methods for handling 'government industry' monopolies 14-10-2005

7/27/2019 Methods for Handling 'Government Industry' Monopolies 14-10-2005

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APPENDIX IMETHODS FOR HANDLING GOVERNMENT INDUSTRY MONOPOLIES

OverryiewEach of the methods of handling monopolies and principal-agent failure in non-government industries may be mapped onto the government industry as shown below:

Non-sovernment industrv Government industryStructural regulationConduct regulationFranchisingCooperativesCompetition by comparison

Competitive restructuring

Separation of powers and other similar measuresBills of rights and similar measuresRepresentative government with periodic electionsDirect democracyFederalism

Sovereigntv marketsStructural regulation: regulatory captureBefore examining each of the methods it is necessary first of all to consider a criticalfeature of the govemment industry which distinguishes it from other industries: thescope for regulatory capture.All states employ at least some regulation. Representative govemment, directdemocracy and federalism all require some regulatory oversight. There is, therefore,a need for a regulator or regulators who will inevitably be part of the governmentindustry itself.I submit that participants who are likely to benefit from regulatory capture will tend toplay down or deny the possibility of it occurring, will tend to portray governmentindustry regulation as an objective matter, and will advocate selection of regulators"on merit". However, several different types of evidence strongly suggest at leastsome subjective component in regulationl:. the writings and public statements of some judges reflect the same views that

their judicial opinions indicate;. some biographies ofjudges trace the ways in which their attitude towardpolicy is reflected in their behaviour in court;

at any one time most judges are consistent in the positions they take onparticular sets ofissues from case to case, even though a court collectivelymight be divided on the same issues. This consistency is commonly of a typewhich is diffrcult to explain except in terms of personal support of particularpolicies. For example, even though a court might be divided on civil libertiest Some of these are drawn from Baum. 1989. p 136.


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cases, individual judges tend to be consistent in their views as reflected in theiropmlons-;judges are largely consistent in the positions they take on particular sets ofissues from year to year, even though a court collectively might change itsview over time. Again, this consistency may be of a type which is difficult toexplain except in terms of personal support of particular policies;some judges adopt attitudes in court which would be expected given theirbackgrounds3;judges sometimes state that their decision is based on personal experience;supposedly fundamental legal doctrines which apply in one country, or at onetime, are sometimes at odds with those that apply in another country, or atanother time, in ways which are difficult to explain except in terms ofdiffering personal preferences in the two countriesa or changes over times; andoccasionally decisions are overturned dramatically in response to observableoutside pressure on judges, or following the replacement ofjudges, in a waywhich indicates a change in preferences.6

I submit that the subjective nature of regulation is tacitly acknowledged in most statesby their adoption of some form of structural regulation that seeks to limit theopportunity for regulatory capture. Typically, judges serving on constitutional courtsare structurally separated both from the goverTrment provider and from customers orclasses of customer.Nevertheless, the possibility of capture still arises from several quarters:

appointment ofjudges. Several cases can be identified:unitary states (including the central government of some federations).There are few formal mechanisms available to prevent capture in the

'Baum. 1989. pp 138 - 143 illustrates the consistency of views of individualjudges, and patterns ofagreement and disagreement between pairs ofjudges, in cases involving procedural due process andsubstantive civil liberties.3 For example, in 1986, Sandra Day O'Connor - then the only woman Supreme Court judge - was alsothe only judge to dissent from the Court's refusal to hear a sex discrimination case. (Baum. 1989.p 137.)a For example, the dramatically different application of the establishment provisions to the question ofschool funding in Australia and the United States.5 For example, substantive due process, which became a fundamental doctrine of the United StatesSupreme Court for over thirly years before vanishing again.6 For exampl e, Hepburn v Griswold (1870), which ruled Congress's legal tender acts unconstitutional,was ovefturned the following year n the Legal Tender Cases ( I 87 I ) in response to Congressionalpressure and the following the appointment of fwo new judges. (Pritchett. 1977 . p 177.) Similarly, theSupreme Court reversed several doctrines in the space of only a few weeks in response to Roosevelt's"court-stacking" plan of 1937.


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appointment process, other than legislative approval of executivenominations in some cases;tfederal states. At the sub-national level there is the possibility of aregulator appointed entirely from outside the provincial state. InAustralia, the centrally appointed High Court has'Jurisdiction . . . tohear and determine appeals from all judgements, decrees, orders, andsentences . . . of the Supreme Court of any State . . ."8 In the UnitedStates, the Supreme Court, appointed by the President "by and with theadvice and consent of the Senate,"e may determine cases from theStates "arising under this Constitution;"I0confederal systems. Where members of the highest court are appointedby the member states of a confederal system there is the possibility of aregulator independent of the central government. For the time being,the EU is an example of this system; andhybrid systems. The German Federal Constitutional Court comprisesjudges appointed half by the Bundestag and half by the Bundesratlr,the members of the Bundesrat themselves being appointed andrecallable by the Liinder governments and casting only block votes fortheir Land ". A similar hybrid system operated in the United Statesbefore IgI313. Judges of the Swiss Federal Supreme Court are electedby the Federal Parliament;la

removal ofjudges:basic tenure:

for life, for example the United States Supreme Court;lsfor a fixed and uniform period, for example the EuropeanUnionl6 and Switzerland;17 andfor fixed but not uniform period, for example the High Court ofAustralia (where appointment to the age of seventy allows the

