End-independent legal rules and the political economy of expanding market societies of Europe

European

Journal

of Political

Economy

7 (1991) 579-601.

North-Holland

End-independent legal rules and the political economy of expanding market societies of Europe* Sheri Markose-Cherian Economics Department, Accepted

University

for publication

of Essex, Wivenhoe Park, Colchester

November

CO4 3SQ, Essex, UK

1990

The political economy of the expanding markets of Europe is crucially tied to the Kantian quality of end-independence of rules that coercive authorities may legitimately enforce. A formal statement of this basic property of market societies requires a foray into the meta-mathematics of undecidable propositions. Using the premise first mooted by F.A. Hayek that market outcomes are complex phenomena, it is shown that they belong to the class of undecidable propositions, i.e. they are not amenable to constructive rationalism and human design. The nonpurposiveness or the end-independence of the rules coordinating the market order, follows as a logical corollary. In the creation of a larger market order with the EEC, these rules can be observed to emerge from a negative selection process ~ rules are progressively eliminated as unjust as they cannot be ‘universalized’ over what is now a larger territory and peoples.

1. Introduction ‘Gijdel apparently believed that an eternal ‘not’ was laid up in heaven, where virtuous logicians might hope to meet it here-after.’ [Bertrand Russell, Autobiography, Volume 23.

The line of inquiry pursued in this paper was prompted by certain observations based on the legal developments arising from the 1957 EEC (European Economic Community) Treaty of Rome that attempts to integrate the market societies of Western Europe. These observations lend credence to the hypothesis that in market societies decentralized control characterized by the autonomy of the individual decision maker is achieved by the evolution *This paper has had a long gestation period. In its writing I have been influenced inordinately by discussions with Partha Dasgupta, with whom of course I disagree, and also von Hayek who alerted me to the crucial missing piece in economic analysis, i.e. complex phenomena (though at the time I did not grasp its implications). I am particularly grateful for the interest shown in this area by Bob Sugden and Onora O’Neill without whose encouragement this paper would never have been completed. The editor’s comments are also acknowledged with thanks. 017~2680/91/$03.50

0

1991-Elsevier

Science Publishers

B.V. All rights reserved

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of a specific kind of legal system that constitutes an end-independent (E-I for short) system of rules. The fundamental idea that the autonomy of private decision making, the freedom associated with market relationships, can only be achieved by a coercive application of those legal rules that are themselves end-independent and universalizable is a Kantian one. In the words of Kant (1965, p. 25), in order to develop a deeper understanding of the legal system that coordinates actions of autonomous individuals, one must be able to: (i) ascertain how a legal rule qualifies for universal legislation (see also ibid., P. 34), (ii) gauge ‘the great and manifold consequences that can be drawn from this law’, and (iii) overcome our astonishment at ‘its simplicity (of structure) . . and its authority to command without appearing to carry any incentive with it’. This Kantian agenda of furthering our understanding of the fundamental rules that coordinate and control market relationships, receives the most brilliant and consistent exposition in the work of F.A. Hayek. Hayek, in having hypothesized that markets and the libertarian ethic associated with the system, is the outcome of the development of a system of control and coordination that is (a) informationally decentralized, (b) evolutionary and (c) possessing non-rational or non-purposive characteristics of an open-ended system, has undoubtedly challenged the predominant bastions of utilitarian, rationalistic and centralized theories of control. It is however, my major contention, and perhaps the utimate rationale for this paper, that even before considering the tall order of mathematical imagination required to develop a consistent paradigm of decentralized control in market societies, we are in need of some sociological imagination to unravel such processes at work. In this respect, it is not surprising that the processes of control engendered by the workings of the EEC Treaty should constitute an ideal test bed for the substantiation of the hypothesis that the Kantian end independent rules have a fundamental role in creating a decentralized market order. The EEC Treaty reflects a conscious or a deliberate attempt to ‘create’ a market order, or, to be more exact, to expand the same. Such a document would attempt to simulate the formal characteristics of those rules which in the past have known to enable individuals to interact for mutual benefit on the basis of private information and personal preferences, i.e. the hallmark of voluntary exchange so fundamental to free markets. It is convenient to summarize here the nature of my findings, leaving a more detailed and formal analyis to later sections. The fundamental rules in the 1957 Treaty of the EEC [Sweet and Maxwell (1977)], are characterized by their end independent nature. A likely corollary to the process of expansion of smaller communities which can share or even know and pursue specific ends, is a dynamic transformation of rules existing

S. Markose-Cherian,

End-independent legal rules and political economy

581

within the original system. Rules that may be efficacious and considered to be morally valid in smaller communities may not be so in larger ones. The import of the following Articles of the EEC Treaty - Arts. 3(a), (c) & (f); Art. 7; Arts. 9-17; Arts. 3&37; Arts. 4849; Arts. 52-54; Arts. 59-63; Art. 67; Art. 85; Art. 9G-92; and Art. 101 - is to eliminate as illegal certain rules that exist in the original legal systems of the member states. The rules that suffer elimination or restriction exhibit qualities obverse to the E-I rules. They are the socio-economic laws of the original legal systems that aim at the establishment of a deliberate and specific pattern in society which is considered to be morally desirable by the articulate, if not by the predominant sections of national societies. It is with a sense of shock that some writers exclaim that ‘there is no reference at all in the Treaty establishing the European Community, to the objective of a reasonable distribution of income, so obvious in the socioeconomic policy of some of the member-states’ [Kapteyn and Themaat (1973, p. 49)]. Neither does the Treaty provide for a Common Economic Policy (ibid, p. 275). Of course, it is held that these are temporary defects of the legal system of the European Community that will and ought to be remedied. It is a matter of annoyance to many that what they regard as a more or less settled issue - i.e., the concept of national socio-economic planning and the inviolability of its administrative instruments - should become a contentious issue with the creation of the European Common Market. The determination of the relationship between the concept of socio-economic law and the provisions of the EEC Treaty is an area fraught with prevarication to say the least. Yet, nowhere can the juridical and politico-economic significance of the distinction between the rules creating and maintaining a market order and the socio-economic rules that aim at the establishment of a deliberate and specific pattern in society, be demonstrated better than in recent experience with the enforcement of the EEC Treaty. This paper will necessarily fall short of resolving ‘the finer socio-political and legal aspects involved here. In fact, even a formal description of E-I rules, a matter which has eluded me for years, will also receive only a cursory discussion within the meta-mathematical framework of undecidable propositions. The paper will have succeeded, however, if it enables one to identify, alongside the above mentioned provisions of the EEC Treaty that aim to eliminate those national laws that stand in the way of a universalizable form of governmental authority, the very existence of the process generating E-I legal rules. This rule selection process is heuristic [Simon (1981, p. 56)] with the test criterion for selection being Kantian: rules are progressively eliminated as unjust because they are not ‘universalizable’ over what is now a larger territory and peoples. Furthermore, in keeping with Hayek’s principle of decentralized control, the modus operandi of this

