WEINGAST, B. (2005) - The Constitutional Dilemma of Economic Liberty

8/17/2019 WEINGAST, B. (2005) - The Constitutional Dilemma of Economic Liberty

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The Constitutional Dilemma of

Economic Liberty

Barry R. Weingast

Most constitutions fail, including those in most new democracies. So why

do some succeed?

Constitutional failures in democracies occur in every part of the

globe. Ferguson (2001, Appendix E) shows that over 50 percent of the 24 interwar

European democracies failed prior to World War II, including the three Baltics,

Germany, Italy, Poland and Spain. Constitutions in postcolonial Africa fared worse, with failures including Congo, Ghana, Kenya, Nigeria, Uganda and Zambia. Coun-

tries in Latin America regularly set aside their constitutions, sometimes by elected

presidents, such as Hugo Chavez in Venezuela and Alberto Fujimori in Peru, but

also through military takeovers, in among others Argentina, Brazil and Chile in the

1960s and 1970s.

Constitutional failure occurs when political officials fail to honor one or more

constitutional provisions, such as abusing citizen rights, ruling by decree rather

than the constitutional lawmaking process, or calling off an election. Because no

external enforcement mechanism exists for most constitutions, constitutional suc-

cess requires that constitutions be self-enforcing in the sense that political officialshave incentives to honor constitutional provisions.

In the United States and other developed western countries today, citizens can

take for granted a series of rights and freedoms associated with economic liberty,

such as free speech, the right of association, property rights, contract enforcement

and an unbiased judicial system. Moreover, these rights are universalistic in the

sense that citizens have them by virtue of citizenship rather than by virtue of a

specific relationship with those in power.

yBarry R. Weingast is Senior Fellow, Hoover Institution, and Ward C. Krebs Family Professor, Department of Political Science, Stanford University, both in Stanford, California.

Journal of Economic Perspectives—Volume 19, Number 3—Summer 2005—Pages 89 –108


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Unfortunately, maintaining these rights is problematic in the developing

world, where expropriation and exploitation of citizens and their assets remain

endemic problems. Governments in these countries fail to honor citizen rights,

whether rights to assets and their returns or to full political participation. Thedegree to which an individual’s rights are respected in these countries depends on

that individual’s relationship with those in power. This limited protection of

individual rights typically affects the ability and incentives of individuals to obtain

a license to open a business, to participate in international trade, to create a

bank—and sometimes to escape imprisonment for their beliefs.

Moreover, each of the countries of the developed west also went through a

transition period in which these issues were deeply problematic (North, 1981). In

these countries, economic development is not simply the creation of markets, but

a simultaneous political transformation from a sovereign who runs the state forhimself to a state where the government officials not only have explicit duties to

serve citizens, but also have incentives to do so (Acemoglu and Robinson, 2005). As

Skinner (1978, p. x ) wrote: “The decisive shift [in creating the modern state] was

made from the idea of the ruler ‘maintaining his state’—where this simply meant

upholding his own position—to the idea that there is a separate legal and consti-

tutional order, that of the State, which the ruler has a duty to maintain.” Without

this political transformation, the foundations of markets property rights and third

party enforcement of contracts will not exist.

This paper studies the problem of self-enforcing constitutions, addressing the

question, how do some constitutions provide incentives for political officials toabide by the constraints announced in the constitution? The literature on consti-

tutions divides into three groups. First, by far the largest (especially in the legal

literature) is the normative literature. In economics, this approach is associated

with Friedrich Hayek (1960) and especially James Buchanan (1975; see also Bren-

nan and Buchanan, 1980). Second, a growing literature exists on the economic

and political effects of constitutions (Mueller, 2003, chapters 1, 10, 26, offers a

summary; see also Elster, 2000; La Porta, Lopez-de-Silanes, Pop-Elesches and

Shleifer, 2004; Persson and Tabellini, 2004; Riker, 1982). The third and smallest

component of the literature, to which this paper contributes, studies self-enforcing

constitutions.Hardin (1989) was the first to propose that the constraints on government can

be analyzed as a form of a coordination game (see also Hardin, 2005; Filippov,

Ordeshook and Shvetsova, 2004). If citizens can coordinate their reactions against

the government in the face of potential transgressions, they can provide govern-

mental officials with incentives to honor universalistic citizen rights. However,

coordination among citizens may be difficult, because citizens typically disagree

along several dimensions: what rights should exist; and the appropriate scope,

scale, structure and process of the government. Further, the government may use

a divide-and-conquer strategy to benefit some citizens at the expense of others: if citizens cannot always coordinate their behavior, then the government can exploit

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the citizenry by transgressing what some citizens consider their rights while

retaining the support of others. More recently, a number of authors have studied

the problem of what makes democracy self-enforcing (Fearon, 2000; Przeworski,

1991, 2004; Weingast, 1997, 2005; Calvert, 1995; Gibbons and Rutten, 2004).To understand the mechanisms underlying successful constitutions, this paper

begins by exploring a simple society facing the dilemma of policing the govern-

ment: a sovereign, who controls the government, and two citizens. It then moves to

a discussion of how constitutions are often formed out of crises, with some more

detailed discussion of two main examples: England’s Glorious Revolution of 1688

and the U.S. Constitution.