7 Informal processes of approval appear to be ineffective. For example, after the American BarAssociation's Committee on the Federal Judiciary gave mixed ratings on two nominees in 1971 "theNixon administration immediately retracted its acceptance of the ABA committee's presecreening."Baum. 1989. pp30-37.8 Australian Constitution, section 73.e United States Constitution, Article II, Clause 2[2].t0 United States Constitution, Article IIl, Clause 2[1].tt German Basic Law, para 94(1).tt German Basic Law, Article 51.tt At which time Article l, Clause 3[] was superseded by the XVIlth amendment.to Swiss Constitution, Alticle 168. Article 148 provides that the two chambers of the Swiss parliamenthave equal powers.tt United States Constitution, Article III, Section l.16 Treaty of Rome, Article 167.tt Swiss Constitution, Article 145.


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executive to select, to a degree, the period ofservice ofanominee);rgtenure conditional upon good behaviour (and in some casesincapacity), with good behaviour or capacity determined by:. the Court itself;le or. the legislature;20 andavailability of informal inducements to retire, such as promotion toother office; and

. other influences:size of the bench. A large bench reduces the chance that a singleoorenegade judge" acting out of character will produce unexpectedresults;the ability to enlarge the bench (fundamental to the "court-stacking"plan 1937);siting of court in the political capital (Australia and the United States),or elsewhere (Luxembourg for the European Court of Justice). Itmight be expected that judges residing in the political capital - relyingon local media - might be expected to be more susceptible to capturefrom the centre than those living elsewhere; and

- the ability to limit the court's jurisdiction, and control of the court'sbudget and increases in judges salaries.2lAppointment for life gives sitting judges greater scope to maximise the chances thattheir replacement will be to their liking. I submit that the reluctance of o'Republican"judges to resign from 2001 to 2004 may be explained by their desire to wait for aclear Republican majority in the Senate. Likewise, on this hypothesis, "Democratic"judges are likely to hold out until 2009 inthe hope that the new President will bemore to their liking.The mandatory retirement of Australian judges at the relatively young age of seventyyears reduces the capacity of any particular government to entrench its appointeesunless it is prepared to nominate quite young candidates. For example, for a judge toserve as long as William Rehnquist (34 years) he or she would need to be appointed atthe age of 36 (Rehnquist was 47). I submit that young judges may not have firmlysettled opinions, their opinions are less likely to be known, and ovet time they may ber8 Australian Constitution, Section 72, amended 1977.re Protocol on the Statute of the Court of Justice of the European Economic Community as amended byCouncilDecision of 24 October 1988.20 Australian Constitution, Section 72. United States Constitution, Article II, Section 4. See Tribe.1988. Footnotep64." Baum. 1989. pp 227 -229.


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more susceptible to change under the influence of older judges on the bench. Theyare, therefore, less reliable for a govemment seeking to entrench its constitutionaldoctrines.Using these criteria it is possible to compare the scope for regulatory capture inAustralia and the United States.

Taking all these factors together, I submit that:. compared with the United States Supreme Court, the Australian High Court ismore likely to be captive of the Australian central government. This is duemainly to the appointment process;. capture manifests itself most clearly in conflicts between the centralgovernment and the States governments where the Australian High Court has

consistently held for the central govemment. The United States SupremeCourt has oscillated between centralism and particularism;22 and. on other matters the doctrines of the Australian High Court may from time totime diverge from those of the central goverrrment, but the combination ofmandatory retirement and absence of Senate approval ensures that anygovernment that remains in power for a decade or more will be able to reshape

the bench to its own liking. The United States Supreme Court may be at oddswith the central government and the State governments for decades at a time.

" For example, the expansive interpretation of congressional power by the Marshall court in Gibbons vOgden (1824), the opposite extreme reached 'tn Hammer v Dagenhart ( 191 8), and the reversion tocentralism (in the face of the "court-stacking" plan) in NLRB v Jones & Laughlin Steel Corp (1937).Tribe. 1988. pp 301 - 309. Since the I 988 edition, the Court appears to have swung back in favour ofthe States once more.

Australia United StatesAppointment

TenureConditional uponAs determined bySize ofbenchCourt sited in

7Political capital

9Political capital

By executive' of central By directly elected executive'government with no formal of central govemment, subjectreview. to the consent of the Senate.To age 70 LifeCapacity and good behaviour Good behaviourBoth houses of legislature Both houses of legislature

Note: I It is relevant that the directly elected executive of the United States isdrawn from a wider range of communities. Since 1949, USpresidents have come from Missouri, the military, Massachusetts,Texas, California, Georgia, and Arkansas; all Australian primeministers in that period have come from Victoria or Svdney.