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legal rules and political economy

heuristic rule selection process is informationally decentralized. It relies on the litigious behaviour of individuals who are prompted by a complex mesh of expectations on the universalizability of a legal rule. Thus an essential ingredient of the Hayekian and Simonian characterization of the heuristic rule selection process in society is the role played by previous experience of individuals, an ingredient certainly missing in 18th century Kantian idealism. The format of the rest of the paper is as follows. Section 2 elaborates on the above mentioned combination of Hayek’s development of Kantian jurisprudence with Simon’s contribution to rule selection in complex problems to form the cornerstone of the theory of decentralized control in market societies espoused in this paper. This approach is briefly contrasted with the mainstream literature on economic decentralization. Section 3 will attempt to formalize the notion of E-I legal rules in order to distinguish them from purposive, goal orientated socio-economic laws that purport to achieve certain ‘desired’ outcomes in society. For an unambiguous statement on the existence of E-I rules, the meta-mathematical framework for undecidable propositions has proved to be most fruitful. The references that I have used in this area are the standard ones of Rogers (1967), Cutland (1980) and Beeson (1985). Section 4 uses case studies of litigious activity in the EEC to substantiate the principles involved in the development of E-I legal rules. This is then followed by a brief concluding section.

2. Kantian jurisprudence and a theory of decentralization

in market societies

‘We cannot expect that this problem will be solved by first communicating all this information to a central board which, after integrating all knowledge, issues its orders. We must solve it by some form of decentralization. But this answers only part of our problem.’ [Hayek (1945, p. 524)].

Decentralized decision making in society necessarily presupposes the granting of some degree of autonomy to the individual decision maker. In a pair of papers (1937, 1945) Hayek postulated that the rationale for decentralized systems lies in what is perhaps the two most commonplace but singularly intractable informational constraints in society. First, information in society is found in a dispersed form subject to time and place matrices and it is perceived by individuals in a subjective fashion. Second, it is impossible to centralize information by communication alone. Economists [e.g. Marschak (1959), Arrow and Hurwicz (1977)] have been quick to incorporate the above two informational constraints in the resource allocation problems in an economy. In the mainstream literature on decentralized decision making initiated by Marschak (1959), the optimal level of decentralization determining the extent or degree to which decision making entities should be given autonomy to make decisions on the basis of their private information,

S. Markose-Cherian, End-independent legal rules and political economy

583

requires direct and rational calculations of the relative speeds and costs involved in the alternative systems of communication and control. In a survey article, Athans (1965) has indicated the potential analytical/ mathematical impasse inherent in viewing decentralized systems of control as an extension of the centralized paradigm of control in classical control theory. Athans notes that a mere imposition of the first, but not the second, of the Hayekian informational constraints within the latter framework may still lead to the mathematical result on the non-existence of decentralized decisions: it is optimal for the centre to cancel local decisions. Almost bearing this out is the following statement of Hurwicz (1960, p. 339), made in a self-deprecating mood: ‘it is the characteristic of the current state of the literature on decentralization, that one may be provided with a definition of what it means to have a more or less centralized command (italics added) economy’; virtually nothing is known about the decentralizing processes of the market system. A consistent paradigm for the existence of decentralized systems requires in particular that the process that determines the level of decentralization in the system should itself conform with the informational constraints that economists popularly associate with the price mechanism of the market. Furthermore, Hayek’s contention that the overwhelming aspect of communication and control in market societies is that they are devoid of conscious direction and rational calculation, has not been analysed in any systematic way in the mainstream literature. In fact, it is somewhat ironic that one has to rely on a cognitive psychologist, Weimar (1982), for a cogent appraisal of the issues that should be central to the study of market economies. However, see also Sugden (1989, 1986). Hayek’s radical departure from the above mainstream literature on decentralization is the consequence of his insight that the Kantian autonomy of the individual is not consistent with a regime of control in which the overall pattern of outcomes have been predetermined by conscious direction [Hayek (1973-1979)]. In Hayek’s evolutionary scheme of social developments, the physical informational constraints alone will not be sufficient to engender individual autonomy and non-purposive and open ended control by Kantian type legal rules. There has to be an even more fundamental problem with regard to the human condition. In having been first to postulate what this is, Hayek’s genius perhaps lies in transforming the Kantian agenda from an 18th century paradigm to one that can satisfy the theoretical demands of the 21st century. Hayek’s bold response to part (ii) of the Kantian agenda (see the Introduction) is that the ‘great and manifold consequences’ of the Kantian type law of market societies is to ensure that market outcomes are ‘complex phenomenon’. Coercive rules of control in society that do not satisfy the Kantian premises of non-purposiveness or endindependence will result in degenerate ‘simple’ outcomes in society. In the Hayekian scheme of things, it should not take an act of faith to comprehend

