higgling over terms of trade. A "natural equilibrium" in which some coalition of persons provides some of the public good and in which some other members of the community remain outside as free riders may emerge spontaneously in particular instances, but these results will tend to be inefficient. Careful analysis suggests that if efficiency criteria are to be met, some "social contract" among all persons must be made, a contract that requires all members of the community to participate in collective decisions which are, in turn, made under a unanimity rule. There is an apparent paradox here worth noting. A rule of unanimity will insure to each individual that he will not be harmed or damaged by collective action. But individuals, until and unless they are specifically organized under a "social contract" like that indicated, will not, privately and independently, attain efficient outcomes through voluntary trades or exchanges.


This poses a question of some importance for my discussion. Does a "social contract" in which all members of the community agree to make all collective choices relating to the provision and cost-sharing of a purely public good embody coercion as meaningfully defined? Ex ante, each participant knows that he will secure gains under such a contract, gains over and beyond those secured when none of the pure public good is provided. Recalcitrant members of the community may, however, expect to be able to secure differentially larger gains by remaining outside of the possible cost-sharing coalitions that would emerge to provide some of the jointly consumed good. Since, by our assumptions, Pareto optimality or efficiency is not attained until all persons are brought into the trading arrangements, there must exist mutual gains-from-trade as between potential cost-sharers and any potential free riders in this "social contract" sense. Hence, it would seem that an agreement to join a collectivity that would make its decisions only under a rule of unanimity could be reached noncoercively. Such an agreement might require, however, that certain members of the group be allowed differentially higher gains solely because of their unwillingness to cooperate. On the other hand, if this sort of differential treatment is granted, it might, in its turn, prove unacceptable to persons who would otherwise voluntarily agree to the contract. The basic principle of collective political order, that of equal treatment, would be violated at the outset. Paradoxical as it might seem, the conclusion must be that an all-inclusive collectivity could scarcely be organized voluntarily, even one that is severely limited to some required adherence to a rule of unanimity in making all collective choices.*42

Unanimity, Voluntarism, and Exclusion


This result is modified if exclusion can be implemented. If those persons who do not choose to join in collective arrangements under which all cost-sharing decisions are to be made unanimously (surely a minimal set of requirements) can be excluded from any enjoyment of the subsequent benefits of public-goods provision, Pareto optimality or efficiency will tend to be attained voluntarily even in the pure public-goods case. Sharing arrangements will tend to emerge in which all persons will participate.*43 Potential free riders will not exist since each person will recognize that, should he refuse to participate, he will be wholly excluded from the enjoyment of public-goods benefits, benefits that he evaluates positively. Exclusion, as such, might never be observed in such a setting since the certainty of being excluded if they stayed outside would motivate all persons to join in the basic contract. Exclusion, if practiced, may in some cases be extremely costly to those in the sharing group, and in the case of a good that exhibits no rivalry in consumption or use, exclusion is always resource wasteful. Nonetheless, to the extent that the power to exclude and the willingness to exclude are known to exist, the sort of inefficiency generated by free-rider behavior will rarely, if ever, occur.*44


More important for my discussion, however, is the problem of reconciling a power of exclusion, regardless of cost, with the assumption that individuals' rights have been assigned, rights which are well defined and are mutually accepted by all parties. If we shift to the orthodox economist's model here and specify these in strict commodity dimensions, representing property rights as individualized claims to stocks of resources and final goods, complexities arise. Suppose that, in a community of n persons, n - 1 of them express a willingness to enter a binding contractual agreement to participate in sharing arrangements for the provision of a purely public good, with decisions as to quantity and cost shares to be made only under a rule of unanimity. When implemented, this would involve each of the n - 1 persons giving up some share of his initial endowment or stock in "exchange" for the expected return flow of public-goods benefits. But what about the nth person who refuses to enter the contract? We have implicitly presumed that, initially, he is a "member of the community," but we have not specified just what such membership means. Exclusion from enjoying the benefits of the public good must involve complete or partial expulsion from the community, as such. But this act seems inconsistent with the assignment of rights in basic constitutional contract, the assignment that defines an individual in terms of his initial endowments and entitlements which, presumably, incorporate physical location in a geographic community along with "social" location in a community which has adopted certain generalized rights of citizenship. Exclusion from the enjoyment of the public good may involve coercive intrusion into an individual's rights, defined independently of the public-goods decision.


