- Email: [email protected]
The design of federations
Book reviews
119
legally determined standards of care such as are provided by the rules of negligence may seriously be doubted, but the question is not, as the author suggests, whether there will be a reduction in the amount of (say) motoring or walking but whether there will be a reduction in the amount of careless motoring or careless walking. The limited capacity of the tort action to make appropriate allocations in the light of the economic model is convincingly exposed. Tort claims are a ‘lottery’ insofar as they charge the costs to the offending actor only when there is a victim who can successfully overcome the legal and financial hurdles in pursuing his claim. The ‘personal’ nature of the action also means that important externalities, for example those incurred by the National Health Service and the social security funds, are ignored. Perhaps the most penetrating section of the analysis is that concerned with attempts to reconcile the allocative and distributional aims of compensation systems. The solution proposed by Calabresi that this can be achieved through insurance financed by varying premium rates is an appealing one, but Professor Atiyah draws on empirical evidence to show that insurance companies’ practice in premium fixing, especially in relation to liability insurance, is more arbitrary than is commonly thought. The author’s conviction that an appropriate degree of premium-rating would sometimes be unacceptable on distributional grounds may be justified in relation to individuals but is certainly not in relation to firms and in any event contrasts oddly with his subsequent observation that the marginal effect of differences in insurance premiums will be insignificant in comparison with price distortions arising from tax and other governmental controls. As mentioned above, Professor Atiyah’s interest in this analysis is essentially normative. The value theoretical insights into the structure of the law and its procedures which the economic analysis provides is understandably, given the author’s aims, granted little attention. But in this new edition he does now recognize that the law drew inspiration from utilitarian theory and classical economics, a necessary concession in the light of his own superlative historical investigation of contract law (Rise and Fall of the Freedom of Contract). Whether those loyal to the law and economics approach will accept the degree of scepticism revealed in this book is unsure. All readers, however, lawyers, economists and others, will benefit immeasurably from its wisdom and perception. It was, and remains, a classic. A. I. Ogus University of Newcastle upon Tyne
A. Breton and A. Scott. The Design of Federations. The Institute for Research on Public Policy, Montreal, Canada, 1980. xxi and 60 pp. This short text rejects the conventional views that federations either are historical accidents or political compromises between sectional interests. Instead, it posits the view that federations are designed (or should be designed-the text does not distinguish clearly between normative and positive in this respect) to minimize organization costs given the self-interest
120
Book reviews
motivation of all members of society. By this shift of emphasis, the authors open up an essentially novel? if not always fully convincing, avenue of analysis into the economics of constitutional design. Government activities are separated into two categories, namely constitutional and policy. The constitutional dimensions of such activity are considered to be wider than is conventional, encompassing the number of jurisdictional levels, the number of governmental units at each level, the powers assigned to each level, the rules of representation and the rules of amendment which regulate all constitutional rules. The authors recognize the interdependence between such constitutional aspects of government activity and the policy issues with which any constitution is involved. Nevertheless, they emphasize, in their text, the constitutional rather than the policy aspects of the political system. The conventional definition of federalism as the entrenching, in a constitutional document, in tradition, or in custom, of the division of responsibility for public policies between two (or more) jurisdictional levels is rejected. Instead all systems are classified as federal where the responsibility for public policies is divided between a number of jurisdictional levels, whatever the basis ofsuch division. This shift of definition, which classifies as federal not only such political systems as those of Australia, Canada, West Germany, India and the United States of America, but also those such as France, Belgium and the United Kingdom, in my view is too sweeping and ignores important legal differences between the truly-federal and the merely pseudo-federal political systems. How serious this mis-definition will prove to be must depend upon the precise area of analysis in which it is deployed. In fact, the impact of redefinition is lessened once the authors introduce the concept of a ‘constitutional assembly’, defined as the body accorded with responsibilities for determining the constitutional dimensions of governments. For, it turns out that all true federations are rules by two-level assemblies, whereas the others are ruled