James Buchanan, The Need For Constitutions

Buchanan's ideal is ordered anarchy, the archetype of which is voluntary exchange.
Ordered anarchy pervades many areas of human interaction. One has only to think of the ethics of the queue where mutual tolerance exists without formal rules. Though Buchanan considers movements away from this ideal a 'bad' he does recognise the necessity for some laws and rules, even though his overriding concern is with individual freedom. Liberty cannot be unbounded due to the necessities of social interdependence. Without some mutually agreed set of rules the fruitful association between Crusoe and Friday would have broken down into open conflict. Society exists when property rights are defined and boundaries are drawn. 'Good fences make good neighbours.' Property rights place limits on the set of activities an individual can carry out and exclude others from certain actions. These rights will differ between individuals and so provide the incentive to make contracts and enter into exchange. When conflicts arise between individuals institutions will emerge to resolve them. But of paramount importance in Buchanan's framework is reciprocal respect for individuals' property rights, i.e. a contractual relationship. Individuals must therefore search for and maintain agreement amongst themselves. How do they do this? How does law emerge? How are laws modified and enforced? What can go wrong? These questions are the subject matter of one of Buchanan's major books The Limits of Liberty (Buchanan, 1975a) and of a collection of his essays Freedom in Constitutional Contract (Buchanan, 1977).

In the beginning Buchanan sees an initial distribution of rights emerging as individuals fight over scarce resources. This 'natural' distribution is achieved by individuals' investments in defence and attack capabilities to secure the supply of the scarce resources. No matter what the characteristics of the natural distribution, there will exist the possibility of mutual gains from trade. By agreeing to a set of behavioural limits, i.e. making a contract, individuals can benefit from disarmament. This first step is, in Buchanan's terminology, the formation of a 'constitutional contract'. It represents the transition from anarchy to ordered anarchy. The constitution will define, as carefully as possible, individuals' rights within the existing state of knowledge. It may include some procedure for the redistribution of income (Buchanan and Bush, 1974) and will certainly cover rules for the enforcement of contracts.
As already noted, individuals differ as to tastes, capabilities, knowledge and now property rights. This acts as an incentive for them to trade i.e. they enter into 'postconstitutional contracts'. This is the subject matter of economics where individuals trade in private and public goods, the latter involving social contracts.

Private contracts require that a set of rules for interpersonal behaviour is established. They also need enforcing i.e. a government. Private contracts between two individuals reduce transactions costs to a minimum and, because of the wide variety of possible alternatives, reduce the possibility of conflicts. The outcome of these contracts is directly dependent upon the actions of the participants. But public goods require social contracts which have high transactions costs and a severely limited range of possible alternatives. Further, individuals in this context may expect their own behaviour to be independent of that of other participants. This acts as an incentive to become a 'free rider' taking the benefits of public goods but avoiding the costs. Public choice on constitutions must therefore establish the following: (i) private property rights; (ii) an enforcement agency; (iiii) a list of what goods will fall within the public domain; (iv) how these goods will be provided; (v) how they will be financed. What rule should be used to make these decisions? Buchanan naturally suggests the rule of unanimity but here there is a problem if any one individual stubbornly refused to agree. If he is coerced into agreement this is clearly a 'bad'. Alternatively, the individual could be excluded from any collectively provided benefits. Thus the constitution will define the generalised right of citizenship which will be limited to the extent that an individual will be excluded from public benefits when he is unwilling to contribute to their costs. This will act as an incentive for every individual to join and maintain the voluntaristic character of contracts.

A constitution can be conceived of as a set of rules developed to enable individuals to achieve the gains from trade. The formation of a constitution is not a once and for all event; as the environ­ment evolves so will the constitution. The status quo is not rigid; what is important is that the constitution provides a basis for predictions, allowing individuals to formulate expectations concerning the unfolding of events. Clearly a demand for a revised constitution will arise, particularly from future gener­ations who were not party to the original constitutional contract. Conceptually they could compare their existing property rights with those they might expect if they returned to the underlying 'natural' distribution. If this is significantly different from their current position they will wish to renegotiate the constitutional contract.7 Again, unanimity can be achieved for a new contract. Those who might reasonably expect to have their rights reduced may accept current reductions to forestall even larger reductions in the future. Also the hand of those wanting constitutional change may be strengthened by the attitude of the enforcement agency which may become increasingly unwilling to uphold property rights so divergent from the 'natural' distribution.

But public choice under the unanimity rule will be costly and may retard the development of exchange. Is there then a case for operating under less than unanimity rules (LUR) and how generally do different rules for decision making emerge? These questions were tackled by Buchanan and Tullock in their influential book The Calculus of Consent (1962).