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Federalism as an ideal political order and an objective for constitutional reform

The author, James M Buchanan discusses federalism as a central element in an inclusive political order.

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Federalism as an ideal political order and an objective for constitutional reform

  1. 1. Federalism As an Ideal Political Order and an Objective for Constitutional Reform James M. Buchanan George Mason University Federalbm is first examined as an ideal-type political order as possibly emergent fiom initial constitutional agreement among members of a prospective political community. This abstracted and nonhistorical analysis is followed by an examination of the possible applicability of the federalist ideal as the basis for refiznn in specific historical-institutional settings. The direction of constitutional change toward efiective federalLrm is discussed, with the devolution of political authority from centralized structures carejitlly distinguished from the limited concentration of authority from previously autonomous political units. My aim here is to discuss federalism, as a central element in an inclusive political order, in two, quite different, but ultimately related, conceptual perspec- tives. First, I examine federalism as an ideal type, as a stylized component of a constitutional structure of govcmance that might be put in place ab initio, as emergent from agreement among citizens of a particular community before that community, as such, has experienced its own history. Second, the discussion shifts dramatically toward reality, and the critical importance of defining the historically determined status quo is recognized as a necessary first step toward reform that may be guided by some appreciation of the federalist ideal. IDEAL THEORY Federalism as an Analogue to the Market An elementary understanding and appreciation of political federalism is facilitated by a comparable understanding and appreciation of the political function of an economy organized on market principles. Quite apart from its ability to produce and distribute a highly valued bundle of “goods, ” relative to alternative regimes, a market economy serves a critically important political role. To the extent that allocative and distributive choices can be relegated to the AUTHOR'S NOTE: An initial version of this paper was prepared for and presented at a conference in Mexico in January 1995, cosponsored by the Fraser Institute and the Instituto Cultural Ludwig Von Mises. 0 Publius: The Journal of Federalism 25:2 (Spring 1995) 19
  2. 2. 20 Publlus/ Spring 1995 workings of markets, the necessity for any politicization of such choices is eliminated. But why should the politicization of choices be of normative concem? Under the standard assumptions that dominated analysis before the public choice revolution, politics is modeled as the activity of a benevolently despotic and monolithic authority that seeks always and everywhere to promote “the public interest, " which is presumed to exist independently of revealed evaluations and which is amenable to discovery or revelation. If this romantic image of politics is discarded and replaced by the empirical reality of politics, any increase in the relative size of the politicized sector of an economy must carry with it an increase in the potential for exploitation. ‘ The well-being of citizens becomes vulnerable to the activities of politics, as described in the behavior of other citizens as members of majoritarian coalitions, as elected politicians, and as appointed bureaucrats. This argument must be supplemented by an understanding of why and how the market, as the alternative to political process, does not also expose the citizen- participant to comparable exploitation. The categorical diiference between market and political interaction lies in the continuing presence of an effective exit option in market relationships and in its absence in politics. To the extent that the individual participant in market exchange has available effective altematives that may be chosen at relatively low cost, any exchange is necessarily voluntary. In its stylized form, the market involves no coercion, no extraction of value from any participant without consent. In dramatic contrast, politics is inherently coercive, independently of the effective decision rules that may be operative. The potential for the exercise of individual liberty is directly related to the relative size of the market sector in an economy. A market organization does not, however, emerge spontaneously from some imagined state of nature. A market economy must, in one sense, he “laid on" through the design, construction, and implementation of a political-legal framework (i. e., an inclusive constitution) that protects property and enforces voluntary contracts. As Adam Smith emphasized, the market works well only if these parameters, these “laws and institutions, ” are in place. ’ Enforceable constitutional restrictions may constrain the domain of politics to some extent, but these restrictions may not offer sufficient protection against the exploitation of citizens through the agencies of govemance. That is to say, even if the market economy is allowed to carry out its allocational-distributional role over a significant relative share of the political economy, the remaining domain of actions open to politicization may leave the citizen, both in person and property, vulnerable to the expropriation of value that necessarily accompanies political coercion. ‘James M. Buchanan, “Politics without Romance: A Sketch of Positive Public Choice Theory and Its Normative Implications. " Inaugural lecture, Institute for Advanced Studies, Vienna, Austria, II-IS Journal, Zeltschrlfl dc: Instlruts/ fir Hfihere Studleu 3 (1979): Bl-Bl 1. ‘Adam Smith. The Wealth of Nations (1776; Modern Library ed. ; New York: Random House. 1937).