There are two avenues of escape from this logical difficulty. We can either (1) reject the logical possibility of genuine social contract, even at the postconstitutional stage, while continuing to define individual rights in the manner suggested, or (2) redefine the assignment of rights in constitutional contract so as to embody exclusion. As the discussion indicates, the latter course offers a more explanatory model for exploring the complex issues of social order. Specifically, I propose that the initial assignment of individual rights emerging out of some prior constitutional contract embodies sets of personal claims to physically defined resource endowments (human and nonhuman) along with claims to share generalized rights of citizenship, limited or constrained by the minimal negation of such claims as may be required to implement exclusion from the benefits of public-goods provision upon the expressed unwillingness of claimants to participate in the postconstitutional contract under an effective rule of unanimity. Put somewhat more simply, this means that membership in a community is defined so as to compel participation in the genuine postconstitutional contracting for public goods, provided that an effective rule of unanimity is insured. Compulsion takes the form of exclusion from public-goods benefits, exclusion that may, if necessary, require the negation of specific "private ownership" claims.*45


This setting allows us to analyze postconstitutional contract in a fully voluntaristic model. The individual, as such, is defined in terms of the rights assigned to him in constitutional contract. These include a specific imputation of initial endowments along with membership in a collective unit that makes decisions in accordance with a unanimity rule. The individual possesses no right to withdraw from the collectivity; to do so violates the constitutional contract just as clearly as the physical taking of endowments or goods that are assigned to other persons. Admittedly, this is a highly abstract and unrealistic construction, but it is necessary in order to develop the more realistic constructions to follow. The model suggests that, even when we restrict decision-making by a rule of unanimity, a collectivity, a state, must be an explicit element of and emerge out of constitutional contract. The inclusive exchanges in purely public goods that efficiency dictates will not necessarily emerge voluntarily from the behavior of individuals, each of whom is defined only in terms of initial endowments.


If, however, we make membership in an explicitly organized political entity an inherent component of each individual's rights, and if we restrict decision-making of this unit by a rule of unanimity, we can discuss all-inclusive, many-party exchange in public goods in voluntaristic terms, analogous to the two-party exchanges in private or partitionable goods implemented through market processes. As Wicksell recognized, the rule of unanimity offers the only ultimate test for efficiency in many-party exchanges, efficiency being measured by individualistic criteria. Or, to put this differently, any multiparty exchange that captures potentially realizable surplus can conceptually secure the unanimous approval of all participants. (In positive-sum games, all players can gain.) To get this result, however, individuals' incentives to invest in pure distributional gains must, somehow, be reduced or eliminated. A rule of unanimity provides each and every participant with a veto over final outcomes; it places each person in a position where he can bargain bilaterally with all others, treated as a unit. Because of this feature, the costs of agreement under a unanimity rule may be extremely high or even prohibitive. Recognizing this, Wicksell himself was willing to propose a qualified unanimity rule, by which he meant something like five-sixths of the total membership (or their representatives) for fiscal choice-making.

Individual Rights under Nonunanimity Rules


On grounds of institutional efficiency, departure from unanimity in the reaching of collective decisions seems necessary. Nonetheless, the importance of this change in any derivation of any postconstitutional "social contract" should be stressed. In The Calculus of Consent, Gordon Tullock and I analyzed the choice faced by an individual at the stage of constitutional contract on the presumption that his own cost-benefit position in subsequent decisions is unpredictable. We derived a logical basis for the adoption of less-than-unanimity rules, although we did not present arguments for any specific one among a large set of alternatives.*46 Indeed, one of our subsidiary purposes was to demonstrate that there is nothing unique about majority rule, the single alternative that is most often associated with nonunanimous collective action. But the problem of determining the rule to be chosen for postconstitutional collective choice is not my concern at this point. For present purposes, we may assume that any less-than-unanimity rule has been adopted, and we may use simple majority voting as illustrative. This rule is, presumably, chosen as one part of the more inclusive constitutional contract that defines the whole set of individuals' rights. My concern is the reconciliation of this majority rule with the multiparty exchange concept. What are individual "rights" in this setting? Can we discuss collective choice in terms analogous to voluntaristic exchanges in private goods? Is it necessary to analyze collective decisions in a framework that is entirely different from that which is applicable for unanimity rule?


