Constitutional Economics and Transnational Governance Failures

Armin Steinbach

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Chapter 3 Constitutional Economics and Transnational Governance Failures

In: Constitutionalism and Transnational Governance Failures

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Armin Steinbach

Armin Steinbach
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Type:: Chapter

Pages:: 75–106

DOI:: https://doi.org/10.1163/9789004693722_004

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Abstract

With policy failure as perennial phenomenon in an interconnected world of transnational public goods, the UN Charter and the Bretton Woods agreements aimed at replacing the power-oriented ‘international law of coexistence’ by a new ‘international law of cooperation’ aimed at protecting human rights and related public goods through legal and judicial limitations of foreign policy discretion. This chapter addresses this development on two levels: First, the chapter seeks to untap the contribution of constitutional economics for the discussion of transnational public goods. With constitutional economics focusing on mutual agreeability of constitutional arrangements for all members of society positing ‘consumer sovereignty’ and ‘citizen sovereignty’, I argue that this requires – as normative benchmark – markets and political arenas to be organized in a way that allows consumers and citizens to freely and fully engage in market-based and political transactions. In political practice, however, the constitutional economic approach only explains and guides the European experience of multilevel constitutionalism. It does not offer normative appeal to regimes characterized by political systems that place majoritarianism over individual rights, authoritarianism over equality or business over society interest. Second, despite the lack of normative universality, constitutional economics establishes ‘failure’ as analytical category in the discourse on transnational governance and constitutionalism. Disentangling policy failures into market, governance and constitutional failures offers analytical insight for policy responses to avoid policy failures. This taxonomy of failure highlights responsibilities for policy conduct and allows policy address; it reveals deficiency of rules and informs their re-design; and it highlights systemic rivalries between rules-based, process-dominated, state-controlled, and business-determined governance regimes.

1 Introduction

Failure is a negatively connotated label.¹ Blaming mistakes and failures is standard practice of rhetoric rivalry between political opponents² and even extends to the diplomacy-based world of international relations.³ In international law, failure is possibly most salient as analytical and normative reference in relation to the ‘failed state’. Rooted in the traditional thinking of the Westphalian system, the failed state carries the narrative of a state’s incapacity to live up to the classical international law ideal, notably to ensure a minimum authority over territory and citizens and refers to the collapse and dissolution of States.⁴ Failing states share characteristics of inadequate structural competency, including, inter alia, the inability to advance human welfare and security.⁵

At the same time, failures are the source of enlightenment,⁶ learning⁷ and political impetus.⁸ They offer the genuine rationale for states to enter into international cooperation and produce international law ushering into a regional and international agreements which may be understood as response to failed domestic-only policies. Historically, any shift in governance occurring vertically (between sovereign states and transnational or supranational entities) or horizontally (shifting competence between or within domestic or transnational entities, e.g. altering competences between EU institutions) is preceded by applying benchmarks of, inter alia, inadequacy, ineffectiveness, unfairness – and hence implicitly posit a failure judgment on a given governance structure.⁹ The EU, as most sophisticated construct of supranationality, evolved through various stages of institutional, political, and economic failures that gave rise to a unique architecture of rights, obligations, and competences.

Failure also became a popular analytical category amidst the loss of control of nation states to regulate an interconnected world by domestic means. Constitutionalism and transnational governance are inevitably connected to failure, as nations have not only lost their grip on setting rules effectively but also struggle to manage the disruptive process of globalization and social, cultural, and legal interconnectedness. Local and national actions and decisions produce increasingly extraterritorial effects, for instance by way of trade and environmental changes, which cannot be solved only at the domestic level. Complex cross-border interdependencies and side-effects ensue from free trade in goods, services, and financial capital.¹⁰ Revolutionary advances in knowledge and technology have changed the preconditions of nation states as the legitimate and effective entities of decision-making and problem-solving. Modern societies interconnecting knowledge, technology, governmental and non-governmental interaction across borders do not longer coincide with territorially-bound regulation and the traditional sources of legitimacy.¹¹

The world’s increasing interconnectedness and transboundary mutation imply national public goods to turn into transnational public goods, and domestic and international policy proponents of a political order endorsing the protection of public goods may hence easily take recourse to policy failures as analytical and normative argument. The provision and protection of public goods is traditionally plagued by failures, but the interconnected world has rendered effective provision of public goods even more prone to failure, as the community affected by external effects has expanded in size and heterogeneity.

The core contribution put forward in this chapter is to invoke constitutional economics to better understand the failures plaguing the governance of transnational public goods and offering avenues to overcome it. The thrust of this approach is to abandon the dominant lens of welfare economics with its neoclassical ‘maximization paradigm’ and rational choice focus that underlies realist theories in international relations.¹² Rather, the constitutional economic premise rests on ‘constitutional contract/exchange paradigms’, notably mutual individual and collective gains enabled by constitutional cooperation improving the ‘laws and institutions’ of the economic-political order protecting informed, individual and democratic preferences. Constitutional economics re-directs the focus of economic analysis away from individual utility maximization towards designing markets and political arenas such that ‘consumer sovereignty’ on markets and ‘citizen sovereignty’ in political domains form the analytical and normative benchmark. In political practice, however, constitutional economics has been fertile only in European constitutionalism, where ‘constitutionalizing’ the ubiquity of abuses of public and private power in the economy were progressively embedded into multilevel theories of democratic constitutionalism and social justice. Constitutional economics does not offer normative appeal to regimes characterized by authoritarian and neoliberal governments. The respective problem-solving capacities of authoritarian power politics and business-dominated politics are difficult to align with constitutional economics in light of diverse value priorities (e.g. individual vs collectivist values) and diverse types of competition (e.g. conflictual struggle-type rivalries vs rules-based competition limiting monopoly powers and other restraints of competition). Systemic rivalry undermines constitutional economics arguments for multilevel protection of human and constitutional rights and effective third-party adjudication enabling individuals to pursue both their diverse private self-interests and their common public interests in mutually coherent ways.¹³

While limited in normative appeal to political systems undermining economic and social inclusion of individuals or those over-emphasizing utilitarian individualism as policy orientation, constitutional economics offers analytical rigor in underscoring ‘market failures’, ‘governance failures’ and ‘constitutional failures’ as sources of transnational governance failures. Constitutional economics offers a framework to explain why ‘intergovernmental supply of public goods’ requires ‘institutional checks and balances’ limiting abuses of public and private powers and judicial protection of rule-of-law to promote individual and democratic autonomy by assisting citizens and governments in maximizing long-term benefits and minimizing costs in the pursuit of individual and collective preferences.¹⁴

Against this background, this chapter proceeds as follows: Section 2 unfolds the analytical framework of constitutional economics and spells out its notion of mutual agreeability of constitutional arrangements for all members of society. ‘Consumer sovereignty’ and ‘citizen sovereignty’ guide the quest for inclusive social and economic arrangements that meet basic needs of all citizens and consumers requiring mutually agreed protection through constitutional rights. However, the normativity of constitutional economics has been limited to the EU constitutionalism, yet meets deaf ears under process-oriented, authoritarian, or business-biased concepts of political and economic governance. Building on the constitutional economic insight, Section 3 disentangles market, governance and constitutional failures in the supply of transnational public goods. These failure types have historically stood in variable relationship to each other and drew policy-makers efforts to remedy to a different degree. Constitutional economics further requires, as discussed in Section 4, correction of market failures to the protection of public goods, notably by widening the narrow focus on cost-benefit analysis and instead locating the ultimate sources of choices and preferences in individuals and in their informed exchange contracts. With policy failures increasingly shifting from domestic government to transnational governance levels, ‘citizen sovereignty’ emphasizes the case for implementation of legislative, administrative and adjudicative protection of rule of law and equal rights in transnational governance (Section 5).