The approach developed throughout this paper assumes a sovereign who

maximizes his take. This assumption often seems alien or exaggerated to many in

developed western economies, because it does not match our own experience of how government works. Yet the assumption seems peculiar only because we live in

societies that have solved the very problem this paper seeks to understand. Most

developing countries have yet to solve this problem, which is why the most common

way to model dictators is to assume that they maximize their take (as reviewed in

Barzel, 2000; Olson, 2000). Mitigating this type of ruler behavior represents one of

the fundamental problems that constitutions have to solve.

A Model of Self-Enforcing Liberty

I use a type of coordination game to model the problem of citizen control and

the sovereign. Consider a society made up of a sovereign S , who controls the

government, and two citizens, A and B . As participants in the economy, A and B

produce a social surplus. All players share in the surplus, but both the quantity and

distribution of the surplus depend on political choices. The sovereign values

remaining in power, and to do so he needs political support. If at least one of the

two citizens supports the sovereign, he retains power, but if both citizens oppose

him, he is deposed and loses power.

The Game and its One-Shot Equilibria

The moves in the game occur in this sequence. The sovereign S moves first and

may choose to honor both citizens’ rights or attempt to transgress the rights of

either or both of the citizens. If S chooses to honor A and B ’s rights, he remains in

power, and the game ends. If S attempts a transgression against one or both

citizens, then A and B move simultaneously and must decide whether to challenge

the sovereign or acquiesce in the face of his attempted transgression. If A and B

both challenge, they depose the sovereign, the sovereign’s attempted transgression

fails, and the game ends. If one or both of the citizens acquiesce, then the challenge

fails, the transgression succeeds, and the game ends.If the citizens react together by challenging a transgression, they can police the

Barry R. Weingast 91


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sovereign: the sovereign will avoid actions that trigger citizens to react in concert to

depose him. If citizens can coordinate on their trigger strategies, they can police

the sovereign and hence make their rights self-enforcing in the sense that the

sovereign has an incentive to honor these rights.Several impediments inhibit citizen coordination. First, citizens are likely to

disagree among themselves. No natural consensus exists about the nature of rights,

either among political philosophers (for example, Waldron, 1999, chapter 1) or

among citizens. Moreover, different specifications of rights, duties and public

choice rules yield different distributions of benefits. For example, citizens in Chile

prior to the 1973 military coup were divided as to whether they wanted land reform

(involving a form of expropriation of current landholders) or whether they wanted

to protect existing property rights. Americans in the early United States differed as

to whether they believed the national government should promote the interests of slaveholders and protect southern property rights in slaves. The lack of consensus

over rights combines with the natural diversity of preferences to imply a natural

impediment to bargaining over how to coordinate.

Second, unforeseen contingencies arise in which people disagree about how

the rules should apply. The contingencies imply impediments to coordination.

Because citizens typically use self-interest as their guide as to what to do in such

circumstances, they will disagree about how to extend their coordination scheme to

the new situation.

Third, the sovereign has an incentive to impede coordination against him by

using a divide and conquer strategy. Indeed, the literature on authoritarian rulersemphasizes that authoritarians spend a great deal of effort and resources prevent-

ing citizens from organizing and coordinating against them (for example, Kuran,

1998; Tullock, 1987). When a sovereign S transgresses against one of the citizens,

he has strong incentives to share some of what is gained with the other citizen. In

effect, the sovereign forms a coalition with one citizen and then preys on the rest

of society, represented here by the other citizen. Or put differently, the sovereign

bribes some citizens into ignoring his transgressions against others. Leaders in

nonliberal states, such as Vladimir Putin in Russia or Hugo Chavez in Venezuela,

typically work against both citizen coordination and citizen rights.

In the face of citizen disagreements about rights, the sovereign may relatively cheaply build a coalition by bribing those who do not feel very strongly when the

treatment of the rest of the citizens violates the rights stated in the constitution.

Figure 1 lays out the structure of the game and its payoffs. The sovereigns

values power, receiving a payoff of p if he retains power. Each citizen A and B

produces a surplus, s . The sovereign gains from transgressions, and a successful

transgression by the sovereign against one of the citizens nets him t s , reflecting

the fact that transgressions create deadweight social costs, d t – s . If the

sovereign’s transgression against one citizen succeeds, he shares some of his gain

with the other citizen; that is, the net gain from the transgression, t , is divided intoa portion for the sovereign, r , and a portion for the other citizen group, g . In this



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case, the citizen suffering the transgression receives u s t d . If S successfully

transgresses against both citizens, he receives t from each; and each citizen receives

u . Finally, challenging the sovereign costs each citizen, c , regardless of whether the

challenge succeeds. Social surplus is maximized when the sovereign honors both

citizens’ rights.

As Figure 1 shows, the sovereign S makes the first move. Then citizens A and B

move simultaneously—and their interaction takes the form of a prisoners’ di-lemma. In Figure 1, citizen A is the row player in each prisoner’s dilemma while

citizen B is the column player. The three payoffs in each box represent, in order,

the payoffs to the sovereign, to A and to B . To see the prisoners’ dilemma aspect of

the game, consider A and B ’s incentives in the face of an attempted transgression

against B . Assuming that challenging is not too costly ( c t d ), B prefers that

both citizens challenge. No matter what action B takes, however, A has a dominant

strategy to acquiesce. Suppose in the face of a transgression against B , B challenges.

If A challenges, then the challenge succeeds, the transgression fails, S is deposed,

and A receives s – c . If instead A acquiesces, A can avoid the costs of challenging

and receive a payoff from the sovereign S, and thus receives s g s – c . Similarly,if B acquiesces, the A receives s g if he acquiesces and s g c if he challenges.