Under a unanimity rule, decisions if made at all are guaranteed to be efficient, at least in the anticipated sense. Individual agreement signals individual expectation that benefits exceed costs, evaluated in personal utility dimensions, which may or may not incorporate narrowly defined self-interest. With a purely public good, the individually secured benefits, as evaluated, must exceed the individually agreed-on share of costs, measured in foregone opportunities to secure private goods. From an initial imputation of endowments or goods, the multiparty exchange embodied in public-goods provision moves each individual to a final imputation, which includes public goods, that is evaluated more highly in utility terms. Each person in the collectivity moves to a higher position on his own utility surface, or thinks that he will do so, as a result of the public-goods decision reached by unanimous agreement.


No such results are guaranteed when collective decisions are made under less-than-unanimity rules. Under simple majority voting, for example, a person may find that a majority decision for public-goods provision shifts him to a lower rather than a higher position on his utility surface. What are his "rights" in such a postconstitutional change? It would seem that, for the person in question, this sort of change could hardly be called a "contract." Goods that he values are taken from him against his expressed desire. Coercion is apparently exercised upon him in the same way as that exerted by the thug who takes his wallet in Central Park. This manner of speaking is commonplace, but it tends to obscure much that requires careful analysis. The thief takes the victim's wallet. We should agree that genuine coercion is involved here because the victim, the thief, and external parties agree and accept the property rights. The wallet was the victim's by right of assigned and acknowledged ownership. Is this comparable to the situation of the citizen who finds that he must, on fear of punishment, pay taxes for public goods in excess of the amounts that he might voluntarily contribute? Is the collectivity, acting as directed by the effective decision-making coalition authorized in the conceptual constitutional contract, analogous to the thief? There is no question but that the collectivity is perceived in this image by many persons, and not only by those whose utilities may be directly reduced at a particular point in time.


This is one of the major sources of confusion in modern discussion of social policy, and it is related to a paradox of government that we shall examine in more detail in Chapter 6. If, as we have postulated, individual rights are defined as rights to do things with respect to some initial set of endowments or goods, along with membership in a collectivity that is empowered to act by less-than-unanimity rules, and, further, if these rights should be mutually accepted, it becomes inconsistent and self-contradictory for a person to claim that his "rights" are violated in the mere working out of the collective decision rules that are constitutionally authorized. At this point it is worth recalling once again that the analysis remains timeless. We are assuming that the same persons participate in the conceptual constitutional contract and in postconstitutional adjustments. From this it follows that, if a constitutional contract is made that defines separate persons in terms of property rights, and if these rights are widely understood to include membership in a polity that is authorized to make collective decisions by less-than-unanimity rules, each person must have, at this prior stage, accepted the limitations on his own rights that this decision process might produce. (Note that this statement need not imply that the prior constitutional contract was itself optimal or efficient. Note further that the justice or injustice of this contract is irrelevant here.)


To clarify the analysis, it will be helpful to distinguish two institutional structures of departure from a unanimity rule for collective action. In the first, collective decisions are made by less than full agreement of all members of the community, but these rules are externally constrained so as to guarantee outcomes that might, conceptually, have been attained under unanimity, without bargaining or agreement difficulties. That is to say, outcomes generated by collective choices must dominate the prechoice positions for all members of the community, evaluated in a utility dimension. In this restricted framework, it seems legitimate to refer to collective action as indirect contract or exchange. The decision rule embodying less than full agreement is necessary to avoid the behavioral effects of a unanimity rule, but the intent of the substitute rule is to accomplish essentially similar purposes. Even if an individual might have chosen differently from that outcome which the substitute rule produces, he has made a net improvement in his utility through participation in the collectivity. As later discussion will suggest, this restricted departure from unanimity is not without real-world application.