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The capture of the Australian regulator is reflected in the fact that all members are ofmetropolitan origin and typically five of the seven come from metropolitan Sydney.Structural regulation: separation of powersThe best known system of structural regulation of states is the "separation of powers"model which involves (actual or purported) structural separation of executive,legislative and judicial functions.As discussed above, both Australia and the United States employ structural regulationofjudicial functions.Structural separation of the United States executive and legislature is effected in twoways:. Article I, Clause 6(2) of the Constitution which provides that "no person

holding any office under the United States shall be a member of either Houseduring his continuance in office". This prevents the President from "bribing"legislators with the promise of cabinet or other appointment during their termof off,rce; and. Article I, Sections 2 and 3 which fix the terms of legislators (to 2 years for theHouse and 6 years for the Senate). This prevents the President from"blackmailing" legislators with the threat of election at an inconvenient time,

and the possible loss of party support at any election that is suddenly called.I submit that the effectiveness of structural regulation in allowing individualrepresentatives to vote independently is often underestimated. It is worth noting thatin the period 1994 to 2004, when Republicans had a majority in the House but not theSenate, every single bill passing through the United States Congress - other thanthose unanimously approved in both chambers - required, as a mathematicalnecessity, at least one Republican or one Democrat member to vote against themajority of his or her party. Even with the current makeup of the Senate, it stillrequires at least five Democrats to tacitly "cross the floor" to vote down any filibusterattempted by their party.It is worth noting that structural separation of legislature and executive does not implya directly elected president. The Swiss constitution provides that members of theHouse of Representatives, the Senate and the Federal Government may not bemembers of another of those bodies. However, the members of the FederalGovernment are elected for four years by the parliament "after each full renewal ofthe House of Representatives". Presidents are elected by the parliament for a term ofone year and are ineligible for election the following year. The parliament itself iselected for a fixed four year term.23

" Swiss Constitution, Articles 144, 168, I 75 and 176. The cabinet comprises seven members who, bya convention known as "The Magic Formult', are selected to reflect as closely as possible theproportional representation of different parties in the parliament. The result is a permanent cross-partycabinet.


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In contrast to either of these systems, the structural separation of executive andlegislature in Australia appears nominal in respect of the House of Representativesand marginal in respect of the Senate:in relation to cabinet appointments, members of either chamber may becomeministers of state:24

in the House of Representatives, the existence of a voting system thatalmost always produces a clear majority ensures that a majority oflegislators will be eligible for cabinet appointment or some otherrewards of office; andin the Senate, the existence of a voting system that produces a majorityor a near-majority ensures that (at worst) a near-majority of legislatorswill be eligible for rewards, and the balance of power will be held by afew independents who may be "bought off in other ways; and

in relation to the calling of elections:the Governor-General may dissolve the House of Representatives atany time;25 andthe terms of senators are f,rxed at approximately three years for half theSenate and six years for the other half. However, the Governor-General may dissolve the House of Representatives and the Senatesimultaneously at any time once the conditions of Section 57 of theConstitution have been met. The minimum period for satisfyingSection 57 is three months.

Taking these features into account, an Australian Prime Minister may expect almostcomplete compliance from the House of Representatives and, at worst, a tolerableworking relationship with the Senate.As suggested above, the voting system plays a role in the structural separation ofexecutive and legislature. A system of proportional representation in the AustralianHouse of Representatives would increase structural separation as it has in the Senate.However, neither member of the two-party duopoly would have an interest inpromoting a change that would increase competition in the industry.It may also be seen that a bicameral system contributes to structural separation. Forexample, the voting system for the Australian Senate could easily be changed bysimple act of Parliament26 to effectively remove independent parties. Why has thisnot occurred? Once again, neither member of the two-party duopoly has an interest inpromoting a change that might produce a clear Senate majority for the opposition.The current voting system - which generally gives the balance of power to a smallnumber of biddable independents - may not be the major parties' preferred system2a Indeed, Section 64 of the Australian Constitution requires that ministers of state be members of theHouse or the Senate or become members within three months.2s Australian Constitution, Section 5.26 Australian Constifution , Section 9.


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but, given a bicameral legislature, it is their most reliable strategy for ensuringconsistent legislative capture.2TThe lack of effective structural separation in Australia between executive andlegislature will be relevant when considering the effectiveness of franchising as ameans of handling monopoly power.Conduct regulation: bills of rights and similar measuresEarly conduct regulationIn addition to structural regulation, most states are subject to at least some conductregulation.In the Anglo-Saxon tradition, conduct regulation may be traced back at least as far asthe coronation charter of Henry I in 1 100. In order to secure the support of theChurch and the baronage, the king agreed with them to subordinate his sovereignpower in certain matters affecting them.28 Although the coronation charter was nothonoured, the same principle of restraint on conduct reappears a century later in theMagna Carta. King John agreed to be bound by a body of rules including not toproceed against any freeman "except by the lawful judgment of his peers or by thelaw of the land'',2e an early concept of "due process".Other early forms of conduct regulation include:30

An obvious conclusion to be drawn from these early forms of conduct regulation isthat they were completely ineffectual. As a means of controlling a monopolygovefirment, conduct regulation involves more than simply writing out a list ofdesirable behaviours: it depends on having an infrastructure to interpret and enforcethe regulations.

