Appendix 2: A Review of Bailey's Constitution

Bailey's Constitution is a pathbreaking attempt to show how an economy might be operated so as to provide public goods and services in a manner that "mimics" the operation of private competitive markets. Using principles pioneered by Wicksell and Lindahl, this has long been a goal of public economics but until the advent of so-called demand revealing mechanisms (described in Chapter 2 of his book), there was to known way to achieve this result in real world institutions. Bailey has shown the way this result can be achieved through the provision of the appropriate constitutional decision making and self enforcing incentive structure in a small public economy.

The "incentive compatible" mechanisms that Bailey utilizes received recent attention by the Nobel Prize Committee. In awarding the 1996 Nobel Prize to William Vickrey, the Nobel Committee recognized the importance of Vickrey's contribution to providing ways to "overcome the public goods problem" (the subject of B&T's Chapter II). The Committee noted that an idea analogous to the Vickrey auction "underlies the so-called Clarke-Groves mechanism for eliciting truthful tenders for public projects. Vickrey anticipated this important result by an important time margin". Whereas this and other work cited by the Committee (particularly the "Vickrey auction") has had many important practical applications in the allocation of goods in private markets (i. e. spectrum auctions and Treasury debt auctions), it has been more difficult to apply the ideas in the public sector.

Part of this difficulty may be the result of certain perceived "technical limitations" of what Bailey calls the (Vickrey-Clarke-Groves" (VCG) mechanisms, the operation of which are described thoroughly in Chapter II of B&T. Over 25 years, the literature has spawned a number of criticisms centering on these technical limitations. Throughout the body of the work and especially in Part II, Bailey has shown how most, if not all, of these difficulties can be surmounted, mostly through the self enforcing incentive structure embedded in the appropriate constitution.(3)

In my own 1980 book of which this is an Afterward (and which was an extension of my 1978 University of Chicago dissertation, I tried to deal with many of these difficulties as well as other difficulties being raised outside the conventional "rational choice" framework of analysis. For example, political scientists (Margolis, 1983) were asserting that altruism invalidates the VCG mechanisms. Bailey's work greatly extends previous attempts, such as mine, in dealing with these technical limitations and criticisms, and offers important and pathbreaking fresh perspectives as well.

The book, in my mind, does an excellent job at stimulating readers ranging from the layperson with only a rudimentary understanding of economics all the way to mathematical economists thoroughly familiar with the current state of the art in "incentive compatible" mechanism design. The great strength of the work is in how it is all put together through a combination of incentive compatible devices and self enforcing incentive mechanisms, starting in chapter II, and running through the exciting "draft constitution" in Chapter III, concluding with a Chapter IV in Part I with "perspectives and alternatives" which analyses other attempts to address the public goods problem and deals with the possible objections that others might raise to the approach suggested by Bailey. The ways in which Bailey combines the mechanisms (i e. the VCG mechanisms and the Thompson mechanism, the latter being treated separately in Chapter V of this book), for example, is particularly important and stimulates one to immediately want to explore practical applications.(4)

Others would surely find important insights in carefully studying Bailey's response to criticisms and misunderstandings (for example the perception that altruism invalidates the VCG mechanism) all the way to perceptions that abound in the political science literature that subvert any attempts to institute decisionmaking mechanisms that would amount to a simple aggregation of individual preferences. (This is the longstanding "liberalism against populism" debate that would try to invalidate any mechanism that relies on direct democracy implemented through a mechanism that relies on voting rules that reflect the intensity of individual voter preferences). In this respect, Bailey's book is a useful supplement to Mueller's Constitutional Democracy (1996) which also provides a defense of the more complex, sophisticated procedures (though not necessarily the VCG mechanisms), leaning somewhat more to the use of the "preference intensity" rules for use in representative or parliamentary settings, rather than through individual voter referenda. All this is a roundabout way of saying that Bailey's work is a important and pathbreaking addition to the rapidly growing "constitutional democracy" literature and will be stimulating to anyone interested in this area.