2 The (Limited) Value of Constitutional Economics for the Study of Transnational Governance Failures

Neoclassical economics offers valuable analytical tools in addressing international law and economic regulation. Rational choice analysis of law has been applied productively to international law and cooperation.¹⁵ For instance, scholarship has put emphasis on the issue of compliance with or disregard for international law rules and the extent to which this may be influenced by economic considerations and choices.¹⁶ It offered the descriptive and prescriptive yardstick for realist theories to cast doubt on the relevance of international law, and instead consider states as rational egoists in a self-help world.¹⁷ The underlying neoclassical Walrasian tradition in economics posits the “maximization paradigm” of individual utility in a world populated by perfectly rational homines oeconomici.¹⁸ While behavioral economics offers some relaxations to the rationality paradigm,¹⁹ constitutional economics questions the efficiency-focused and utility-only perspective more fundamentally. This disciplinary strand draws from the work of James M. Buchanan,²⁰ the work on limited knowledge of state planners by F.A. Hayek, and emphasizes the choice of rules and institutions by offering a process-oriented rather than an outcome-focused view on the optimal design of institutions. If economics is about the arrangements within which individuals and collective actors make ‘efficient choices’ in response to scarcity, it is important to distinguish choices within existing constraints (as studied by ordinary economics) from choices among alternative legal and institutional constraints (as studied by constitutional and ‘institutional economics’).²¹ The focus on comparative rule design rests on the basic premise that the order of rules affects the resulting order of actions.²² Interested in the institutional structure of an economy rather than its outcome, Buchanan conceptualizes the rules governing markets as determining private market choices and the rules leading to political decision-making as matters of collective-political choice – on both markets and politics the normative benchmark is that sovereign individuals enter into voluntary agreement among sovereign individuals.²³

Constitutional economics does not draw from maximizing utility (as motivating realists theories). It instead emphasizes individual freedom of choice as a constitutional value (e.g. grounded in respect for human dignity and human rights) and the procedural concept of ensuring mutual benefits from voluntary cooperation and gains from trade.²⁴ To some extent this approach aligns with welfare economics pertaining to the market dimension, with voluntary market-exchanges as safeguard for efficient and mutually beneficial market transactions; but constitutional economics extends the “mutual gains from trade” notion to voluntary co-operation more generally understood, including arrangements for collective action, private and public.²⁵ Mutual benefits accrue in situations where transactions or arrangements generate benefits to all parties involved.²⁶ The ‘mutual benefit’-requirement plays out particularly for public goods, which typically suffer from (positive and negative) externalities and collective actions dilemmas. Mutual benefits do not allow environmental harm to be passed on to the society, nor does it permit decision-making practices inflicting harm on others not agreeing to it, nor to impose arbitrary sway on other sovereigns or individuals. Mutual benefits must be safeguarded through inclusive participation in political decision-making, fundamental rights and social and economic inclusiveness.

Despite a wide range of economic perspectives on legal rules, constitutional economics’ focus on legal rules offers a suitable, albeit under-researched framework and interdisciplinary approach to studying international law.²⁷ To the extent that neoclassical economics assumes the existence and market-clearing function of ‘perfect competition’ and the absence of transactions costs (allowing what is typically referred to as the Coase theorem), constitutional economics instills what lawyers may find more realistic when dealing with interpreting and analyzing legal rules – that in the real world without ‘perfect market competition’ and without equal access to human capabilities, economic resources and opportunities, a move toward ‘free markets’ may not enhance efficiency;²⁸ that the political economy environment with its heterogeneity of stakeholders and interests matters for the design of legal rules; that given the persistence of transactions costs, legal institutions offer plausible solutions to deal with transactions costs in cost-effective manners; and that emphasis should be given to constitutional choices regarding protection of human capabilities, constitutional rights of citizens (like equal access to education, health protection, satisfaction of basic needs) and the principal-agent relationships between citizens and governance agents with limited, delegated powers.²⁹ The added-value of constitutional economics emphasizing the gains-from-trade paradigm lies in its procedural logic offered by the institutional framework within which individuals choose, whether individually and separately in markets, or collectively in politics and in organizational arrangements more generally.³⁰

Constitutional economics lends itself to descriptive and normative analysis: In its descriptive dimension, it remains committed to methodological individualism in the sense that it seeks to explain social phenomena and individual choices in terms of the actions of individual human beings.³¹ Descriptive analysis may uncover institutional differences shaped by fundamentally divergent paradigms. For example, ‘constitutional reforms’ (e.g. in communist economies) may be of more existential importance for citizens than the utility maximization paradigm of ‘efficient choices within existing constraints’ (like use of ‘black markets’). In its normative dimension, constitutional economics seeks to design markets and political choices such that individuals enter into voluntary agreements, which implies that individuals must themselves be respected as the ultimate judges on what qualifies as desirable in their social and market transactions. The focus lies on improving the legal-institutional frameworks of markets and of politics in a way that enables mutually beneficial transactions to be realized. With legitimacy thus rooted in the notion of voluntary agreement, constitutional economists address the constitutional question of how people can live together in liberty, peace and prosperity by using the ‘exchange paradigm’ for exploring efficient ‘choices of constraints’: How should constitutional rights, obligations and institutions be designed in order to protect democratic preferences and ensure individual freedoms responding to democratic preferences and citizen demand for public goods?

Constitutional economics can be re-phrased as exploring and proposing the ‘rules of the game’, be it on markets or in the political arena, under which individuals are allowed to pursue their own interests.³² Markets and political arenas follow different constitutions, with different rules of the game and different actors. With respect for equal individual freedoms of consumers as the normative nucleus for designing markets and political arenas with the aim of mutual benefit, constitutional economics suggests a normative design of these constitutions, as initially coined by William H. Hutt³³ and elaborated by Viktor Vanberg:³⁴ an economic constitution that enhances consumer sovereignty, and a political constitution that enhances citizen sovereignty.

Standard economics assesses efficiency of constitutional arrangements in terms of the market outcome or political outcome, which remain untestable personal utility preferences and perceptions. In turn, the process-oriented perspective emphasized by constitutional economics explores the processes that unfold under alternative legal-institutional frameworks, notably the extent to which they enable agents to realize mutual gains from voluntary cooperation. Ultimately, there can be no other test of “mutual advantage” than the agreement of the parties involved. Performance of markets are thus assessed against the benchmark of whether consumers are able to enter into voluntary commercial relations, free of power dominance.³⁵ Market failures occur where producers undermine consumers as ultimate judges by escaping the constraints of competition, either through abusing dominant market positions or by insufficiently taking account of harmful effects on society or consumers.

In turn, ‘citizen sovereignty’ looks at the collective arrangements in the political arenas, allowing formation of political will through “cooperative ventures for mutual advantage”.³⁶ In analogy to consumer sovereignty, citizen sovereignty places the individual at the heart of a democratic polity, in whose common interests the polity should be operated. Accordingly, the political process should be institutionally framed in a manner that makes citizens’ common interests its principal controlling force.³⁷ Citizen sovereignty requires that political institutions, domestic politicians and bureaucracies as well as international organizations are made most responsive to citizens’ common interests. Institutions, decision-making process, fundamental rights protection and adjudication must be implemented and respected in a way so as to maximize the prospects that the political process works to the mutual advantage of all citizens. Applying citizen sovereignty as normative and comparative benchmark means that potential alternative rules and institutions of democratic politics are analyzed with regard to their capacity to enable citizens to realize mutual gains – and to what extent these arrangements can protect consumers from being dominated by potent market actors and citizens from being dominated by political agents.³⁸

Normative constitutional economics concerned about citizen sovereignty pertains to issue of societal self-government: How should societies proceed in order to bring about constitutional rules that ensure agreeability to all members of society? Which issues should be dealt with in the constitution – and which should be left to post-constitutional choice?³⁹ Constitutional economics hence searches for optimal rules of higher rank building on consensus and free political will of citizens safeguarded through equal fundamental rights, democratic and social inclusions.

Europe’s multilevel democratic, economic, and human rights constitutionalism offers probably the most developed governance system aligning with consumer and citizens sovereignty as normative benchmarks through protecting equal freedoms, non-discriminatory conditions of competition, and democratically agreed principles of ‘constitutional justice’ for democratic governance of public goods. For example, the EU Charter of Fundamental Rights (eucfr) guarantees civil, political, economic, social and ‘European citizenship rights’ that protect not only ‘negative freedoms’ (e.g. constraining abuses of public and private power). Rights empowering individuals to exercise ‘positive freedoms’ (e.g. human rights to education, health protection, freedom of association, decent life and work conditions) through governmental protection of individual self-development (e.g. ‘human dignity’) can be seen as constitutional core values balancing economic liberties with social rights based on the idea of economic and social inclusion.

