Why Constitutions Matter

Nils Karlson, Nils Karlson

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781351471602
• Edition: 1
• Topic: Politics & International Relations
• Subtopic: Politics
• Index: Politics & International Relations

As countries in the twentieth and twenty-first centuries change from colonialist to independent rule, or from a socialist to a democratic society, the need for a written constitution becomes apparent. Countries in the former Soviet Union, Africa, or nations once part of the British Empire face social, economic, and humanitarian problems as they experiment with democratic rule. Such issues as clearly defining where sovereignty lies, how much power is given to the people, and what rights are possessed by a nation's citizenry are new to these countries. While a constitution, being a man-made document, is subject to interpretation and does not always delineate in a lucid framework its parameters for future generations, it is clear that constitutions do matter.This volume, compiled under the direction of the City University of Stockholm, is an important study on the significance of constitutions and constitutional law in a democratic society. A number of scholars in law, political science, and economics have contributed to this volume. They include: James Buchanan, Aleksander Peczenik, Mats Lundstrom, Joakim Nergelius, Sverker Hard, Niclas Berggren, Peter Kurrild-Klitgaard, Wolfgang Kasper, and Erik Moberg. All add to the understanding of the intertwining roles of politics and the social sciences in a modern democratic state.They explore why a constitution is essential; the relationship between a constitution and a rational political system; the democratic principle of majority rule; why constitutional constraints are needed in a democratic state; recent constitutional reforms in the United Kingdom; the electoral system and its centrality in a democracy; evolution in constitutional change; competition within a federal structure; and the connection between politics and economics. Why Constitutions Matter is a fascinating and timely study of constitutionalism, and will be of interest to students of politics, law, economics, and sociology.

Economic Effects of Political Institutions, with Special Reference to Constitutions¹

Niclas Berggren and Peter Kurrild-Klitgaard

I. Introduction

One of the major questions in economics is what causes the growth of wealth: what explains that some countries experience higher economic growth than others? The idea here is to explore the linkage between political institutions, on the one hand, where the constitution is at the centre of our interest, and economic performance, on the other.² Is it the case that certain sets of institutions are more conducive to economic growth and sound fiscal affairs than others—through their influencing the way political decision-makers act? If so, which are these institutions? The present paper presents both a theoretical analysis of these issues, and the results from a number of real-world studies.

Below, some theoretical considerations will be presented, stemming from two perspectives—the new institutional economics and constitutional economics—which argue that political institutions matter for, among other things, how an economy functions (section II). A survey of empirical studies that look into this is given next, the purpose of which is to clarify the degree to which the theoretical implications can be confirmed. Among the things covered are the following: the effects of economic freedom, the rule of law and secure property rights, the effects of different budget rules, the effects of electoral systems, the length of legislative terms, federalism, popular initiatives and referendums (section III). Lastly, some concluding and summarizing remarks are offered, reflecting, among other things, on the potential for improving the working properties of an economy through reforming political institutions.

It should be noted at the outset that it is quite difficult to isolate the effects of particular constitutions on economic performance, since many factors, institutional and non-institutional, play a role for the actual policies. But even though much more work needs to be done in this area, the studies discussed here, in conjunction, seem to indicate the clear relationship between certain institutions and economic outcomes, a result that must be included into any earnest and comprehensive constitutional discussion. The selection of institutions is an important matter.

II. The Importance of Political Institutions:A Theoretical Perspective

Underlying many, or most, theories in the social sciences is some conception of man, at least with regard to what determines his actions. Not least is this the case in economics, with a view of man as a rational, largely self-interested actor who does his best, given his endowments and given the rules, or institutions, under which he acts. But whereas classical economists paid much attention to the role of rules for human behaviour, this aspect has largely been ignored in the post-war literature, at least as an explicit factor to be studied. Rather, man has been seen as a utility-maximiser without a possibility to change the rules under which he goes about his business. Of course, the idea behind institutions is to direct human action in certain ways—and hopefully in ways productive of human well-being—which seems in effect to presume that institutions are completely exogenous and hence not objects with which social scientists need to concern themselves.³

However, institutions can both be seen as exogenous and binding, on the one hand, and as possible (and, sometimes, desirable) to alter, on the other. The latter insight is important and, as mentioned, neglected in much economic analysis. As clarified by Buchanan and Tullock (Buchanan & Tullock, 1962, pp 77-80) and Brennan and Buchanan (Brennan & Buchanan, 1985), in many contexts there are two distinct levels of choice, e g in choosing a constitution and in making everyday political decisions. If so, this implies that rules instituted by lower-level decisions in some practical sense are exogenous to those to whom these rules apply albeit possible to change for those given the authority, in line with some higher-level rules, to do so. But it bears noting that the higher-level rules are not totally exogenous: although they are more difficult to change, they can be changed. Hence, alterability is a continuous variable, not a dichotomous one.⁴ This is in fact what underlies the research programme of constitutional economics; as stated by Buchanan (Buchanan, 1990, pp 1,7),

Constitutional political economy is a research program that directs inquiry to the working properties of rules, and institutions within which individuals interact, and the processes through which these rules and institutions are chosen or come into being. The emphasis on the choice of constraints distinguishes this research program from conventional economics…. [E]mphasis is centered directly on the selection of rules, or institutions, that will, in turn, limit the behavior of the persons who operate within them. Institutions, defined broadly, are variables subject to deliberate evaluation and to explicit choice.