I should note the relationship of this work to Bailey's other work on social choice, now readily accessible in his 1994 Essays on Normative and Positive Economics. His approach to "social choice" (contained in a "commentary" in those essays) sets the stage for this book, where he truly demonstrates that the impossibility results that haunted social choice for many decades is really a problem of a "plenty of possibilities". Whereas I may be an enthusiast for his particular perspective, the rigor and thoroughness of his work will be appreciated by those approaching the subject matter from sharply differing perspectives and who will find the rigor of his analysis helpful in sorting through the "plenty of possibilities". In this way, his work makes an important contribution to scholarly research in this important area.

I became aware of Bailey's work in late June, 1996 when Professor Bailey sent me a earlier draft. Professor Bailey has made strenuous efforts to cover some of the areas that I and others felt deserved more treatment. For example, I pointed out the altruism (Margolis) controversy and Bailey subsequently devoted an entire appendix to Chapter II in dealing with the controversy in what I believe to be a convincing and dispositive manner.

In terms of real world applicability, Bailey explicitly recognizes that a more complex Federal structure (rather than a small country) would require the use of a more complex decisionmaking structure than is set forth in this book. He has pointed the way for useful further research in this more complex area and in the field of constitutional democracy (and economics) generally. Others, like myself, have been or will likely be stimulated to develop possible real world applications of these principles in particular institutional settings. See, for example, the essays contained in Volume II.

I believe the book will be widely read by scholars in the fields of social choice and public choice. It will also command a good general audience along economists and political scientists, all of whom will find Part I readily accessible. It is hard to judge how wide ranging the general audience could be. I suspect there will be a good deal of "retailing" of Bailey's ideas, so the work will likely be widely cited in the economics, political science and some of the other social sciences. The ideas may catch on in a wider general audience in the near term and even become a public economics classic in later years. I think it could eventually become one of the "great books" in public economics. It will also possibly command some interest in such areas as philosophy and social theory and will surely become a classic in the rapidly expanding literature on "constitutional economics", perhaps ranking beside Buchanan and Tullock's Calculus of Consent (1962) which first stirred modern interest in this field.

In some respects, particularly the material contained in appendices A-D in Chapter VI) is heavy going for any nonmathematical economist, like myself. However, Chapter VI (which summarizes these appendices) is a masterful and understandable presentation of very difficult material (i.e. adjustments for income effects) that has previously perplexed me, a close student of this subject matter, for many years. I can now say I much better understand what has been a difficult real world condition (i. e. income effects) that I usefully assumed away in originally developing and presenting my formulation of the VCG mechanism, but which must be adequately dealt with in many practical settings where one seeks to make decisions based on a consistent ordering of preferences. In this respect, Bailey's treatment of the asymmetry between the "willingness to pay" of those opposed and those in favor of a public project in Chapter VI is an important new contribution to the literature.

Endnotes to Appendix

1. Bailey (1996a-c and related technical papers) has shown how the perceived "technical limitations" of demand revealing processes can be overcome, in part through the appropriate design of the "constitutional code". For an early catalogue of the "technical problems, see Groves and Ledyard, 1977): "Some Limitations of Demand Revealing Processes". Groves and Ledyard presented "five warnings" intended to "dampen any premature urge to adopt a constitutional amendment to institute one of these demand revealing mechanisms". Bailey develops his own taxonomy of the five main limitations (somewhat different from the original Groves-Ledyard list), focusing mainly on the limitations of the incentive tax or Clarke tax (i. e. the tax is (i) undefined and (ii) the known mechanism for implementing the tax lacks incentive compatibility, except (in both cases) when utility functions are of a narrowly restricted form. Further (iii) the tax creates a budget surplus that cannot be distributed without disturbing incentive compatibility. Most importantly, the mechanism may (iv) be vulnerable to collusion among voters and, in large economies, there is (v) no incentive to vote. Bailey's treatment of these issues and his way of integrating the incentive tax, the Thompson insurance mechanism (1966) into a set of theoretically convincing and practically attractive solutions for an economy based on Wicksell-Lindahl "benefit tax" principles (see also Foley, 1967) is a truly remarkable intellectual achievement.