In the second set of institutions to be examined, collective decision rules are unconstrained, and when unanimity is dropped an individual may find himself actually suffering net utility losses from "participating." That is to say, he may end up at a lower utility level than he might have been able to sustain in the complete absence of collective action. (Recall that we are continuing to assume that there has been mutual acceptance of initially defined rights to endowments.) It would seem to be an improper use of language to call this process "contractual." In this case, collective action may seem to an individual to be equivalent to that taken by the thug in the park, or worse. Even here, however, care must be taken to specify just what protections the constitutional contract offers the individual against exploitative collective or government decisions. If the constitution embodies unconstrained collective action under less-than-unanimity rules, the individual does not really "own" the initial endowments or stocks in a manner at all analogous to "ownership" under the contrasting institutional structure. "Private ownership" takes on a wholly different meaning in this setting, a meaning that must be explored in considerable detail. Before such exploration, however, it will be useful to present the alternative structure somewhat more systematically.*47

Indirect contract under less-than-unanimity decision rules


Figure 3.1.  Click to open in new window.
Figure 3.1

We may discuss the first of the two alternatives with the aid of a simple two-person model and a single diagram. In figure 3.1 we measure the utility of one person, A, on the ordinate, and the utility of the other person, B, on the abscissa. (The construction is similar to that of fig. 2.2, chap. 2 above.) The utility attained by each person from the establishment of constitutional contract is shown at C. Trade between the two persons in divisible or private goods shifts the position to E. There remain, however, further gains-from-trade to be secured from the provision of a good that is consumed jointly. (The two-person model here is treated as being analogous to a many-person model; in an actual two-person interaction, few problems would arise in reaching agreement on joint or collective sharing.) If the group can attain agreement under a unanimity rule, this insures that a final outcome will be contained in the northeast quadrant from E, the area bounded by the dotted lines extending from E. In our extension to the many-person world, however, we have assumed that an effective unanimity rule is unworkable and that some less-than-unanimity variant is adopted constitutionally. In the two-person illustration, this means that decisions for the group will be made by either one or the other of the two persons, by either A or B, and independently of the preferences of the other.


Figure 3.2.  Click to open in new window.
Figure 3.2

We assume that collective decisions are limited to the purchase, provision, and financing of a single purely public good. Note that this assumption, in itself, severely constrains the set of outcomes that are possible. At best, the single ruler could impose all costs of the good on his cohort while providing the good out to his own satiety levels. This constraint alone would not, however, normally be sufficient to insure that outcomes fall within the indirect exchange area bounded by the dotted lines of figure 3.1. As a further constraint, let us assume that the basic constitutional contract also specifies a taxing institution. That is to say, there exist constitutional requirements that the single public good must be financed from a specific tax structure. We might select any one of the familiar patterns of taxation such as equal-per-head charges, proportional taxes on incomes, progressive taxes on incomes, or others. In this setting, if the tax institution is properly chosen, the results generated under one-man rule may be beneficial, in the net, to both persons. Ideally, choice of the tax structure could make the collective decision rule irrelevant since all rules would produce the same outcome.*48 The ideal tax could not, of course, be selected at the constitutional level. But with some practicable choice of tax structure along with the limitation of collective action to the provision of genuine public goods, we might plausibly predict that outcomes would be bounded within the Pareto-superior area. Consider, as a supplement to figure 3.1, the demand patterns shown in figure 3.2, and suppose that equal-per-head taxes are required. If individual A is the ruler, he will choose a quantity Qa; if individual B is the ruler, he will choose Qb. Note that, in each case, the nonruler will still be enjoying a net fiscal surplus from participating in the public-goods arrangement. We might depict these separate outcomes in figure 3.1 as positions A* and B* respectively. Note that both fall well within the boundaries of the Pareto-superior set.


This means that either A* or B* could conceptually have been achieved from the working of a unanimity rule, given the chance pattern of bargaining toward solution that might have generated such outcomes. Given the tax institution postulated, the nonruler, B, will not be satisfied at A*, or Qa. He will not be in full marginal adjustment with respect to public-goods quantity and tax-price. If he should be made ruler, he would prefer to shift to B*, and Qb. He will, therefore, be "unhappy" with the tax-budgetary decision imposed on him by A through the solution at A*. The same results would apply conversely to A if he should be the nonruler.


Differing constraints will, of course, generate different results, even under identical decision rules. Assume now that A remains the collective decision-maker, but that instead of head taxes, proportional income taxes are required. Furthermore, assume that B has a higher income than A, as indicated by the positions of DA and DB in figure 3.2. This tax will tend to reduce the quantity of good preferred by B and to increase that preferred by A. Under this scheme of taxation, individual A might optimally choose Q*a and individual B might choose Q*b. The utility positions attained under the alternative single-man rule are shown as A** and B** in figure 3.1. As depicted, both remain within the Pareto-superior region with relation to the initial position, E. This example suggests that there may exist a whole set of tax and budgetary institutions, or, more generally, constitutional constraints on fiscal process, which will insure that nonunanimity rules operate effectively as instruments to produce what we have called "indirect exchange" among individuals for purely public goods.