by one-level assemblies. This forms a useful basis of distinction, though the authors themselvs are not disposed to press such matters. By contrast with their definitions of federalism, the authors define unitary government in terms of the existence of only one jurisdictional level and of only one unit of government at the level. Where unitary government exists in each of several spatial subdivisions of a country, such government is defined as ‘balkanized’, and is seen to reflect some of the features of political decentralization which conventionally are associated with federalism alone. The authors clearly prefer federal to unitary systems of government most especially because the fragmentation of power characteristic of the former, and the consequential competition between rival political units, is seen to be conducive in general to individual liberty (of the negative kind in the sense of Hayek and Isaiah Berlin). Nevertheless, an associated economic case for federalism is developed within a text which stresses throughout the importance of diversity and of adaptability to risk in societies characterized by limited information and subjected periodically both to internal and to external shocks. For the most part, such benefits do not accrue either in unitary or even in balkanized systems of government. For a federation (they claim) reduces the cost of political mobility by reference to either of these alternatives. The authors recognize that the alleged benefits of federalism are purchased at a price, which is measured, in essence, by foregone scale economies, by the
Book reviews
121
loss of positive externalities both in production and in consumption and by the sacrifice of some efficiency in the provision of public goods as well as in the interjurisdictional trade with its financial leakages and in the IOSS of empathy between persons across the jurisdictional boundaries. Clearly, the stage is set for some form of economic trade-off between the benefits and costs associated with the federal system. The authors review briefly the conventional approaches to this problem before presenting a novel alternative of their own. The conventional approach to the determination of the optimal division of political power was that of making internal to jurisdictions as much as possible of the activities associated with spillovers, leakages and empathies. Inevitably, this solution operated for the most part with a centralization bias, even though recognition dawned eventually that costs and benefits were not measurable within comfortable dimensions. This approach retains its disciples now, though, in the eyes of the authors at least, it is essentially discredited, superceded by the ‘new’ minimum cost solution. The latter approach recognizes that it is often feasible to capture efficiency gains not only by transferring powers from one jurisdictional level to another, but also through coordination of the relevant policies between the governments involved. Such coordination, of course, gives rise to associated transaction costs which are viewed as an increasing function of federal decentralization. If (as the authors urge) the administration costs of government overall are considered to be neutral with respect to the degree of federal decentralization, whereas the signalling costs and mobility costs of citizens are seen to decline as federal decentralization proceeds, it is feasible to envisage a constituent assembly which set out mechanically to minimize the four costs in question in their search for the optimal degree of federalism. The authors reject this approach also on two principle grounds. Firstly, they argue that the approach is uneconomic, that the costs of finding and collecting the relevant information as well as of computing the ideal solution are excessively high. They present no real support for this hypothesis and, in my view, tend to underestimate developments in the communications field which, within the near future, will revolutionize opportunities for citizen participation in the political process. Their argument, nevertheless, cannot be-rejected out of hand. Secondly, however the authors reject the notion of a constituent assembly whose members compute costs with machine-like impartiality without reference to their own individual preferences concerning the constitutional question. In their own, alternative, approach, therefore, the authors introduce politicians explicitly into the decision-making process, and endow such politicians with preferences over the amenities, monetary and non-monetary, derived from tenure of office. Thus, the behaviour of members of a constituent assembly will be conditioned inpart by their search for such amenities and, in part, by the impact of such immediate self-seeking upon their future political careers. For the most part, the authors assume (and on this they have history on their side) that the politicians elected to the assembly will have post-assembly, political aspirations. As such, they will tend to allocate their own future jurisdictional levels those powers which, if implemented, would raise their probability of re-election at that level. Powers with adverse consequences would be allocated elsewhere. The one-level constitutional assemblies (typical in the pseudo-federal systems) are analysed in this text within the framework of monopoly theory.