27 An obvious alternative - changing representation in the Senate to match representation in the Houseof Representatives - appears to be effectively ruled out by the final paragraph of Section 128 whichrequires each State to approve the reduction in its proportional representation. A further alternative -stripping the Senate ofits powers - appears unlikely to succeed at referendum at least for theforeseeable future. This has led some supporters of monopolisation to suggest that the FederalParliament should simply enact "manner and form" legislation to eflectively strip the Senate of itspowers without a referendum. Winterton. 1980.28 Prohibitions on the sale or lease of church property, limitations on exactions on the transfer ofestates, and prohibition on payment for royal consent to marriage. Jones. 1971. pl17.2n Jones. 1971. p 137.'oFlynn. 2003. p249.

Enslish Act DateCriminal and Civil Justice ActDue Process of Law ActDue Process of Law ActPetition of RightHabeas Corpus ActHabeas Corpus Act

135 1I 35513681627r6401679

First reference to "due process" by name.Claiming parliamentary supremacy


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English Bill of RightsI submit that the English Revolution of 1688 represented a change in the enforcementinfrastructure - by creating an effective division of power - and it was this changethat gave the 1688 Bill of Righrs its longer term effect. Specifically:

the royal family's legitimacy henceforth depended on acts of parliament;parliament finally secured undisputed control of the taxing and appropriation,eliminating the ability of the monarch to act alone; andparliament itself comprised factions (reflecting factions within the state), andtogether with the monarch these created a three-way stand-off in which noparty could seize control without the consent of one other.

United States Bill of RightsThe best known modern example of conduct regulation is to be found in the UnitedStates. Both the federal state and the States are subject to a wide range of conductregulation. Article I of the United States constitution regulates the conduct of thefederal legislature, and consequently the federal state, in such matters as suspendinghabeas co{pus, passing bills of attainder or ex post facto laws, and granting titles ofnobility.The first ten amendments constituting the United States Bill of Rights greatlyextended the range of conduct regulation applying to the federal state into religion,speech, press and assembly; the bearing of arms; quartering of soldiers; searches andseizures; due process of law; bail conditions; and cruel and unusual punishment.Following the Civil War, the Thirteenth Amendment and Fifteenth Amendmentsought to regulate the conduct of the States in relation to race. The Nineteenth,Twenty-fourth and Twenty-sixth Amendments regulate the conduct of both thefederal state and the States concerning age, sex and racial discrimination in relation toelections or primary elections.A case study in conduct regulation: the Fourteenth AmendmentThe Fourteenth Amendment stands alone because it did not seek to introduce newconduct regulation but rather to apply the federal conduct regulation to the States.31This amendment was drafted in 1866 and adopted in 1868. The probable intention ofthe legislators was to extend the scope of the Bill of Rights to cover actions by Stategovemments as well as the United States federal government. Given that theCongress was also formulating a federal civil rights act at the same time, it isplausible that its members were also seeking a constitutional basis for federal lawspreventing discrimination against newly freed slaves.

" ln Barronv Baltimore (1833) the Supreme Court held that the Bill of fughts applied only to theUnited States govemment, not the States, even where the wording did not expressly make this clear.Tribe. 1988p3n. Also,Pritchett. 1977. p289.9


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Section I of the amendment provides that:all persons born or naturalized in the United States and subject to thejurisdiction thereof, are citizens of the United States and of the State whereinthey reside ["the citizenship clause"].No State shall make or enforce any law which shall abridge the privileges andimmunities of citizens of the United States ["the privileges and immunitiesclause"];nor shall any State deprive any person of life, liberty, or property, without dueprocess oflaw ["the due process clause"];nor deny to any person within its jurisdiction the equal protection of the laws["the equal protection clause"].

I submit that,by examining the Supreme Court's treatment of the FourteenthAmendment over the years, it can be seen that the outcome of conduct regulationdepends critically on the attitude of the regulators rather than on the wordsthemselves. First, the Court proceeded to read down each of the clauses of theFourteenth Amendment:

in the Slaughter-House Cases (1873), the Court restricted the privileges andimmunities clause to those privileges and immunities derived from UnitedStates citizenship, but not those derived from State citizenship, therebylimiting its use in State courts;32beginning with Hurtado v Califurnia (1.884), the Court restricted the dueprocess clause by refusing to incorporate into its meaning the specificprocesses set out in the Bill of Rights;"in the Civil Rights Cases (1883), the Court in effect restricted the equalprotection clause to cover only actions by a State, not by individuals, therebyti*iting its effectiveness in pieventing discrimination by individuals3a. Finallyin Plessy v Ferguson (1896), the Court allowed the States to impose racialt"g."guiion by adopting a "separate but equal" doctrine.35

" Pritchen. 1977. p 417. Also Tribe. 1988. pp550-552, 555-556." Pritchett. 1977 . pp 417 -420, Requirement for indictment by grand jury (Hurtado), the right to trialby ju.y (excluded n Mqxwell v Dow, 1900), protection from forced self-incrimination (excluded inTwining v New Jersey, 1908), protection against double jeopardy (excluded n Palko v Connecticut,lg37 - on a capital charge!), and the right to have defence counsel appointed by the court (excluded inBetts v Brady, 1942, ibid, pp 450-453).'o Pritchett. 1977. pp 485-487. Also Tribe. 1988. pp 331, 351."Pritchett. 1977. p490. AlsoTribe. 1988. p1474.

