constitutions, economic approach to 119

economist John Rae (1796--1872). His explanation of the Normative research on constitutions
nature and effects of luxury was based on the meaning of Arguably the most important contribution of The
vanity in human life. He understood vanity to be the Calculus was to view democracy as a two-stage process.
mere desire for superiority over others without any ref- In stage one, institutions to make future collective
erence to merit. The aim is to have what others cannot decisions are placed into the constitution. In stage two,
have, whereas the stimulus to productivity in economic collective decisions are made using these rules. The
life is the passion for effective accumulation: 'Articles of long-run nature of the choices at the first stage creates
which consumption is conspicuous, are incapable of considerable uncertainty about the consequences of
gratifying this passion' (Rae, 1834). different voting rules. This uncertainty makes unani-
However, it was Veblen who introduced the concept of mous agreement on the rules of the political game likely,
conspicuous consumption as a phenomenon important even though individuals would disagree in stage two
for the understanding of consumption as a whole. He about the outcomes of the game. This unanimity at
gave Rae no reference at all. the constitutional stage provides the normative under-
Veblen's historical and socio-economic explanation of pinning for the constitution (B&T, p. 7). Harsanyi (1955)
this institution gave as a result the so-called 'Veblen also used uncertainty over future positions to produce
effect'. This is the phenomenon whereby as the price of an unanimity and to provide a normative argument for
article falls some consumers construe this as a reduction a Benthamite social welfare function (SWF), as did
in the quality of the good or loss of its 'exclusiveness' and Rawls (1971) in his ethical theory of a social contract.
cease to buy it. Mueller (1973) discussed conditions under which a B&T
F. STANKOVIC constitution maximizes a Harsanyian SWF.
Another innovation in The Calculus was to introduce
See also Rae, John; Veblen, Thorstein Bunde. the external costs of collective decisions (B&T, pp. 63-8).
When a collective choice is made without the consent of
all members of the community, the decision can make
Bibliography some members worse-off. The votes of those favouring
Mason, R.S. 1981. Conspicuous Consumption: A Study of the decision thus impose a negative externality on those
Exceptional Consumption Behaviour. New York: St opposing it. The smaller the majority required to pass an
Martin's Press. issue, the more likely it is that an individual is on the
Rae, J. 1834. The Sociological Theory of Capital, ed. losing side. However, the amount of time required to
C. Mixter. New York: Macmillan. make a collective decision is also likely to increase
Smith, A. 1776. An Inquiry into the Nature and Causes of the with the required majority. The optimal majority min-
Wealth of Nations, ed. E. Cannan, London: Methuen, imizes the sum of collective decisions' external and
1981. decision-making costs.
Sweezy, P. 1952. Veblen and Marx. In Socialism and There is nothing in B&T's costs-minimization-
American Life, 2 vols. ed. D.D. Egbert and S. Persons. approach that implies that the optimal majority is likely
Princeton: Princeton University Press. to be a simple majority, and thus their approach does not
Veblen, T. 1899. The Theory of the Leisure Class. London: account for this rule's ubiquitous use. The approach does
George Allen & Unwin. imply the widespread use of the simple majority rule, if
one of the two cost curves - most plausibly decision-
making costs - has a sharp discontinuity at 50 per cent
constant and variable capital. See Marx's analysis (Mueller, 2003, pp. 76--8).
of capitalist production. Rae (1969) used the two-stage approach to provide a
completely different normative justification for the
simple majority rule. At the constitutional stage, each
individual is uncertain of whether he will favour x or "-'X
constitutions, economic approach to in future votes on these binary issues. The expected gain
The economic approach to constitutions applies the if an individual favours x and x wins equals the expected
methodology of economics to the study of constitutions, loss if x wins and the individual favours "-'X. Rae further
just as public choice applies this methodology to the full assumed that the probability of favouring x equals the
range of topics of political science. probability of favouring "-'X. An egoist chooses the voting
The economic approach to constitutions began with rule that minimizes the probability that she favours x in
The Calculus of Consent by James Buchanan and Gordon the future and "-'X is imposed, or that she favours "-'X and
Tullock (1962, hereafter B&T). Theirs was largely a nor- x is imposed. The simple majority is the only rule sat-
mative analysis of what ought to go into a constitution. isfying this condition. (For additional discussion and
Their main findings and the literature that grew out of references see, Rae and Schickler, 1997.)
