Thursday, August 23, 2012

Euvoluntary Institutions?

Before I restore the post I wrote yesterday on montonicity, I think it may be wise to consider if it's fair to apply euvoluntary criteria beyond commerce. Can we have euvoluntary law? Euvoluntary rules? Euvoluntary institutions? Before we roll up our sleeves and see how we might tinker with our ideas, let's review the conditions for euvoluntary exchange:

(1) conventional ownership
(2) conventional capacity to buy/sell
(3) absence of regret
(4) no uncompensated externalities
(5) neither party coerced by human agency
(6) neither party coerced by circumstance; the disparity in BATNAs is not "too large"

For ordinary trade, condition 1 is self-explanatory (usually). Ownership is more or less well-defined in the common law. In those instances when it isn't, or when the civil authority usurps portions of ownership rights by way of legislative fiat, Coasean bargaining, judicial remedy or armed conflict (as in the case of the Pig War of 1859) exists to help settle matters. If we expand this rule to the ex ante creation of rules or institutions, it would be analogous to :

(1a) conventional sovereignty

Note that this can easily be scaled. As Pete Leeson notes in The Invisible Hook, pirate ship charters act as mini-constitutions for each vessel. Prairie trains in US Western expansion frequently drafted covenants as they headed into Indian territory. In each of these cases (ditto for town incorporation), the contracting parties  enjoyed sovereignty over the scope of their agreement. To contrast, we might say that some of the Indian nation treaties violated conventional sovereignty, treating ancestral land claims as void. Not euvoluntary.

The second condition is also pretty well-established in the common law. The UCC lists them explicitly in case you find yourself with a few extra hours and not much better to do. A short explanation is that unimpaired adults can contract over conscionable exchanges. For rule generation, there's quite a bit of ink spilled on forming meta-rules. I point interested readers to James Buchanan and Gordon Tullock's landmark work The Calculus of Consent. For euvoluntary purposes, we want to establish that the founders enjoy legitimacy when they form agreements.

(2a) conventional capacity to establish compacts

Here, I worry that there may be no good conventions over compact creation. Historically, the big Constitutional sessions (France and the United States) followed wars or uprisings of questionable legitimacy (questionable ex ante of course, as Jefferson's denial of the Divine Right of Kings was both unprecedented and hostile). Here, I suppose I might argue that agreements governing criminal enterprises violate this condition, since the purpose of the compact is to commit crime. I'd be open to an argument that an arrangement between elites to claim artificial rents also violates this condition, though that may be a tougher sell, mostly because governments are long in the business of handing out special favors in return for campaign contributions. Corruption is well legitimized by now, so maybe this rule will be worth revisiting once I can hash it out a little more.

(3a) absence of regret/amendability

De novo institutions are formed behind the Rawlsian veil of ignorance. They therefore contain fewer and weaker expectations than you're likely to find in conventional exchange. If we expand euvoluntary criteria to institution formation, we have to acknowledge that the world is not ergodic and permit revision accordingly. I think I'd reference the common law rules for partnership formation as the standard against which I'd judge the euvoluntarity of rule formation under this condition. Partnerships can be dissolved at any time by any one of the partners for any or no reason at all, unless specifically stated in the charter. This seems like strong regret avoidance and comports well with rule 3.

The externality condition appears as a footnote in the GTM's main paper. The trouble here is one of efficiency criteria: should use use strict Pareto conditions or the more relaxed Kaldor-Hicks? Pareto demands compensation be paid, K-H does not. For euvoluntary institutions, we would want to avoid rules that make anyone systematically worse off than without the rule. The institutionalized graft I mentioned in rule 2a might fit the bill better here. US sugar import restrictions clearly make a few Americans better off at everyone else's expense, and the Constitutional rule that allows the Congress to dole out favors like this are obviously non-euvoluntary. Small, concentrated interests benefit, and the rest of us pay. This political pollution is uncompensated. So,

(4a) no [inefficient] rent contests

This condition might also be contentious. I can't rule out the possibility that there exists a rent contest that could enrich everyone. There is reason to believe that patent rights, which are a political rent, are welfare-enhancing under some conditions. I don't like the word I have there in square brackets, since it would make this condition beg the question, which rankles me, but I'm not entirely sure how else to phrase it. If any reading this has suggestions for improvement, please leave a comment.

(5a) No party coerced by human agency

Self-explanatory. The Treaty of Versailles was not euvoluntary. Indeed, any peace treaty signed following a decisive military victory cannot be euvoluntary by this condition. This is not to imply that the conditions can't be fair or acceptable, but if the victor has the implicit threat of annihilation, I don't see how this could be anything but coercion. "You surrendered, and these are my terms. Take them or die" is not euvoluntary.

(6a) No coercion by circumstance, no great disparity in BATNA

Here, the negotiated agreement is over rules. This means that the BATNA consideration is joint and several, so all pairwise and subgroup combinations have to be evaluated. This seems daunting to do formally, even with computer assistance. Modeling it is problematic, so I think the best thing to do is punt back to Buchanan. A unanimity rule cuts the Gordian knot to establish whether or not each party finds the compact preferable to the status quo ante, but I'm not convinced folks waste a lot of energy fretting over BATNA disparity in meta-rules than in ordinary exchange. People care about the plight of the exploited factory worker, but whose heart bleeds for the poor statesman who would have to retire to his massive estate in obscurity should the constitution fail to be ratified? I suspect that although this condition is the chief driver for moral intuition in ordinary exchange, it's a non-starter for most meta-arrangements. An exception would be trade agreements. Perhaps some ire towards NAFTA is the perception that the big bad US is strong-arming weaker North American nations to accept crappy terms of trade.

So there you have it: my first pass at euvoluntary institutions. I think there's a case to be made that evolved or implicit institutions are probably closer to euvoluntary than their negotiated cousins. I also think that we might imagine a coercive-to-euvoluntary spectrum over institution formation the same way we can think of a euvoluntary spectrum for trade. I claim (above) that the US Constitution is not euvoluntary by dint of rent contests, but it's almost certainly more euvoluntary than many other constitutions elsewhere in the world.

I hope this is convincing enough that I can now credibly discuss spectrum monotonicity. I also now sort of wonder if this idea provides a viable germ to develop into something more rigorous. Let me know what you think in the comments.

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Do you have suggestions on where we could find more examples of this phenomenon?