In either case, A is better off acquiescing. Knowing this, B will also acquiesce, and

the sovereign’s transgression succeeds.

The game allows the sovereign to transgress against some of the citizens’ rights

and survive. In the one-shot game there are three equilibria: 1) S challenges

against A ; and both A and B acquiesce; 2) S challenges against B ; and both A and

B acquiesce; 3) S challenges against both A and B ; and both A and B acquiesce.

These equilibria arise out of the prisoner’s dilemma structure of payoffs for A and

B . Notice that citizen cooperation, which maximizes social surplus, is not anequilibrium.

Figure 1

Sovereign and Citizens Game

Acquiesce

Challenge

p 2t , u , u

p 2t , u c , u

Acquiesce

Transgress against both A and B

Transgress against A /honor B

Transgress against B /honor A

Honor both A and B

S

p 2t , u , u c

0, s c , s c

Acquiesce

Challenge

p t , u , s g

p t , u c , s g

p t , u , s g c

0, s c , s c

Acquiesce

Challenge

p t , s g , u

p t , s g c , u

p t , s g , u c

0, s c , s c

p , s , s

Challenge

Acquiesce Challenge

Acquiesce Challenge

The Constitutional Dilemma of Economic Liberty 93


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Equilibria in the Repeated Game

The situation is more complicated when the game is repeated, as one would

expect of payoffs based in part on a prisoner’s dilemma. Imagine that A and B

recognize that the sovereign is transgressing against one or both of them repeat-edly, and they find that it is worth incurring costs in the one-time game to avoid a

string of such future transgressions. In this situation, virtually any outcome can

become an equilibrium.

However, two equilibria of the repeated game are especially noteworthy. The

first outcome, which I call the asymmetric equilibrium, continues the equilibrium of

the one-shot game over time. In this equilibrium, the sovereign continually trans-

gresses against one of the citizens while retaining the support of the other. This

equilibrium corresponds to a sovereign who creates a durable support coalition

whose members have a privileged position while the coalition preys on the rest of society. A society in this equilibrium cannot sustain universalistic rights; or put

differently, a citizen’s rights depend on that citizen’s relationship to the sovereign.

The second noteworthy equilibrium I call the self-enforcing liberty equilibrium. In

this equilibrium, repetition allows citizens to support the outcome in which the

sovereign honors their rights and that maximizes social surplus. In particular, the

following strategies for each player in the game are an equilibrium.1 For the

sovereign S : If either A or B has ever acquiesced to a transgression, transgress

against both A and B . Otherwise, honor both citizens’ rights. For citizen A : If B has

challenged every previous transgression by S , then challenge if S transgresses and

acquiesce otherwise. If B has acquiesced to a previous transgression by S , acquiescein every period. For citizen B : If A has challenged every previous transgression by

S , then challenge if S transgresses and acquiesce otherwise. If A has acquiesced to

a previous transgression by S , acquiesce in every period.

In this equilibrium, citizens A and B coordinate to depose the sovereign S if he

transgresses either or both of their rights. This threat forces the sovereign to honor

rights. The self-enforcing liberty equilibrium is based on a consensus about trigger

strategies of when to challenge a transgression: citizens coordinate by agreeing to

react in concert. Although each citizen has an incentive in the short-run to

acquiesce in the face of transgressions against the other, the citizens can create an

incentive to come to one another’s aid when each threatens in the future not tocome to the other’s aid. This equilibrium implies that citizens have solved their

differences over the content of rights and over the mechanisms of public choice, a

topic to which I return below.

The self-enforcing liberty equilibrium is reminiscent of the notion of an idea

propounded by John Locke (1689) in his Second Treatise on Government that in the

face of transgressions, citizens have a duty to act to defend their liberty. However,

1 This equilibrium requires that, for each citizen, the discounted present value of cooperation, s /(1

), exceeds the one-time gains from of acquiescing in the face of the sovereign’s transgression, s g , where is the discount factor that citizens A and B apply to future costs and benefits.



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the coordination game emphasizes that this “duty” need not be based on commu-

nity spirit, but on long-term self-interest, properly understood. In the self-enforcing

liberty equilibrium, Lockean duty reflects individuals who come to the aid of others

because a failure on the part of the first citizen this period implies that the othercitizen will forever acquiesce in the face of transgressions against the first, and

hence the sovereign will respond by transgressing the rights of both citizens.

Of course, the key to the self-enforcing liberty equilibrium is that the citizens

agree sufficiently on a definition of rights and a structure of government that they

will act in concert to support those rights. This typically requires constructing a

focal solution to the citizen coordination problem.

Nonetheless, the impediments to coordination suggest that the asymmetric

equilibria, in which the society cannot sustain universalistic citizen rights and hence

is characterized by an absence of economic liberty, is the most natural one.

