2.3 — The Calculus of Consent

# 2.3 — The Calculus of Consent
## ECON 410 • Public Economics • Spring 2022
### Ryan Safner Assistant Professor of Economics <a href="mailto:safner@hood.edu">safner@hood.edu</a> <a href="https://github.com/ryansafner/publicS22">ryansafner/publicS22</a> <a href="https://publicS22.classes.ryansafner.com"> publicS22.classes.ryansafner.com</a>

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# The Story So Far

We need to .hi[create a State to constrain individuals] from interfering against one another...but .hi[we also need to constrain the State]

- .hi[Constitutional rules] define the .hi-purple[domain of allowed collective decisions] and the .hi-purple[rules or procedures] for doing so

- Their practical function is .hi-purple[to protect minorities from the majority]

]

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# The Story So Far

.hi-purple[Political rules] allow us to make one collective choice for all, even though many will disagree with the outcome

We must .hi[agree at a constitutional level] so that .hi-purple[we can disagree on political outcomes]

]

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# James Buchanan and Gordon Tullock

R: Gordon Tullock (1922—2014)
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- Buchanan:
  - 1986 Nobel Prize in Economics
  - Collective choice as exchange, constitutional political economy, political philosophy

- Tullock:
  - Rent-seeking, transitional gains trap, autocracy, law & economics

- Brings economic tools to political science: **politics as exchange**
]
]

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# Public Choice and Behavioral Symmetry

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# Behavioral Symmetry

R: Gordon Tullock (1922—2014)
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]
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> “Political theorists seem rarely to have used this essentially economic approach to collective activity. Their analyses of collective-choice processes have more often been grounded on the implicit assumption that the representative individual seeks not to maximize his own utility, but to find the "public interest" or "common good,” (p. 19)

.source[Buchanan, James M and Gordon Tullock, 1962, *The Calculus of Consent: Logical Foundations of Constitutional Democracy*]
]

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# What is ‘the Public Interest‘ or ‘the Common Good?’

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# Naive Political Economy

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# Naive Political Economy

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- People often recommend optimal policies that could effectively be installed by a .hi[benevolent despot] who has
  - Perfect knowledge to correctly identify ‘the public good’
  - Has the desire and perfect incentives to achieve it
  - Has no constraints on his/her actions
]

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# Naive Political Economy

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# Robust Political Economy

- In reality, 1st-best policies distorted by:
 - problems with knowledge
 - problems with incentives
 - problems with politics/agreement/control

- Real world: 2nd-to-*n*th-best outcomes
]

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# Making Fair Comparisons: Nirvana Fallacy

Harold Demsetz

1930-2019
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> “The view that now pervades much public policy economics implicitly presents the relevant choice as between an ideal norm and an existing 'imperfect' institutional arrangement. This .hi[nirvana approach] differs considerably from a comparative institution approach in which the relevant choice is between alternative real institutional arrangements,” (p.1).

.source[Demsetz, Harold, 1969, "Information and Efficiency: Another Viewpoint," *Journal of Law and Economics* 12(1): 1-22]

]

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# Comparative Analysis

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- Compare imperfections of feasible and relevant alternative systems
    - .hi[Nirvana fallacy]: comparing a flawed (but real) system with some flawless, ideal system

- Economics: *think on the margin!* 
    - One system's “failure” does not imply another's “success”!
    - the real world requires tradeoffs
    - “economics puts parameters on people's utopias”
    - “compared to what?”
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# Hume: Assume the Worst (?)

1711-1776
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.right-column[
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> “Political writers have established it as a maxim, that, in contriving any system of government, and fixing the several checks and controuls of the constitution, .hi[every man ought to be supposed a knave, and to have no other end, in all his actions, than private interest.] By this interest we must govern him, and, by means of it, make him, notwithstanding his insatiable avarice and ambition, co-operate to public good. .hi[Without this, say they, we shall in vain boast of the advantages of any constitution, and shall find, in the end, that we have no security for our liberties or possessions, except the good-will of our rulers; that is, we shall have no security at all,]”  (“Of the Independency of Parliament”)

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# Behavioral Symmetry

R: Gordon Tullock (1922—2014)
]
]
]

> “Throughout the ages the profit-seeker, the utility-maximizer, has found few friends among the moral and the political philosophers...In the political sphere the pursuit of private gain by the individual participant has been almost universally condemned as 'evil' by moral philosophers of many shades. .hi[No one seems to have explored carefully the implicit assumption that the individual must somehow shift his psychological and moral gears when he moves between the private and the social aspects of life],” (p. 19)

.source[Buchanan, James M and Gordon Tullock, 1962, *The Calculus of Consent: Logical Foundations of Constitutional Democracy*]
]

