Introduction

This essay takes an economist's perspective with respect to a long-debated question of political theory, namely, the conflict between democracy and constitutionalism. I intend to show that an economic analysis of the forces that govern competition and contracts in the political arena can shed some light on the tension between the view that constraints on the governing ability of the majority are inconsistent with the very principle of democracy and the opposite view that rule of law and constitutional boundaries are instead necessary conditions for democracy.

By extending some results of the economic theory of incomplete contracts to the analysis of political exchange, I will develop a simple argument in support of the view that the constitutional principle of isonomia–that is, the separation of legislature and government, which leads to democratically elected governments being subject to “equal laws”–is a necessary condition for the optimal working of representative democracy.

The essay is organized as follows. Section 1 discusses whether the standard economist's approach to “democracy as competition” justifies the view that democracy can be interpreted per se as an optimal procedure of selection of political leaders. The main argument will be that the democratic procedure may fail in this respect, possibly giving rise to adverse selection, if the conditions of enforcement of the (incomplete) contract that supports the political exchange are not carefully specified.Then, Section 2 reviews some of the main results of the recent economic theory of contracts, especially those concerning the enforcement mechanisms of incomplete contracts.