. As I note in a 1996 paper discussing some of Bailey's work (1996, 1997) and the forthcoming book), his overall work describes in detail how a combination of incentive compatible devices can be molded into a "constitution for a small country". Three of the critical devices are (1.) "the VCG mechanism" for the official legislature (and competing legislatures or private parties), (2.) incentive payments for (a.) these legislatures and (b.) a Wicksellian tax allocator or Electoral Commission (the incentives in each case being somewhat different) and (3.) use of the Thompson insurance mechanism for referenda on the proposals advanced by the legislatures, guided by the mechanisms incorporated in (1.) and (2.). The mechanisms in (1.) and (2.) are generally similar to the mechanisms I describe in my 1996 paper applied to budgetary allocation mechanisms that might be applied in practical budgetary settings. In Bailey's work, however, they are combined in admittedly much more sophisticated ways, and there are "very" sophisticated ways (from the standpoint of technical economics) in

which budgetary surpluses are disposed of and preferences elicited when there are multiple budgetary choices,

Additional References (not appearing in original bibliography). Also citations to original papers by Vickrey, Clarke, Groves and Tideman and Tullock are included.

Additional References

Anderson, C. (1990) Pragmatic Liberalism. Chicago: University of Chicago Press

Bailey, M. J. (1997) "Towards A New Constitution for a Future Country", Public Choice

90 (1-4) 73-115

________ (1996), "Implementation of the Thompson Mechanism" Public Choice

89: 231-43

_______" The Demand Revealing Process: To Distribute the Surplus" (1996a) in Public Choice 89:

________ (forthcoming Constitution for A Future Country MacMillan Press

Brough, W. (1995) "Superfund Unplugged", Citizens for A Sound Economy Washington, D. C.

Brough, W., Clarke E. and Tideman, T. N. (1995) "Airport Congestion and Noise: Interplay of Allocation and Distribution, Transportation Research Record 1450: 3-7

________ (1971) "Multipart Pricing of Public Goods" Public Choice 11; 17-33

_______ (1977) "Some Aspects of the Demand Revealing Process", Public Choice (special spring supplement 29(2): 37-49

________ (1980) Demand Revelation and the Provision of Public Goods

Ballinger Publishing . Co.

________ and Tozzi, J. J. (1983) "On Information and the

Regulation of Public Utilities", in A. Danielsen and D. Kamershen, Eds., Current Issues in Public Utility Economics, 133-147: Lexington: Lexington Books

_______ (1991) "The Supply of Public Goods and Bads at Free Airports" (Paper presented at the Annual meeting of the Public Choice Society, New Orleans, March 1991, unpublished)

Ferejohn J., Forsythe, R. and Noll, R. (1979) "Practical Aspects of the Construction of Decentralized Decision-Making Systems for Public Goods" in Russell, C. (ed.) Collective Decisionmaking: Applications from Public Choice Theory Baltimore: Johns Hopkins Press.. Also, Clarke (comment) and Forsythe, Ferejohn and Noll "reply" in the same volume..

Green, J. and Laffont, J. J. (1979) Incentives in Public Decision Making: Amsterdam North Holland

Groves, T. and Ledyard, J. (1977) Optimal Allocation of Public Goods; a Solution to the "Free Rider" Problem, Econometrica 45: 783-809

Holcombe, R. (1992) "Revolving Fund Finance" Public Budgeting and Finance 12 (3) 50-65

Mueller, D. (1979) Public Choice Cambridge:Cambridge University. Press)

________ (1996) Constitutional Democracy Cambridge: Cambridge University Press

Riker, W. (1979) "Is the New and Superior Process Really Superior?", Journal of Political Economy 87 (4): 875-890

________ (1982) Liberalism Against Populism. San Francisco, W. H. Freeman.

Rosen, F. (1983) Jeremy Bentham and Representative Democracy: A Study of the Constitutional Code Oxford: Clarendon Press.