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At the same time, the Court was reading unexpected new meanings into the words ofthe amendment:in 1886 the Court decided that the term "person" included corporations;36in Chicago Milwaukee and St Paul Railway Company v Minnesota (1890) theCourt introduced the idea that "substantive" due process must be observed byStates in setting regulated railway rates;37by 1897 the Court had decided that the liberty "mentioned in [the Fourteenth]Amendment . . . is deemed to embrace the right of the citizen. . . to live andwork where he will; to earn his livelihood by any lawful calling; to pursue anylivelihood or avocation, and for that purpose to enter into all contracts whichmay be proper, necessary and essential to his carrying out to a successfulconclusion the purposes above mentioned";]8 *din Smyth v Ames (1898), the Court held that State regulated railroad rateswhich - in the opinion of the judges - did not permit the railroad owners a fairreturn were a denial of due p.ocess.3e

Until the mid-1930s, the Court used its new interpretations of liberty and substantivedue process to overturn economic regulation of corporations and business. On the onehand, State laws regulating working hours or minimum wages, or protecting workers'rights to join a union could be overturned because they infringed the 'liberty' ofworkers to contract with their employer, ignoring the potential unfairness of havingworkers negotiate from a position of weakness.a0 On the other hand, regulated ratesof retum were liable to be disallowed if - in the opinion of the judges - they wereunfair to the owners of property.Conduct regulation: regulatory captureThese Court doctrines, and others which limited legislative and executive power atboth the state and federal level, continued until the 1930s when they were overturnedin response to the Roosevelt's "court-packing" plan.al This might b. ,""n as the36 Sqnta Clara CounQ v Southern Pacific Railroad Company. In San Mateo County v Southern PacificRailroad Company (1882), counsel for Southern Pacific Railroad, Roscoe Conkling, who had been amember of the congressional committee which drafted the amendment, had argued that this was theintention of the legislators. That case became moot and was dismissed, but the notion of persons beingcorporations was retained by the Court. Subsequent publication of the commiffee's minutes indicatedthat Conkling had misrepresented the debate, but the new doctrine remained. See Hamilton. 1966.p 145. [This and other essays refer to an earlier paper by Howard Graham: "The 'Conspiracy Theory'of the Fourteenth Amendment".]tt Pritchett. 1977. p 523.tt Ailgeyerv Louisiqna. Pritchett. 1977. p523.'n Pritchett. 1977. p 530.ao Lochner v New York (1905) on working hours (Pritch etr. 1977 . pp 526-527), Adkins v United Stateson federal legislation protecting union membership, and Coppagev Kqnsas (1915) on State legislationprotecting union membership (Pritchetr. 1977. p 529).al Advocates ofconduct regulation are inclined to porffay the court-packing plan as a failure because itwas never enacted. In fact, a close examination suggests the very opposite. Although the legislation toincrease the bench was defeated in the Senate in June 7937 , the Court had by that time already reversed

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ultimate triumph of "right" over'hrong". However, I submit that it is merely afurther example of regulatory capture: the combined force of the President and theSenate was sufficient to force the Court to change its opinion. It is notable that thefirst decisions under the new regime were those most desired by the Rooseveltadministration. As late as 1942 the Court was still reading down due processrequirements in criminal proceedingsa2 and it wasn't until the mid-1950s that theCourt began to seriously address the "separate but equal" doctrine.43It is easy to look back on decisions such as Plessy v Ferguson and criticise theSupreme Court as being "wrong". But it would be well to stop and consider howhistory might judge the regulatory doctrines which prevail today. How, for example,might the Supreme Court's protection of first trimester abortion - and its partialprotection of second trimester abortion - be judged, especially as premature babies areviable at earlier and earlier ages? Or, at the other end of the political spectrum, howmight the Court's continued acceptance of capital punishment be judged, especially asa disproportionate number of those executed are poor or are from racial minorities, oras it is applied to the young or the mentally retarded?Indeed, even as this essay is being written, the process of regulatory capture may beplaying itself out in the appointments of John Roberts as Chief Justice and HarrietMiers as an associate justice. Future generations may (or may not) come to see 2005as the year in which a conservative president and Senate "packed" the Supreme Court.Future generations may (or may not) come to see the doctrine of implied right ofprivacy used in Roe v Wade in the same way that we view the doctrine of "economicdue process" used to protect railroad companies in 1898.Franchising: representative governmentIn the govemment industry, franchising corresponds to the system commonly knownas "representative government": representatives are selected through a competitiveprocess for the right to administer the monopoly state for a limited time. At the end ofthe franchise period there is another competition for control of the monopoly. Thefranchisee is typically subject to some regulation during the franchise period.Within this general framework there are many variations:

if structural regulation is in place, there may be separate tenders for control ofthe executive monopoly and the legislative monopoly. The legislativemonopoly itself may be divided into separate "houses" with separatecompetitions for each. The tenders for each of these may be held jointly or atdifferent times;structural regulation may extend to franchising ofjudicial and administrativemonopolies (e.g. elections for judges and dog-catchers);

its position and Justice van Devanter had announced his retirement, changing the majority on thebench. The legislation was defeated because the victory had already been won.o' Betts v Brady.ot Brown v Board of Education(I954, 1955). Pritchett. 1977. pp 494-497.