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# Behavioral Symmetry

R: Gordon Tullock (1922—2014)
]
]
]

> “We are, therefore, placed in the somewhat singular position of having to defend the simple assumption that .hi[the *same* individual participates in both processes [the market and politics]] against the almost certain onslaught of the moralists,” (p. 19)

.source[Buchanan, James M and Gordon Tullock, 1962, *The Calculus of Consent: Logical Foundations of Constitutional Democracy*]
]

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# Politics as Exchange

R: Gordon Tullock (1922—2014)
]
]
]

> “The economic approach, which assumes man to be a utility-maximizer in both his market and his political activity, does not require that one individual increase his own utility at the expense of other individuals. This approach incorporates .hi[political activity as a particular form of *exchange*]; and, as in the market relation, .hi[mutual gains to all parties are ideally expected to result from collective action],” (p. 23)

.source[Buchanan, James M and Gordon Tullock, 1962, *The Calculus of Consent: Logical Foundations of Constitutional Democracy*]
]

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# Politics as Exchange

R: Gordon Tullock (1922—2014)
]
]
]

> “The power-maximizing approach, by contrast, must interpret collective choice-making as a zero-sum game...When one man gains, the other must lose; mutual gains from "trade" are not possible in this conceptual framework,” (p. 23-24)

.source[Buchanan, James M and Gordon Tullock, 1962, *The Calculus of Consent: Logical Foundations of Constitutional Democracy*]
]

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# Levels of Rules

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# The Political and the Constitutional

- We must be able to examine both levels simultaneously:

1. .hi[Constitutional level] choice among **alternative sets** of rules

2. .hi[Political level] choice **within a specific set** of rules

]

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# The Political and the Constitutional

- Each level affects the other

- Constitutional rules constrain political decisions

- Current political situation (preferences, interests, wealth, power) tints how we view particular constitutional rules
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# How to Decide How to Decide

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# Veil of Uncertainty

- Behind .hi[veil of uncertainty] at the .hi[constitutional moment]
  - Rawlsian veil of ignorance

- Individuals do not know if they will be in majority or minority

- Need to know costs of State action, but can't know this before we know how State is organized

]

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# Collective Action on the Margin

- B&T assume some pre-existing property rights at some minimal level

- .hi-purple[What _further_ collective action will individuals agree to?]

> “When will a society composed of free and rational utility-maximizing individuals choose to undertake action *collectively* rather than *privately*?”

- Pre-existing **externalities** that individuals cannot mitigate alone
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# Collective Action on the Margin

- Pre-existing **externalities** that individuals cannot mitigate alone

- Failing to act collectively would leave these externalities
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# Constitutional Political Economy

R: Gordon Tullock (1922—2014)
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]
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> "There should be little reason to expect that constitutional rules developed in application to the passage of general legislation would provide an appropriate framework for the enactment of legislation that has differential or discriminatory impact on separate groups of citizens," (p. 22)

.source[Buchanan, James M and Gordon Tullock, 1962, *The Calculus of Consent: Logical Foundations of Constitutional Democracy*]
]

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# The Unanimity Rule

- **What is the moral status of a decision rule?**
  - e.g. “majority rule”

- .hi[Unanimity] is .hi[ideal]: Pareto efficient by definition

- Choice of .hi[constitutional rules] should be .hi[unanimous], so we can .hi-purple[disagree] about .hi-purple[political outcomes]

]

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# The Unanimity Rule

- But there are .hi[costs] of trying to secure unanimity!
  - Need **everyone** to agree

- A .hi-purple[less-than-unanimous rule] will **create other costs** on minorities that are not in the majority

- Consider two types of costs to determine **optimal departure from unanimity**
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# External Costs

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- .hi-red[External costs, `\\(C(n)\\)`]: cost of collectively-chosen outcome on individual, falling with `\(n\)`

- Expected cost of being in minority and coerced to comply with unfavorable decision

- Some expected cost at 0, personal cost of unresolved externality

- With .hi[unanimity] `\((N)\)`, external costs `\(\rightarrow 0\)`
]

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# Decision-making Costs

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- .hi-blue[Decision-making costs, `\\(D(n)\\)`]: cost of reaching an agreement, rising at an increasing rate with `\(n\)`

- With more people, any one person can veto!

