Much debate about the economy seems to play out at the level of policy. Should taxes rise or fall? Should the government borrow more, or spend less? But before any of these are settled, a deeper question comes first: who sets the rules that decide how such choices get made, and how do those rules shape the outcome long before a single decision is taken? These are the questions at the heart of constitutional economics.
What is the definition of constitutional economics?
Constitutional economics is a field that emerged from public choice theory within the wider field of political economics.¹ It examines how constitutional rules, the rules of the game within which economic and political life takes place, shape the way people and governments behave.¹,² Rather than treating those rules as fixed, it studies how they are chosen and designed, and how different sets of rules would work in practice.²
Although we tend to associate the word “constitutional” with governments and the rules that constrain them, a constitution in this sense is much broader. The same analysis applies to other organizations, such as companies, unions and universities, each of which runs on its own constitution.²
How does constitutional economics differ from conventional economics?
The difference between constitutional economics and conventional economics lies in what each field treats as fixed. Conventional economics typically studies choices made within an existing set of rules, such as how a household chooses what to buy given prices and a set budget.² Constitutional economics, on the other hand, moves up a level and studies how the rules themselves are chosen.¹,²
This distinction sits at the heart of the work of American economist James Buchanan, whose Nobel-winning research shifted the focus from playing the game well to choosing the rules of the game itself.³
Who popularised constitutional economics?
James M. Buchanan is widely credited with establishing constitutional economics as a distinct field.⁴ He laid its foundations in the landmark 1962 book The Calculus of Consent, co-authored with Gordon Tullock.¹ It applied the way economists analyze individual choice to a political question: how rational individuals would choose the rules that govern their politics.⁵
Although Buchanan laid the groundwork, the field did not get its name until later. The term “constitutional economics” itself was coined by economist Richard McKenzie in 1982, and Buchanan adopted it for his ongoing research within public choice theory.² In 1986, after nearly four decades of work in the field, Buchanan received the Nobel Memorial Prize in Economic Sciences. The prize citation credited his development of the 'contractual and constitutional bases for the theory of economic and political decision-making'.⁶
What are the key aspects of constitutional economics?
There are a few key ideas that define constitutional economics, including:
- Rules over outcome: It looks at how different sets of rules shape economic and political life, instead of judging one policy at a time.¹
- A rule-making approach: It uses the tools of economics to study how societies choose their rules.¹
- A contractarian standard: When it makes recommendations, it judges a rule by whether the people who live under it could agree to it, not by an outside standard of what is "fair" or "efficient."¹
- An interdisciplinary frame: It brings together economics, constitutional law, public choice theory, and political philosophy.¹
How is constitutional economics applied in practice?
Constitutional economics has shaped real-world policy in several ways, most visibly in how governments manage their own budgets.
The fiscal constitution
You can see the ideas behind constitutional economics at work in public finance. The clearest example is the fiscal constitution, a set of standing rules for how a government taxes, borrows, and spends. Buchanan made the case for such rules with fellow economist Geoffrey Brennan in The Power to Tax, published in 1980. Firm limits set in advance, they argued, can hold a government's taxing and spending powers in check, rather than leaving each budget to year-by-year discretion.⁷
Debt brakes in Switzerland and Germany
Switzerland's debt brake is one of the clearest examples of a fiscal constitution in practice. It was approved by referendum in 2001, backed by about 85% of voters. The rule has been in force since 2003 and is written into Article 126 of the Federal Constitution.⁸ The rule ties everyday spending to the revenue the government can expect across the normal ups and downs of the economy. In strong years it runs a surplus, and in downturns it can draw on that cushion, so the budget balances over the whole cycle rather than every single year.⁸
Germany brought in a similar rule in 2009. It is written into the German Basic Law (the country's constitution), capping federal borrowing at 0.35% of GDP after accounting for the state of the economy.⁹ In both Switzerland and Germany, the rule is written into the national constitution, which makes it much harder for governments to weaken or repeal.⁸,⁹
Fiscal rules like these have become common around the world. By 2021, the International Monetary Fund counted 106 economies using a fiscal rule, whether their own or one shared across a bloc like the European Union.¹⁰,¹¹ What began as a theory of constitutional rules is now written into fiscal law worldwide.
Final thoughts: why constitutional economics continues to be relevant today
The same debates we began with, whether taxes should rise or fall, whether governments should borrow or spend, remain very relevant around the world. Constitutional economics is a reminder that they are shaped by something deeper: the rules societies choose, and the limits those rules place on what governments can do.⁴ By focusing on that framework rather than day-to-day policy, the field offers a lasting framework for thinking about how rules shape what governments can do.
For more insights into political economy by James M. Buchanan and other Nobel laureates, visit UBS Nobel Perspectives & Economic Views.
Recommended reading about political economy
References
- ¹ Van Den Hauwe L.Constitutional Economics II. The Elgar Companion to Law and Economics, 2005.
- ² Buchanan JM.The Domain of Constitutional Economics. Constitutional Political Economy, 1990.
- ³ Nobel Prize Outreach.James M. Buchanan Jr. – Prize Lecture. NobelPrize.org, 1986.
- ⁴ UBS.James M. Buchanan. Nobel Perspectives, UBS.
- ⁵ Buchanan JM, Tullock G.The Calculus of Consent: Logical Foundations of Constitutional Democracy. University of Michigan Press, 1962.
- ⁶ Nobel Prize Outreach.Press release. NobelPrize.org, 1986.
- ⁷ Brennan G, Buchanan JM.The Power to Tax: Analytical Foundations of a Fiscal Constitution. Cambridge University Press, 1980.
- ⁸ Federal Department of Finance.Debt brake. FDF, 2024.
- ⁹ Deutsche Bundesbank.
The Debt Brake in Germany – Key Aspects and Implementation. Monthly Report, October 2011. - ¹⁰ International Monetary Fund.Fiscal Rules Dataset. IMF, 2022.
- ¹¹ European Commission.Stability and Growth Pact. Directorate-General for Economic and Financial Affairs.