  3. 3. Federalism As Ideal Political Order 21 How might the potential for exploitation be reduced or minimized? How might the political sector, in itself, be constitutionally designed so as to offer the citizen more protection? The principle of federalism emerges directly from the market analogy. The politicized sphere of activity, in itself, may be arranged or organized so as to allow for the workings of competition, which is the flip side of the availability of exit, to become operative. The domain of authority for the central government, which we assume here is coincident in territory and membership with the economic exchange nexus, may be severely limited, while remaining political authority is residually assigned to the several “state” units, each of which is smaller in territory and membership than the economy. Under such a federalized political structure, persons, singly and/ or in groups, would be guaranteed the liberties of trade, investment, and migration across the inclusive area of the economy. Analogously to the market, persons retain an exit option; at relatively low cost, at least some persons can shift among the separate political jurisdictions. Again analogously to the market, the separate producing units (in this case, the separate state govemments) would be forced to compete, one with another, in their offers of publicly provided services. The federalized structure, through the forces of interstate competition, effectively limits the power of the separate political units to extract surplus value from the citizenry. Principles of Competitive Federalism The operating principles of a genuinely competitive federalism can be summa- rized readily. ’ As noted, the central or federal government would be constitution- ally restricted in its domain of action, severely so. Within its assigned sphere, however, the central government would be strong, sufficiently so to allow it to enforce economic freedom or openness over the whole of the territory. The separate states would be prevented, by federal authority, from placing barriers on the tree flow of resources and goods across their borders. The constitutional limits on the domain of the central or federal govemment would not be self-enforcing, and competition could not be made operative in a manner precisely comparable to that which might restrict economic exploitation by the separate states. If the federal (central) govemment, for any reason, should move beyond its constitutionally dictated mandate of authority, what protection might be granted—to citizens individually or to the separate states—against the extension of federal power? The exit option is again suggested, although this option necessarily takes on a different form. The separate states, individually or in groups, must be constitu- tionally empowered to secede from the federalized political structure, that is, to form new units of political authority outside of and beyond the reach of the existing federal govemment. Secession, or the threat thereof, represents the only ’See Geoffrey Brennan and James M. Buchanan. The Power to Tax: Analytical Foundations ofa Fiscal Constitution (New York: Cambridge University Press, 1980), pp. 168-186. for more comprehensive treatment.
  4. 4. 22 Publlus/ Spring 1995 means through which the ultimate powers of the central government might be held in check. Absent the secession prospect, the federal govemment may, by overstepping its constitutionally assigned limits, extract surplus value from the citizenry almost at will, because there would exist no effective means of escape. ‘ With an operative secession threat on the part of the separate states, the federal or central govemment could be held roughly to its assigned constitutional limits, while the separate states could be lefi to compete among themselves in their capacities to meet the demands of citizens for collectively provided services. Locational rents, differential preferences for publicly provided goods and ser- vices, scale efiiciencies, and the absence of residual claimancy—these and other factors would prevent even the idealized federal structure from attaining overall results that would be comparably efficient to those attained in the market economy, even when one acknowledges the shortfall of the latter from its idealized variant. Nonetheless, an effectively competitive federalism can be imaginatively constructed that is consistent with the observed behavioral regu- larities of human nature. Such a construction surely belongs in the realm of the “might be” rather than the realm of science fiction. In such an idealized political order, the individual citizen would be insured against undue fiscal or economic exploitation by either the federal govemment or the state governments. The exploitation that might occur would be kept within threshold limits determined by the costs of personal and institutional work. Some observers mightbe prompted to inquire: What political activities will the separate states perform in an effectively competitive federalism? The asking of such a question as this suggests a basic misunderstanding of the principles sketched out in this section. Within each separate state of the federal system, both the dividing line between privately and publicly organized production-distribution activity and the allocational-distributional mix among the items within the publicly organized sector, remain to be detennined by the interworkings of the preferences of the citizenry and the intemal political process. There is no extemal constraint that takes explicit shape here, whether emanating from the Constitution, the central govemment, or anywhere else. The separate states are free to do “as they please, ” constrained only by the participation of their own citizens in the decision processes. We should predict, of course, that the separate states of a federal system would be compelled by the forces of competition to offer tolerably “efficient” mixes of publicly provided goods and services, and, to the extent that citizens in the different states exhibit roughly similar preferences, the actual budgetary mixes would not be predicted to diverge significantly, one from the other. However, the point to be emphasized here (and which seems to have been missed in so much of ‘For formal analysis of secession, see James M. Buchanan and Roger Faith, “Secession and the Limits of Taxation: Towards a Theory of lntemal Exit. " American Economic Review 5 (December 1987): 1023-1031; for a more general discussion, see Allen Buchanan, Secession: The Morality of Political Divorce from Fort Sumter to Lithuania and Quebec (Boulder, Col. : Westview, l99l).