Yet ‘constitutional pluralism’ at national levels of governance is a reality. Rights-based constitutional democracies and functionally limited international constitutional democracies adopting a strong focus on individual rights (such as the EU) stand in stark contrast to process-based constitutional democracies (for example, US, Australia). Process-based national constitutionalism prioritizes democratic elections, majoritarian institutions like the US Congress, democratic accountability and international ‘unilateralism’ if needed to limit the influence of unelected international institutions and of ‘anti-democratic world constitutionalism’ on democratic self-government by the American people. The 2022 US Supreme Court judgments construing constitutional rights and delegated executive powers (e.g. of the US Environmental Protection Agency) narrowly as long as related ‘political questions’ (like limiting greenhouse gas emissions caused by fossil fuels) are not decided by the US Congress reveals a bias of majoritarianism to the detriment of constitutional individual rights and balance of powers.

Likewise, authoritarian state-capitalism prioritizing power monopolies (e.g. of China’s communist party state, Russia’s oligarchic government structures) does not prevent executive power monopolies from undermining human and democratic rights. In turn, Anglo-Saxon economic and societal governance has long prioritized liberties, trade liberalization, deregulation, privatization and ‘financialization’ of economies, business-driven regulation and market competition as decentralized information-, coordination-and sanctioning mechanism.⁴⁰ These systems engender dangers of ‘regulatory capture’ (e.g. by rent-seeking business actors or political party monopolies), thus contravening the concepts of consumer and citizen sovereignty.

This reveals a mixed record of constitutional economics serving as normative rulebook. Normative guidance on market design and political will formation was adopted only in the European constitutionalization process, one that inspired also the ‘Brussels and Geneva Schools of ordoliberalism’ with its impetus to shape the multilateral economic governance as to safeguard multilevel legal, institutional and judicial guarantees of non-discriminatory market competition limiting abuses of public and private powers beyond European integration.⁴¹ Other states reject legal constitutionalism at national levels (e.g. China’s ‘communist party state’ and military power are not subject to legal constitutionalism), yet support and participate in international ‘constitutional systems’ (like the UN Security Council, the compulsory wto dispute settlement system).

3 Constitutional Economics Revealing Market, Governance and Constitutional Failure Types

Constitutional economics uncovers market failure, governance failures, and constitutional failures in the supply of transnational public goods. More generally, failure in effectively supplying and safeguarding transnational public goods can be assessed through two lenses: actor-based and rules-oriented perspectives. ‘Actor-based’ inquiry into failure quests for origin and responsibility of the failure.⁴² By looking at conduct of private and public authorities, governments, international organisations, intergovernmental or supranational entities, an actor-focused analysis of failure explores – descriptively – how and why actors fail or succeed in supplying public goods (e.g. through private market-based transactions or government decision failing to take decisions in account of negative spillovers for others) and – normatively – how actors should align their decision such that they remedy collective actions problems or to avoid harming others. Typically, there is congruence between the formal institutional distribution of authority and the distribution of responsibility, not only in the national political arena but also in international contexts. However, in complex multi-level governance systems the responsibility attributions are much less obvious than in domestic context due to their institutional complexity, leading to diffuse public responsibility attributions.⁴³ This actor focus also encompasses actions channeled through markets mechanisms. With markets serving as cybernetic information-, coordination-and sanctioning mechanisms, they produce and determine private and public actions. This connects to, but differs from, ‘rules orientation’ which examines existing rules and institutions and how they should be adjusted. A rule-oriented perspective inquires about the role of legal principles of higher rank, with constitutional rules offering the framework within which actors are expected to bring their individual rationality in line with societal imperatives. Related, an institution-based view lends itself to the tenets of institutional economics that depart from narrow assumption of neoclassical paradigms and acknowledges the communitarian dimensions of individuals, their civil, political, economic, social and cultural rights and voluntary cooperation.⁴⁴

Approaching policy failure by distinction between actors, rules and institutions informs the academic and policy debate in two regards. First, it allows a multidisciplinary approach to transnational governance: political science and sociological approaches typically focus on empirical (rather than normative) analysis of the types of actors involved,⁴⁵ the rationales guiding their conduct,⁴⁶ or the processes through which the content of transnational rules is determined.⁴⁷ International relations and foreign policy analysis identify broad ranges of possible causes of mistakes and failures in international relations, relating to: individual decision-makers, the decision-making process, domestic politics and the structure of the international system.⁴⁸ Economists apply normative efficiency and welfare standards and explore whether desirable outcomes can be achieved through market transactions or public policy intervention and why the private and public actors pursue self-serving interests yielding socially suboptimal results.⁴⁹ Lawyers emphasize less the empirical incentive structure of individual actors but rather inquire into the normative design of the legal framework guiding actions of private and public parties, in particular pertaining to whether the legal principles of higher rank should guide transnational conduct and how they should be designed and enforced. Put differently, economics informs roots and remedies to market and government failure, international relations and political science identify political and governance failures, and international law informs the debate on constitutional failure and constitutionalization.

Second, from policy perspective, differentiating between actors and rules permits to trace and formulate forward looking remedies to overcome failure: policy inferences can be made from findings, for instance, that market actors neglect societal concerns such as public goods (e.g., private investment decision irrespective of the CO₂ intensity and environmental impact of an investment) leading markets to inefficient results; that governmental actors or international bureaucrats pursue their own non-welfare oriented interests (e.g. by power politics detrimental to the society such as Brexit disintegration from European common market) or value domestic interests over the legitimate interests of the global community in avoiding negative impact (e.g. by free-riding of governments on climate mitigation undertaken by other countries). Remedying failure thus invites focusing on the respective source of failure, such as markets to be redesigned or regulated in order to modify the conduct of private actors; change domestic rules and regulations in order to confine public authorities to welfare orientation; or modify the domestic or transnational design of constitutional rules in order to safeguard legal principles of higher rank (e.g. strengthening third-party adjudication).

The constitutional economics perspective unfolded above, with further distinctions between actors and rules allows to classify and distinguish between three types of transnational governance failures.⁵⁰ With public goods transforming from domestic public goods to transnational public goods, market failures, constitutional failures, and governance failures occur in policy fields characterized by collective action dilemmas, notably turning previously domestically perceived and tackled crisis into transnational governance crisis – like irreversible climate change, biodiversity losses, global health pandemics, food crises, unprovoked and unjustified wars of aggression and related war crimes (as currently in Ukraine), refugee and migration crises.

3.1 Market Failures

‘Market failures’ capture dysfunctions of market and price mechanisms in delivering decentralized information, coordination and sanctioning mechanisms to maximize consumer welfare and contribute to the supply of public goods. Specifically, market failures occur in different guises: restrictions of competition, induced by anti-competitive conduct, engender harmful effects for consumers or competitors, or both; external effects occur where market actors do not internalize the social costs of their market activity (e.g. environmental externalities); asymmetric information entails uninformed decision-making and inefficient market results; market failures can lead to or compound inequitable access to services. Market failure undermines consumer sovereignty as required by constitutional economics. Consumer sovereignty builds on the proposition that non-discriminatory market competition and internalized externalities generate welfare maximizing outcome. History shows however that consumer sovereignty can only be insufficiently achieved through ‘negative integration’ minimizing state intervention, but that embeddedness of market liberties into legal architecture (e.g. legal protection of equal freedoms, property rights, constitutional-, competition-, environmental-and social rules limiting abuses of public and private power) require ‘positive integration’ in order for markets to minimize societal harm. Standard economics explains the vulnerability of markets to settle in bad equilibria such as abuses of market power, cartel agreements, negative external effects like environmental pollution, unseized positive externalities like public health protection, all of them leading to diminished efficiency and reduce overall welfare. The ambivalence of market results and the inevitable nature of market failures is illustrated by wto memberships of China and Russia. Productive efficiency gains of market orientation boosted macroeconomic output and lifted many domestic citizens out of poverty through international trade, sidelined, however, by significant societal costs due to exploding inequality caused by non-transparent corruption and social and legal inequalities inside oligarchic governance systems. From an actor perspective, market failure points at the limits of markets as sole welfare generating actors implying that it remains incumbent on domestic government, intergovernmental cooperation or international agreement to set rules guiding the conduct of market actors (actor perspective) by designing or modifying constitutional arrangements on transnational level (rules perspective).

