Money and Markets: Essays in Honor of Leland B. Yeager

Leland’s favorite economists 107One 12 can identify eight basic institutions which must be present and workable inorder for any market economy to function well, irrespective of the specific style ofthat economy. Hence, these institutions must be present in an unfettered freemarket economy, in a socialist market economy, in a cooperative market economy,in a market economy with syndicalist elements or variously in one with strong statemarket participation. All these forms – and many more – are potentially feasible, providedthese basic institutions are firmly in place and can fulfill their functions well.If these institutions are weakened and impaired, such as when property rights arebeing diluted, this market will work with high transaction costs and only to theextent that the gains from market exchange outweigh those transaction costs.Basic rightsFreedom of contractFrom an economic point of view, freedom of contract is an important guaranteebecause it ensures as a necessary condition that all the information available ina society enters economically relevant decisions and all the resources available in asociety will be put to their most efficient use. This implies that every infringement offreedom of contract has to be judged in terms of the losses imposed on society dueto ignorance and wasted resources. From an economic point of view, it is notsufficient to weigh freedom of contract against some other guarantee such as theprinciple of equality as such, without paying attention to the full consequences ofthe trade-off. If, for instance, it is observed that in a certain society members of aminority are not represented in a particular profession according to their numericshare in that society, from an economic point of view it is not justified to pit theobserved end-state inequality against the guarantee of freedom of contract, since arational choice in the interest of all parties concerned may have led to the unequaloutcome. An economic analysis would have to inquire into the reasons for theobserved inequality, and it would lay the foundation for assessing the trade-offbetween the social (opportunity) costs of constraining freedom of contract on theone hand, and the gains in terms of economic equality on the other. Based onthe inquiry into the causes of the observed inequalities, an alternative strategy toimprove the chances of the minority in question can in all likelihood be derived. Itis at this instance that the economic analysis of constitu tional guarantees can haveimplications for constitutional law. Many constitutions require that basic rights canonly be curtailed if less onerous measures are not available. To the extent thateconomic analysis can yield the design of such less onerous measures, it changes theconstitutionality of particular policies.Private propertyThe guarantee of private property is often thought to be the most important withrespect to the means of production. Again, from an economic point of view, theguarantee goes far beyond the protection of people’s possessions of goods andservices. The reason for this wider scope is fairly straightforward. In economics,