  5. 5. Federalism As Ideal Political Order 23 the discussion about the potential European federalism) is that any such standard- ization or regularization as might occur, would itself be an emergent property of competitive federalism rather than a property that might be imposed either by constitutional mandate or by central govemment authority. THE PATH DEPENDENCY OF CONSTITUTIONAL REFORM From Here to There: A Schemata The essential principle for meaningful discourse about constitutional-institu- tional reform (or, indeed, about any change) is the recognition that reform involves movement fiom some “here” toward some “there. ” The evaluative comparison of alternative sets of mles and alternative regimes of political order, as discussed above in the first section, aims exclusively at defining the “there, " the idealized objective toward which any change must be tumed. But the direction for effective reform also requires a definition of the “here. ” Any reform, constitutional or otherwise, commences from some “here and now, ” some status quo that is the existential reality. History matters, and the historical experience of a political community is beyond any prospect of change; the constitutional- institutional record can neither be ignored nor rewritten. The question for reform is, then: “How do we get there from here? " These prefatory remarks are necessary before any consideration of federalism in discussion of practical reform. The abstracted ideal—a strong but severely limited central authority with the capacity and the will to enforce free trade over the inclusive territory, along with several separate “states, ” each one of which stands in a competitive relationship with all other such units—of this ideal federal order may be well-defined and agreed upon as an objective for change. However, until and unless the “here, ” the starting point, is identified, not even the direction of change can be lmown. A simple illustration may be helpful. Suppose that you and I agree that we want to be in Washington, D. C. But, suppose that you are in New York and I am in Atlanta. We must proceed in different directions if we expect to get to the shared or common objective. Constitutional reform aimed toward an effective competitive federalism may reduce or expand the authority of the central govemment relative to that of the separate state govemments in the inclusive territory of potential political interac- tion. If the status quo is described as a centralized and unitary political authority, reform must embody devolution, a shifi of genuine political power from the center to the separate states. On the other hand, if the status quo is described by a set of autonomous political units that may perhaps be geographically contiguous but which act potentially in independence one from another, reform must involve a centralization of authority, a shift of genuine power to the central government from the separate states. Figure 1 offers an illustrative schemata. Consider a well-defined territory that may be organized politically at any point along the abstracted unidimensional
  6. 6. 24 Publlus/ Spring 1995 spectrum that measures the extent to which political authority is centralized. At the extreme lelt of this spectrum, the territory is divided among several fully autonomous political units, each one of which possesses total "sovereignty, " and among which any interaction, either by individuals or by political units, must be subjected to specific contractual negotiation and agreement. At the extreme right of this spectrum, the whole of the ten-itory is organized as an inclusive political community, with this authority centralized in a single govemmental unit. Indi- viduals and groups may interact, but any such interaction must take place within the uniform limits laid down by the monolithic authority. FIGURE 1 A Conrtltutlunal Reform schemata . _) (__ Fully autonomous Competitive Centralized separate states federalism unitary polity An effective federal structure may be located somewhere near the middle of the spectrum, between the regime of fully autonomous localized units on the one hand and the regime of fully centralized authority on the other. This simple illustration makes it easy to see that constitutional refonn that is aimed toward the competitive federal structure must be characterized by some increase in centralization, if the starting point is on the lefl, and by some decrease in centralization, if the starting point is on the right. The illustration prompts efforts to locate differing regimes at differing places in their own separate histories on the unidimensional scalar. In 1787, James Madison, who had observed