their work are reviewed first, after which the positive Mueller (2001) generalized the two-stage approach to
stream of the literature is discussed. show that the optimal majority for binary choices
S. N. Durlauf and L. E. Blume (Eds.), The New Palgrave Dictionary of Economics
© Palgrave Macmillan, a division of Macmillan Publishers Limited 2008
120 constitutions, economic approach to
depends on the relative payoffs from the two issues.
(Riley, 2001, presents a game theoretic analysis of a
two-stage constitutional process.) As the loss to those
favouring x rises relative to the gain to those favouring
rvx, higher required majorities become optimal to imple-
ment rvx, with unanimity being optimal when the asym-
metry in payoffs is very large. Mueller (1991; 1996, ch.
14) employed this analysis to explain why placing rights
to act into a constitution would maximize the expected
utilities of those writing it.
Positive research on constitutions
The positive literature of constitutions falls into two cat-
egories: studies of constitutional conventions and of the
consequences of constitutions. The second category is
obviously very large, and so I provide only the flavour of
this type of work.
Charles Beard's work (1913) might well be regarded as
the first economic analysis of the Philadelphia Conven-
tion. Beard stressed the self-interest of the participants,
and claimed that the final product reflected the interests
of the landowning aristocracy. In an equally cynical
analysis, Landes and Posner (1975, p. 893) claimed that
the First Amendment was a result of pressure from 'pub-
lishers, journalists, pamphleteers, and others who derive
pecuniary and nonpecuniary income from publication
and advocacy of various sorts'. Case studies of constitu-
tional conventions confirm the importance of the
self-interest of the participants in determining the
constitution's content. For example, representatives from
small parties favour rules that produce proportional rep-
resentation and low percentage thresholds for taking
seats in the parliament. Representatives from large parties
favour the reverse. If delegates are selected geographically,
the constitution protects geographic interests. (For fur-
ther discussion and references to the literature, see Elster,
1991, and Mueller, 1996, ch. 21). Econometric analyses
confirm these findings. McGuire and Ohlsfeldt (1986)
and McGuire (1988) concluded that the votes of dele-
gates to the Philadelphia convention reflected both their
personal interests and those of their constituencies. Eavey
and Miller (1989) reached the same conclusion from the
voting patterns of those who ratified the Pennsylvania
and Maryland constitutions.
A key decision facing any constitutional convention is
whether to design institutions that will produce a two-
party system or a multiparty system. In practice, this
choice appears to rest upon the number of representa-
tives elected from each electoral district (Taagepera and
Shugart, 1989; Lijphart, 1990; Mueller, 1996, chs. 8-10).
Recent theoretical and empirical work by Persson and
Tabellini (1999; 2000; 2003; 2004a; 2004b) and Persson,
Roland and Tabellini (2000) demonstrates the economic
importance of this choice. They find more rent seeking,
more corruption, more redistribution and larger deficits
in multiparty systems. Presidential systems lead to
smaller governmental sectors because they generally con-
tain stronger checks and balances than parliamentary sys-
tems. (For a review and references to other contributions,
see Persson and Tabellini, 2004a.)
Conclusions
There are two kinds of people in the world: those who
believe that constitutions matter and those who do not.
The contributors to the literature reviewed here fall into
the former category. Their work helps illustrate why and
in what way constitutions matter, and further illustrates
the fruitfulness of undertaking an economic approach to
the study of constitutions.
DENNIS C. MUELLER
See also Buchanan, James M.; collective rationality.
Bibliography
Beard, C. 1913. An Economic Interpretation of the
Constitution of the United States. New York: Macmillan,
1941.
Buchanan, J. and Tullock, G. 1962. The Calculus of Consent.
Ann Arbor: University of Michigan Press.
Eavey, C. and Miller, G. 1989. Constitutional conflict in state
and nation. In The Federalist Papers and the New
Institutionalism, ed. B. Grofman and D. Wittman. New
York: Agathon Press.