122
Book reviews
Members of such assemblies are asumed to seek to maximize their own satisfaction concerning constitutional issues, though the final outcome is expected to depend also upon the citizen-resistance that they encounter. The authors predict that one-level assemblies will assign more powers to themselves than would a minimum cost solution, i.e. that such systems will tend to be over-centralized. They refer to substantial Canadian experience in support of this prediction, which latter is not very rigorously established. The two-level constitutional assemblies (typical in the true federal systems) are analysed within the framework of bilateral monopoly theory, at least for those cases where the two assemblies cannot logroll initially to a common position. Such situations will be characterized by interassembly bargaining over the allocation of powers, with trading of powers for grants and other benefits often slow because of the absence of a unique market-determined price. Once again, the authors predict a non-optimal outcome from such processes, though they concede that the outcome will be closer to the ideal than is likely for the one-level assembly. In my view, they do not fully justify this conclusion. Finally, the authors present a proposal for a better constitutional design. Using a result from standard economic theory that increasing the degree of competition is generally beneficial, they claim that an extended constituent assembly tends towards the minimization of organization costs and provides the best design for a federation. For, in contrast to conventional assemblies, where members inevitably are insulated from such competitive pressures, the extended assembly is forced to take into account, in the internal competitive struggle, the interests of all citizens and, thus, to review fully the cost of all alternative constitutional designs. The additional transactions costs, presumably, here are deemed to be worthwhile. The text is short-perhaps excessively so-in places a little repetitive and in certain respects less tightly argued that one is entitled to expect. Certainly, further work is necessary on the details of organization cost and on the specifics of systems design before judgment can be passed on its principal conclusions. Moreover, the non-Canadian may find its major predilections somewhat parochial (though Americans are guilty of similar domestic preby virtue of its systematic application of the dilections). Nevertheless, economic approach and of the fresh insights that this throws upon matters constitutional I must conclude by commending this text for critical reading to all intereted in the new economics of politics and its implications for governmental systems in the Western democracies. Charles K. Rowley University of Newcastle upon Tyne
119
legally determined standards of care such as are provided by the rules of negligence may seriously be doubted, but the question is not, as the author suggests, whether there will be a reduction in the amount of (say) motoring or walking but whether there will be a reduction in the amount of careless motoring or careless walking. The limited capacity of the tort action to make appropriate allocations in the light of the economic model is convincingly exposed. Tort claims are a ‘lottery’ insofar as they charge the costs to the offending actor only when there is a victim who can successfully overcome the legal and financial hurdles in pursuing his claim. The ‘personal’ nature of the action also means that important externalities, for example those incurred by the National Health Service and the social security funds, are ignored. Perhaps the most penetrating section of the analysis is that concerned with attempts to reconcile the allocative and distributional aims of compensation systems. The solution proposed by Calabresi that this can be achieved through insurance financed by varying premium rates is an appealing one, but Professor Atiyah draws on empirical evidence to show that insurance companies’ practice in premium fixing, especially in relation to liability insurance, is more arbitrary than is commonly thought. The author’s conviction that an appropriate degree of premium-rating would sometimes be unacceptable on distributional grounds may be justified in relation to individuals but is certainly not in relation to firms and in any event contrasts oddly with his subsequent observation that the marginal effect of differences in insurance premiums will be insignificant in comparison with price distortions arising from tax and other governmental controls. As mentioned above, Professor Atiyah’s interest in this analysis is essentially normative. The value theoretical insights into the structure of the law and its procedures which the economic analysis provides is understandably, given the author’s aims, granted little attention. But in this new edition he does now recognize that the law drew inspiration from utilitarian theory and classical economics, a necessary concession in the light of his own superlative historical investigation of contract law (Rise and Fall of the Freedom of Contract). Whether those loyal to the law and economics approach will accept the degree of scepticism revealed in this book is unsure. All readers, however, lawyers, economists and others, will benefit immeasurably from its wisdom and perception. It was, and remains, a classic. A. I. Ogus University of Newcastle upon Tyne
