by Jurgen Brauer, July 2004
Copyright: J. Brauer. No reproduction without permission.

As we celebrate U.S. independence day - July 4th - let us reflect on the economics of the constitution.

The Bill of Rights, a set of amendments to the constitution of the United States, protects the right to free speech, freedom of peacable assembly, freedom of religion, and other basic freedoms. These rights are important not so much for the 99 percent of the population whose daily babble merely reinforces social mores, but for the one percent whose voice opposes the consensus.

I am reminded of an American lady of Chinese origin. Her parents fled China and cherish the right to free expression in the U.S. So did their child, the lady. But, living in a small, conservative, southern town she felt pressured not to freely express her opposition to the U.S. war on Iraq in the spring of 2003. I reminded her that the right to free speech is a legal protection for those with the courage to speak out. The constitution does not supply the courage to speak one's mind; it supplies the protection to do so.

Why does the U.S. constitution contain such rights? To see the answer, suppose that it did not. In that case, just over half the population could make rules for just under half of the population. A majority of 51 percent might dictate how the other 49 percent are to believe and pray. It is easy to see that rebellion and revolution would be quickly in the offing.

The constitution does not supply the courage to speak one's mind; it supplies the protection to do so.

We learn from this example that a well-designed constitution, a country's basic law, must anticipate vested interests and tension far into the future. Some countries frequently change their constitution. Not in the U.S. because to do so requires a supermajority in Congress, and a large number of state legislatures also must agree to proposed constitutional changes. In the 1970s, even as basic a concept as equal rights for men and women failed to be enshrined into the U.S. constitution.

The upside of making constitutional changes difficult is that this provides stability and, with stability, confidence that the basic system by which the country runs will not change easily. Stability and confidence amount to certainty. Certainty is important for economics because it lowers costs for market participants. Fewer defensive outlays such as risk hedging are required, less insurance against political risk will need to be taken, and more resources can be devoted to productivity-enhancing investment.

Not only do constitutions affect economies but economics can help us analyze the content and consequences of constitutions. For example, how should voting systems be designed? A simple-majority system, we already noted, can encourage rebellion. To forestall this danger, certain minority rights are irrevocably guaranteed in the constitution, regardless of what future majorities may think about the matter. We thus have a two-track voting system. One track makes it nearly impossible to change the Bill of Rights, but another track does work with simple majority voting for the passing of legislation.

The U.S. constitution is not free of problems. One is that Congress can pass legislation obliging states to take certain actions even when the legislation fails to provide funding to finance the required action. These unfunded mandates force states to raise revenue, or to cut expenditure elsewhere in their budgets, and the states rightly object. The U.S. has become less of a federal and more of a central construct, and many argue that this is not what the designers of the U.S. constitution intended.

Just as federal government encroaches on state matters, so states encroach on local matters, at the county and municipality level. This can generate considerable resentment by the governed. Nobody likes to be governed from afar. Politically apathetic as American voters are, they become more involved the more local the matters at hand are. The gradual transfer of effective decision-making power from local communities to distant state houses and to the even more distant U.S. Congress may be a matter worth watching and pondering over the next few decades.

Americans are increasingly mobile, and it is probably right to expect some degree of uniformity and homogeneity across all fifty states, provided by federal mandates. In fact, I find many state laws parochial and wish national standards would prevail. Still, remove too much power too fast from the local and state arena to the federal government, and a period of unrest is not unthinkable even for the United States.