3.2 Governance Failures

Market failures give rise to ‘governance failures’ referring to failures of public and private governance actors to limit ‘market failures’, undermining both consumer sovereignty and citizen sovereignty in constitutional economic parlance. In the above example of wto memberships boosting growth with significant side-effects, domestic governance institutions fail to protect consumer sovereignty and to contain these market failures, nor do UN and wto law offer the adequate constitutional framework for competition, environmental, social rules, legislative procedures and judicial remedies. Market failures are thus exacerbated by governance failure (and are not prevented by constitutional design suggesting constitutional failure), with citizen sovereignty impaired as governments fail to act to protect consumers and citizens from distortive and power-dominated market structures. As long as states were the central (and sole) actor in national and international legal systems, it was predominantly ‘government failure’ that failed to limit market failures and implement their constitutional mandates, e.g. through appropriate law-making, administration, adjudication and other protection of private and public goods demanded by citizens like human rights and rule-of-law. The standard conceptualization of government failure in international relations scholarship was provided by Putnam’s two-level games, in which the key yardstick for success or failure becomes whether or not decision-makers are able to adopt policies on the international level that pass the domestic policy arena. Failure occurs when decision-makers are unable to implement domestically what they have agreed to internationally, either because they have misjudged their domestic constraints or because these constraints have changed.⁵¹

Yet, the more national governments are constrained by the realities of today’s multi-polar world and by global interdependencies between civil, political, economic, social, environmental, cultural and technological interactions, the more necessary appears the analytical focus on ‘governance failures’ (widening the focus to include private and public market actors, governments, international organizations and governance institutions to) or even ‘multilevel governance failures’ to capture the interplay between domestic with supranational entities, international organisations or intergovernmental actions. Impediments to citizens sovereignty may occur no matter on which level of governance, with national governments as well as regional and global institutions bearing the responsibility to maintain what is required from constitutional economics perspective: to design markets and political choices such that individuals enter into voluntary agreements, which implies that individuals are enabled to realize mutually beneficial transactions. Governance failure also empirically demonstrates that path-dependent governance methods – like intergovernmental power politics or welfare nationalism – are insufficient for realizing the universally agreed UN sustainable development goals. Governance failure thus spots the increased range of actors involved in failure – from domestic governments to transnational plethora of actors and institutions (actor focus) –, and allows to identify the relevance of post-constitutional rules which are, if ill-defined, not existent, or not enforced, at the roots of governance failure (rules perspective).

3.3 Constitutional Failures

‘Constitutional failures’ reveal that legal principles of higher rank are not in place to the effect that transnational public goods are sufficiently protected. Constitutional failures connect to protecting citizen sovereignty. It relies on constitutional commitments organized through collective action that serves to define and enforce the “rules of the game” to which the members of a group are subject. They offer a framework to allow mutually agreeable decisions in their social and market transactions. National and international constitutional rules and institutions of a higher legal rank may be lacking, ill-defined, misinterpreted, unenforceable or simply ignored, thus rendering constitutional rules ineffective to regulate and limit market failures and governance failures. Constitutional failures may appear in different guises, most generally occurring as inadequate measures to protect human and constitutional rights of citizens through representative democratic institutions, judicial remedies, fundamental rights requiring minimum social regulation to contain negative effects of market failures, and other ‘institutional checks and balances’ like independent central banks and science-based health and environmental agencies. Constitutionally secured fundamental rights may be safeguarded through independence of state agencies and bureaucracies in order to prevent dangers of ‘regulatory capture’ (e.g. by rent-seeking business actors, political party monopolies). Arguably, UN and wto law reflect the insight that improving multilevel governance of the sdgs requires more effective, multilevel regulation of constitutional and governance failures (e.g. to protect human rights, rule-of-law, decarbonize national economies).

History documents the variable interaction between market failure, government failure, and constitutional failures, driven by a changing awareness and perception of these failures. The emergence and functioning of local markets (e.g. responding to supply and demand for local goods and services) depended, inter alia, on legal guarantees of contract law (pacta sunt servanda), private property rights, monetary means of payment or barter, tort and criminal law (e.g. limiting fraud). Markets required to be embedded in legal and constitutional systems in order for markets to unleash their welfare increasing effect by protecting consumer sovereignty. Likewise, in response to governance failures such as abuses of monetary and police powers entailing legal insecurity and market distortions, for the protection of citizen sovereignty democratic and republican city states (e.g. since the ancient Greek and Italian city republics) introduced republican laws limiting monetary, tax and fiscal powers of governments, and regulating monetary, trade, investment and health policies, related contractual and property rights, and transnational trade and investment agreements (e.g. among city republics around the Mediterranean Sea, the ‘Hanse cities’ around the Baltic seas).⁵² The 1944 Bretton Woods Agreements and decolonization initiated progressive worldwide, legal and institutional reforms of economic regulation aimed at limiting government failures, notably common abuses of power (e.g. in authoritarian and imperial trade regimes) and protecting transnational public goods.⁵³ The evolutionary pattern of transnational governance shows how new forms of (transnational) governance reacted to market failures, while constitutional arrangements were implemented to respond to market and government failure.

Take the evolution of transnational trade governance as one example: Historic development of international economic law shows the evolution from narrow market failure orientation towards addressing government failures up until the point in which constitutional failures (on national and international level) are at stake. The lense provided by institutional economics enables the analysis to differentiate the variable influence of different economic schools on international cooperation and on legal institutions, which they have fostered or undermined. The Bretton Woods agreement and the 1947 General Agreement on Tariffs and Trade (gatt) had been negotiated and progressively implemented under the leadership of the United States; they were strongly influenced by Anglo-Saxon, economic liberalism aimed at liberalizing trade barriers and promoting monetary stability and convertibility of currencies.⁵⁴ However, while driven by liberal market paradigms underpinned by a narrow role for the state to frame markets, they were a first step of institutionalization and rules-generation with the aim to restrain political and economic power. Government failures and constitutional failures played a minor role, the focus was on a narrow correction effort to contain market failure. From an institutional economics perspective, the Bretton Woods environment established an institutional setting that, while maintaining the hegemonic predominance of the US economy (e.g. due to the use of the dollar as global reserve currency and its convertibility into gold). With little constitutionalization and deference to domestic policies provoking government failures (e.g. rent seeking, trade wars), legal uncertainty in international relations remained and predictability were fostered only through a successively built web of international treaties.

While market framing disciplines such as non-discrimination principles contributed to offer substantive rules to contain government failure, it became clear that constitutional rules beyond substantive obligations were required in order to safeguard compliance with rules. The development of procedural rules such as the gatt’s dispute settlement system fostered legal security, progressively evolving through decisions of the gatt Contracting Parties and additional trade agreements resulting from eight ‘gatt Rounds’ of multilateral trade negotiations. With the inception of the wto institutions and multilevel wto dispute settlement system implemented through the multilateral Uruguay Round negotiations (1986–1994) and ushering in the 1994 Agreement establishing the wto and its Dispute Settlement Understanding (dsu), a major shift towards constitutionalization of state-like principles such as checks and balances and binding adjudication ensued. The wto Agreement recognizes the separation of legislative, executive and judicial powers of wto institutions (cf. Article iii wto), it places the wto within the multilevel governance structures with its Member States (cf. Article iv), and coordinates wto activities with those of other worldwide and regional organizations (cf. Articles v wto, xxiv gatt) – taken together, the multilevel architecture emancipated trade governance from the logic of retaining market and government failure by establishing constitutional mechanisms that contained domestic constitutional failures (e.g. insufficient rule of law and fundamental rights to pursue trade-oriented economic activities). This turns the wto towards a more ordo-liberal foundation of international cooperation (e.g. strengthening fundamental rights through binding state-to-state adjudication and third-party adjudication of trade disputes, rule of law, multilateral treaties).⁵⁵

This development is illustrative also of a changing view about the cause of failure. The neoliberal turn throughout the ’80s trusted in market power and the self-healing forces of market failures denying the role of the state to frame market forces and ensure through positive (rather than negative) integration a minimum social and economic equality. The focus was on government failure with bureaucracies and governments acting in self-interest rather than for common good seen as the source of failure, hence retrenching government influences on markets. ‘Small governments’ was the cure to the insights offered by public choice, rather than thinking about constitutional remedies such as well-defined checks and balances pushing back on business influence on governments decision and independence safeguards of governments preventing regulatory capture. Lifting binding adjudication to transnational level offering adjudication by independent panelists supported by a neutral wto Secretariat, hence cutting off the outreach of business interests, was a turn to recognize domestic governance failures. No longer trusting in self-healing market forces but seeing that constitutional and governance failures is “causally prior” to the operation of markets and therefore markets can fail because of insufficient constitutional arrangements.