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the scope of the monopoly being franchised varies. In some states thepermanent civil service remains in place. In others the successful executivefranchisee replaces key administrators with its own appointees;the franchise may be for a fixed period, or the incumbent may have somecontrol over when the next tender will be held, subject to a maximumterm; andthe maximum duration of franchises varies considerably. Members of theUnited States House of Representatives legislature are franchised for twoyears only, while French presidents are franchised for seven.

Although the introduction of franchising was an important advance in constraining themonopoly power of the state, franchising in the government industry suffers from thesame shortcomings as in non-government industries:lack of competition in bidding for, or awarding of, a franchise leading to:

collusion;incumbency advantage;principal - agent failure;

costs offranchise transfer; anddiffi culties of contract specification, and exploitation.

In general there will be lack of competition in bidding for the franchise, especially ifbidding costs are high. In practice, government franchises (being largely designed bythe suppliers themselves) are usually tendered in such a way as to reduce the scope forcompetition:. all positions in the legislature are usually tendered on the same day.ao Thi.

ensures that only candidates affrliated with a well organised and well fundedpolitical party have any realistic change of winning; andsingle member constituencies where only one member can be retumed alsoconfer a benefit on major parties. Proportional representation presents a lowerbarrier to entry, but this may be raised by requirin g a party to achieve a highminimum quota before qualifuing to return any members.

Lack of competition typically manifests itself through the development of a duopolyor oligopoly of political parties. To have a realistic chance of winning a tender,individual candidates must be backed by a party which can offer product branding* There are some notable exceptions such as the United States Senate, which retires one third of itsmembers every two years. But, even here, the tendering of Senate vacancies is conducted on the sameday as all House ofRepresentatives positions. The system oftendering all positions at once contrastswith normal corporate practice whereby company directors typically retire in rotation each year andoffer themselves for re-election.

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through access to coordinated mass media advertising and association with highprofile candidates who have established brand recognition ("party leaders"). Suchbranding is especially important when all positions are re-tendered on a single dayand media congestion prevents all but the best organised brands from delivering theiradvertising message to the market.Parties also coordinate access to financial support from influential interest groups. Toobtain interest group backing party candidates must, at the very least, be prepared tolisten to their views. Formal or informal indications of support may also be required.Well financed and well organised interest groups often support several parties equally.Lack of competition has several consequences. First, there is collusion'. politicalparties which are the favoured tenderers typically agree on many, if not all, of themost important policies. This avoids competition in areas which would bedetrimental to them all. For example, major parties typically agree not to:

reduce the power and scope of the monopoly for which they are competing,for example by granting independence to a region, by creating competingchambers of the legislature, or by introducing direct democracy;4scampaign to reduce their salaries, or terms of office, or otherwise to limit theconditions of their franchise; orcampaign for electoral reform (for example, proportional representation)which would make it easier for smaller competitors to enter the market.

On the other hand, major parties typically:try to win the support of influential interest groups;dismiss (as "populist") any policies which have clear majority public supportbut risk antagonising influential interest groups;46 anddesign election funding laws to their own advantage, providing public fundingfor parties (such as themselves) which have representatives elected but not forothers.

ot For example: "I was to have given a paper [on direct democracy] to your conference on 3l July1994,but three days before . . . I had spoken at a seminar in Canberra on direct democracy that I hadorganised with a number of parliamentary colleagues. As a result there was a lot of politicalcontroversy within the Coalition Opposition about my views . . . and I was prevailed upon not to makemy presentation." Reith. 2003. p 87.a6 The objective difference between "popular" and "populist" is one which is never fully explained: ifpolicies aren't pursued because they are desired by the populace, then in whose interests are theypursued?

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Lack of competition also manifests itself in incumbency advantage: unless anincumbent franchisee is particularly inept, it is often difficult for a competitor todisplace it in re-tender. For example:incumbents may bring all the power of government to advertise theirqualifi cations for reappointment;incumbents may seek to manipulate the economic cycle to their wonadvantage: for example, raising taxes or interest rates early in the franchiseperiod then lowering them as the re-tender approaches;in some states, incumbents may some discretion over when the next tenderwill be held, bringing it forward if they are likely to win, or putting it back ifthey are not; andin some states, the incumbent may be able to change the tender process todisadvantage smaller competitors.

Principal-agent failure manifests itself in the failure of legislative franchisees to acton behalf of their principals. In the parliamentary system it is almost unknown forlegislative franchisees of the winning party to cross the floor in such a way as to bringdown the govemment. In this case a tender which is in form being conducted only forthe legislaiure is in substance being conducted for both the legislature and executive.aTThe cost offranchise transfer may manifest itself in different ways:

in a typical parliamentary system, talented potential administrators sit in"opposition" for years on end, and experienced ministers can be thrown intoyears of unemployment overnight if their faction fails to win a re-tender; and

. in a typical presidential system, an incoming administration must fill dozens oreven hundred of positions, often with people of little skill who are owedpolitical favours.