Elster, J. 1991. Arguing and bargaining in two constituent
assemblies. Mimeo. Storrs Lectures, Yale Law
School.
Harsanyi, J. 1955. Cardinal welfare, individualistic ethics,
and interpersonal comparisons of utility. Journal of
Political Economics 63, 309-21.
Landes, W. and Posner, R. 1975. The independent judiciary
in an interest-group perspective. Journal of Law and
Economics 18, 875-901.
Lijphart, A. 1990. The political consequences of electoral
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481-96.
McGuire, R. 1988. Constitution making: a rational choice
model of the Federal Convention of 1787. American
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McGuire, R. and Ohlsfeldt, R. 1986. An economic model of
voting behavior over specific issues at the Constitutional
Convention of 1787. Journal of Economic History 46,
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Mueller, D. 1973. Constitutional democracy and social
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consumer expenditure
The study of consumers' expenditure, both in total and
in composition, has always been of major concern to
economists. Neoclassical economics sees the delivery of
individual consumption as the main object of the eco-
nomic system, so that the efficiency with which the
economy achieves this goal is the criterion by which
alternative systems, institutions and policies are to be
judged. Within a capitalist economy, such considerations
lead to an examination of the relationship between
prices and consumption behaviour, and theoretical
development and empirical analysis have been a major
continuous activity since the middle of the last century.
Even older is the tradition of using individual household
budgets to dramatize poverty, and the relationship
between household incomes and household expenditure
patterns has occupied social reformers, statisticians and
econometricians since at least the 18th century. In more
modern times, it has been recognized that the study of
public finance and of taxation depends on a knowledge
of how price changes affect the welfare and behaviour of
individuals, and the recent development of optimal tax
theory and of tax reform analysis has placed additional
consumer expenditure 121
demands on our understanding of the links between
prices, expenditures and welfare.
In the last fifty years, aggregate consumption has
become as much of an object of attention as has its
composition, and in spite of a common theoretical struc-
ture, there has been a considerable division of labour
between macro economists, interested in aggregate con-
sumption and saving, and micro economists whose main
concern has been with composition, and with the study
of the effects of relative prices on demand. The interest of
macroeconomics reflects both long-term and short-term
interests. What is not consumed is saved, saving is thrift
and the basis for capital formation, so that the determi-
nants of saving are the determinants of future growth and
prosperity. More immediately, aggregate consumption
accounts for a large share of national income, typically
more than three-quarters, so that fluctuations in behaviour
or 'consumption shocks' have important consequences
for output, employment, and the business cycle. Since
Keynes's General Theory, the consumption function, the
relationship between consumption and income, has played
a central role in the study of the macroeconomy. Since the
1930s, there has been a continuous flow of theoretical and
empirical developments in consumption function research,
and some of the outstanding scientific achievements in
economics have been in this field.
In this essay, the major themes will be the interplay
between theory and evidence in the study of consumers'
expenditure and its composition. If economists have any
serious claim to being scientists, it should be clearly vis-
ible here. The best minds in the profession have worked
on the theory of consumption and on its empirical
implementation, and there have always been more data
available than could possibly be examined. I hope to
show that there have been some stunning successes,
where elegant models have yielded far from obvious pre-
dictions that have been well vindicated by the evidence.
But there is much that remains to be done, and much
that needs to be put right. Many of the standard pre-
sumptions of economics remain just that, assumptions
unsupported by evidence, and while modern price theory
is logically consistent and theoretically well developed, it
is far from having that solid body of empirical support
and proven usefulness that characterizes similar central
theories in the natural sciences.
1 A simple theoretical framework
Almost all discussions of consumer behaviour begin with
a theory of individual behaviour. I follow neoclassical
tradition by supposing that such behaviour can be
described by the maximization of a utility function sub-
ject to suitable constraints. The axioms that justify utility
maximization are mild, see any microeconomic text such as
Varian (1978/1984) or Deaton and Muellbauer (1980b), so
that utility maximization should be seen as no more than a
convenient framework that rules out the grossest kind