A. Breton and A. Scott. The Design of Federations. The Institute for Research on Public Policy, Montreal, Canada, 1980. xxi and 60 pp. This short text rejects the conventional views that federations either are historical accidents or political compromises between sectional interests. Instead, it posits the view that federations are designed (or should be designed-the text does not distinguish clearly between normative and positive in this respect) to minimize organization costs given the self-interest
120
Book reviews
motivation of all members of society. By this shift of emphasis, the authors open up an essentially novel? if not always fully convincing, avenue of analysis into the economics of constitutional design. Government activities are separated into two categories, namely constitutional and policy. The constitutional dimensions of such activity are considered to be wider than is conventional, encompassing the number of jurisdictional levels, the number of governmental units at each level, the powers assigned to each level, the rules of representation and the rules of amendment which regulate all constitutional rules. The authors recognize the interdependence between such constitutional aspects of government activity and the policy issues with which any constitution is involved. Nevertheless, they emphasize, in their text, the constitutional rather than the policy aspects of the political system. The conventional definition of federalism as the entrenching, in a constitutional document, in tradition, or in custom, of the division of responsibility for public policies between two (or more) jurisdictional levels is rejected. Instead all systems are classified as federal where the responsibility for public policies is divided between a number of jurisdictional levels, whatever the basis ofsuch division. This shift of definition, which classifies as federal not only such political systems as those of Australia, Canada, West Germany, India and the United States of America, but also those such as France, Belgium and the United Kingdom, in my view is too sweeping and ignores important legal differences between the truly-federal and the merely pseudo-federal political systems. How serious this mis-definition will prove to be must depend upon the precise area of analysis in which it is deployed. In fact, the impact of redefinition is lessened once the authors introduce the concept of a ‘constitutional assembly’, defined as the body accorded with responsibilities for determining the constitutional dimensions of governments. For, it turns out that all true federations are rules by two-level assemblies, whereas the others are ruled by one-level assemblies. This forms a useful basis of distinction, though the authors themselvs are not disposed to press such matters. By contrast with their definitions of federalism, the authors define unitary government in terms of the existence of only one jurisdictional level and of only one unit of government at the level. Where unitary government exists in each of several spatial subdivisions of a country, such government is defined as ‘balkanized’, and is seen to reflect some of the features of political decentralization which conventionally are associated with federalism alone. The authors clearly prefer federal to unitary systems of government most especially because the fragmentation of power characteristic of the former, and the consequential competition between rival political units, is seen to be conducive in general to individual liberty (of the negative kind in the sense of Hayek and Isaiah Berlin). Nevertheless, an associated economic case for federalism is developed within a text which stresses throughout the importance of diversity and of adaptability to risk in societies characterized by limited information and subjected periodically both to internal and to external shocks. For the most part, such benefits do not accrue either in unitary or even in balkanized systems of government. For a federation (they claim) reduces the cost of political mobility by reference to either of these alternatives. The authors recognize that the alleged benefits of federalism are purchased at a price, which is measured, in essence, by foregone scale economies, by the
Book reviews
121
loss of positive externalities both in production and in consumption and by the sacrifice of some efficiency in the provision of public goods as well as in the interjurisdictional trade with its financial leakages and in the IOSS of empathy between persons across the jurisdictional boundaries. Clearly, the stage is set for some form of economic trade-off between the benefits and costs associated with the federal system. The authors review briefly the conventional approaches to this problem before presenting a novel alternative of their own. The conventional approach to the determination of the optimal division of political power was that of making internal to jurisdictions as much as possible of the activities associated with spillovers, leakages and empathies. Inevitably, this solution operated for the most part with a centralization bias, even though recognition dawned eventually that costs and benefits were not measurable within comfortable dimensions. This approach retains its disciples now, though, in the eyes of the authors at least, it is essentially discredited, superceded by the ‘new’ minimum cost solution. The latter