With three failure types shedding light on responsible actors and on (in)adequate rules architecture, transnational governance can be analyzed both from descriptive perspective (why do failures occur and through whose action?) and normative perspective (how can failure be remedied and by whom?).

4 ‘Consumer Sovereignty’ Requires Correction of Market Outcomes to Promote Transnational Public Goods

While constitutional economics is concerned with mutual gains from voluntary co-operation and voluntary joint commitment, it is not blind to self-interested agents searching for unilateral gains by taking advantage of others. Exploitative strategies are common, and the constitutional economist does not ignore the omnipresence of opportunities for gaining at the expense of others.⁵⁶ Public goods are particularly vulnerable to exploitative strategies. By extending the definition of public goods from the economic to the legal sphere, public goods can be defined as goods that benefit and can be consumed by all citizens and whose supply is plagued by problems of collective action and free riding – like the rule of law, international security or climate stability.⁵⁷ For transnational public goods to be supplied and safeguarded, extensive participation must be achieved. Yet, even though the rationale of the multilateral framework as response to the collective action problem is reasonable in theory and formally addressed by the universal recognition of legal arrangements (such as the universal treaty-based recognition of human rights), collective action problems such as ‘free-riding’ can diminish the effectiveness of global regimes (e.g. by domestically minimizing the scope of environmental human rights, thus shifting the burden of climate mitigation to other countries that recognize stronger environmental rights).⁵⁸ Similarly, international legal cooperation governing national defense, adherence to the rule of law or the absence of armed threat typically allow all citizens to enjoy the associated benefits, yet at the same time gives rise to collective action problems. International agreements may suffer from fairness and efficiency deficits as they are biased by power politics; or countries threaten security or peace due to short-sighted selfish reasons inflicting negative externalities on other states.

Welfare economics struggled in translating its notion of efficiency into operational terms for real world policies. Narrow Pareto efficiency requiring for a state of society to be preferred only if the new state does not make anyone in society worse off, is an unrealistic efficiency benchmark, as any policy decision produces distributional effects leaving at least some groups of society worse off (e.g. taxation, infrastructure, pricing CO₂ consumption). Less strict concepts of Pareto efficiency allow some groups to be better off, and others to be worse off and require negotiation (or re-distribution) to the end that the gains compensate the losses.⁵⁹ With unanimity of citizens being the condition to accept a new state of society, this wide Pareto concept may guide many policy decisions. However, unanimity involves high transaction costs and thus hinders an assertive state action and policy implementation. The least challenging criterion of Kaldor-Hicks, in turn, renounces the need for actual negotiations and compensation between winners and losers and lets it suffice that benefits exceed costs and hypothetical compensation suffices. The policy relevance of the classical welfare economics concepts is thus severely limited.

Constitutional economics extends the narrow focus on cost-benefit analysis inherent in welfare concepts and their focus on utility-maximization and assumptions of ‘perfect market competition’ without transaction costs. It focuses on constitutional designs that maximize the likelihood of being voluntarily agreeable to all members of society. This promotes economic growth satisfying the basic needs of all citizens, enhancement of ‘human capacities’ (A.K. Sen) and their mutually agreed protection through constitutional rights, which offer better benchmarks for human well-being. Specifically, market-specific ‘consumer sovereignty’ constitutionalizes market arenas by going beyond assessing efficiency only by way of cost-benefit studies; free consumer choice limits particularistic interests undermining the common good and constrains government powers to discriminate (e.g. in response to rent-seeking pressures). ‘Consumer sovereignty’ locates the ultimate sources of choices and preferences in individuals and in their informed exchange contracts. Yet, the ‘consumer sovereignty’ ideal of consumers making reasonably informed market choices is often confronted with the reality that economic actors and political regulators have only limited knowledge of the complex interactions among private and public, national, transnational and international legal, economic, political and social rules and institutions.⁶⁰ Their decisions may be influenced also by ‘rational ignorance’ and intuitive or irrational motives, as illustrated by the diversity of ‘social contract’ theories and assumptions.⁶¹ Market failure is therefore often intertwined with governance failures, as governments, who define the framework within which markets unfold, are incapable of designing market rules such that public goods are not harmed. How then does constitutional economics inform the address of governance failures?

5 Domestic Government Failure and Transnational Governance Failure Undermine ‘Citizen Sovereignty’

While ‘consumer sovereignty’ requires market failures to be addressed, it is ‘citizen sovereignty’ that searches for inclusive, reasonable agreements among citizens protecting democratic preferences. Both ‘consumer sovereignty’ and ‘citizen sovereignty’ endorse a set of normative values putting choices of individuals at the core of legitimacy of market and governance design – the normative individualism hence builds on the respect for human dignity and the recognition of individual rights pertaining to the making of individual consumer choices as well as political preferences. With citizens as sovereigns in whose interest the polity should be operated, politicians and bureaucrats should be responsive to citizens’ common interests. Like consumer sovereignty, citizen sovereignty is a procedural criterion, not one of specific outcomes. That is, the constitutional economic concept of ‘citizen sovereignty’ leaves space for constitutional plurality – modes of participation and free will-based decision making may vary as long as it remains responsive to the free will of citizens and as long as citizens’ common interests remain its principal controlling force.⁶²

Public choice scholars argued that government failures are often far more disastrous than market failures.⁶³ Governments sometimes fail to provide the fundamental requirements of law and order or even actively foment humanitarian crises; they fail to implement property rights and legal institutions, all of them as preconditions for markets to thrive.⁶⁴ Public choice literature casts doubts on the notion of benevolent governments performing taxation, regulation and administration with a general welfare objective, but rather emphasizes government agents’ decision-making biases and explores why they fail to achieve efficient outcomes. This feeds into multiple government failures related to the supply of public goods – political actors trust in markets even though they should regulate, hence perpetuating market failures; they fail to resist to regulatory capture and rent seeking by business interest; corrupt leaders deprive society of welfare for selfish reasons; insufficient domestic checks-and-balances, weak judiciary etc. undermine societal interests taken into account; or welfare losses result from insufficient account of transnational public goods by nationalist welfare perspective or discount of future generations’ welfare (e.g. climate).

Government failure often translates into transnational governance failure, as illustrated by the US withdrawal from the 2015 Paris Agreement and by the US assault on the wto legal and dispute settlement system. Populist governments ushered into trade wars by the US Trump administration and the ‘Brexit’ confirming that global cooperation is no longer a one-way development towards more rules-orientation. The return of hegemonic, mercantilist power politics and neo-liberal interest group politics undermine an order of international cooperation that builds on mutual respect and necessarily conflicts with public goods, as short-run nationalist interests are placed before a common interest of the international community. Consequently, there is a revival of political and economic forces which the trade order was intended to restrain by rules-based market competition and adjudication. This development is embedded more broadly into the rising influence of authoritarian state-capitalism threatening to undermine the rules-based trading system through state-induced, anti-competitive practices in guises as different as hidden subsidy practices, forced technology transfers, indirect discrimination, other market distortions and trade sanctions for political reasons. Subsidy schemes in state-capitalist countries like China not only distort competition on world markets (creating government-induced market failures), they also conflict with wto subsidy rules and more broadly with a rules-based trading system building on a level-playing field and non-discrimination.