584

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economy

how the generation of complex phenomena in society from human actions coordinated by Kantian type legal rules has evolutionary survival value for mankind as a whole. For a formal statement on the distinction between ‘simple’ and ‘complex’ phenomenon, Hayek (1967, p. 62) refers to the famous theorem in mathematical logic demonstrated in 1931 by Kurt Godel. Giidel’s Undecidability Theorem can be informally stated as follows: no system can explain itself and a system of increased complexity is required to explain the principles of a lesser system. (The epistemological framework of Godel’s theorems is clearly stated in a companion paper that he published shortly after his proof [Godel (1967, p. 617)].) In his seminal book on cognitive psychology Hayek (1952) argues that the formal rules of cognition and inferential processes of the human brain must abide by Gddel’s Undecidability Theorem. Hayek’s pronouncement that a ‘brain cannot explain itself is the most intriguing and spectacular application of mathematical logic to cognitive psychology. He further argues that since the inferential processes of the human brain are constrained by such absolute limits, individuals when confronted with complex phenomena (which includes the human brain itself) rely on a system of formal rules of inference and problem-solving, the details of which are necessarily of an inarticulate form. The significant aspect of these rules that enables individuals to ‘handle’ complex phenomena is that they could only have evolved by a process of trial and error. They could not have been the design of the human brain; this would imply a logical contradiction. Furthermore, to govern societies by coercive legal rules other than the Kantian ones, will only replicate the fundamental limitations of the human brain on society at large, causing thereby degenerate ‘simple’ outcomes in society. Conversely, an adoption of Kantian legal rules to coordinate human actions, enables societies to achieve complex outcomes that would be impossible for the human brain to have designed via rationalistic and utilitarian programs of control in society. It is in this far reaching sense that a system of decentralization a la Dasgupta (198 1, p. 112) prompted merely by pragmatic considerations of informational constraints in society, will not generate the complex phenomena of market societies and furthermore the coercive imposition of laws that do not abide by the Kantian criteria will prove to be inconsistent with the E-I legal rules necessary for the survival of the market order. This brings us to points (i) and (ii) in the Kantian agenda (see the Introduction). How does one ascertain the universalizability of legal rules and how do the Kantian rules that are incapable of fulfilling any a priori desired pattern of allocation in society (i.e. their apparent lack of incentives) be capable of adoption and perpetuation by individuals? It appears to me that in the actual modus operandi underlying the adoption of E-I legal rules (studied in some detail in section 4) the principles

S. Markose-Cherian, End-independent legal rules and political economy

58.5

involved seem appropriate to problem solving in complex systems. In this respect there seems to be considerable overlap in the work of Hayek and Simon [see especially Simon (1981)]. It is now recognized in the theory of Artificial Intelligence that the rules of problem solving which are applicable to complex problems are formally distinct from those that are applicable to simple phenomenon. In solving complex problems the formal structure of search for the right answer (determining the course of action required) does not rely on an explicit optimization calculus based on the consequences of actions. Instead, the rules that enable us to handle complex phenomenon direct the search for a solution by an elimination process that imposes constraints on the set of actions whereby courses of action are eliminated on the grounds of their inconsistency with certain test criteria. In an application of the Hayekian and Simonian method of problem solving in complex systems, the rule selection process in the legal system is made operational by the decentralized litigious behaviour of individuals who challenge the coercive imposition of legal rules on the grounds that they fail the test criterion of their universalizability. The latter arises from previous experience in the lives of people. The perpetuation of negative legal rules relies on the reinforcement of a certain set of expectations fostered by their own existence, from the experience arising from the elimination of coercion to achieve specific or predetermined outcomes in society. It will be seen that E-I legal rules alone are amenable to non-discriminatory and equal application. Expectancy of such treatment by individuals in the application of a particular legal rule constitutes the ‘self-executing’ quality of negative legal rules of the market order. This sets up a powerful filter process in the form of litigation and judicial appeal that eliminates rules as being ‘unjust’. The surviving rules can only be thought of as being negatively selected, i.e. those that were not eliminated by this filter process. Thus not only does a system of E-I legal rules reject any a priori knowledge of what is just; in the very manner of its development, the test for justice is a negative and empirical one. The juridical effect of this has been to limit arbitrariness in the content and scope of the rules that govern market societies. In any conscious or deliberate attempt to create a market order, as is the case of the Treaty drawn up to integrate the markets of West European states, a simulation of E-I legal rules and the processes engendered by them will provide the sufficient conditions for the creation of a larger market order. Clearly, the above methodology is in marked contrast to what is espoused in the mainstream literature on decentralization. The latter attempts to arrive at an optimal level of decentralization by direct, rational calculation of the costs and benefits involved for the economy as a whole. The paradigm I propose suggests that such an exercise is impossible due to intrinsic complexity in the system and the overall level of decentralization in the

586

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system is determined by some consistency requirements that can only be verified empirically. In fact in a market economy, there is an ‘acceptable’ level of decentralization up until the time the next person challenges the system for the non-universal nature of a legal rule.

3. End-independent

rules: A formal definition and some interpretations

‘The task of selecting specific systems or distributions of desired things as just must be abandoned as a mistaken principle, and it is, in any case, not capable of a definite answer.’ (Italics added) [Rawls (1972, p. 102)].

As the starting point for a formal definition of this class of rules, I take the Hayekian premise that market outcomes are complex phenomena or to use the epigram often attributed to Adam Ferguson, society is the result of human action but not of human design. A preliminary representation of this statement is the following: propositions relating to functional mappings from the space of alternative actions available to individuals (or groups) in society to the space of outcomes are undecidable in the Gijdel sense. Or using the equivalent Church-Turing Thesis on effective computability (Cutland (1980), Rogers (1967)], these mappings constitute functions that cannot be calculated by finite algorithms. Computable functions identified as recursive functions and realized by Turing machines determine the set of feasible computations that human beings can undertake. Demonstration of non-computability of the functions determining final outcomes in a system defines the intrinsic complexity of that system. Undecidable outcomes cannot be the result of human design. If they were of human design, the outcomes must be decidable and capable of constructive implementation (Beeson (1985, p. xiii)]. Such a system is then without intrinsic complexity. The Austrian economists Ludwig von Mises and Hayek coined the terms catallaxy and spontaneous order to distinguish social phenomena with undecidable outcomes from other soical organizational units with no intrinsic complexity that are amenable to goal seeking behaviour. The quality of end-independence or non-purposiveness of the rules that co-ordinate the spontaneous order of the market is conceived here as being the logical corollary of the system having undecidable or uncomputable outcomes. I will now proceed to make these ideas more precise. The formalism offered here, however, assumes only a minimum of structure and therefore can only be suggestive rather than definitive. As human action is the basis of this model, let set A denote the universal set of all actions that individuals can undertake. This set is countable as every action can be described from a finite alphabet. Set A is infinitely countable. There is a cardinal number of I individuals in society and they will be indexed by i = 1,. ., 1. Human action in society refers to the unique

S. Markose-Cherian,

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587

configurations of actions undertaken by each of the I individuals. Let us define a set C whose elements CE C are I-tuples of all possible permutations on set A. Indeed, we can conceive of each CE C as being a finite sequence of natural numbers, i.e. each c is an I-tuple of natural numbers which define a unique configuration of human action in society. For this we exploit the idea first mooted by Godel of coding non-numerical objects by numbers referred to as Godel numbers. Since set A is denumerable, there is a bijection.’ q:

A-N.

