1. Constitutional Economics

2. The prisoners' dilemma - the benefits of cooperation –Mueller – Theft as a “prisoner’s dilemma” –Why should theft be illegal? If you are not using your car and I steal it, aren’t I putting a resource to a higher valued use? No. I would be substituting a high transactions cost process for allocating resources involving anti- theft devices, police, courts, prisons, etc., for a low transactions cost process called a “sale”.

3. Constitutional Economics The prisoners' dilemma - the benefits of cooperation –Mueller – Theft as a “prisoner’s dilemma” –Pm = payoff to me –Py = payoff to you Work YOU Steal WorkPm = 10 Py = 10 Pm = 6 Py = 12 ME StealPm = 12 Py = 6 Pm = 5 Py = 5

4. Constitutional Economics The prisoners' dilemma - the benefits of cooperation –Mueller – Theft as a “prisoner’s dilemma” –When we both work we maximize our wealth (TW). Work YOU Steal WorkPm = 10 TW = 20 Py = 10 Pm = 6 TW = 18 Py = 12 ME StealPm = 12 TW = 18 Py = 6 Pm = 5 Py = 5

5. Constitutional Economics The prisoners' dilemma - the benefits of cooperation –Mueller – Theft as a “prisoner’s dilemma” –When we both work we maximize our wealth (TW). –This is “negative sum” symmetrical game Work YOU Steal WorkPm = 10 TW = 20 Py = 10 Pm = 6 TW = 18 Py = 12 ME StealPm = 12 TW = 18 Py = 6 Pm = 5 Py = 5

6. Constitutional Economics The prisoners' dilemma - the benefits of cooperation The “Nash Equilibrium” of a prisoners’ dilemma game is TW = 10 Work YOU Steal WorkPm = 10 TW = 20 Py = 10 Pm = 6 TW = 18 Py = 12 ME StealPm = 12 TW = 18 Py = 6 Pm = 5 TW = 10 Py = 5

7. Constitutional Economics What we end up with is Hobbes’ “state of nature” where “everyman is at war with everyman, and life is nasty, brutish and short.” Work YOU Steal WorkPm = 10 TW = 20 Py = 10 Pm = 6 TW = 18 Py = 12 ME StealPm = 12 TW = 18 Py = 6 Pm = 5 TW = 10 Py = 5

8. Constitutional Economics So, is there a way out of Hobbes’ “state of nature”? Work YOU Steal WorkPm = 10 TW = 20 Py = 10 Pm = 6 TW = 18 Py = 12 ME StealPm = 12 TW = 18 Py = 6 Pm = 5 TW = 10 Py = 5

9. Constitutional Economics So, is there a way out of Hobbes’ “state of nature”? Sure, the usual route historically has been this way. Autocracy Work YOU Steal WorkPm = 10 TW = 20 Py = 10 Pm = 6 TW = 18 Py = 12 ME StealPm = 12 TW = 18 Py = 6 Pm = 5 TW = 10 Py = 5

10. Constitutional Economics “The good old rule, the simple plan, Let him take who has the power, Let him keep who can.” William Wadsworth, “Rob Roy’s Grave” Work YOU Steal WorkPm = 10 TW = 20 Py = 10 Pm = 6 TW = 18 Py = 12 ME StealPm = 12 TW = 18 Py = 6 Pm = 5 TW = 10 Py = 5

11. Constitutional Economics Autocracy is more efficient than the “state of nature” Work YOU Steal WorkPm = 10 TW = 20 Py = 10 Pm = 6 TW = 18 Py = 12 ME StealPm = 12 TW = 18 Py = 6 Pm = 5 TW = 10 Py = 5 ?

12. Constitutional Economics Autocracy is more efficient than the “state of nature” But these alternatives represent “tyranny”. Work YOU Steal WorkPm = 10 TW = 20 Py = 10 Pm = 6 TW = 18 Py = 12 ME StealPm = 12 TW = 18 Py = 6 Pm = 5 TW = 10 Py = 5 ?