With governance shifting increasingly from domestic to international, transnational and supranational levels, failures appear in different guises: they can occur as decisions and actions plagued by biases due to rent-seeking (favoring some countries, groups, or businesses’ interests), for example by letting market power proliferate in favor of big digital companies, insufficient financial regulation giving rise to too big to fail dilemmas, or letting companies undermine individual rights to privacy; governments can fall afoul of international law obligations due to power-mongering or domestic policy reasons; or international organisations take or prepare decisions that lack sufficient commitment to the collective action problem of public goods, for example if their decisions are biased to favor the interest of (big) Member States⁶⁵ (or the largest financial contributors to the organization) like the UN Security Council adopting policies in the interest of dominant veto powers, for example by Russia’s abuse of veto power to block assertive climate action by the UN Security Council,⁶⁶ to the detriment of other members of the international community undermining the idea of equal rights. International organizations may insufficiently remedy rule-of-law violations (as they are required by international law) if their internal decision-making does not prevent power-politics, with the EU only half-heartedly tackling assault on rule-of-law in some EU member states like Hungary and Poland as one example. Also, judicial decisions by international tribunal and courts can be skewed due to political biases or by judges not being able to act entirely independent from their domestic governments’ interests or from the parties selecting judges or arbitrators. The EU initiatives respond to such development by aiming to replace investor-state arbitration inside the EU – as well as in the external relations of the EU – by new kinds of multilevel adjudication responding to the increasing civil society challenges of ‘investor biases’ and insufficient guarantees of public interests in international investment arbitration.⁶⁷

In some cases, the mandate of international organisations is more generally not well-designed to constrain governments from taking recourse to welfare-nationalistic policies. In international trade, the wto law has never followed consistently the embedded liberalism underlying gatt 1947, as it contained elements of power imbalances reflecting neo-liberal Anglo-Saxon interest-group politics (e.g. resulting in the wto Anti-dumping and Trade-related Intellectual Property Rights (trips) Agreements).⁶⁸ Arguably, drawing from the gatt’s embedded liberalism to the challenges of decolonization, the embedded liberalism underlying the wto trading system needs to be adjusted not only to the ‘new nationalism’ inspiring hegemonic mercantilism, the United Kingdom’s ‘Brexit’ from the European Union (EU), and protectionism in brics countries (Brazil, Russia, India, China, South Africa). In order to enable wto members to realize their ‘sustainable development’ objectives, wto rules and institutions must also adjust to the 2015 Paris Agreement aimed at mitigating climate change.

Public choice scholars have offered a number of solutions to government failures. Among them, competition between jurisdictions has been viewed as a suitable tool to reduce failure.⁶⁹ The ‘sovereign equality’ of states and related legal freedoms foster ‘regulatory competition’ among states, with competition placing a natural limit on government predation. If citizens, capital and labor can move freely from jurisdiction to jurisdiction, policy makers are incentivized to select more favorable bundles of policies.⁷⁰ The notion of institutional competition normatively inspires the idea of political competition for, within and between government(s) in order to produce benefits for citizens similar to those generated by economic market competition, for instance by promoting regulatory competition. On that account, legal-institutional pluralism promotes institutional competition between jurisdictions, thereby furthering knowledge, enhancing efficiency, restraining power and promoting experimentation with innovative legal-institutional arrangements.⁷¹ Institutional competition can promote variability and quality, for instance if socially and economically viable institutions are imitated while unsuccessful policies are refused by competing jurisdictions. But competition may not be working in many instances because barriers between markets remain high and regulatory competition is often abused, which plays out in particular in the context of transnational governance. Power biases trump fair jurisdictional competition. Transnational governance is also prone to failure where unequal distribution of human and economic resources risks aggravating social inequalities to a point that citizens lose trust (e.g. in social justice, political elites), or circumvent the law (e.g. through tax avoidance, black markets, illegal transactions).⁷²

Insight from constitutional economics offers to overcome the pitfalls of jurisdictional competition by strengthening the role of judiciary and multilevel governance. Barry Weingast has argued that, rather than emphasizing competition, the devolution of power can function as a credible commitment to policy reform. Drawing from English constitutional history, Weingast shows that the shifting of power from monarchs to Parliament raised the transaction costs of potential rent seekers and hence reduced government failure.⁷³ He infers that competitive judiciary is key to remedy government failure.⁷⁴ By extension, in the same way in which national constitutions have transformed their constitutional rules towards balancing democratic legislation, administration and adjudication protecting rule of law and equal rights of citizens, the ‘world order treaties’ – like the UN Charter and the wto Agreement – can deliver governance of transnational public goods only though additional legislative, administrative and judicial implementing acts (like political or judicial interpretations clarifying indeterminate treaty provisions).

Normative constitutional economics therefore emphasizes the need for ‘social embedding’ of international economic regulation, for instance through protecting also social rights and ‘social peace’, and for ‘institutionalizing public reason’, safeguarded by independent regulatory authorities, impartial third-party adjudication protecting rule-of-law and equal rights of citizens. Constitutional economics hence offers a rationale why ‘intergovernmental supply of public goods’ requires ‘institutional checks and balances’ limiting abuses of public and private powers: Just as executive powers inside national jurisdictions have often been abused until democratic and republican constitutionalism progressively succeeded – in many countries – in protecting constitutional rights of citizens and collective supply of national public goods, so have the multilevel constitutional ‘checks and balances’ and judicial protection of constitutional and human rights inside the EU – or the multilevel judicial protection of transnational rule of law among the 164 wto members – enhanced multilevel governance of transnational public goods by containing abuses of detrimental geopolitical power by means of trade policy.⁷⁵

6 Conclusion

Governance failures of transnational governance abound in an interconnected world, as local and national actions and decisions produce increasingly extraterritorial effects. While market failure reveals insufficient transaction-based market solutions in promoting and protecting public goods, and governance failures reveal public or private actions undermining public goods, constitutional failures focus on the adequacy of constitutional rules, notably legal norms of higher rank, in governing transnational public goods.

Constitutional economics engages in the search for legal restraints on abuses of public and private power, for ‘institutional checks and balances’ and for legal protection of individual preferences (e.g. by means of legal protection of human and fundamental rights). It focuses on ensuring equal freedoms of consumers (‘consumer sovereignty’) and of citizens (‘citizen sovereignty’) that require constitutional arrangements to ensure mutual agreeability of market rules, political decision-making and exercise of domestic and transnational political power.⁷⁶ Yet, the ‘social contract ideal’ of citizens making reasonably informed ‘constitutional choices’ is often confronted with the reality that economic actors and political regulators have only limited knowledge of the complex interactions among private and public, national, transnational and international legal, economic, political and social rules and institutions.⁷⁷

In political practice, constitutional economics is a European project. The normative persuasiveness of constitutional economics has been limited to inspire European integration ushering into multilevel democratic, economic, and human rights constitutionalism, thereby offering the most developed treaty practices aiming at securing consumer sovereignty and citizen sovereignty; this has led the EU to strengthen multilateral rules-based fora such as the wto and to ratify most UN human rights conventions. Yet, the European tradition of rules-based constraints making governments responsive to citizens’ interests is not shared widely. Its normative appeal vanishes in process-based constitutionalism placing democratic elections over rights-based adjudication of political issues. More generally, authoritarian regimes and those driven by business-interests undermine core principles developed under constitutional economics. Geopolitical rivalries and geoeconomic interests are likely to deepen these rifts further as illustrated by the promulgation of divisive policy slogans such as ‘friend-shoring’ or ‘systemic rivalries’, with even the EU being at risk to abandon its dna as normative power to enter instead power-based international ‘cooperation’.⁷⁸

Michael Howlett, ‘The Lessons of Failure: Learning and Blame Avoidance in Public Policy-Making’ (2012) 33 International Political Science Review 539.

Andreas Kruck, Kai Oppermann and Alexander Spencer, ‘Introduction: Mistakes and Failures in International Relations’ in Andreas Kruck, Kai Oppermann, Alexander Spencer (eds), Political Mistakes and Policy Failures in International Relations (Palgrave Macmillan 2018) 5, 18 (“The close link between labelling a policy a failure, blaming its originators and reaping political benefits from succeeding in the blame game crucially contributes to making the designation of a policy as a failure so political, powerful and contested.”).