The logic behind institutions is hence at base one of ensuring that the incentives facing those making choices, to the highest degree possible, are such as to make it more probable that certain actions, considered desirable, are taken rather than others (Elster, 1985 and Brennan & Kliemt, 1990). Just as a person may wish to exercise self-constraint by choosing to impose on himself a certain set of behavioural restrictions, ultimate democratic decision- makers may likewise think it prudent not only to put constraints on themselves (admittedly, only binding in an imperfect manner) but on their fellow present and subsequent rulers as well.⁵

The realization that institutions matter has been stressed by several economists, not the least Adam Smith, as remarked by Coase (Coase, 1977, p 320):

[T]hroughout the Wealth of Nations one finds Adam Smith discussing the appropriate institutional framework for the working of a price system. Whether one agrees or disagrees with his views on apprenticeship laws, land tenure, joint-stock companies, the administration of justice, or the educational system, what distinguishes Adam Smith’s approach from much of what has come since is that he obviously thinks this is a proper and important part of the work of an economist. It is, I believe, only recently that economists in any number have come to realize that the choice of an institutional framework is a subject which deserves to be studied systematically.⁶

And in that tradition we follow.

However, there is a theoretical critique of this view, as formulated by, e g, Boudreaux (Boudreaux, 1998) and Voigt (Voigt, 1998). In a somewhat nihilistic tone, these critics seem to assert that the specific contents of a written constitution are more or less unimportant for the way politics is actually carried out. The reason is that those deciding on the written constitution are the ones who must obey it, and if they wish to act in ways which the constitution do not allow, they either change it to suit their desires or simply agree not to follow it.⁷ Above, some theoretical counter-arguments have been presented to this dichotomous way of analysing the issue, and Buchanan (Buchanan, 1999) sums it up well,

Constitutional rules have the effect of increasing the costs of taking certain actions. It is more costly to take action in violation of a rule than it is to take the same action in the absence of the rule. If this much be acknowledged, then rules must matter if the basic law of economics is accepted. An increase in the cost of any choice alternative will reduce the resort to that alternative.⁸

We largely agree with this statement.⁹ But ultimately, this is an empirical matter, hopefully to be settled in section III below. Before delving into the real-world effects of political institutions, this section will present some theoretical insights from new institutional economics and constitutional economics.

Institutions, Politics, and the Economy

One of the major questions in economics and economic history has been the basis for the growth of wealth. What explains that some countries have experienced higher economic growth than others? In older, more traditional neo-classical economic models, economic growth was largely, if not completely, a question of natural endowments: economic output simply flowed from combinations of such inputs as land, labour and capital, and faster— or slower—growth would then just be a question of the amount or efficient use of the input. In contrast, newer economic theories have emphasized the role played by institutions, and hence by institutional design. Specifically, one approach is represented by the so-called new institutional economics¹⁰ which stresses that man acts under uncertainty for lack of perfect information about the world and because of a limited capacity for processing information. This implies that there are transaction costs in connection with human action, which among other things have an inhibiting effect on economic activities. Among these costs can be mentioned search costs, contractual costs, and controlling costs.¹¹ In such a reality, institutions in the sense of formal and informal rules, the violation of which entails some sort of penalty, tend to arise to reduce uncertainty and transaction costs.¹² Typical institutions of this kind are judicial systems, accounting systems, insurance, and the existence and protection of private property rights, which entail a set of rules within which the ownership of property is delineated and which stipulate how conflicts on such issues are to be resolved. If property rights are clearly defined and enforced, we should expect this to facilitate welfare-enhancing interactions between individuals, as well as the internalisation of externalities, and hence to stimulate economic growth.¹³

An efficient institution can thus be defined as one that guides human action in such a way that productive activities are favoured instead of unproductive, or even destructive, activities and which therefore leads to economic growth. To achieve economic progress, efficient institutions are required. It is hence of central importance to realize that economic development is highly affected by the institutional structure, as it affects how humans choose to behave both in economic and political contexts. As Coase (Coase, 1998, p 73) puts it,

Adam Smith explained that the productivity of the economic system depends on specialization (he says the division of labor), but specialization is only possible if there is exchange—and the lower the costs of exchange (transaction costs if you will), the more specialization there will be and the greater the productivity of the system. But the costs of exchange depend on the institutions of a country: its legal system, its political system, its social system, its educational system, its culture, and so on. In effect, it is the institutions that govern the performance of an economy.

This insight—especially the connection between political institutions, decisions in the political process, decisions in the market, and economic performance—is partly captured in figure 7.1 on the next page..¹⁴

The political institutions define the rules of the political game and thus heavily influence the working properties of the political process. Among these institutions, the foremost is the formal constitution, which lays down such basic things as voting rules, the electoral system, a catalogue of rights, the central political units (not the least the relationship between the legislature, the executive, and the judiciary).¹⁵ But there are also other political institutions, and they may also be quite important. Examples are the internal organization of the legislature, the budgetary process, and the structure of the bureaucracy, which together with the formal constitution may be seen as constituting what could be called the extended’ or ’effective’ constitution. This concept allows f...