Rubin E. (1991, 1993) "Public Choice in Practice and Theory" (A review of Farber and Frickley's Law and Public Choice, California Law Review , 1993) and "Comprehensive Rationality in the Writing and Reading of Statutes" New York Law Review, 1991)).

Stein R. and Bickers K. (1995) Perpetuating The Pork Barrel:; Policy Subsystems and American Democracy Cambridge:Cambridge University Press)

Thompson, E. (1966) "A Pareto Optimal Group Decision Process" In G. Tullock, Papers on Non-Market Decision Making 133-40 Charlottesville, University of Virginia.

Tideman, T. N. (1977), Public Choice (special spring supplement) (29(2): 1-9 (introduction), 71-77.

________ and Tullock, G. (1977) "A New and Superior Process for Making Social Choices" JPE: 84: 1145-1160

_________ and Tullock, G. (1981) "Coalitions under Demand Revealing" Public Choice: 36: 323-328

________ (1979) "Liability Rules, Compulsory Exchange and Compensated Incentive Compatibility:Towards Improved Management of Urban Externalities". In COUPE Papers on Public Economics, Vol 3, pp. 105-34 Washington D. C.: The Urban Institute

U. S. Office of Management and Budget (1983) "Incentives for

Efficient Information Resources Management, a Supplemental Report to Managing Information Resources , Second Annual Report to Congress under the Paperwork Reduction Act of 1980. (see also the Second and Fourth Annual Reports, 1982, 1984)

Vickrey, W. (1961) "Counterspeculation, Auctions, and Competitively Sealed Tenders", Journal of Finance

Varian, H. (1992) Microeconomic Analysis 3rd. Ed., (New York: W. W. Norton, 1992) Pages 426-429. See also Intermediate Microeconomics (1989)


(Photo to be Embedded in Text)

Edward Clarke discovered the demand revealing process as a University of Chicago graduate student during the late 1960s. This book is an outgrowth of work he began on applications of the process as a Fellow of the Smithsonian Institution's Woodrow Wilson International Center for Scholars during 1977-78 and which he has developed further in recent years..

Dr. Clarke has had wide experience in government finance and the management of domestic economic and social programs, at the city/regional, State, Federal and international levels. He served as a special assistant to the Secretary of Treasury during 1972-73 and subsequently joined the U. S. Office of Management and Budget in 1974, where he was instrumental in initiating a program of regulatory reform and improvements in Federal regulatory management which has been ongoing for the past 25 years. During 1983-88, he also served as a chief economist in the U. S. Agency for International Development and also served in long-term field assignments in Morocco and Haiti.

He has written extensively on the theory and practical application of demand revealing processes which were noted in the 1996 Nobel Prize awards in economics. He is currently a senior economist with the Office of management and Budget in the area of government regulatory management.

This reprint of his 1980 work summarizes more recent developments in this field, aimed at applications to constitutional economics as well as more practical and immediate applications to improvements in the finance of education, the mitigation of transportation congestion and improved environmental management.


The Nobel Prize Committee in Economics (1996) awarded the prize to William Vickrey in recognition in part for the Vickrey (second-price) auction. The Committee noted that an idea analogous to the Vickrey auction "underlies the so-called Clarke-Groves mechanism for eliciting truthful tenders for public projects. Vickrey anticipated this result by an important time margin".

"A New and Superior Process for Making Collective Choices" T. N. Tideman and Gordon Tullock, describing the process in the title to their lead article appearing of the 1976 Journal of Political Economy. "It will not cure cancer, stop the tides or solve many other problems" but go on to describe many other important social problems that could be addressed by the process.

"The book is a pathbreaking attempt to show how an economy might be operated so as to provide public goods and services in a manner that 'mimics' the operation of private competitive markets". Edward Clarke, reviewing Martin Bailey's forthcoming Constitution for a Future Country , describing in his own (this) book a major new advance in public economics made possible by the demand revealing processes.



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