(1)

Here N denotes the set of natural numbers {O, 1, 2, 3, . . .}. Set A will be enumerated without repetitions using the index s. Thus, A={a,, a,, . . ..a.,. ..} where a, is the action with the code number s. Note that we reserve the number zero to stand for ‘no action’ in our coding. Then set C can be defined as the set of all finite sequences of natural numbers lJ1 N’. Set C is effectively denumerable where a bijection.

(2)

z: C-N

is defined

by Cutland

(1980, p. 74) as

Here, si, i = 1,. . , I, stands for the code number of the action taken by the ith individual. Using the above fixed coding we will index the Giidel numbers for set C by x. Then, for any particular number x, by effectively computing r-l(x) we can recover the unique sequence of numbers associated with x and in turn by using the bijection q: A-N we can decode the unique contiguration of actions undertaken by the Z individuals in society. The coding r can be used to enumerate set C without repetitions and in the following ascending order:

C={

co,c1,c2,...,c,,...

I..

(3)

Here co is the I-tuple of human actions with the smallest code number given by (2) and so on for all c,. Clearly the former is obtained for the I-tuple of actions where no action (denoted by zero) is undertaken by the Z individuals in society. Since we are attempting to analyse coordinating rules in society, these ‘In (1) above, the function q is a mapping from set A, its domain, Dam(q), to the set of natural numbers N, its range, Ran(q). The function q is a bijection if it is both an injection and a surjection. The function q is said to be injective if, for a, bE A and afb, it follows q(a) #q(b). This implies that the inverse of q is a unique function g such that g(q(a))=a for aE A, and Dam(g) = Ran(q). The function q from A to N is surjective if Ran(q) = N.

588

S. Markose-Cherian,

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legal rules and political economy

rules can be thought of as eliciting certain courses of action and forbidding certain others such that only some configurations or particular subsets of C can result from the operation of a given set of rules. In the formalism of constructive mathematics, rules correspond to programs. Every program P consists of a finite set of instructions, I*, such that the set of all programs denoted by I7 satisfies the bijection [Cutland (1980, p. 75)]. y:l7-+N.

(4)

For a fixed coding y, the programs will be indexed by we say P, is program with code number a. As rules mechanism, using (2) we can define the following mapping from the set of actions to the set of outcomes

Giidel numbers a and operate as a selective partial function as a in society:

f(x): N-+N. Then for each program

= the unary

(5.i) aE N, let us define

function

in (5.i) computed

by program

P,.

(5.ii)

K = W, = Dom (4,) = {x: P,(x) converges}.

(5.iii)

3.1. Market outcomes as complex phenomena The above formalism should enable us to characterize the Hayekian premise on the fundamental undecidability pertaining to the outcomes of human action in society. Theorem 1. The undecidability theorem: defined’, or ‘P, converges’) is undecidable.

XE W, (or, equivalently,

Proof. Proof by contradiction proceeds by the standard can be referred to [Cutland (1980, p. lOl)].

diagonal

‘$u(x)

method

is

and

Informally, what the above theorem states for our model is that there is no method of deciding which initial configurations of human action in society c, E C (whose Godel numbers are indexed by x) can result in some well defined configurations 4,(x) such that this can be implemented by a finite algorithm program P, that man or machine can devise. In other words, short of knowing ostensibly by the successful completion of a specific program with the number a, one does not know what XE W, and that 4.(x)

general

S. Markose-Cherian,

End-independent legal rules and political economy

589

is defined. In this sense, the constructive content of our experience is instrumental in allowing us to conclude that the set K= W, for this problem is not a null set. Furthermore, in the face of the fundamental undecidability of final outcomes some formal conjectures have to be made with regard to the programs or rules associated with such problems. The undecidability of final outcomes has a direct bearing on the end-independence of the rules of the system. In the formalism of constructive mathematics the programs associated with undecidable propositions do not converge, or in the jargon of computers, they loop forever. What does this mean for the coordinating rules of society? I put forward one conjecture here. Set C with its enumeration in (3) can be viewed as a world as yet untrammelled by taboos or by other restrictions on actions due to social pressure, only physical impossibilities are ruled out. As rules are viewed as selective mechanisms of configurations of human action, when confronted with any I-tuple with Godel number x as an input, the first instruction in the rule/program is to consult an oracle [Cutland (1980, pp. 167-171)]. The oracle is external to the program itself, and in this model the oracle is meant to manifest some sort of collective memory of taboos and generally unacceptable modes of behaviour. The latter like the quality of truth or falsity of propositions depends on some non-constructive definition outside of the model one is trying to analyse. An input x could activate a taboo or prohibition in the oracle associated with a certain program P,, then one of the following happens: (i) There can be outright rejection of x such that x converges directly to the code number of the I-tuple of ‘no action’ c,, in (3) and the program halts. Or: (ii.a) The taboo that x activates works on individual actions in the c, associated with x and sets these equal to zero. The remaining actions a, in c,(x) that survive the taboo then determine the new code number. (ii.b) The input x survives intact having found no taboo relevant to it in the oracle associated with Pa. In the case of either (ii.a) and (iib) the value of x supplied by the oracle is not equal to the code of the ‘no action’ I-tuple ce. This then sets the program to loop indefinitely when the output from the oracle altered by instructions in the program is continually referred back to it. The intuition behind this is that in society the power of taboos is so great that at least a subset of K = W, is decidable. Therefore, the tabooed or prohibited set of x E N is a proper subset of W, defined in (5.iii). In any case x E W, is partially decidable because the set K = W, is recursively enumerable [see, Cutland (1980, p. 112) for the former and Rogers (1967, p. 58) for the latter]. Now, consider the infinite set K, the complement set of K = W, which defines the set of configurations of actions that are not prohibited by any

590

S. Markose-Cherian,

rule P, in society. partially decidable we define

End-independent legal rules and political economy

K is not recursively enumerable and x$W, fails to be even [Cutland (1980, pp. 123, 111) Rogers (1967, p. 84)]. Thus,

l? = {x: x $ W, and x is not prohibited

3.2. Undecidability

and its politico-economic

by P,}.