Franchises suffer from difficulties of contract specification. If it is difficult tospecifying the franchised operation of something simple like garbage collection or atoll road or an airport, then specifying how a tenderer is to administer a sovereignstate is quite impossible. Prospective franchisees can and do tender on the basis ofundertakings which are never fulfilled. Behaviour which in any other industry wouldlead to prosecution for misleading or deceptive conduct is grudgingly endured in thegovernment industry as being an inescapable part of politics.a8

a7 Lord Hailsham's "elected dictatorship".o8 Indeed the very term "politician's promise" is a byword for cynical deceit.

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Finally, like other franchised industries, the franchised government industry suffersfrom exploitation. There is a presumption that those individuals who work hardest towin the franchise will be those for who covet the exercise of power most strongly.There is a presumption that those interest groups who pay the most to support politicalparties are those for whom the returns will be greatest.[S]uppose that a monopoly right is to be auctioned; whom will we predict tobe the highest bidder? Surely we can presume that the person who intends toexploit the monopoly power most fully, the one for whom the expected profitis highest, will be among the highest bidders for the franchise. In the sameway, positions of political power will tend to attract those persons who placehigher values on the possession of such power. These persons will tend to bethe highest bidders in the allocation of political offices. . . . Is there anypresumption that political rent seeking will ultimately allocate offices to the"best" persons? Is there not the overwhelming presumption that offices willbe secured by those who value power most highly and who seek to use suchpower of discretion in the furtherance of their personal projects, be these moralor otherwise? Genuine public-interest motivations may exist and may even bewidespread, but are these motivations sufficiently passionate to stimulatepeople to fight for political offrce, to compete with those whose passionsinclude the desire to wield power over others?ae

Cooperatives: direct democracyIn the government industry, corporate cooperatives coresponds to directdemocracy: the customers of the government industry jointly control the supplier andexercise continuous rather than period control over elected managers.The mechanisms of direct democracy include the following:

recall provisions which can require elected managers to re-contest theirposition before the normal expiry of their term. This is analogous to thecalling a meeting to vote on the removal of a director;mandatory voter approval for certain types of government action. This isreflected in the amendment provisions of Section 128 of the AustralianConstitution or Article 140 of the Swiss Constitution;two forms of direct legislation:- popular veto, which allows a specified number of voters to call areferendum to veto legislation which has been enacted by thelegislature but which has not yet taken effect. For example, Article

141 of the Swiss Constitution allows 50,000 citizens entitled to vote oreight cantons to submit federal statutes to the "vote of the People" (i.e.approved if a majority of those voting approve). The "Schengenland"bilateral treaties were submitted to popular vote this year andapproved; and

n'Brennan and Buchanan. 1985. p 64.

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legislative initiative, or "citizens initiated referendum", which allows aspecified number of voters to propose new legislation or a change tothe state's constitution. For example, Article 140 of the SwissConstitution allows 100,000 citizens entitled to propose ao'partialrevision" of the Constitution which is then put to the "vote of thePeople and the Cantons" (i.e. requiring the approval of both a majorityof those v-oting and a majority voting in a majority of thecantons);5u and

. non-binding indicative referendums and citizens indicative referendums.Indicative referendums may influence a legislature by making it politicallydifficult to enact legislation which is clearly contrary to the opinions expressedin a non-binding referendum.Other important features of Swiss direct democracy include the following:sl. when an initiative is submitted to the vote of the People and the Cantons, theParliament is required to recommend its approval or rejection of the proposal.In practice, each ofthe parties represented in parliament publish their voting

recommendations;s2 and. if Parliament recommends rejection of an initiative, it may submit its owncounter-proposal in which case both the proposal and the counter-proposal arevoted on simultaneously.As with cooperatives, the main shortcoming of direct democracy is its inability toreconcile divergent interests of citizens. The double majorities required under Article140 of the Swiss Constitution go some way to preventing a simple "tyranny ofmajority", but neither this mechanism (nor indeed any of the mechanisms discussedso far) solve the problem of how to reconcile irreconcilable groups of citizens.Competition by comparison: federalismIn the government industry, competition by comparison corresponds to the system offederalism.Federalism allows:. irreconcilable groups of citizens to adopt different policies in differentjurisdictions;. some customers (typically the more mobile) to enjoy competition through theirability to move from one jurisdictions to jurisdictions; and50 Switzerland has 20 cantons and 6 half-cantons. Each half-canton has only one halfofa cantonalvote. Swiss Constitution, Article 142.tt Swiss Constitution, Article 139, sections 5 and 6.52 See rvr\'$'-swirspolilg5.rug, the politics web page of swissinfo/Swiss Radio tntemational (a divisionof the Swiss Broadcasting Corporation). Ballot and election reminders, with links to votingrecommendations, are forwarded automatically by email to citizens and non-citizens on request.