Comparing the Two Equilibria

To see the difference in the two equilibria, consider two very different reac-

tions to similar proposals to “pack” a nation’s Supreme Court so that it would offer

less of an independent constraint to political officials. Presidents propose to pack

a Supreme Court when they seek to avoid constitutional constraints protected by

the court. In 1937, U.S. President Franklin Roosevelt, upset at the U.S. Supreme

Court’s ruling that many of his New Deal programs violated the Constitution,

proposed a court-reform plan that would have expanded the number of Supreme

Court justices from 9 to 15—allowing Roosevelt to nominate six new justices. TheNew Deal and the Democrats who sponsored it were phenomenally popular at the

time. Roosevelt had won a landslide presidential election in 1936, and the Demo-

cratic party controlled two-thirds of both houses of Congress and nearly three-

quarters of all state legislatures. Despite this popularity, at no time during the

campaign debating the proposal did a majority of the country support it (Epstein

et. al., 1994, Table 8-26). Early in 1937, Justice Roberts, who had often voted to

strike down New Deal laws, suddenly started voting in the other direction; later that

year, another justice who had been a strong opponent of the constitutionality of the

New Deal laws retired. But Roosevelt did not withdraw his proposal until many New

Deal supporters, including the Senate Judiciary Committee (which was dominatedby Democrats) and the Chief Justice of the Supreme Court Charles Hughes (who

had mainly voted to support New Deal laws), publicly stated their opposition to

Roosevelt’s court-packing plan. In the end, Roosevelt was forced to back down. This

example illustrates the properties of the equilibrium supporting citizen rights:

enough of the potential beneficiaries of the proposal joined the opposition to

challenge the proposal despite the fact that it would benefit their side.

In contrast, when President Carlos Menem of Argentina proposed in 1990 to

expand Argentina’s Supreme Court from five to nine members—and to appoint

four new members sympathetic to his policies—there was no public backlash andthe proposal succeeded. Menem used a compliant Court to create favorable rulings



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allowing him to alter property rights in bank deposits and to pursue a shady

privatization of the airlines.2

As another example, British constitutional scholars argue that the government

adheres to constitutional conventions because of the adverse political reactionsthey would face upon a violation (Jennings, 1959, pp. 132–135). Although the

British crown nominally has the power to veto legislation, there is now a constitu-

tional convention prohibiting use of this power, and an attempt to use it would

more likely result in the demise of the monarchy rather than sustaining the royal

veto of the relevant legislation.

Citizen reaction determines the difference between the two cases. As the

model suggestions, citizen acquiescence in many Latin American countries allows

political officials to manipulate the constitution in a way that cannot happen in the

United States.

Constructing Solutions to the Citizens’ Coordination Dilemma

Given the impediments preventing coordination, how can citizens construct

the necessary consensus facilitating their acting together against a sovereign? Few

examples exist in history of sovereigns who, absent internal or external threat,

created constitutional democracy to constrain their own behavior. Instead, these

constraints are nearly always imposed on sovereigns during or after a period of

crisis. As Elster (2000, p. 159) suggests:

The occasions for constitution-making include social and economic crisis, as

in the making of the American constitution of 1787 or the French constitu-

tion of 1791; revolution, as in the making of the French and German 1848

constitutions; regime collapse, as in the making of the most recent constitu-

tions in Southern Europe and in Eastern Europe; fear of regime collapse, as

in the making of the French constitution of 1958, which was imposed by de

Gaulle under the shadow of a military rebellion; defeat in war, as in Germany

after the First or Second World War, or in Italy and Japan after the Second;

reconstruction after the war, as in France in 1946; creation of a new state, asin Poland and Czechoslovakia after the First World War; and liberation from

colonial rule, as in the American states after 1776 and in many third world

countries after 1945.

Importance of Crises and Pacts

Crises create the potential for a new coordination mechanism for two reasons.

First, countries in the asymmetric equilibrium are often stable for decades. The

2 Political officials in Argentina have regularly interfered with the Supreme Court. For example,

following unfavorable rulings, the government impeached four justices in 1946; and in 1973, thegovernment dismissed the entire Supreme Court.



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forces underlying the asymmetric equilibrium work against the creation of a

coordination mechanism. A serious crisis, however, provides a shock to this system,

often implying that the old equilibrium cannot be sustained. A sustained budgetary

crisis, for example, sometimes means that the regime can no longer sustain the set of political benefits maintaining itself in power. Second, by their nature, crises

make people worse off—which can provide the opportunity for groups with oppos-

ing views to negotiate for mutual gain. For example, after the death of Francisco

Franco in 1975, Spain’s negotiations over a new constitution occurred under the

threat of a reemergence of the disorder that had preceded the Franco regime. For

most individuals, the range of constitutional characteristics that are superior to a

crisis greatly exceeds the range preferred to the previous status quo.

Of course, many things can happen in the wake of a crisis. Another asymmetric

equilibrium may emerge. Sometimes, however, members of the society are able toresolve the crisis by constructing a focal solution to the citizen coordination

problem. Resolution of crisis often involves agreements among contending—and

often previously warring—groups of citizens that end hostilities and create new

agreements about governance. A large literature in political science studies these

kinds of pacts (Diamond, 1999; Weingast, 1997, 2005).

To construct focal coordination mechanisms during a crisis, contending elites

typically negotiate pacts—agreements that help resolve crises and that alter the

rules of the game. Pacts are quite common in constitutional history. Indeed, U.S.

history is surprisingly full of pacts, including the Articles of Confederation (1781–

1788) and the U.S. Constitution (1787–1788). Other parts include the EnglishGlorious Revolution in 1688 (discussed in more detail in the next section); in

France, the revolution of 1789 and also the Fifth Republic created to strengthen the

power of the executive in 1958; the institutions negotiated with Germany, Italy and

Japan by the occupying powers after World War II; and in Spain, the various pacts

surrounding democratization after the death of Francisco Franco from 1975–1978.

Successful pacts also ended civil wars in Colombia in 1955 and El Salvador in the

late 1980s and early 1990s.