It is important to recognize both the purpose and the limits of the constitutional constraints that may be imposed on the operation of nonunanimity rules for collective decision-making at the postconstitutional stage of social interaction. To remain within what we may call broad contractual bounds, individuals must be assured that, in the net, operational politics will produce for them benefits rather than damages. There is nothing in the public-goods "exchange structure," however, that dictates uniqueness in the distribution of the gains-from-trade, nothing analogous to the unique distribution of the comparable net realizable surplus in private-goods trade, no unique price vector emergent from idealized recontracting. For this reason, there may be considerable variation in political-institutional structure, in rules, without forcing results out of the bounds of mutuality of benefits among all parties. In game-theoretic parlance, the core of the public-goods game is considerably more inclusive than that in the private-goods game.*49


In a regime with perfect side payments and zero transactions costs, a unique allocative result for the provision of a purely public good will be generated only if income-effect feedbacks are neglected or absent. However, any allocative result achieved may, itself, be attained from any one of a whole set of distributive patterns. An allocative result requires that marginal prices confronted by separate participants stand in some specific relation one to another. There is no comparable relationship among average prices. The relatively loose restrictions imposed by the "indirect exchange" constraints require only that all persons secure net benefits. In the more general setting where side payments are costly, the constraints also allow for considerable departures from the attainment of idealized allocative efficiency. The necessary condition is only that public-goods exchange, conceived as a game, be positive sum for all participants. There is no necessity that aggregate payoffs be maximized. To the extent that total payoffs may be influenced by the rules, one criterion of adjustment at the constitutional stage becomes that of predicted allocative efficiency. But, as we shall suggest, this criterion may well be dominated by distributive norms.

Unconstrained departures from unanimity rules


A categorically different model is introduced when collective decisions can be taken under nonunanimity rules with no constitutional limits or constraints. Recall that our basic schemata includes a conceptual separation between the stage of constitutional contract, at which individual rights are defined and collective decision rules are made, and postconstitutional contract, at which trades or exchanges take place among persons whose rights to carry out activities and to dispose of things are defined in the prior stage. This schemata allows us to discuss market process, private-goods trade, and those political processes that embody public-goods "exchanges" in the postconstitutional stage. We have incorporated the "indirect exchanges" that take place under constrained nonunanimity rules for collective choice. If, however, the delineation of rights in the constitutional stage allows the collectivity, the state, to make decisions on any less-than-unanimity rule without constraint, the proposed schemata appears to involve an internal contradiction. In the two-person example, we could scarcely argue that B's rights are defined in some prior stage if A's rights are all-inclusive and unrestricted. The model emphasizes the necessity of defining the "rights" or limits of the decision-maker for the collectivity as well as those of the separate persons within it. So long as the collectivity's actions are constrained as noted above, we are able to talk as if the contracting parties in postconstitutional negotiations are individual citizens. Although vastly more complex, political process becomes analogous to market process. But we are no longer able to think in such terms when all shackles are removed from collective action.


An attempt might be made to get out of the apparent contradiction here by resort to "probabilistic rights."*50 That is to say, we might consider that human and nonhuman rights are defined in the constitution subject to the actions to be taken by an unconstrained collectivity, operating under any of a large subset of specified nonunanimity rules for decision, ranging from the near-unanimity of a Wicksellian qualified majority, through simple majority voting, to one-man dictatorship. The value of any individual's actual claim over "goods," including over life itself, might then be represented by some "expected value," determined by the descriptive characteristics of the decision rule in being, by the social history of the collectivity, by the value of the nominal claim, and by the probability that this claim will be changed, upward or downward, by imposed action taken in the name of state or collective authority.


