James d. Gwartney

Thinking About Constitutional Rules for
Prosperity
There is enormous inertia—a tyranny of the status quo—in private and
especially government arrangements. Only a crisis—actual or perceived—
produces real change. When that crisis occurs, the actions that are taken
depend on the ideas that are lying around. That, I believe, is our basic function:
to develop alternatives to existing policies, to keep them alive and available
until the politically impossible becomes politically inevitable.
(83)
— Milton Friedman, 1976 Nobel Laureate
What are the major messages of Part 3? First, economic analysis establishes that
monopoly, public goods, and externalities are all problems of the market that encourage self-
interested individuals to engage in counterproductive actions. These market failures create an
opportunity for government intervention to enhance efficiency. But there is no assurance this
will be the case.
Political allocation, even when directed democratically, is an alternative form of
economic organization—and, like markets, it has both benefits and shortcomings. There is
government failure as well as market failure. Government failures include the following, as
discussed above:
Voters have little incentive to cast well-informed votes.
When government moves beyond the protection of individual rights and becomes

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heavily involved in the allocation of scarce resources, elected political officials have a
strong incentive to cater to the views of well-organized interest groups.
Political favoritism will encourage wasteful rent-seeking.
The political process tends to be shortsighted (often just until the next election), which
results in excessive use of debt and unfunded promises that are difficult, if not
impossible, to keep.
If government is going to be a positive force for economic prosperity, the rules of the
political game must bring the self-interest of voters, politicians, and bureaucrats into harmony
with economic progress. What would this look like and how might it be achieved?
Clearly, equal treatment under the law and restraints on the powers of governments are
central to the design of a political structure supportive of economic progress. Although
institutional arrangements vary around the world, there are lessons to be learned from the
successful (and the failing) options found in various countries. To a large degree, the framers
of the United States Constitution got the general structure right. They built checks and
balances into the system. Political power was divided among the legislative, executive, and
judicial branches. Legislation had to pass through two legislative bodies that, at the time,
represented diverse and often-conflicting interests, and the approval of the president was
required for passage into law.
The limitations on the powers of the central government provided for a decentralized
federal system and still more dispersal of governmental powers. The permissible fiscal powers
of the central government were enumerated (Article I, Section 8) and all other powers were
allocated to the states and the people (Tenth Amendment). Congress was to levy uniform taxes
in order “to provide for the common defense and general welfare.” The clear intent was to
prevent the use of the federal treasury as a tool to favor some groups and regions relative to
others.
The American Constitution also protected the property rights of individuals and their
freedom to engage in voluntary exchange. The Fifth Amendment specified that private
property shall not be “taken for public use without just compensation.” States were prohibited
from adopting legislation “impairing the obligation of contracts” (Article I, Section 10).

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Perhaps most importantly, states were prohibited from implementing trade barriers, and as a
result, the United States of America became the world’s largest free-trade zone.
The United States Constitution sought to limit the ability of government, particularly
the federal government, to politicize the economy and restrict the rights of citizens. Put another
way, the Constitution was designed to promote government action based on agreement rather
than coercion. Why is this important? People will agree to an action only when each party
gains. Thus, actions based on agreement, whether undertaken through markets or government,
will be mutually advantageous and will therefore promote the general welfare rather than the
interests of some parties at the expense of others.
With the passage of time governments often seek to become involved in larger and
larger portions of citizens’ economic and personal lives, so that by now, in most countries,
government is involved in almost everything and the results are highly visible: political
favoritism, special-interest spending, large budget deficits, excessive regulation, political
corruption, and increased influence over many aspects of our lives.
The challenge before all countries, both those with long-established governmental
structures and those newly devising the rules under which they will operate, is to design a set
of constitutional rules that will promote government action based on broad consensus and
bring the political process into harmony with economic progress.
How can this be accomplished? What provisions would a constitution designed to
promote economic prosperity and stability contain? Several proposals flow directly from the
analyses discussed above. Although others may have different ideas worth discussing, we
believe that both economic logic and empirical research support the following general
principles that would contribute to a well-functioning government and promote economic
progress.