As with most repeated game models, the approach above has only the simplest

dynamics. Over time, most societies experience a range of changes, including the

issues and challenges these face, the level of economic development, populationgrowth, or changing international environments. When these changes affect pay-

offs, they imply that arrangements that were self-enforcing under some conditions

are not under newer ones. Most constitutions therefore go through various adjust-

ments, whether official constitutional amendments or, as is more typical in the

United States case, though legislative or judicial changes that reflect new bargains

to adjust the constitution to new circumstances.

For example, U.S. history in the nineteenth century offers four great consti-

tutional “compromises” that helped hold together the U.S. constitutional frame-

work at moments of potential failure: the Missouri Compromise of 1820, whichresolved the crisis over the admission of Missouri by allowing it to enter the Union



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as a slave state and Maine to enter as a free state; the Compromise of 1833, which

resolved the nullification crisis initiated when South Carolina threatened to “nul-

lify” or ignore federal law and even to secede, nominally over the issue of high

tariffs, but also to create a precedent to use nullification to help protect slavery against federal incursions; the Compromise of 1850, which resolved the crisis over

the territories of the Mexican cession; and the Compromise of 1877, which resolved

the crisis over the disputed election of 1876, where the Republicans agreed to

remove all federal troops from and to provide economic benefits to the South and

the Democrats agreed that Rutherford B. Hayes had won the presidential election

over Samuel Tilden by winning the Electoral College by a single vote—although

Tilden had clearly won the popular vote and several state vote totals were highly

disputed. A failed pact, the Compromise of 1861, which would have extended a line

from Missouri to the Pacific Ocean, explicitly prohibiting slavery north of the linebut explicitly allowing it south of the line, preceded the failure of the U.S.

Constitution in the Civil War.

As new constitutional elements, pacts must be self-enforcing to succeed; that is,

they must provide the parties to the pact with incentives to abide by the pact’s

provisions. Successful pacts meet four conditions (Weingast 1997, 2005). First, the

pact must create (or be embedded in a context that has already created) structure

and process—a set of citizen rights and a set of rules governing public decision-

making that in combination define the limits on and powers of the state. Second,

the negotiating parties must each believe that they are better off under the pact. In

particular, the parties must believe that the structural and procedural limits onaverage lead to policies that make them better off. Third, each party agrees to

change its behavior in exchange for the others simultaneously doing so. Fourth, the

parties to the pact must be willing to defend the pact against transgressions by

political leaders. Maintaining the pact requires that each party defend not just the

parts of the pact that benefit themselves, but also the parts that benefit others.

Parties to the pact are willing to defend it when they see the pact as making

themselves better off and when they know that failure to defend it means that the

pact will collapse, making them worse off.

Other Constitutional Elements Fostering Coordination

As the incentive conditions just noted demonstrate, coordination is not simply

a matter of luck. In addition to these conditions, other elements help facilitate

coordination. The central importance of coordination implies the importance of

constitutional provisions that facilitate monitoring and the dissemination of infor-

mation. Constitutional bright lines help foster citizen coordination because these

reduce the problem of ambiguity and conflicting interpretations that plague more

subtle provisions. Thus, the U.S. Constitution prohibited all restraints of freedom

of speech and prohibited the national government from imposing direct taxes

except in proportion to population; a British constitutional convention holds that a government falls on losing a no-confidence vote.



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Legislatures are places where representatives of different groups meet to

negotiate and potentially coordinate against a regime. Root (1994), for example,

argues that the British Parliament helped foster coordination against the monarchy

in the eighteenth century in ways not available to the French, whose Estates General went unused for the 150 years prior to their revolution in 1789.

Opposition political parties also help foster monitoring and coordination

because they have the highest incentive to publicize the regime’s transgressions.

Similarly, a free press contributes to coordination by facilitating the exchange of

information. All this may seem obvious at one level, but not all pacts and consti-

tutional agreements contain mature versions of these elements.

Two Illustrations of Constructing Constitutions

In this section, I discuss two constitutions, both constructed during crises and

both relying on explicit pacts: the Glorious Revolution in England and the Amer-

ican Constitution.

The English Glorious Revolution of 1688

England experienced great turmoil in the seventeenth century, including a

civil war fought between the “royalists” headed by Charles I and the “parliamen-

tarians” led (among others) by Oliver Cromwell from 1642–1649; the beheading of

Charles in 1649; a government largely under the dictatorial control of Cromwelland the Puritans from 1649–1660; a restoration of the monarchy under Charles II

in 1660; and finally a coup, known as the Glorious Revolution of 1688.3

The model illuminates several features of this century, including how the

conflict and various transgressions by the king were sustained; and also how this

behavior was ended through the construction of a focal solution that gave citizens

the means to coordinate against the crown.

The asymmetric equilibrium characterized much of the century, with the one

group of citizens, called the Tories by the end of the century, supporting the crown,

and the other group, called the Whigs by the end of the century, opposing thecrown. Roughly speaking, Whigs were more likely drawn from commerce, and

many were great merchants with extensive overseas interests. They favored a strong

international presence, including a strong navy to promote and defend their

international interests. Tories were more likely drawn from agriculture and include

many of the traditional barons. They generally opposed an international presence

and war. Tories were also the main supporters of the Church of England and of the

3 The English case occurred prior to the rise of democracy and universal citizen rights. Only 10 percent

of English men were enfranchised. Nonetheless, this smaller set of citizens exhibits the same type of coordination problems as the much larger set of all adults.