- Holdouts, strategic bargaining, high transaction costs
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# Optimal-Decision Rule

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- With greater `\(n\)`, a tradeoff between lower .hi-red[External costs `\\(C(n)\\)`] and higher .hi-blue[Decision-making costs `\\(D(n)\\)`]
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# Optimal-Decision Rule

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- With greater `\(n\)`, a tradeoff between lower .hi-red[External costs `\\(C(n)\\)`] and higher .hi-blue[Decision-making costs `\\(D(n)\\)`]

- .hi-purple[Total costs `\\(C(n)+D(n)\\)`]: the (vertical) sum of external and decision-making costs

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# Optimal-Decision Rule

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.pull-right[
- With greater `\(n\)`, a tradeoff between lower .hi-red[External costs `\\(C(n)\\)`] and higher .hi-blue[Decision-making costs `\\(D(n)\\)`]

- .hi-purple[Total costs `\\(C(n)+D(n)\\)`]: the (vertical) sum of external and decision-making costs

- .hi[Optimal decision rule]: **minimize total costs at `\(\frac{K}{N}\)`** 
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# Optimal-Decision Rule

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- **_ANY_ group of `\(\frac{K}{N}\)` people that agree will determine the outcome**
  - the “decisive set”

- Note: again, the **minimum of** .hi-purple[Total Costs]
  - not necessarily the *intersection* of .hi-red[External costs] and .hi-blue[Decision-making costs]
  - not necessarily **simple majority `\(\frac{n}{2}+1\)`**!
]

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# The Benefits of Majority Rule

- .hi[Majority rule `\\(\left(\frac{n}{2}+1\right)\\)`] *is* a very common decision rule

- Despite moral arguments for/against, practical reasons:
  1. It's the smallest possible group which can ensure there will not be two contradictory measures passed
  2. Can break a “voting cycle” (**next class**!)

]

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# Optimal Decision Rules Vary

- Costs are different issue by issue
  - **No single voting rule optimal for all issues**

- High .hi-red[`\\(C(n)\\)`]-issues
  - Exercise of State power vs. individual
  - Constitutional amendment
  - Criminal convictions
  - .hi-purple[Require much larger decisive set than a simple majority]

]

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# Optimal Decision Rules Vary

- Costs are different issue by issue
  - **No single voting rule optimal for all issues**

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# Optimal Decision Rules Vary

- Low .hi-red[`\\(C(n)\\)`]-issues, common access rules:
  - Nomination (1 person)
  - Introducing a motion/bill (moved and seconded)
  - *Writ of certorari*
  - .hi-purple[Require much smaller decisive set than a simple majority]
]

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# Optimal Decision Rules Vary

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# A Little Tool I Made

[https://ryansafner.shinyapps.io/ccmodel/](https://ryansafner.shinyapps.io/ccmodel/)
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# Common Decision Rules

- **Access rules**: less than majority
  - Bringing issues to the group

- **Decision rules**: majority
  - Actual business of passing resolutions

- **Changing the rules**: more than majority (closer to unanimity)

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# What Affects Total Costs

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- Size of `\(N\)`: larger groups create larger `\(C+D\)` costs
  - .hi-purple[We want the smallest group consistent with the size of the externality]

- Heterogeneity (of preferences, wealth, power, etc)
  - `\(C\)`-costs rise: greater fear of being in minority
  - `\(D\)`-costs rise: harder to get very different people to agree
]
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# Heterogeneity

R: Gordon Tullock (1922—2014)
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> "Many activities that may be quite rationally collectivized in Sweden, a country with a relatively homogenous population, should be privately organized in India, Switzerland, or the United States."

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# Comparing the Cure and the Disease

- Different alternative decisions regarding an externality have different costs:

- `\(A\)`: do nothing, live with externality

- `\(B\)`: voluntary collective action
  - cost of collective action might yield underprovision

- `\(C\)`: government action
  - cost of collective action might create *new* political externalities

]

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# Comparing the Cure and the Disease

R: Gordon Tullock (1922—2014)
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> "The existence of external effects of private behavior is neither a necessary nor a sufficient condition for an activity to be placed in the realm of collective choice," (p.61)

.source[Buchanan, James M and Gordon Tullock, 1962, *The Calculus of Consent: Logical Foundations of Constitutional Democracy*]
]

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# When Optimal Collective Action is Second-Best

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- Even with optimal collective decision rule, it might be better off left to private hands if total costs are lower (at A)

- In general, the higher `\(C+D\)` costs are (for whatever reason), the greater likelihood that an activity should be left private
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# The Importance of the Starting Point

- Constitutional choice does not take place in a vacuum

- Veil of ignorance assumes we have no specific stake in changing rules in a particular way, but

- Our current political situation (preferences, wealth, power, etc.) naturally will affect how we view different rules

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# The Importance of the Starting Point

- Incorrect to start from Hobbes (no rules); irrelevant to our actual decisions

- Constitutional economics is practically about *reform* of rules, rather than designing from scratch

- We must always start from where we are

- We would build a different house from scratch than if we change our existing one
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