the several former British colonies that had won their independence and organized themselves as a confederation, located the status quo somewhere to the left of the middle of the spectrum, and he sought to secure an effective federalism by establishing a stronger central authority, to which some additional powers should be granted. Reform involved a reduction in the political autonomy of the separate units. In the early post-World War ll decades, the leaders of Europe, who had observed the terrible nationalistic wars, located their status quo analogously to Madison. They sought reform in the direction of a federalized structure—reform that necessarily involved some establishment of central authority, with some granting of power independently of that historically claimed by the separate nation-states. By comparison and contrast, consider the United States in 1995, the history of which is surely described as an overshooting of Madison's dreams for the ideal political order. Over the course of two centuries, and especially after the demise of any secession option, as resultant from the great Civil War of the 18605, the U. S. political order came to be increasingly centralized. The status quo in 1995 lies clearly to the right of the spectrum, and any reform toward a federalist ideal must involve some devolution of central govemment authority and some increase in the
  7. 7. Federalism As ldeal Political Order 25 effective independent power of the several states. (The electoral results in November 1994 suggest that the federalist ideal contains considerable popular appeal, and prospects for reform appear better than in many decades. ) Constitutional reform in many countries, as well as the United States, would presumably involve devolution of authority from the central govemment to the separate states. Constitutional Strategy and the Federalist Ideal The simple construction of Figure 1 is also helpful in suggesting that it may be difficult to achieve the ideal constitutional structure described as competitive federalism. Whether motivated by direct economic interest, by some failure to understand basic economic and political theory, or by fundamental conservative instincts, specific political coalitions will emerge to oppose any shift from the status quo toward a federal structure, no matter what the starting point. If, for example, the status quo is described by a regime of fully autonomous units (the nation-states of Europe after World War II), political groups within each of these units will object to any sacrifice of national sovereignty that might be required by a shift toward federalism. Additionally, the strategic success of such groups is enhanced to the extent that the effective alternative is presented, not as a federal structure located somewhere in the middle of the spectrum, but as the highly centralized authority at the other extreme. If the anti-federalists raise the specter of central govemment domination, popular support for the federalist reform necessarily becomes weaker. Similar comments may be made about the debates mounted from the opposing direction. if a unitary centralized authority describes the status quo ante, its supporters may attempt to and may succeed in conveying the potential for damage through constitutional collapse into a regime of autonomous units, vulnerable to economic and political warfare. The middle way offered by devolution to a competitive federalism may, in this case, find few adherents. ‘ The discussion of steps toward a constitution for the European Union, espe- cially during the period 1989-1995, seems to reinforce the points made above. The discussion appears to have proceeded largely as if the genuine federalist structure is not considered as a constitutional altemative. The position repre- sented by Jacques Delors and much of the Brussels bureaucracy envisages a Europe in which political authority is highly centralized, with the whole economy subjected to uniform regulation. By contrast, the position represented by the Bruges group, and promoted by Margaret Thatcher, more or less accepts the Delors thrust as the only effective altemative to the retention of full national ‘The theory of agenda-setting in public choice offers analogies. if the agenda can be manipulated in such fashion that the altematives for choice effectively “bracket" the ideally preferred position, voters are confronted with the selection ofone or the other of the extreme altematives, both of which may be dominated by the preferred option. See Thomas Romer and Howard Rosenthal, “Political Resource Allocation, Controlled Agendas, and the Status Quo, ” Public Choice 33 (Winter 1978): 27- 43.