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Stuart monarchy in part because they acted throughout most of the century to

protect the Church’s interests.

Charles II transgressed the rights of the Whigs in many ways, including

imposing taxes on them without the consent of Parliament. The most important

transgression, however, occurred in the 1680s when Charles mounted an explicit

and successful campaign to disenfranchise them from Parliament. Of the 104 Whig

constituencies packed by the crown, only one returned a Whig to the next

Parliament (Jones, 1972, pp. 47–50). Disenfranchisement portended worse

transgressions.

The Tories and Whigs had very different beliefs about their rights, which

impeded coordination between the two groups to defend citizen rights. The Tories

believed in the divine right of kings, which implied that, although kings might

harm citizens and make bad policy choices, citizens had a duty to obey. Whigs, incontrast, believed that sovereigns had a duty to honor citizen rights and that

citizens have a duty to act to defend these rights when the sovereign fails to honor

them. These different ideas reflected the incentives of the asymmetric equilibrium:

Tories benefited from the regime and would not bear costs to protect the interests

of the Whigs. Tory behavior, in turn, allowed the crown to transgress the Whigs’

rights while retaining the support of the Tories. Although the Whigs would

have liked to challenge Charles II, they knew that challenging would fail without

the Tories’ support; the Whigs therefore acquiesced in the face of the king’s

transgressions.

This situation was stable for more than a generation after the restoration of

King Charles II in 1660, becoming problematic only in the mid-1680s. In 1685, in

the wake of Charles’s successful campaign to disenfranchise the Whigs, James II

succeeded him. Historians have debated James’s rationality for over three centu-

ries. Yet the king’s actions are unambiguous: he turned on his own constituency,

particularly the moderate or country Tories who sometimes joined the Whigs in

opposing the Stuarts on matters of taxation and finance. James II began a campaign

to disenfranchise them from Parliament. James’s goal was to consolidate power and

create a more absolutist monarchy in the style of the continent. He sought to raise

a standing army in time of peace without Parliamentary consent, appointing many Catholic officers. In part, James was gambling that his erstwhile constituents and

the Whigs—opponents for most of the century—would be unable to work together

to remove him. He lost the gamble.

At the same time, James’s open Catholicism threatened his relations with those

Tories who worried about its implications for the Church of England (Speck, 1989,

pp. 242–243). The triggering event of the Glorious Revolution was the birth of

James’s son from a second marriage, a Catholic heir who displaced James’s Prot-

estant daughter Mary from the next in line to succession (Horowitz, 1977, pp. 4 –5).

In 1688, the Tories joined the Whigs in the Glorious Revolution, with severalpolitical effects. The revolution was in part a coup, forcing James to flee England



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and bringing in William and Mary from the Dutch Republic as the new crown. More

important for our purposes, the two parties also constructed through negotiations

in Parliament a pact creating a new focal solution to many of their society’s

fundamental citizen coordination problems that had plagued them over the cen-tury. Tories renounced the divine right of kings and joined the Whigs to agree that

kings had a duty to honor citizen rights and that if they failed to do so, citizens had

a duty to act against the king. The model suggests how these agreements provided

citizens with the incentives to act on this duty, in turn providing the crown with the

incentive to honor their rights. In the wake of the king’s behavior in the 1680s, each

side understood that maintaining its own rights required that they help defend

those of the other.

One of the central pieces of the solution was the legislation known as the Bill

of Rights (Schwoerer, 1981). This legislation, again negotiated between Tories and Whigs to create the new focal consensus about rights, articulated what the previous

king had done that had caused the coup and then listed a set of actions that any

future king who failed to honor risked causing a coup. The Bill of Rights spelled out

a series of bright line conditions that would trigger citizens to act against potential

violations by the king. As Jones (1972, p. 318) summarizes: “The thirteen points in

the Declaration were not just statements of the true nature of the law of the

constitution, they were also intended to provide a guideline for the future conduct

of government, so that any departure from legality would be instantly signaled, and

remedial action could be taken.” This legislation forbade the crown from attacking

the basis of elections. In addition, laws of parliament became sacrosanct, so that any king who failed to honor them risked being deposed.

The clear rules concerning parliamentary legislation created for the first time

an explicit separation of powers system, and with it, a huge change in the incentives

of government (North and Weingast, 1989).4 Indeed, the incentives created by the

separation of powers afforded the government—now the “king in parliament”

rather than the king alone—the ability to make credible commitments.

Moving from a noncoordinated, asymmetric equilibrium to the coordination

equilibrium represents a nonmarginal change. Looking back from the vantage

point of more than 300 years, the best evidence we have derives from financial

markets, in particular the market for sovereign debt. Prior to the Glorious Revo-

lution, sovereign debt was a personal obligation of the king and thus subject to

unilateral revision by the king. The king regularly reneged on his agreements, and

consequently (and per the theory of sovereign debt laid out in Eaton, Gersovitz and

Stiglitz, 1986, and elsewhere) the crown was constrained in how much it could

borrow. In rough numbers, the Stuart king’s debt had never risen above 5 percent

of GDP.

4

More generally, Elster (2000) and Persson and Tabellini (2000) study the positive incentive effects of the separation of powers system.



14/21

After the Glorious Revolution, the government changed how it raised debt.