approach recognizes that it is often feasible to capture efficiency gains not only by transferring powers from one jurisdictional level to another, but also through coordination of the relevant policies between the governments involved. Such coordination, of course, gives rise to associated transaction costs which are viewed as an increasing function of federal decentralization. If (as the authors urge) the administration costs of government overall are considered to be neutral with respect to the degree of federal decentralization, whereas the signalling costs and mobility costs of citizens are seen to decline as federal decentralization proceeds, it is feasible to envisage a constituent assembly which set out mechanically to minimize the four costs in question in their search for the optimal degree of federalism. The authors reject this approach also on two principle grounds. Firstly, they argue that the approach is uneconomic, that the costs of finding and collecting the relevant information as well as of computing the ideal solution are excessively high. They present no real support for this hypothesis and, in my view, tend to underestimate developments in the communications field which, within the near future, will revolutionize opportunities for citizen participation in the political process. Their argument, nevertheless, cannot be-rejected out of hand. Secondly, however the authors reject the notion of a constituent assembly whose members compute costs with machine-like impartiality without reference to their own individual preferences concerning the constitutional question. In their own, alternative, approach, therefore, the authors introduce politicians explicitly into the decision-making process, and endow such politicians with preferences over the amenities, monetary and non-monetary, derived from tenure of office. Thus, the behaviour of members of a constituent assembly will be conditioned inpart by their search for such amenities and, in part, by the impact of such immediate self-seeking upon their future political careers. For the most part, the authors assume (and on this they have history on their side) that the politicians elected to the assembly will have post-assembly, political aspirations. As such, they will tend to allocate their own future jurisdictional levels those powers which, if implemented, would raise their probability of re-election at that level. Powers with adverse consequences would be allocated elsewhere. The one-level constitutional assemblies (typical in the pseudo-federal systems) are analysed in this text within the framework of monopoly theory.
122
Book reviews
Members of such assemblies are asumed to seek to maximize their own satisfaction concerning constitutional issues, though the final outcome is expected to depend also upon the citizen-resistance that they encounter. The authors predict that one-level assemblies will assign more powers to themselves than would a minimum cost solution, i.e. that such systems will tend to be over-centralized. They refer to substantial Canadian experience in support of this prediction, which latter is not very rigorously established. The two-level constitutional assemblies (typical in the true federal systems) are analysed within the framework of bilateral monopoly theory, at least for those cases where the two assemblies cannot logroll initially to a common position. Such situations will be characterized by interassembly bargaining over the allocation of powers, with trading of powers for grants and other benefits often slow because of the absence of a unique market-determined price. Once again, the authors predict a non-optimal outcome from such processes, though they concede that the outcome will be closer to the ideal than is likely for the one-level assembly. In my view, they do not fully justify this conclusion. Finally, the authors present a proposal for a better constitutional design. Using a result from standard economic theory that increasing the degree of competition is generally beneficial, they claim that an extended constituent assembly tends towards the minimization of organization costs and provides the best design for a federation. For, in contrast to conventional assemblies, where members inevitably are insulated from such competitive pressures, the extended assembly is forced to take into account, in the internal competitive struggle, the interests of all citizens and, thus, to review fully the cost of all alternative constitutional designs. The additional transactions costs, presumably, here are deemed to be worthwhile. The text is short-perhaps excessively so-in places a little repetitive and in certain respects less tightly argued that one is entitled to expect. Certainly, further work is necessary on the details of organization cost and on the specifics of systems design before judgment can be passed on its principal conclusions. Moreover, the non-Canadian may find its major predilections somewhat parochial (though Americans are guilty of similar domestic preby virtue of its systematic application of the dilections). Nevertheless, economic approach and of the fresh insights that this throws upon matters constitutional I must conclude by commending this text for critical reading to all intereted in the new economics of politics and its implications for governmental systems in the Western democracies. Charles K. Rowley University of Newcastle upon Tyne