We have seen why Buchanan perceives the necessity of laws, how social order emerges from the contracts individuals make at the constitutional level, thereby allowing them to engage in trade. What needs to be explained is an individual's considerations when faced with the constitutional choices that will crucially influence all his subsequent conduct.
At the ultimate constitutional level when property rights are assigned, we have seen Buchanan argue for consensus. This represents a minimal collectivisation. However, there may exist a demand for an extension of collective action. The source of this demand may be either to eliminate the external costs of private action on the individual or to secure an external benefit that cannot be achieved through private action. It is in dealing with these decisions that LUR may emerge.
Buchanan and Tullock's approach is 'cost' as opposed to 'cost-benefit' based. Two costs are identified. First, 'external costs', which represent the expected cost to an individual imposed upon him by the action of others. Secondly, 'decision-making costs' being the cost to an individual of his participation in an organised activity. Decision-making costs can also be viewed as the costs of two or more individuals reaching agreement. The sum of these two costs is termed 'interdependence costs'. For purely private actions interdependence costs are zero. Clearly there are many areas where these costs are positive and collective action is a possible means of reducing them. However there are alternative means involving voluntary associations. Buchanan has made a significant contribution to the theory of clubs (1965) which offers a solution to positive interdependence costs without an extension of collectivisation.
The existence of non-zero interdependence costs may induce individuals to consider constitutional changes bringing an activity within the realm of social choice. His decision will depend on his relative evaluation of private, voluntary and collective action.
The cost of collective action can be explained with the help of Figure 1. Curve E is the present value of external cost function. It relates the expected cost to an individual of action taken by others to the number of individuals who must agree before a collection decision is made for the group. Under dictatorship external costs are at a maximum whilst if unanimity prevails external costs are zero as the individual can exercise his veto on any potentially damaging action.
When two or more individuals must agree, decision making costs are positive. When the proportion of individuals needed to make a decision is low there are many potential replacements if one individual refuses, so decision-making costs are small. As the proportion needed to make an agreement rises so do decisionmaking costs. As unanimity is approached the number of alternative individuals is very small; people will invest time and resources in bargaining and decision-making costs rise rapidly. With unanimity every individual has a monopoly over a valuable resource, his agreement, and decision-making costs are very high indeed. This movement of the decision-making cost function is represented in Figure 1 by the curve D. The curve /is the vertical summation of C and D and is the interdependence costs. By assuming that each individual seeks to minimise interdependence costs the optimal decision-making rule for the individual is at A.
Figure 2 helps to explain whether an individual will support the movement of an activity into the collective realm. The curve / is as above. X is the cost of the activity when carried out privately or voluntarily, whichever is the cheaper. Since X'\s greater than Z, the individual's assessment of the costs of his preferred decision rule, he will support the activity's shift into the realm of collective action. If however the cost of private or voluntary action is Y he would not support any shift.
There are several important implications to be drawn from the above analysis. First, under collective action interdependence costs are never zero, collectivisation always imposes a cost on the individual. Further the existence of the external costs of private behaviour is neither a necessary nor a sufficient condition for an activity to be collectivised. Finally, there is nothing special about simple majority rules. Buchanan feels these implications are frequently ignored by many social scientists.
The calculus of consent is, like the rest of Buchanan's work, based on the individualist postulate. Obviously, individuals may have different optimal voting rules for any given activity. How are these reconciled? Individuals will be involved in a continual process of decision-making on whether activities should be collectivised and then on how any collective activity will be operated.
This opens up the possibility of gains from trade, i.e. log-rolling on an explicit or implicit basis. Further, though individuals will be guided by self-interest in their decisions this will be tempered by additional characteristics. Social contracts differ from private contracts with respect to the degrees of social participation, responsibility, coercion (collective choices bind everyone) and certainty. They also differ with respect to the nature of alternatives being considered and the power relations between people (Buchanan, 1954b). It is perhaps the associated degree of uncertainty that brings about the movement of individuals towards a consensus on rules. Each individual, not knowing where he will be in the future, will be interested in generating a 'fair' set of rules-one that will make the 'most interesting game'. There is a similarity here with John Rawls' (1971) concept of'justice and fairness' (Buchanan, 1971). It is the weakest element in Buchanan's analysis, though doubtless individuals could act in this way.
The outcome of the calculus of consent is a set of rules, a constitution. Where these rules deal with property rights, unanimity is likely to be used. When the rules deal with the operation of a collective activity less than unanimity rules (LUR) will be introduced. In accepting LUR the individual expects to incur some external costs as decisions go against him. But on balance he is willing to endure these as he expects them to be less than if the activity were run on a private or voluntary basis. The external costs he bears are the price he pays in the social contract just as law abiding is the cost he pays in the constitutional contract.