Consider, for example, the position of a person who, in nominal terms, has been assigned command over a relatively large share of "goods" in the community, but who holds membership in a collectivity that makes decisions on the basis of simple majority voting, without explicit or traditional constitutional constraints. In this setting, the probability of the person in question being able to retain the full nominal value of his "goods," as assigned, or to improve this by participating in public-goods trade, might be low. He should find it possible to compute some plausibly realistic "expected value" for his nominal claims. The question is whether this value might offer a basis for both private- and public-goods trades or exchanges. To the extent that trades can take place in terms of such expected values, it seems evident that risk elements will necessarily dampen pressures toward efficiency. A more fundamental problem arises, however, concerning the nominally assigned claims upon which such expected values might be computed. If the contractual setting is literally applied, why should a person have accepted the unconstrained collectivity in juxtaposition with his relatively favorable set of nominal rights? Even conceptually, why should he have ever acquiesced in the assignment of unlimited rights to the collectivity? These issues force us back into a discussion of constitutional contract itself which we have tried to relegate to a subsequent chapter. But a provisional answer may be advanced here. If an individual acknowledges the existence of an unconstrained collectivity that reduces the expected value of his net claims, he should rationally have preferred some initially defined constitutional reduction in his nominal claims along with an accompanying restriction on collective action. Similarly, if another person finds that the expected value of his net claims, under the operation of unconstrained collective action, exceeds that measured by the nominal value of his assignment, he should prefer a somewhat larger nominal assignment along with imposed limits on the collectivity. For both persons, uncertainty is reduced by restrictions on state action.


This would provide a logical basis for the imposition of constraints on the collectivity, as an acting unit, even if institutional necessity requires that this unit act independently from individual efforts. An additional basis for constitutional constraints on collective action is provided when it is recognized that, if there are no constraints, individuals have a stronger incentive to invest resources in attempts to secure control over collective decisions. Control over the collective decision-making apparatus becomes the instrument for securing the winnings of a zero-sum component of the game of politics. And, for the community in total, all resources invested in gaining this control are wasted. Incentives to gain control over the collective decision-making machinery are not, of course, wholly absent in the fully constrained model. As the simple diagram in figure 3.1 shows, it does make some difference in utility terms whether A or B is the effective decision-taker for the community. In the unconstrained model, however, individual A might look on the prospects of reaching some position like Au that would result from his gaining control over the decision-making for the collectivity, while B might be similarly attracted by the prospects of moving to Bu if he successfully seizes the reins of government. It is clear that the incentives to invest resources in "politics" become dimensionally larger in the unconstrained than in the constrained model.


Corollary to this is the motivation for persons who control collective decision-making to use this means of generating directly enjoyable and divisible private and partitionable goods rather than producing genuine public goods which benefit all persons in the community. In a constitutionally unconstrained collectivity, it seems likely that net wealth and income transfers would bulk much larger in governmental action than they would in constrained constitutional regimes. The use of tax revenues collected from those who are the "outs" to finance Swiss bank accounts for the "ins" is the familiar real-world example.


In a sense, the analysis of unconstrained collective action under nonunanimity decision-making brings us full circle. The very purpose, in the larger "social" meaning, of defining rights in constitutional contract is to facilitate orderly anarchy, to provide the basis upon which individuals can initiate and implement trades and exchanges both of simple and complex forms. Having defined and accepted a structure of rights, individuals can reduce their own investment in defense and predation and go about their business of increasing utility levels through freely negotiated dealings with each other. To the extent that collective action is allowed to break beyond the boundaries imposed by the mutuality of gains from exchange, both direct and indirect, the community has taken a major step backward into the anarchistic jungle or has failed to take the major step from this jungle in the first place.


The operation of an unconstrained collectivity could scarcely emerge from rational constitutional contracting among persons. Historically, an explicit stage of constitutional contracting may never have existed; the structure of rights may have emerged in an evolutionary process characterized by an absence of conscious agreement. From this setting, the apparent contradiction may be generated. More important for my purposes, even if something akin to an initial contract may have settled the structure of individual and collective rights, this structure may be eroded over time. Although once constrained, the powers of the collectivity may gradually be expanded so as to become, for all practical purposes, unlimited. As we have noted earlier, the contractual models are not designed to be historically descriptive. They are, instead, designed to assist in the development of criteria with which existing political-legal systems may be evaluated. In this context, empirical evidence that the collectivity as it exists is unconstrained suggests the hypothesis that general agreement could be attained for genuine constitutional revision.