  8. 8. 26 Publluslsprlng 1995 sovereignty. From this base of interpretation, any talk of federalism becomes an anathema. ‘ As the construction in Figure 1 also suggests, however, the fact that the federalist structure is, indeed, “in the middle, " at least in the highly stylized sense discussed here, may carry prospects for evolutionary emergence in the conflicts between centralizing and decentralizing pressures. Contrary to the poetic pessi- mism of William Butler Yeats, the “centre" may hold, if once attained, not because of any intensity of conviction, but rather due to the location of the balance of forces. ’ Federalism and Increasing Economic Interdependence In the preceding discussion, I have presumed that the economic benefits of a large economic nexus, defined both in tenitory and membership, extend at least to and beyond the limits of the political community that may be constitutionally organized anywhere along the spectrum in Figure 1, from a regime of fully autonomous political units to one of centralized political authority. Recall that Adam Smith emphasized that economic prosperity and growth find their origins in the division (specialization) of labor and that this division, in turn, depends on the extent of the market. Smith placed no limits on the scope for applying this principle. But we know that the economic world of 1995 is dramatically different from that of 1775. Technological development has facilitated a continuing transformation of local to regional to national to intemational interactions among economic units. Consistently with Smith’s insights, economic growth has been more rapid where and when political intrusions have not emerged to prevent entrepreneurs from seizing the advantages offered by the developing technology. Before the technological revolution in information processing and communi- cation, however, a revolution that has occurred in this half-century, politically motivated efforts to “improve” on the workings of market processes seemed almost a part of institutional reality. In this setting, it seemed to remain of critical economic importance to restrict the intrusiveness of politics, quite apart from the complementary effects on individual liberties. Political federalism, to the extent that its central features were at all descriptive of constitutional history, did serve to facilitate economic growth. The modem technological revolution in information processing and commu- nications may have transformed, at least to some degree, the setting within which politically motivated obstructions may impact on market forces. This technology may, in itself, have made it more difficult for politicians and govemments, at any and all levels, to check or to limit the ubiquitous pressures of economic interde- ‘For earlier analyses of the discussion, see my several papers, James M. Buchanan, “Politics without Romance"; “Europe's Constitutional 0ppomrnity, "Eurape ‘s Constitutional Future (London: Institute of Economic Affairs, 1990), pp. 1-20; “National Politics and Competitive Federalism" (Fairfax, Va. : Center for Study of Public Choice, George Mason University, 1994). "William Butler Yeats, "The Second Coming, " The Collected Works of W. B. Yeats, vol. 1, 11:2 Poems, ed. Richard J. Finneran (New York: Macmillan, 1989), p. 187.
  9. 9. Federalism As Ideal Political Order 27 pendence. ‘ When values can be transferred worldwide at the speed of light and when events everywhere are instantly visible on CNN, there are elements of competitive federalism in play, almost regardless of the particular constitutional regimes in existence. Finally, the relationship between federalism, as an organizing principle for political structure, and the freedom of trade across political boundaries must be noted. An inclusive political territory, say, the United States or Westem Europe, necessarily places limits on its own ability to interfere politically with its own internal market structure to the extent that this structure is, itself, opened up to the free workings of intemational trade, including the movement of capital. On the other hand, to the extent that the intemal market is protected against the forces of intemational competition, other means, including federalism, become more essential to preserve liberty and to guarantee economic growth. CONCLUSION The United States offers an illustrative example. The United States prospered mightily in the nineteenth century, despite the wall of protectionism that sheltered its internal markets. It did so because political authority, generally, was held in check by a constitutional structure that did contain basic elements of competitive federalism. By comparison, the United States, in this last decade of the twentieth century, is more open to international market forces, but its own constitutional structure has come to be transformed into one approaching a centralized unitary authority. Devolution toward a competitive federal structure becomes less necessary to the extent that markets are open to extemal opportunities. However, until and unless effective constitutional guarantees against political measures to choke ofi‘ extemal trading relationships are put in place, the more permanent constitutional reform aimed at restoring political authority to the separate states offers a firmer basis for future economic growth along with individual liberty. The Europe of the 1990s offers a second example. If trade beyond the limits of the European Union’s members remains open, the concerns about excessive centralization of political authority may be misplaced. However, to the extent that “fortress Europe" becomes descriptive of political reality, the movement toward a genuinely competitive federalism takes on much more importance. ‘Richard McKenzie and Dwight Lee, Qulcb-llver Capital: How the Rapid Movement of Wealth Has Changed the World (New York: Free Press. 199]).