Mark Bovens and Paul ‘t Hart, ‘Revisiting the Study of Policy Failures’ (2016) 23 Journal of European Public Policy 653; Annika Brändström and Sanneke Kuipers, ‘From ‘Normal Incidents’ to Political Crises: Understanding the Selective Politicization of Policy Failures’ (2003) 38 Government and Opposition 279; Krebs, ‘How Dominant Narratives Rise and Fall: Military Conflict, Politics, and the Cold War Consensus’ (2015) 69 International Organization 809.

Rosa Ehrenreich Brooks, ‘Failed States, or the State as Failure?’ (2005) 72 The University of Chicago Law Review 1159.

Mario Silva, State Legitimacy and Failure in International Law (Brill Njhoff 2014).

“Trial-and-error” is at the heart of “Critical Rationalism” as developed by Karl Popper. The permanent learning process through failing is inherent to the trial and error process; this process is open to criticism and corrections and denies any deterministic approach by recognizing error and failure as sources for progress. Karl R Popper, Auf der Suche nach einer besseren Welt: Vorträge und Aufsätze aus dreißig Jahren (8th edn, Piper 1995) 79.

On the learning effect from policy failures also Michael Howlett, ‘The Lessons of Failure: Learning and Blame Avoidance in Public Policy-Making’ (2012) 33 International Political Science Review 539; Pat Gray, ‘Disastrous Explanations – Or Explanations of Disaster? A Reply to Patrick Dunleavy’ (1996) 11 Public Policy and Administration 74.

Political speeches often refer to failures as reference point for political change and to differentiate past and future political action. For example, Macron’s famous speech on the future of the European continent in 2017 at Sorbonne University referred to failure four times; similarly, Macron referred to failure in his Speech at the closing ceremony of the Conference on the Future of Europe in 2022; former German foreign minister Joschka Fischer in his famous speech on “From Confederacy to Federation – Thoughts on the finality of European integration” at Humboldt University referred to policy failures two times. For failure as element of political narrative see Arjen Boin, Paul ‘t Hart, and Allan McConnell, ‘Crisis Exploitation: Political and Policy Impacts of Framing Contests’ (2009) 16 Journal of European Public Policy 81.

Michael Howlett, ‘The Lessons of Failure: Learning and Blame Avoidance in Public Policy-Making’ (2012) 33(5) International Political Science Review 539, 541–542; Allan McConnell, ‘Policy Success, Policy Failure and Grey Areas In-Between’ (2010) 30(3) Journal of Public Policy 345, 349–351.

Inger-Johanne Sand, ‘Polycontextuality as an Alternative to Constitutionalism’ in Christian Joerges, Inger-Johanne Sand and Gunther Teubner (eds), Transnational Governance and Constitutionalism (Hart Publishing 2004) 48.

ibid 58.

Carmen E Pavel, Law Beyond the State (Oxford University Press 2021) 58–85.

Ernst-Ulrich Petersmann, ‘Neoliberalism, Ordoliberalism and the Future of Economic Governance’ (2023) Journal of International Economic Law (book review).

Ernst-Ulrich Petersmann and Armin Steinbach, ‘Neo-liberalism, State-capitalism and Ordo-liberalism: “Institutional Economics” and “Constitutional Choices” in Multilevel Trade Regulation’ (2021) 22 Journal of World Investment and Trade 1.

See, e.g., Jeffrey Dunoff and Joel P Trachtman, ‘Economic Analysis of International Law’ (1999) 24 Yale Journal of International Law 1; Jagdeep S Bhandari and Alan O Sykes, Economic Dimensions In International Law: Comparative and Empirical Perspectives (Cambridge University Press 1998).

Cf. Joel P Trachtman, The Economic Structure of International Law (Harvard up 2008).

John J. Mearsheimer, ‘The False Promise of International Institutions’ (1994) 19 International Security 5; Eric Posner, The Perils of Global Legalism (Reprint, University of Chicago Press 2009).

Tracing back to Lionel Robbins, An Essay on the Nature and Significance of Economic Science (2nd edn, Macmillan 1935) 16.

Anne van Aaken, ‘Behavioral International Law and Economics’ (2014) 55 Harvard Journal of International Law 427.

Geoffrey Brennan and James M Buchanan, The Reason of Rules – Constitutional Political Economy (Cambridge University Press 1985); James M. Buchanan, ‘The Domain of Constitutional Economics’ (1990) 1 Constitutional Political Economy 1.

On institutional economics Ludwig Van den Hauwe, ‘Public Choice, Constitutional Political Economy and Law and Economics’ in Boudewijn Bouckaert and Gerrit De Geest (eds), Encyclopedia of Law and Economics (Vol. i, Edward Elgar 2000) 603.

Friedrich A. Hayek, ‘Rechtsordnung und Handelsordnung’ in Friedrich A. Hayek, Freiburger Studien (J. C. B. Mohr (Paul Siebeck) 1969) 161.

Viktor Vanberg, ‘Market and state: The perspective of constitutional political economy’ (2005) 1 Journal of Institutional Economics 23, 42.

James M Buchanan, The Economics and Ethics of Constitutional Order (The University of Michigan Press 1991) 31.

James M Buchanan, What Should Economists Do? (Liberty Press 1979) 27–31.

As such, this concept turns against strong realist theories that normative guidelines for state conduct should be to enter only in those transactions that secure relative gains (rather than absolute gains), see John J Mearsheimer, ‘The False Promise of International Institutions’ (1994) 19(3) International Security 5, 12–13.

For an overview on general collective action issues pertaining to political systems and democratic institutions Stefan Voigt, Constitutional Economics: A Primer (Cambridge University Press 2020).

On the history of feudal, capitalist, communist and neo-liberal ‘inequality regimes’ distorting market competition, the distribution of incomes and wealth see: Thomas Piketty, Capital and Ideology (Belknap Press 2019).

Viktor Vanberg, ‘Market and state: The perspective of constitutional political economy’ (2005) 1(1) Journal of Institutional Economics 23, 35.

ibid, 24.

Geoffrey Brennan and Alan Hamlin, ‘Constitutional Economics’ in P Newman (ed), The New Palgrave Dictionary of Economics and the Law (Vol i, London: Macmillan 1998) 401.

William H Hutt, Plan for Reconstruction: A Project for Victory in War and Peace (London: Kegan Paul 1943) 215.

Viktor J Vanberg, ‘Market and state: The perspective of constitutional political economy’ (2005) 1(1) Journal of Institutional Economics 23, 37.

Viktor J Vanberg, Wettbewerb und Regelordnung (Mohr Siebeck Verlag 2008).

John Rawls, A Theory of Justice (Harvard University Press 1971) 84.

Viktor J Vanberg, ‘Market and state: The perspective of constitutional political economy’ (2005) 1(1) Journal of Institutional Economics 23, 42.

ibid.

Cf. Viktor J. Vanberg, The Constitution of Markets. Essays in Political Economy (Routledge, 2001); Robert B McKenzie (ed), Constitutional Economics. Containing the Economic Powers of Government (Lexington Books, 1984); James M Buchanan, The Economics and the Ethics of Constitutional Order (University of Michigan Press 1991).

The recent support by the imf and World Bank of activist fiscal, economic, health and environmental policies in response to the global health pandemics and climate change illustrates that distinctions between ‘neo-liberalism’, ‘state-capitalism’, and ‘ordo-liberalism’ refer to policy trends that elude precise legal definitions. Even in the USA, government spending, budget deficits, central bank interventions, welfare payments and corporate bailouts have increased over the past decades. The neo-liberal focus (as promoted notably by British Prime Minister Thatcher and US President Reagan) on business efficiency in terms of consumer prices is now challenged also in the USA by focusing on the welfare of workers, farmers, house owners, and citizens adversely affected by media concentration, rising health, energy and housing costs, and environmental harm.

For a comparative discussion of the various strands underpinning the ‘Washington consensus’, the ‘Brussels consensus’ and the ‘Geneva consensus’ see Heinz Hauser et alii, ‘The Contribution of Jan Tumlir to the Development of a Constitutional Theory of International Trade Rules (in German with English summary)’ (1988) 39 Ordo – Jahrbuch für die Ordnung von Wirtschaft und Gesellschaft 219; Ernst-Ulrich Petersmann, Transforming World Trade and Investment Law for Sustainable Development (Oxford University Press 2022) chs 2.4, 2.5, and 4.4.