The analysis in this chapter, and elsewhere, is derived from the basic norms of individualism discussed in Chapter 1. The position taken here stands in apparent opposition to the allegedly "positivist" view that denies the possibility of constraining the collectivity in any ultimate sense. This was Hobbes's position, and in his conceptual model the individual surrenders all rights to the sovereign at the time of the initial contract. In the terminology employed here, this amounts to saying that only the collectivity, the government, holds anything that might be called "rights." Those claims to carry out specific activities, including disposition and usage of resources, that are expressed on the part of persons are subject at all times to arbitrary redefinition by government. And, indeed, the central role of government in this positivist model is the settlement of competing claims among individuals and groups, settlement which necessarily involves continual redefinition of limits.*51 I shall not defend the approach taken in this book against the positivist arguments. Whether it is possible to constrain the powers of government, to protect individual rights in a genuine usage of this term, can never be proven empirically. It is at this point, however, that individuals' attitudes toward reality seem more important than the reality itself. Governmental decisions are always made by men, and if these men act within a paradigm that embodies meaningful constitutional constraints, the "as if" analysis seems warranted, regardless of the ultimate power that may or may not remain unexercised.

Allocation and Distribution


The categorical distinction that I have made between constitutional contract and postconstitutional contract may seem familiar to economists. The distinction is related to the familiar neoclassical dichotomy between allocation and distribution, especially as the latter is treated in normative discourse in political economy. In the world restricted to private or partitionable goods and services, when property rights are defined, markets will emerge to allocate resources with tolerable efficiency and the gains-from-trade will be distributed among particular parties in a specific manner. Neoclassical, and modern, economists have expressed little or no direct concern for the market's distribution of the gains-from-trade. They have been unwilling to accept the final distributional results largely because they remain unwilling to restrict their domain of evaluation to postconstitutional contract. The distinction developed here would have been helpful in clarifying much of the discussion in political economy because this would have indicated that the distributional problem arises, not with respect to the gross gains-from-trade, but with respect to the initial distribution of endowments or capacities—that distribution that provides the basis upon which individuals enter the trading process.


In this particular respect, discussion and analysis of public-goods exchange in postconstitutional contract have been considerably more sophisticated than the parallel analysis of the private market sector. Knut Wicksell recognized explicitly that the efficiency norms for the provision of jointly consumed goods and services which informed his search for the appropriate institutions for collective decision-making are applicable only in a setting where individual property rights are well defined and broadly acceptable. Wicksell recognized that the whole decision-making process must be modified when genuine constitutional contract is considered. In this respect, as in others, my own approach has been greatly influenced by Wicksell. In modern public-finance theory, R. A. Musgrave, in his basic treatise, makes a categorical distinction between the allocational branch of the budget and the distributional branch.*52 Especially in his response to attempts to extend allocational norms to distributional policy, Musgrave seems to make a categorical distinction between the fundamental decision processes that are involved.*53