(6)

implications

The meta-mathematical formalism presented here has far reaching implications for the grand old issues of liberty, justice and socialist planning. I will deal with the last first and make my remarks brief as unlike the perennial concerns of liberty and justice, socialist planning is being swept away by historical events that have yet again shown up the abject failure of what is perhaps the most comprehensive attempt so far in social engineering. The perspicacity of the Undecidability Theorem for the socialist planning problem is that this problem is not capable of a constructive solution - the desired result cannot be achieved by rational planned direction. The only outstanding issue here, then, is why did politico-economic analysis of the past half century or more, lead us to believe in the efficacy of socialist planning? This is, of course, the domain of the history of politico-economic thought and can not be pursued here. In the above quotation from John Rawls where he recommends that we abandon references to the desirability of end states as the criterion of justice, one must of course replace the words ‘not . . . definite’ by the word ‘undecidable’. The meta-mathematical model of society that demonstrates this fundamental undecidability can also formally demonstrate what liberal thinkers from Kant onwards have intuitively emphasized as the crucial link between individual liberty and E-I type rules that cannot purport any positive notion of justice. The formal system K defined in (6) and the rules P, associated with it, i.e. {I?, P,}, constitutes the domain of what we understand to be the market order. The latter is the generic name for the spontaneous order which manifests voluntary interactions between individuals. Thus, R, defines the common domain of freedom for individual action in society and this domain is of infinite adaptive capacity as any contiguration of human action can emerge from the infinite set l? and no c, that does emerge is the outcome of a planned or constructive solution. In other words, the institutions that can emerge from the free and voluntary participation of individuals within the domain of R are beyond the scope of human design. Furthermore, it should be clear that l? which defines the common domain of freedom does not refer to individual freedom per se but as in the words of Kant (1965, p. 35) it is ‘such that the will of each can coexist with the freedom of everyone in accordance with a universal law’.

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The universality of the law refers to our construction of the relevant subset of P,EZI such that the constraints apply equally to any input x pertaining to c, E C. Recall that the latter includes all possible configurations of individual actions, forseeable and unforseeable, involving other individuals, time and place. Thus the legal system of the market demarcates set t?. As XER is undecidable, coordinating rules of a socio-economic kind, for example the price mechanism, must select market outcomes in a non-constructive fashion. Success or failure of economic actions in a market regime can never be known from the outset and we will prove that the legal system of the market makes its illegal to use coercion to guarantee success of the same. In the system {R, Pa>, all individuals and groups including governmental authorities are prohibited from achieving some configurations of actions which can be recursively enumerated from the set K. In having done this, the system {K, P,} remains undecidable and therefore cannot subscribe to any positive notion of justice, goodness or optimality to the outcomes that emerges from human action. As any desired outcome, denoted here as 4$(x), is defined in terms of individuals defined by x, the impossibility of {I?,PJ to achieve this implies that E-I rules transcend particular persons as well as specificities of time and place with regard to their actions. No specific groups as opposed to other groups can benefit from the establishment of this system of law. Thus from a narrow legalistic sense, all that the system guarantees is that the actions that individuals do undertake in society do not belong to any prohibited categories. However, the remarkable corollary of the fundamental undecidability of market outcomes is that the maintenance of complex phenomena in society is vita1 to the preservation of human liberty. For, the fundamental undecidability (x~ R or x$ W,} that characterizes complex phenomenon guarantees that the actions of individuals are coordinated by rules in such a way that they cannot and do not constitute a predetermined plan fulfilling some ‘desired’ final outcome in society. The freedom that individuals enjoy in the realm of {K, P,} is therefore not just a chimera where they are like cogs in a master plan, only that they are not aware of this! Alternatively, we can take a differing and somewhat bizarre view as in Dasgupta (1980, p. 111). It is worth recounting here the following scenario which is allegedly favoured in the planning literature on the grounds that it lightens the informational burden on the planner as he resorts to a Walrasian set of equilibrium prices. The state in the pursuit of the fundamental theorem of welfare economics, redistributes income and announces prices in such a fashion that each individual will choose what the state wants it to. Under the circumstances since each individual will not choose to act differently to what the state intends him to do, Dasgupta concludes that the fact that the individual is aware that the state knows what he will choose ‘is not perhaps a good reason for the individual to think that

592

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he is not exercising choice’. Our analysis, in having postulated that liberty is the outcome of Kantian type rules that generate and maintain a complex system that is fundamentally undecidable, is a potentially powerful nondeontological theory of liberty. It necessarily shows up the flaw in Dasgupta’s thesis (ibid.) on the possibility of free choice in a centrally planned regime. Furthermore, meta-mathematical analysis can also demonstrate two other impossibility results that neoclassical writers on the planning problem appear to be oblivious of. It is impossible for the state to know what individuals will in fact choose even within the neoclassical framework [see Rustem and Velupillai (1990) and Lewis (1985)] and it is impossible for the state to announce the Walrasian prices as a non-trivial Walrasian model does not have a constructive solution [Lewis (1987)]. The latter means that even if the model tells us that equilibrium prices can exist under certain conditions, as the model is not constructive it cannot tell us how to find out what these prices are (only a market in operation can in fact do this). It is worth examining the efficacy of the negative rules of justice in coordinating expanding societies. This characteristic primarily arises from the non-purposive nature of the system {I?, P,} which therefore presupposes no knowledge of ends to be pursued let alone agreement to this by all individuals in society. In small or what I would prefer to term as ‘simple’ societies (to contrast it with complex societies), pursuit of common ends, if that is at all possible, can be formally modelled as a mapping from the set K. Such societies in the pursuit of some desired 4,*(x) such that there is knowledge of x E K and a constructive solution for this, will necessarily have to restrict human action to conform to a subset of the finite set K. Contrast this with what complex system {K, P,} offers. The latter is capable of coordinating societies with infinite potential, be it in terms of peoples, place or time. However, the dynamic transformation that is required in the system of coordinating rules in the move from simple to complex societies is potentially disturbing to the human psyche: there could be a genuine fear of freedom for having to adapt from a finite world defined by set K to the unlimited potential of l?. Furthermore, in the time scale of evolutionary events, the transformation from simple to complex forms of human association is still in its infancy. Undoubtedly, ingrained in our emotional instincts are sentiments nurtured in many a millennium of roaming in hordes and tribes. Or as Jouvenal (1957, p. 136) puts it less cruelly, ‘the milieu of the small society in which man finds himself first will retain for him an infinite attraction’. Thus a rational acceptance of the fundemental undecidability of a regime of freely interacting individuals is slow in coming and the abstract discipline of the system of negative rules of justice is perhaps too stern for human sentiment. Nevertheless, what our formalism makes clear and what has been perceived by liberal thinkers (ibid.) is that to impose coercively what is good for a

