the mutual benefit of a large number of individuals in a polity. The state helps to overcome free riding
and to solve social dilemmas. The blueprint for such a voluntary agreement is found in a contract, in
this case a basic initial one.
The early contractarians, Hobbes, Locke, Rousseau and Kant, as well as Rawls (1971) interpreted
the contract theoretic reconstruction of the state as a thought experiment to find out to what set of
political rules individuals could potentially agree. In contrast, following Wicksell (1896), proponents
of constitutional political economy, like Buchanan (1975, pp. 147) or Buchanan and Tullock (1962,
p. 96), emphasise the importance of a real and practical agreement of the citizens subordinating to a
constitution. A coercive power of the state is as such legitimate only if agreement cannot be refused
reasonably (Hoffe 1999, p. 47) and agreement to a constitution (and to constitutional change) is ex-
plicit (Buchanan 1975, p. 148). The importance of such individual explicit agreement becomes obvi-
ous from the following argument. Hobbes conducted the contractarian thought experiment to justify
the subordination to an absolute authority, but underestimated to what extent absolute power would
corrupt: The authority itself has incentives to exploit citizens and to behave like a Leviathan. From
that point of view, an indispensable need for constitutional rules follows that prevent the state, and
the politicians, bureaucrats (and interest groups) that constitute it from abusing their power. The de-
sign of the constitution must take account of potentially disastrous political outcomes.5 “The passions
of men will not conform to the dictates of reason and justice without constraint.” (Hamilton, Federal-
ist 15, according to Hamilton, Madison and Jay 1787/1788, p. 110). The government must hence
subordinate itself to the rule of law. Checks and balances laid down in the constitution must help to
create sufficient political competition such that dominant positions of specific centres of power in a
polity cannot emerge.
Three basic institutions help to restrict state authorities such that they respect basic individual rights,
do not assume illegitimately concentrated powers and follow the interests of the largest number of in-
dividual citizens in a jurisdiction (Hoffe 1999, chap. 4): First, the rule of law must be secured by
strong requirements for changes in basic rights and by an independent judiciary. Rights which can be
changed arbitrarily cannot be interpreted as basic rights (Buchanan 1975, p. 106). Basic freedoms
should not be changed easily by simple majorities in the legislature or of the people. Their change in
contents should either be impossible or only partly allowed for under unanimity rule in order to pre-
vent a suppression of structural (ethnic, linguistic, religious, racial) minorities by the majority. An in-
dependent judiciary ensures that these basic rights are secured even against the access of the state.
Granting independence to the judiciary also indicates that government authorities subordinate to the
rule of law which helps to turn state commitment to private property credible. Security of property
rights induces private investment in human and physical capital and subsequently economic growth
(Feld and Voigt 2003). Judiciary independence also contributes to enhancing political competition as
a component of the checks and balances in a democracy.
Second, the separation and division of powers enhances political competition between centres of
power. Since government is guided by natural persons who may surrender to the temptation of
abusing power, caution requires division of powers between the executive, the legislative and the ju-
5. See Hume (1741), Popper (1945), Buchanan (1975).