Notes for this chapter

For a paper which discusses some of the problems which this neglect creates, see Dennis Mueller, "Achieving a Just Polity," American Economic Review 44 (May 1974): 147-52. Although Mueller develops his argument in the context of a critique of the work of John Rawls, much of his analysis is directly relevant to my argument in this book.
For two recent books which examine many of these issues in detail, see Wallace E. Oates, Fiscal Federalism (New York: Harcourt Brace Jovanovich, 1972), and Richard E. Wagner, The Fiscal Organization of American Federalism (Chicago: Markham Publishing Co., 1971).
For a discussion of the spontaneous order that emerges from market processes, see the excellent essay by Michael Polanyi, The Logic of Liberty (Chicago: University of Chicago Press, 1951).
David Hume, A Treatise of Human Nature, p. 538. The behavioral principle involved here has been recognized for centuries, or at least since Aristotle. See Aristotle, Politics, trans. H. Rackham (Cambridge: Harvard University Press, 1967), p. 77.
For a more detailed discussion of the basic analysis here, see my Demand and Supply of Public Goods, chap. 5.
For a summary discussion, see Ludwig von Mises, Human Action: A Treatise on Economics (New Haven: Yale University Press, 1949), p. 271.
See Knut Wicksell, Finanztheoretische Untersuchungen (Jena: Gustav Fischer, 1896). Major portions of this work are available in translation under the title "A New Principle of Just Taxation," in Classics in the Theory of Public Finance, ed. R. A. Musgrave and A. T. Peacock (London: Macmillan, 1958).
For a discussion of the importance of others' behavior in influencing the willingness of individuals to participate in group decisions, see William J. Baumol, Welfare Economics and the Theory of the State, rev. ed. (Cambridge: Harvard University Press, 1965).
Note that I am defining a pure public good here in terms of the jointness rather than the nonexclusion property. That is to say, purity implies that additional consumers or users of any quantity may be added at zero marginal cost to those already in the group. It need not, in this context, be prohibitively expensive to exclude individuals from enjoying the benefits.
Exclusion from public-goods benefits is analytically equivalent to punishment for law violation, which will be discussed in detail in Chapter 8. The possible unwillingness of members of a cost-sharing group to exclude free riders because of the costs of the exclusion is conceptually equivalent to the possible unwillingness of law-abiding members of a polity to punish offenders because of the disutility involved in the act of punishment itself. In this, and other examples, an understanding of the central theory of public goods is helpful in understanding some of the issues involved in maintaining order under law.
Mancur Olson has stressed the importance of by-product private goods as a means of enforcing exclusion in public-goods provision. See his The Logic of Collective Action (Cambridge: Harvard University Press, 1965).
In the approach taken, there and here, unanimity offers the benchmark from which departures are dictated by reasons of efficiency in decision-making. Consent or agreement remains the conceptual ideal. For an argument which opposes this approach, see Douglas W. Rae, "The Limits of Consensual Decision" (Paper presented at the Public Choice Society Conference, College Park, Maryland, March 1973).
The whole discussion here is directly related to the issues involved in "just compensation." These are examined in the context of modern legal doctrine in an excellent long essay by Frank I. Michelman. See his "Property, Utility, and Fairness," pp. 1165-1258.
Wicksell was the first to recognize the basic substitutability between tax institutions and collective-choice rules. By the introduction of more flexibility in tax institutions, more inclusive collective-decision rules can be accepted, with more guarantees against fiscal exploitation. Wicksell did not, however, reverse the logical chain here. With effectively designed tax institutions, the potential exploitation that can be implemented through less-than-unanimity decision rules can be reduced, and, in the limit, wholly eliminated. For an elaboration of this relationship, see my Demand and Supply of Public Goods, and my Public Finance in Democratic Process (Chapel Hill: University of North Carolina Press, 1967).
Formal proofs that the Lindahl "solution" to the public-goods game is in the core do nothing toward showing that there do not exist many other "solutions" that equally qualify for inclusion. In this sense, the Lindahl equilibrium in the public-goods game is not at all comparable to competitive equilibrium in the private-goods counterpart.

To make the geometrical illustration in figure 3.1 more relevant to the large-number setting, we could reinterpret position E as that which is attained from the completion of all interpersonal trades in private goods and in all trades in joint-consumption goods that involve coalitions of less than the full membership of the inclusive group. With this modification, the diagram and the discussion can depict the constraints imposed on political decision rules with respect to any one person vis-à-vis all others in the polity.

For a related discussion in the context of theoretical welfare economics, see A. Mitchell Polinsky, "Probabilistic Compensation Criteria," Quarterly Journal of Economics 86 (August 1972): 407-25.
Warren J. Samuels is an articulate modern spokesman for this positivist position. In an exchange devoted to a specific legal issue, the basic methodological differences between this position and my own are clarified. See Warren J. Samuels, "Interrelations between Legal and Economic Processes," Journal of Law and Economics 14 (October 1971): 435-50; James M. Buchanan, "Politics, Property and the Law: An Alternative Interpretation of Miller et al. v. Schoene," Journal of Law and Economics 15 (October 1972): 439-52; Warren J. Samuels, "In Defense of a Positive Approach to Government as an Economic Variable," Journal of Law and Economics 15 (October 1972): 453-60.

A more comprehensive statement of Samuels's position is contained in his "Welfare Economics, Power, and Property," in Perspectives of Property, ed. G. Wunderlich and W. L. Gibson, Jr. (State College: Institute for Land and Water Resources, Pennsylvania State University, 1972), pp. 61-146.

R. A. Musgrave, The Theory of Public Finance (New York: McGraw-Hill, 1959).
R. A. Musgrave, "Comment," American Economic Review 60 (December 1970): 991-93. The paper that prompted Musgrave's comments, along with those of several others, was Harold M. Hochman and James D. Rodgers, "Pareto Optimal Redistribution," American Economic Review 59 (September 1969): 542-57.

End of Notes

Return to top