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small society on a larger one, or the belief that the enforcement of a common scale of values as the ideal for the integration of individual and group activities in society into an order - is not merely utopian - it will destroy western civilization by destroying the legal system of the market. What the above analysis suggests is that even in the most advanced market societies of the West, there are bound to be conflicting subsets of rules within the corpus of their law. It is important to formalize the nature of this conflict. So far we have only considered the market order and the rules governing it - these rules operate such that the set R contains elements of x, configurations of human action, that are not prohibited by any rule in the system and the x that are indeed prohibited or have negative injunctions on them belong to set K. The latter subset of K will be denoted as KNI, where the subscript NI stands for negative injunction. Another set of rules can directly sanction x E K - KN,, where the latter is the domain of positive goal orientated action with decidable outcomes 4=(x). As legal rules unlike other rules benefit from coercive enforcement, the Kantian injunction that the legitimate use of coercion must be restricted to the enforcement of E-I rules that are capable of universal application, has to be formally examined in the light of the possible validity of the coercive imposition of XEK -K,,. Thus, we can state the following theorem. Theorem 2. From the vantage of E-I rules of the market system, zf the latter have status of law to be coercively ecforced in society, then the coercive imposition of x E K - K,, in the pursuit of desired outcomes, 4:(x), in society must be illegal. Proof. Given the system of rules associated with iT in (6), R defines the domain of x which constitute individuals’ rights to action without coercive injunctions. No x~l? can be illegal. Thus, the domain of 4,*(x) denoted by D must be a subset of i? if XE D is not to be presumed illegal. But, here we have a contradiction. If Dsl?, we cannot have XE W, for then x E K and x# J?, so D is not a subset of l?. This implies that XEI?\D, that is x belongs to R and not to D. Thus if x is to enjoy coercive protection by law (of the market system), x $ D. The theorem follows. Thus it is illegal in the market system for the use of coercion to restrict in order to guarantee the success of some chosen 4,*(x) which XEK-K,, must be presumed to be amenable to a constructive solution. The theorem may be viewed as a negative injunction on governments not to legislate in favour of special interest groups and as such is documented in many a constitutional arrangement of civil society. (In the EEC Treaty, of the Articles listed in the Introduction see in particular Art. 85, Art. 90-92 and Art. 101.) In our formal model these negative injunctions pertain to the

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x E Km KN,cK. Thus the emergence of market societies and the dynamics behind their expansion lies in the progressive elimination of coercion in the achievement of any predetermined outcomes in society, i.e. there must be a progressive elimination of rules in the original corpus of law on the grounds of their inconsistency with rules of the market order. However, the very technical property of the set rT referred to as its productiveness [Rogers (1967, pp. 91, 98)] which enabled us to prove Theorem 2 will stand in the way of effectively classifying all rules as legal or illegal. Thus, there will always be an x presumed to be permissible (not illegal) which may not in fact be so. But this can only be verified empirically. Hence the problem of the consistency of rules in terms of the actions they call forth can only be settled in the law courts of this world.

4. The decentralized

litigious process of rule selection

‘These rules are not the result of any process of collective choice. Nor do they result from the kind of abstract rational analysis employed in classical game theory, in which individuals are modelled as having unlimited powers of deductive reasoning but no imagination and on common human experience.’ (italics added) [Sugden (1989, p. 97)]. In the thrust for a single market with the EEC, the resurgence of the legal principles of the market aims at defining a common domain of freedom of action which transcends special interest groups which can under the circumstances include entire nations. Thus as anticipated in the theoretical model of expanding market societies in the previous section, creation of a common domain of freedom as defined by K, manifests itself as injunctions on governments to abolish principal state imposed restrictions on free trade (see, the Articles of the EEC Treaty listed in the Introduction). These rules are indeed the E-I rules of negative justice. Furthermore, in having defined negative injunctions on governmental authority as above, there emerges what are the legitimate functions of government. A lack of harmonization in the administration of these rules of public utility forms a technical impediment to trade. Hence, a number of EEC Treaty articles (Arts. 35, 36, 100, 101, 222, 220 and 225) are concerned about standardizing the rules with regard to public policy and also the administration of it. The immediate implication of these articles of the Treaty is to abolish or amend rules that exist in the original legal systems of the member states. Indeed, since the operational counterpart of the universality of E-I rules is the possibility of non-discriminatory application, the implementation of these rules is bound to conflict with any set of positive rules with the force of law that purports to achieve specific predetermined outcomes 4.(x) in society whether these rules belong to the legal system of the member states or to the

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EEC Treaty itself. In the EEC Treaty, the Articles 3(d, i, j), 92(3), 39-47, 129, 130 and 104-107 have properties antithetical to those of E-I rules listed earlier. These rules give governmental authorities discretion to determine the content of future rules aimed at the achievement of a particular predetermined result. As this requires both knowledge and control over the concrete circumstances of time and place, the positive rules of this latter category of rules from the EEC Treaty urge onto the coercive authority, activities of a nature essentially forbidden by the negative rules of the first category.