New debt issue now required an act of Parliament. Under the new constitutional

arrangements, the terms of the debt could therefore be altered only through a new

law of Parliament. No longer could the king unilaterally announce new terms fordebt without risking another coup for ignoring the laws of Parliament. Moreover,

because Parliament represented the bondholders, the new constitutional arrange-

ments effectively granted a veto to the representatives of the bondholders over the

crown’s attempts to alter the terms of debt. The separation of powers therefore

afforded the government the ability to make credible commitments for debt.

Consistent with this thesis, in the nine years following the revolution government

debt rose by an order of magnitude, from approximately 5 percent of estimated

GDP to 40 percent (Dickson, 1967; North and Weingast, 1989).5

The Glorious Revolution illustrates several features of the model about con-stitutional stability. First, it shows how disagreements about rights and the

king’s incentive to create a constituency supported the asymmetric equilibrium.

Throughout the century, the king retained the support of the Tories while trans-

gressing the rights of the Whigs.

Second, in the Glorious Revolution the citizens collectively created a new focal

solution to the fundamental citizen coordination problem about citizens’ rights

and royal duties. The Bill of Rights created both a new set of bright lines about how

the government should behave and an associated set of trigger strategies on which

the citizens agreed to coordinate. In combination, these allowed citizens to police

the crown. Agreeing on these limits in advance—and assuring that they becamepart of the constitution via the Bill of Rights—provided an explicit mechanism for

coordinating members of society.

Third, this case illustrates how trigger strategies help sustain complex consti-

tutional provisions, such as the separation of powers system. The opposing groups

demonstrated that, when they acted in concert, they could police their rights. The

constitutional changes following the Glorious Revolution initiated a new and

common knowledge system of creating sovereign commands: legislation had to be

passed by both Houses of Parliament and then accepted by the King. No other

command had this status.

Self-Enforcing Federalism in the U.S. Constitution

Most Americans living under the Articles of Confederation (1781–1788), the

first constitution of the United States written during the Revolution, agreed that the

national government failed to provide critical and highly valued public goods, such

as national defense, a common market and a stable monetary system. For example,

under the Articles, Congress could not raise taxes directly, but had to ask the states

5

Stasavage (2002) demonstrates a partisan aspect to this story, showing that Whig control of thegovernment was an important component of the new form of finance.



15/21

to provide funds. Common pool problems plagued this system (Kaplanoff, 1991;

Middlekauff, 1982).

Americans were nevertheless deeply suspicious of granting the national gov-

ernment new powers that might enable it to provide these public goods. Part of this

suspicion arose because Americans jealously guarded the power of their states,

whom they trusted more than the national government. The fundamental dilemma

for the Federalists—those seeking greater powers for the national government—

became how to devise a new political system where the national government could

provide the desired public goods while not disturbing the power of the states.

The Federalists made several attempts in the early and mid-1780s to increase

the power of the national government. Their opponents, the Anti-Federalists,

defeated these attempts with the argument that nothing would prevent the national

government’s abuse of the new powers. Too many citizens agreed with the Anti-Federalists for the Federalists to succeed. Moreover, the model above suggests that

the Anti-Federalists were right to worry about whether the Federalists’ proposals

would be self-enforcing: Without constructing a new focal solution about the

powers of the national government, its powers could be abused.

The Federalists answer at the Constitutional Convention was to create a pact

that embedded new powers for the national government within a complex system

of constraints. Our model helps illuminate how these constraints worked. In what

follows, I focus on one issue, how federalism became a self-enforcing feature of the

new Constitution.6 Consider the constraints surrounding federalism.

First, the Constitution created a series of clear rules with respect to federal power.

Since the late 1930s, the U.S. Supreme Court has interpreted the Constitution so

that national legislation can supplant state legislation. This interpretation contrasts

with the original conception of the national government as limited to a set of a small

number of enumerated powers, the concept in force for the Constitution’s first

150 years. Moreover the enumerated powers were limited precisely to the types of

public goods that the national government failed to produce under the Articles of

Confederation: national defense, the common market, trade policy and a common

monetary system.7 Virtually all other powers were reserved for the states, including

decisions about property rights, slavery, contract law and religious freedom.Part of the value of Madison, Hamilton and Jay’s Federalist Papers , widely

circulated and debated during the process of constitutional ratification, was to

articulate a set of understandings of the rules of the new federal system. In terms

6 Weingast (2005) provides a more extended treatment of this case that covers a larger variety of constitutional dimensions beyond federalism.7 As Alexander Hamilton observed in Federalist 23 , “The principal purposes to be answered by union arethese—the common defense of the members; the preservation of the public peace, as well against

internal convulsions as external attacks; the regulation of commerce with other nations and between theStates; the superintendence of our intercourse, political and commercial, with foreign countries.”



16/21

of the model, these debates helped make the focal coordination solutions in the

Constitution common knowledge.

Second, another bright line concerned taxation: the national government was

granted power to impose direct taxes only in proportion to population. This

constraint implied that the national government could not impose extractive taxes

on minorities or particular groups, say, the production of cotton or tobacco; to tax

citizens in some states more heavily than citizens in others; or to tax slaves and

slaveholders.

Third, Americans fought the Revolution as citizens of their states, all of which

had constitutions. Americans had an overwhelming consensus supporting the

powers of their state governments and, hence, a limited national government.

Disagreements among Americans arose on a wide variety of issues, including

religion, public education, suffrage and slavery. Because so many Americans fearedbeing forced by the national government to live under national laws against their

interests, most Americans preferred decentralization of power to states as a means

of preserving liberty—the freedom to solve these problems for themselves rather

than live under a single solution imposed by the national government.