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. comparisons of performance of the government industry in differentjurisdictions.Precisely because federalism does allows competition, it may be expected to meetopposition from those participants whose interest are best promoted by lack ofcompetition. Accordingly, federal structures - if they are to survive - requireextensive structural regulation to prevent their being dismantled by governmentservices providers keen to establish, or re-establish, a govemment industry monopoly.As discussed above, structural regulation to prevent regulatory capture is poorlydeveloped in Australia. Consequently, federalism in Australia has been largelydismantled.Several factors have contributed to the progressive transfer of governmental powersfrom the various regional monopolies to the central monopoly. These include:. a weak Senate, due to the lack of structural separation between legislature andexecutive discussed above;. in the absence of cooperative mechanisms, an almost total reliance onfranchising to control abuse of existing monopoly power to acquire morepower;

a generous interpretation by the regulator of the supremacy provisionsSection 109;

. expansive interpretation by the regulator of particular powers assigned underSection 5 1, specifically:corporations power; andexternal affairs power;

. centralised control of taxation, including the striking down of State taxes; andextensive use of appropriations:

Section 96, including the ability to force the ceding of further effectivepowers in exchange for fundingi andSection 81, including the use of appropriations for activities outsidethe scope of powers assigned under Section 51, approved by theregulator.

The shortcomings of federalism mirror those of competition by comparison:. the inability of immobile customers to benefit from actual competition; and

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. the possibility that maintaining several smaller monopolies may require aninefficiently small scale of production compared with a single larger one.These shortcomings may be handled though the more elaborate system of asovereignty market.Competitive restructuring: sovereignty marketsThere is not space to discuss in detail the structure and operation of a fullycompetitive goveriment industry. Essential elements of a sovereignty market wouldinclude:. identifuing and structurally separating those components of the industry which

are irreducibly monopolistic and transferring them to a monopolistic "meta-state" which would be handled using one or more of the models describedabove. The functions of the meta-state might include:regulating the incorporation of new states (using a model combiningfeatures of the "oppression" provisions of corporations law and Article29 of the German Basic Law allowing for the creation of new liinder);liquidation of redundant states;mergers of states (using a scheme of arrangement model drawn fromcorporations law);sovereignty trading between members of the sovereignty market;admission of non-members; andpossible expulsion of members from the sovereignty market;

. allowing substantive government to be undertaken by the competitive stateswithin the sovereignty market;establishing a factor market (or "sovereignty exchange") which would allowstates to contract out to other bodies politic those govemmental functionswhich it is not necessary to supply internally. This would allow the minimumviable size of a state to be reduced. A sovereignty exchange might use avirtual federal model (modelled on the 1990 cooperative scheme forCorporations Law in Australia, elaborated to correct some defects of thatscheme, and/or the sovereign contracting provisions of Section 105A of theAustralian Constitution); and

. using "vesting contracts" to create temporary oovirtual monopolies" to handletransitional risks during the transition from monopoly to market system.Vesting contracts might also be used to handle any market failure which mightarise from time to time within the sovereignty market itself.

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It is worth noting that some aspects of this system are already developing informally'In Europe, the virtual state of iEuroland" is supplying culrency services to some' butnot all, members of the European Union while^';Schengenland" is similarly supplyingi-*lg.ution and other seruices. Signifrcantly, Schengenland is also supplying itsservices to Norway and Switzerland which aie not members of the European Union'

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Reference listFederal Constitution of the Swiss Confederation ("Swiss Constitution") Online sourcedownloadedfromFedera1Chancellerywebsiteu@4]|.-!1!!,23May 2005.German Basic Law ("German Basic Law") As amended up to and including23August I976. Trcnslation published by the Press and Information Office of theFederal Government, Bonn. 1986.Baum, Lawrence. 1989. The Supreme Court. Third Edition. CQ Press: WashingtonD.C.Brennan, Geoffrey and Buchanan, James. 1985. The reason of rules. CambridgeUniversity PressCoase, Ronald. 1960. 'The Problem of Social Cost' in The Journal of Lmu &Economics. Volume III. October 1960.Flynn, Martin. 2003. Human Rights in Australia. LexisNexis Butterworth.Chatswood NSW.Frank, Robert H.2003. Microeconomics and Behaviour. McGraw-Hill/Irwin: NewYork.Jones, J A P. 1971. King John and Magna Carta Longman.Hamilton, Walton H. 1966. 'The Path of Due Process of Law'. InAmericanConstitutional Latu. Historical Essays. Edited by Leonard W Levy. HarperTorchbooks: New York.Posner, Richard. 2001. The Frontiers of Legal Theory. Harvard University Press.Pritchett, C Herman. 1977 The American Constitution. 3rd Edition. Tata McGraw-Hill: New Delhi.Reith Peter, 2003. "Let's Give Democracy a Chance: Some Suggestions". InUpholding the Australian Constitution. Volume 15. (Proceedings of the FifteenthConference of the Samuel Griffith Society). The Samuel Griffith Society: LaneCove, NSW.Tribe Laurence H. 1988. American Constitutional Law. Second Edition. TheFoundation Press: Mineola, New York.Vickers, John and Yarrow, George. 1988. Privatization: An Economic Analysis.MIT Press: Cambridge Massachusetts.Williams, George. 2002. Human rights under the Australian Constitution. OxfordUniversity Press.Winterton, George. 1980. Can the Commonwealth Parliament Enact "Manner andForm" Legislation? Federal LawReview. Volume 11.

methods for handling 'government industry' monopolies 14-10-2005

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