4.1. Judicial review and the test criterion for rule elimination The right to free trade is not a right to anything specific, it is a right to be free from coercive restrictions in undertaking what can be an infinite variety of activities pertaining to the market. Since the right to free trade arises from negative injunctions on governmental authority to abrogate measures that they may otherwise have taken, a necessary condition for the self-execution of this right is that private parties in pursuit of their trading activities have access to legal redress for the measures regarded to be in violation of their rights, whether these measures originate from member state governments or the Community authorities. This process of redress concerning the harmful effects of an existing rule could be referred to as judicial review. From the analysis of the previous section, we know that since the domain of activities in the market is potentially infinite, there is no constructive method of determining which legitimate activity of this domain will come in conflict with a specific legal measure of the existing system and find it too restrictive. In other words, there is no a priori way of knowing which particular rule will fail to be universalized as the implementation of this rule may result in some relevant sections of the population or just one individual being discriminated against. Even the seemingly exhaustive listing of negative injunctions as found in the EEC Treaty can not cover all contingencies in the future. Furthermore, the Treaty itself may have provisions that could produce measures that conflict with activities permitted by other rules in it. Thus, judicial review which enables private parties to challenge the constitutionality of an existing rule on the grounds that it is in violation of rights created by certain other rules in the system, appears to be a natural adjunct to the E-I rules of negative justice. Consequently, to urge on the habit of judicial review so that rules that fail the test of universalizability may be denied the status of law to be coercively imposed, seems to be imperative for market societies. The juridical principle underlying the process of judicial review, which we have explicitly recognized here as the result of an undecidable problem, has long been undermined by the myth of the centralized and articulated will of the people and the unlimited rule of the majority in parliament. Legal

J.PoI.E-

-F

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economy

positivism which purports that the law is the dictates of the sovereign, when applied to democratic forms of government has led to untenable conclusions that as long as power is conferred by democratic procedure it cannot be arbitrary; or that the rule of law exists as long as the ‘law’ was passed by the prescribed parliamentary procedures. Thus the problem of judicial remedies for private parties in the EEC is not so much as the one arising from national courts under the pressure of national authorities are reluctant to acknowledge the ‘priority’ of Community law, as it is the one arising from the fact that positivist jurisprudence in democratic governments do not grant damages for harmful effects of statutory laws enacted by parliament and only do so for the effects of administrative regulations. Advocate-General Roemar in the Schopenstedt Case (1971) expressed the opinion that the principles of governmental liability for normative acts should be accepted as part of Community Law even though it is not known in each of the member states. Schermers (1975, pp. 112-l 13) lends support to this opinion, not because of the juridical principle of negative justice arising from the undecidability of the problem, but because there is an insufficiency of control by European Parliament: ‘in their origin EEC regulations are more similar to national regulations because no parliament had played a decisive role in their establishment’. Consequently, though Schermers (ibid.) commiserates the unfortunate judicial decision in the Plaumann Case (1963) for the slowness in the development of the principles of judicial review (‘the Plaumann decision may be the reason that for many years no appeals were lodged for damages caused by normative acts’), he does not recognize that the problem here is the prevalence of the Benthamite belief in ‘omnipotence of legislature’ whether it resides in the parliaments of member states or in the EEC Treaty which is itself a creation of the latter. The influence of legal positivism is evident in the fact that in each of the following cases, viz. the first Haegeman case (1972, European Court Reports, ECR, pp. 1015-1016) the third Luttiche case (1971, ECR, p. 337), the Schopenstedt case (1971, ECR, p. 900), the Merkur case (1973, ECR, p. 1069), the Holtz and Williamsen case (1974, ECR, pp. l-12), appelants felt inhibited to claim for damages by challenging the validity of normative acts as per Art. 214; they restricted themselves to Art. 173. The non-contractual liability of the EEC under Art. 214 does not require the plaintiff to prove that authorities were at fault. In other words, in each of the above cases what ought to have been challenged is the very constitutional validity of the policy choices motivating the acts of coercive imposition, a matter independent of the wrongful way in which the Act was performed. Conversely, it may be seen that constitutional validity may be claimed only for those rules that are capable of being In fact, no ‘economic’ law is capable of imposed without discrimination.

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being so imposed. Therefore what is held to be an administrative mishap will be found to be inherent in the ‘economic law’ that is being imposed. For this we only have to consider here the interesting instance provided by the programme for the modernisation and the rationalization of farm holdings in the CAP (Common Agricultural Policy). Non-discrimination in the dispensation of collective goods to a particular group is undertaken to provide to all members of that group ‘equality of opportunity’. The latter is a situation the market order is known not to provide, as each person has to begin from the circumstance he finds himself in. An attempt to dispense state developed technology to all farmers in the CAP is a case of this kind; for, to give state developed technology to some farmers and not to others would be a flagrant violation of the above stated principle of justice. Nevertheless, it will be seen that in order to achieve the economic goal for which the government intervenes in the market, actions that are discretionary and in violation of the principle of non-discriminatory implementation have to be taken. To consider further the same example of the CAP, the non-discriminatory dispensation of innovative technology increases the productivity of all farmers. The latter, in conjunction with inelastic demands for food products, pile up surpluses. The authorities again have to display an equal commitment to the fates of all the farmers; therefore in the same way governments intervene in the market to prevent a crash in prices. Yet, any governmental discrimination in selecting some farmers for survival against others is fraught with arbitrariness and injustice. The continuance of the impossible, if not irrational policy of the CAP is the tragic outcome of an attempt to extend the principles that can pertain only to the negative rules of justice, to the implementation of positive socioeconomic rules. In the above case, the economic imperative is that there is some process of discrimination and selection of the more efficient farmers. But a process of discrimination and selection of ‘successful’ farmers when done after the particular circumstances of their existence are controlled by the same authority that selects, can not be but arbitrary and unjust. Thus, the operational counterpart to the test of universality of a law being people’s expectations of equal and non-discriminatory application of it could only have arisen from previous experience of such application which, as we have seen, can only pertain to a system of negative legal rules. Also, in the implementation of socio-economic laws, the objectivity of what constitutes a violation of a person’s right becomes blurred, for discretionary and discriminatory action on the part of authorities is imperative for the achievement of a specific outcome stated in the socio-economic law. 4.2. A case study To my mind,