Fourth, the Federalists explicitly spelled out the trigger strategies that would

support federalism and the limits on the national government. Hamilton observed

in Federalist 31 that the legitimacy and power will remain with the states, so federal

encroachments against the more powerful states were unlikely to succeed:

“[S]trength is always on the side of the people, and as there are weighty reasons toinduce a belief that the State governments will commonly possess most influence

over them, the natural conclusion is that such contests will be most apt to end to

the disadvantage of the Union; and that there is greater probability of encroach-

ments by the members upon the federal head than by the federal head on the

members.” Similarly, Madison observed in Federalist 32 that people’s attachments to

their states would be a barrier against encroachment by the national government:

“I am persuaded that the sense of the people, the extreme hazard of provoking the

resentments of the State governments, and a conviction of the utility and necessity

of local administrations for local purposes, would be a complete barrier against theoppressive use of such a [national taxation] power.”

Finally, after enumerating in Federalist 45 numerous institutional constraints

that the Constitution granted states to influence the national government—for

example, states were explicitly represented in the Senate and presidents came to

office through the electoral college—Madison argued in Federalist 46 that the state

militias would be far more powerful than the national government, allowing the

states collectively to defend their interest against encroachments by the national

government. Indeed, Madison also articulated the idea of a trigger strategy: “But

ambitious encroachments of the federal government, on the authority of the State

government, would not excite the opportunity of a single state, or a few States only.



17/21

They would be signals of general alarm. Every government would espouse the

common cause. A correspondence would be opened. Plans of resistance would be

concerted. One spirit would animate and conduct the whole.”

The model of self-enforcing constitutions helps illuminate how American

federalism defined by the new Constitution became self-enforcing. The debate over

the Constitution, including the Federalist Papers , helped create a common knowl-

edge understanding of the Constitution’s bright lines. These bright lines, in turn,

helped define a series of trigger strategies with which citizens and their represen-

tatives in the state governments could defend constitutional encroachments.

The U.S. Constitution fits the four conditions for successful pacts. First, it

created a range of new structure and process. The Constitution’s federal structure

was to be enforced through a series of common knowledge bright lines, allowing

citizens to observe easily when they were crossed and to react to defend these bright lines. Second, most Americans believed they were better off under the Constitution

than without. Third, all moved simultaneously from the Articles of Confederation

to the Constitution. Finally, citizens had incentives to defend the Constitution, even

against encroachments of their political opponents because they knew that failing

to do so risked having the Constitution fail. Because the vast majority of Americans

believed that they were better off under the Constitution, they had incentives to play

these trigger strategies.

Conclusion

Most developing countries of the world today find themselves in the asym-

metric equilibrium, in which the ruler or government respects the rights of its

support coalition and transgresses against the rights of others. These countries

therefore have great difficulties protecting the individual rights of individual

citizens or providing the minimum basis for markets—such as property rights

and the enforcement of contracts. A principal role of the constitution is to

create a focal solution to the coordination problem so that citizens gain the

ability to act in concert and police their government. Yet constitutions cannot be put in place at just any time. A crisis is often needed to help dislodge the old

equilibrium—and even then, a workable new constitutional arrangement may

not emerge.

In the early nineteenth century, many Latin American countries adopted the

text of the U.S. Constitution. However, Latin America failed to produce a single

successful constitution. The U.S. Constitution was suitable for solving the funda-

mental citizen coordination problem as it existed in the United States in the 1780s,

but not as it existed in Latin America at that time. In the United States, Americans

had an overwhelming consensus favoring the predominant role of their stategovernments. States had constitutions that protected citizen rights and provided for



18/21

the basis of property rights and local markets. The focal solution that emerged from

the combination of the Constitution, the Federalist Papers, and the ratification

debate created the consensus about the federal government as one of enumerated

papers and the state governments as the source of economic control. Latin Americaat independence had neither states with pre-existing constitutions nor a consensus

about issues like the form of government, the structure of federalism, the nature

of citizen rights, or even who ought to be a citizen. For Latin America, the text of

the U.S. Constitution did not offer a workable basis for coordinating citizen actions

in a way that would control the rulers. Yet liberty can only be sustained when

citizens have the ability to act in a coordinated manner against governmental

transgressions.

The model in this paper abstracts from two important issues of long-term

dynamics. First, shocks to the equilibria are an important component of both thetheory and applications. Put simply, crises disrupt existing equilibria and provide

the opportunity for citizens and their leaders to create focal solutions to the

fundamental citizen coordination problem.

Second, the application to the United States suggests that sustaining constitu-

tions over the long haul requires more than just creating the initial constitutional

equilibrium; it requires periodic constitutional adjustments—about one a

generation—as the players adapt the constitutions to new (and often unantici-

pated) circumstances. Americans in the United States’ first century made five major

constitutional adjustments, the post–Civil War Constitutional Amendments plus the

four compromises. The British case would exhibit the same type of adjustments if carried forward beyond the short episode studied here.

Both crises and ongoing constitutional adjustments seem central to

the creation of self-enforcing constitutions that are stable for multiple

generations.

y The author gratefully acknowledges helpful conversations with Rui de Figueiredo, Douglass

North, Konrad Siewierski and John Wallis. Special thanks are due to Daniel Spielman and

to the staff of the Northstar Club, without whose assistance this paper could not have been

written.



19/21

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