Sarah B Hobolt and James Tilley, Blaming Europe? Responsibility Without Accountability in the European Union (Oxford University Press 2014).

Claude Menard and Mary M Shirley (eds), Introduction to a Research Agenda for New Institutional Economics (Elgar Publishing 2018); Erik Furubotn and Rudolf Richter, Institutions and Economic Theory: The Contribution of the New Institutional Economics (2nd edn, University of Michigan Press 2005).

Charles Roger and Peter Dauvergne, ‘The Rise of Transnational Governance as a Field of Study’ (2016) 18(3) International Studies Review 415.

E.g. Graham T Allison, Essence of Decision: Explaining the Cuban Missile Crisis (Little, Brown and Company 1971); Lawrence Busch, Standards: Recipes for Reality (mit Press 2011); Matthew Potoski and Aseem Prakash, Voluntary Programs: A Club Theory Perspective (mit Press 2009).

Tim Büthe and Walter Mattli, The New Global Rulers: The Privatization of Regulation in the World Economy (Princeton University Press 2011); Matthew Potoski and Aseem Prakash, Voluntary Programs: A Club Theory Perspective (mit Press 2009).

Glenn Furton and Adam Martin, ‘Beyond market failure and government failure’ (2019) 178 Public Choice 197; William R Keech and Michael C Munger, ‘The anatomy of government failure’ (2015) 164 Public Choice 1.

Howlett offers a classification of failures based on magnitude and salience see Michael Howlett, ‘The Lessons of Failure: Learning and Blame Avoidance in Public Policy-Making’ (2012) 33(5) International Political Science Review 539; McConnell in contrast differentiates between process, programme and political failure, Allan McConnell, ‘A Public Policy Approach to Understanding the Nature and Causes of Foreign Policy Failure’ (2016) 23(5) Journal European Public Policy 667, 672–675.

Robert D Putnam, ‘Diplomacy and Domestic Politics: The Logic of Two-Level Games’ (1988) 43 International Organization 427; Andreas Kruck, Kai Oppermann and Alexander Spencer, ‘Introduction: Mistakes and Failures in International Relations’ in Andreas Kruck, Kai Oppermann, Alexander Spencer (eds), Political Mistakes and Policy Failures in International Relations (Palgrave Macmillan 2018) 11.

For ‘institutional economics analyses’ of the ancient economies of Rome and Greece see: Taco T Terpstra, ‘Neo-Institutionalism in Ancient Economic History’ in Claude Menard and Mary M Shirley (eds), Introduction to a Research Agenda for New Institutional Economics (Elgar Publishing 2018) ch 26.

ibid.

Viktor J Vanberg, ‘Market and State: The Perspective of Constitutional Political Economy’ (2005) 1(1) Journal of Institutional Economics 23, 28.

Inge Kaul, et al (eds.), Providing Global Public Goods: Managing Globalization (Oxford University Press 2003).

Ernst-Ulrich Petersmann (ed), Multilevel Governance of Interdependent Public Goods: Theories, Rules and Institutions for the Central Policy Challenge in the 21st Century (rscas 2012/13).

William R Keech and Michael C Munger, ‘The anatomy of government failure’ (2015) 164 Public Choice 1, 5.

Cf. Geoffrey Brennan and James M Buchanan, The Reason of Rules. Constitutional Political Economy (Cambridge University Press 1985).

On behavioral economics exploring intuitive or irrational economic behavior see, e.g.: Anne van Aaken and Jürgen Kurtz, ‘Beyond Rational Choice: International Trade Law and the Behavioral Political Economy of Protectionism’ (2020) 22 Journal of International Economic Law 601. On the historical evolution and institutional diversity of social contract theories see e.g.: David Boucher and Paul Kelly (eds), The Social Contract from Hobbes to Rawls (Routledge 1994).

Viktor Vanberg, ‘Market and State: The Perspective of Constitutional Political Economy’ (2005) 1(1) Journal of Institutional Economics 23, 42.

James M Buchanan, Cost and Choice: An Inquiry in Economic Theory (University of Chicago Press 1979); Gordon Tullock, ‘Problems of Majority Voting’ (1959) 67(6) Journal of Political Economy 571; Gordon Tullock, Bureaucracy (CK Rowley ed, Liberty Fund 2005).

Ronald H Coase, ‘The Problem of Social Cost’ (1960) 3(1) The Journal of Law and Economics 1; Elinor Ostrom, Governing the Commons: The Evolution of Institutional Forms of Collective Action (Cambridge University Press 1990).

See the case study of the who’s handling of the 2009 H1N1 influenza pandemic and the 2014 West African Ebola outbreak giving rise to failure due to the who secretariat’s aversion to offending member states, Adam Kamradt-Scott, ‘What Went Wrong? The World Health Organization from Swine Flu to Ebola’ in Political Mistakes and Policy Failures in International Relations [2017] Springer Nature 193–215.

See the UN Security Council rejection to adopt resolution integrating climate-Related security risk into conflict-prevention strategies at its 8926th meeting on December 13, 2021, sc/14732; Shirley V Scott, ‘Implications of climate change for the UN Security Council: mapping the range of potential policy responses’ (2015) 91(6) International Affairs 1317–1333.

Cf. Maria L Marceddu and Pietro Ortolani, ‘What is Wrong with Investment Arbitration?’ (2020) 31 The European Journal of International Law 405.

Hanns Ullrich et alii (eds), trips Plus 20. From Trade Rules to Market Principles, (Springer 2016).

Friedrich A Hayek, The Economic Conditions of Interstate Federalism’ in Individualism and Economic Order (University of Chicago Press 1948); Charles M Tiebout, ‘A Pure Theory of Local Expenditures’ (1956) 64 The Journal of Political Economy 416.

Glenn Furton and Adam Martin, ‘Beyond Market Failure and Government Failure’ (2019) 178 Public Choice 197, 202.

Lüder Gerken, ‘Institutional Competition: An Orientative Framework’ in Lüder Gerken (ed), Competition among Institutions (Palgrave Macmillan 1995); Wallace E. Oates, ’An Essay on Fiscal Federalism’ (1999) 37 Journal of Economic Literature 1120, 1132.

Cf. Anne Case and Angus Deaton, Deaths of Despair and the Future of Capitalism (Princeton University Press 2019).

Barry R Weingast, ‘The Economic Role of Political Institutions: Market-Preserving Federalism and Economic Development’ (1995) 11(1) Journal of Law Economics and Organization 1.

Glenn Furton and Adam Martin, ‘Beyond Market Failure and Government Failure’ (2019) 178(1) Public Choice 197, 203.

Viktor J Vanberg, ‘Market and state: The perspective of constitutional political economy’ (2005) 1(1) Journal of Institutional Economics 23.

Cf. Geoffrey Brennan and James M. Buchanan, The Reason of Rules. Constitutional Political Economy (Cambridge University Press 1985).

Armin Steinbach, ‘The EU’s turn to ‘strategic autonomy’: leeway for policy action and points of conflict’ (forthcoming).

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Constitutionalism and Transnational Governance Failures

Series: World Trade Institute Advanced Studies, Volume: 16

E-Book ISBN:: 9789004693722

Publisher:: Brill | Nijhoff

Print Publication Date:: 22 Feb 2024

Subjects
- International Law
  - International Law: General Interest
  - Constitutional Law

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Chapter 3 Constitutional Economics and Transnational Governance Failures

Abstract

1 Introduction

2 The (Limited) Value of Constitutional Economics for the Study of Transnational Governance Failures

3 Constitutional Economics Revealing Market, Governance and Constitutional Failure Types

3.1 Market Failures

3.2 Governance Failures

3.3 Constitutional Failures

4 ‘Consumer Sovereignty’ Requires Correction of Market Outcomes to Promote Transnational Public Goods

5 Domestic Government Failure and Transnational Governance Failure Undermine ‘Citizen Sovereignty’

6 Conclusion

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Constitutionalism and Transnational Governance Failures

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