the circumstances

of the Holtz

and Williamsen

Cases amply

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bear out the major points raised here. Firstly, it is the ethic of equal and non-discriminatory application of rules by governmental authority, fostered by an elimination of coercion to achieve predetermined outcomes in society, that constitutes the test criterion that determines the validity and consistency of existing rules. A decentralized litigious process set in motion by appellants claiming that there has been a violation of the said principle may result in the elimination of a restrictive practice. Thus, the idea of a centralization of peoples’ preferences and the myth of Rousseauesque democracy for conferring legitimacy to rules, is far removed from the development of the E-I rules of negative justice. An interesting way of illustrating the case best would be to devise a game based on it. In the Holtz and Williamsen Cases the plaintiffs contested the Community’s price support system for the processing of colza. The system was set up after the establishment of a uniform price, in order to save the producers whose enterprises were rendered uneconomical by an amount equal to the difference between the administrative fixed price and the cost of transporting colza to the market. Following Fig. 1, let player A be Holtz and Williamsen who claim to have suffered discriminatory and unfair treatment at the hands of the authorities enforcing the price support scheme. Player B is the EEC Community authority enforcing the interests of colza producers. Player A, Holtz and Williamsen, have the two following strategies: (1) Sue for damages on grounds of ‘inaction’ of administrative authorities, pointing out an administrative mishap as per Art. 173 of the EEC Treaty, i.e. a2 in Figure 1. (2) Sue for damages as per Art. 215 of the EEC Treaty, challenging the very constitutional validity of the price support scheme on the grounds of the absence of a ‘general rule’, i.e. a, in Fig. 1. Against this, player B, the EEC authorities, have two strategies: (i) Concede, b,, or (ii) Do not concede the claims of the plaintiffs, 6,. If the following conditions are assumed to be true with regard to the preferences of the two players: ~21>~11>~22>~12

and

B12>P11>P22>P21,

the game depicts the Prisoner’s Dilemma [Lute and Raiffa (1957, p. 95)]. Since a2 dominates a, for player A and b, dominates strategy b, for player B, the equilibrium outcome of the game is (a,,, /?22) in the cell IV of Fig. 1. The equilibrium outcome remains Pareto inferior to the outcome (all, Bll) of cell I, where the price support scheme for colza is conceded to be constitutionally invalid because of an absence of a general rule amenable to non-discriminatory implementation. For a society with a well defined notion of the rule elimination process of justice, the Prisoner’s Dilemma may be

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Player B: The EEC Community authorities enforcing the interests of the Coke Producers’ Lobby

9

4 Player A: Holtz and Williamsen

Concede

Do not concede

al Sue as per Art. 215

I

II

hl,Bll)

(~11~812)

a2 Sue as per Art. 173

III

IV

(a21.P21)

(a22,P22)

Fig.

1

resolved, and the Pareta optimal solution may be obtained for the parties involved. Such ‘focal points’ [&helling (1960, pp. M-58) Sugden (1989, p. 89)] in society that relies on previous experience as part of a fund of legal precedence, seem essential in order to resolve the Prisoner’s Dilemma that has arisen above. It is interesting to note that initially Holtz and Williamsen sued for damages on grounds of ‘inaction’ of administrative authorities as per Art. 173. It was in the Second Case of Holtz and Williamsen that what was held culpable was not the inaction of administrators per se but the very piece of legislation: ‘the absence of a general rule’. To challenge the constitutional validity of the policy choices motivating the acts of coercive imposition could clearly be a matter that is additional to the wrongful way in which the Act was performed. The immediate and concrete result sought by plaintiff appealing under EEC Art. 173 or Art. 215 is the same - i.e. governmental liability leading to a payment of compensation. What is of fundamental importance and of a more enduring nature is that plaintiffs should feel ‘free’ to appeal under Art. 215 and their appeal is entertained by courts. The acceptance of the fact that there is and will always be the possibility for the illegality of acts made in how-so-ever procedurally correct manner, underlies the filter process that develops the legal rules to govern a market order by rule elimination or negative selection. The illegality is by no means a question of logical consistency within the system, that can be tested a priori by deductive reasoning. Rather, it refers to the incompatibility of the actions of administrators with expectations that they call forth. The inconsistency of the latter kind on which depends the ultimate test of legality can be thrown up only in the course of actual circumstances in the lives of people. Also the determination of the validity of executive acts of coercive authority by no means requires the utopian claims of articulating and centralizing the ‘will’ or preferences of the people. Instead, the negative test for justice is found to operate by collective decentralized behaviour.

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5. Concluding remarks The notion of decentralization in market societies which gives autonomy to individuals to act on the basis of circumstances that are specific and unique to them, can never be adequately comprehended without an analysis of the rules that create the market order. The rules that create the market order have been referred to as end-independent (E-I) rules and an unambiguous formal statement of what they are required us to demonstrate that the regime that they create is necessarily a complex one, i.e. one whose outcomes are fundamentally undecidable. Kurt Godels’s undecidability theorems comprehensibily dismissed Hibert’s programme in mathematics [Beeson (1980, p. 426)] and with that the vaulting ambitions of logical positivism in philosophy. I have no doubt that the consequence of his theorems for political economy, though somewhat belatedly, would be to enable us to understand the fundamental constraint that complex phenomena pose for human affairs. This constraint, unlike Russell’s playful parody of Giidel, given at the beginning of this paper, is very much of this world than the next. As anticipated in the theoretical model of expanding market societies, the rules that govern the creation of a larger market order in Western Europe are negative and non-purposive and give concomitant validity to actions of persons taken on the basis of private information, The development of the E-I legal rules depicts the heuristic principles of problem solving that Simon (1965, 1981) recommends for problem solving in complex systems. This problem solving process is not one of deduction, but, in Simon’s words, ‘a process of selective trial and error’ using ‘rules derived from previous experience’. Consistency in the system of rules of control and coordination can only be obtained empirically by a process of discovery. Careful and systematic development of these ideas can give new impetus to liberal jurisprudence epitomized by Kant’s end-independent rules of justice. This in turn will deepen our understanding of the complex phenomena of market societies.

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