13. Constitutional Economics Autocracy is more efficient than the “state of nature” But these alternatives represent “tyranny” How do we get to here?. Work YOU Steal WorkPm = 10 TW = 20 Py = 10 Pm = 6 TW = 18 Py = 12 ME StealPm = 12 TW = 18 Py = 6 Pm = 5 TW = 10 Py = 5

14. Constitutional Economics How do we get to here?. Historically, we can’t (or, at least, we never have). Work YOU Steal WorkPm = 10 TW = 20 Py = 10 Pm = 6 TW = 18 Py = 12 ME StealPm = 12 TW = 18 Py = 6 Pm = 5 TW = 10 Py = 5

15. Constitutional Economics How do we get to here?. Historically, we can’t (or, at least, we never have). Revolution!! Off with their heads!! Work YOU Steal WorkPm = 10 TW = 20 Py = 10 Revolu- tion Pm = 6 TW = 18 Py = 12 MERiot, Mayhem Coup de etat StealPm = 12 TW = 18 Py = 6 Pm = 5 TW = 10 Py = 5

16. Constitutional Economics How do we get to here?. Historically, we can’t (or, at least, we never have). Logically, how would we want to do it? Work YOU Steal WorkPm = 10 TW = 20 Py = 10 Pm = 6 TW = 18 Py = 12 ME StealPm = 12 TW = 18 Py = 6 Pm = 5 TW = 10 Py = 5

17. Constitutional Economics The way we get out of Hobbes’ “state of nature” is with a social contract

18. Constitutional Economics The way we get out of Hobbes’ “state of nature” is with a social contract A social contract defines a modus vivendi – the way we live.

19. Constitutional Economics The way we get out of Hobbes’ “state of nature” is with a social contract A social contract defines a modus vivendi – the way we live. A modus vivendi is an accommodation of divergent private values, e.g., religion, through some accepted common social value, e.g., tolerance of religious differences.

20. Constitutional Economics The American colonial experiment was almost all about religious accommodation: –Pilgrim Puritans - New England

21. Constitutional Economics The American colonial experiment was almost all about religious accommodation: –Pilgrim Puritans - New England –Catholics – Chesapeake

22. Constitutional Economics The American colonial experiment was almost all about religious accommodation: –Pilgrim Puritans – New England –Catholics – Chesapeake –Quakers – Pennsylvania

23. Constitutional Economics The American colonial experiment was almost all about religious accommodation: –Pilgrim Puritans – New England –Catholics – Chesapeake –Quakers – Pennsylvania –All dissenters from the Anglican Church Contrast this religious tolerance to Islam’s view of “Dhimmis”

24. Constitutional Economics A key concept in Judeo – Christian – Islamic religions is property –“Thou shall not steal.” Etc. In Hobbes’ “state of nature” no man nor his property is safe To secure the right to property, individuals need civil liberties.

25. Constitutional Economics John Rawls’ “A Theory of Justice” proposes an objective for framing a social contract or constitution.

26. Constitutional Economics John Rawls’ “A Theory of Justice” proposes an objective for framing a social contract or constitution: the “Rawlsian Difference Principle.” Maximize the welfare of the least well off member of the community

27. Constitutional Economics John Rawls’ “A Theory of Justice” also proposes a process for framing a social contract or constitution: the “veil of ignorance.” Behind of “veil of ignorance” decision makers choosing rules should not know whether they will be the least well off or most well off member of the community.

28. Constitutional Economics John Rawls’ “A Theory of Justice” also proposes a process for framing a social contract or constitution: the “veil of ignorance.” Behind of “veil of ignorance” decision makers choosing rules should not know whether they will be the least well off or most well off member of the community. Think of a game of poker.

29. Constitutional Economics John Rawls’ “A Theory of Justice” also proposes a process for framing a social contract or constitution: the “veil of ignorance.” Behind of “veil of ignorance” decision makers choosing rules should not know whether they will be the least well off or most well off member of the community. Think of a game of poker. Rawls’ proposal is very “Madisonian”

30. Constitutional Economics Rawls and numerous commentators believe that the Difference Principle makes a case for income equality.

31. Constitutional Economics Rawls and numerous commentators believe that the Difference Principle makes a case for income equality. Does it really?

32. Constitutional Economics Rawls and numerous commentators believe that the Difference Principle makes a case for income equality. Does it really? This would suggest a high degree of risk aversion and perceived lack of opportunity.

33. Constitutional Economics Rawls and numerous commentators believe that the Difference Principle makes a case for income equality. Does it really? Would you rather be the poorest person if everyone is equally poor or if there are some wealthy people?

34. Constitutional Economics Rawls and numerous commentators believe that the Difference Principle makes a case for income equality. Does it really? The existence of wealthy people suggests that there are opportunities for the poorest people to improve their situation.