Competition between Governmental Units
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1 Competition between Governmental Units

1.1 Introduction

In relation to governmental units, each citizen may be viewed both as a shareholder and as a customer. As shareholders we elect a Board of Directors (Representatives) to run the enterprise on our behalf. Also as shareholders we may reserve important decisions for a direct vote by a general assembly of shareholders (or citizens in the case of government). As customers our perspective is different, but in this capacity as well, we must have a method of influencing the behavior of our governmental goods and/or service providers.

Just as the previous chapters on popular sovereignty, direct democracy, devolution and devolved popular sovereignty have examined our role as governmental shareholders, the purpose of this chapter is to examine constitutional mechanisms in view of our role as governmental customers.

We shall be looking at constitutional mechanisms for introducing and preserving competition between governmental units. Competition is not a goal in itself. Competitive markets serve a purpose; they optimize the use of resources (in a very broad sense) so as to make everybody better off.

Vertical and horizontal competition, definitions

The proposed constitutional model establishes two kinds of inter-governmental markets: a vertical competitive market between governmental units at different levels, and a horizontal market between units at the same level. Individual states would all be at the same level, while the Confederation would be at a higher level. While federal constitutions like the Treaty of Rome or the U.S. Constitution inadvertently provide some competitive horizontal mechanisms, no current constitution provides for vertical competition.

The importance of vertical competition

There are two fundamental reasons for emphasizing vertical competition:

  • Since central government by definition is unique, the only means of subjecting it to competition is by subjecting it to vertical competition.
  • Unlike horizontal competition, vertical competition provides freedom of choice without forcing the citizens to move physically and it provides competition between existing organizations within a given geographical area.

For these reasons, vertical competition is a powerful complement to horizontal competition.

1.2 Vertical competition and independent action

Independence of action and state powers

Independence of action is a prerequisite for competitive markets, and it is a greater obstacle to vertical competition than anything else.

Traditionally there are two ways of defining state powers; either by enumerat­ing the powers of the states, and leaving the residual to the federal govern­ment, or by enumerating the powers of the federal government and leaving the residual to the states. Usually each level, either the state level or the federate level, is left with a monopoly regarding each subject matter. The degree of centralization is then determined by how extensive the monopoly powers of the central government are compared with the monopoly powers of each state government.

However, in order to create competitive pressures, authorities must overlap. Instead of fixing tasks at a certain level, dynamic forces must be introduced. There can be no competition where change is not allowed. The proposed constitution replaces a traditional static power distribution with a dynamic equilibrium where the efficacy and prowess of each governmental unit decide the extent of its activities. In this system it is the citizens at the lower governmental level that eventually decide whether any particular task should be carried out either at the confederate level, the regional level, the state level, the individual level or not at all.

Each state may take over any confederate task, but the confederate government has the option of appealing the decision directly to the state citizens. The Confederation may also ask the citizens for permission to assume responsibility for any task neglected by the states.

This process ensures the principle of subsidiarity, i.e. the carrying out of tasks at the most appropriate level, and it creates a dynamic mechanism that allows for moving tasks between levels. ( The principle of subsidiarity is actually most often meant to describe the principle of carrying out tasks at the lowest possible governmental level (which may or may not be the most appropriate level.) I am justifying this slight inaccuracy by suggesting that many governmental tasks would benefit from being carried out at a lower governmental level.) The dynamic component is important because what is the appropriate level or the appropriate service provider today may not be the appropriate level or the appropriate service provider tomorrow.

The easier it is to move tasks between units, the more competitive the market. For the particular mechanisms for moving tasks between levels see section 1.4 and section 3.2. The payment mechanisms for tasks requiring financial outlays may be found in section 1.5.

The proposed system also allows governmental units at the same level to act independently of each other. One state may decide to take over a particular confederate task within its jurisdiction, while other states continue to rely on confederate services in carrying out the same task. Again, the purpose is to provide the maximum competitive pressures on the governmental structures.

Independent institutions

Since state law is superior to confederate law, what prevents the states from nullifying confederate powers altogether? The independence of action of the Confederation and each state is insured by sections 1.1 and 3.1. respectively and by the other sections of the Constitution granting each of them certain prerogatives. These prerogatives supersede ordinary laws.

In particular, the Confederation is said to be co-sovereign with the states within the terms of the Constitution. By this is meant that state authorities may not interfere with confederate decision making or with the carrying out of legitimate confederate tasks. Neither may the states direct or influence the actions of individuals when they are carrying out legitimate confederate business.

Recursion and intermediate layers of government

To lower barriers to entry, i.e., allow the introduction of more competitors, section 1.7 (Regional bodies) provides for the erection of intermediate bodies, called regional bodies, between the state layer and the confederate layer. The powers to erect regional bodies are themselves recursive, so that each intermediate layer may be empowered to build new intermediate layers etc., provided each intermediate layer’s constitution is modeled on the proposed confederate constitution. There is no upper limit on the number of intermediate layers. No other constitution provides for this recursive mechanism. 

Empowering regional bodies

As part of the same section 1.7, the relationship between the Confederation and a regional body may be governed by the same rules as that between the Confederation and the states. The Region may be empowered to take over confederate tasks on the same terms as the states. On the other hand, the Confederation also will have the same powers of making proposals in regional matters as in state matters. By virtue of controlling their own constitutions (section 2.2) and treaties being limited to a fixed period or terminable upon notice, the states will always retain their status as the ultimate sovereigns.

If the Constitution is used as a model for setting up a regional body, the states will also retain the right to assume a task either directly from the Confederation or from the Region. (The Confederation retains the right of making proposals all the way down to the states.)

Closing the size gap

Easing the erection of intermediate governmental layers is not only a means of providing for the introduction of new competitors. It is also a means of enhancing competition by closing the size gap. Certain services or tasks have real economies of scale.

By way of example: private in­dividuals will have a hard time competing with General Motors in the making of cars. Effective competition in this market can only be provided by companies like e.g. Ford, Toyota and Daimler Benz that if not exactly equal with GM, at least is of a more equal size than e.g. a one man garage shop. On the other hand it is quite clear that you can be a lot smaller than GM and still be competitive. Beyond a certain minimum, it is not size alone that counts.

Similarly in the provision of government services it is important that the size gap between governmental units in different competing layers not be too large so that each layer is able to offer services equal to or nearly equal to its competitors. Thus a well-run regional body may be able to offer better services than the larger Confederation.

1.3 Horizontal competition

Horizontal competition rests on many of the same assumptions as vertical competition.

Independence of action

Independence of action is secured for each state by that state's sovereignty, independence and freedoms. Within its own borders, and broadly speaking, as long as it doesn't interfere with the proper interests of other states or their citizens, each state is free to take any actions it pleases. Independence from above is again secured by state sovereignty and by state law being superior law.

Horizontal mechanisms

Horizontal competition is increased by allowing for the free movement of real estate and the physical movement of people and goods. Movement of real estate is accomplished by reclassification (movement of borders) or by the erection of new states. Frequently it is probably easier to move borders than real physical resources. Thus horizontal competition is likely to increase considerably. State governments that are unable to compete will see their citizens disappear as their borders close in on them. Ultimately the state itself will be wiped off the map and pave the way for new states that are more responsive to the needs of the citizens. This is not a new process, but until now the erection of new states or the movement of borders have had terrible costs in blood and human suffering.

Barriers to entry

If there is a mechanism for the wiping out of entities that don't perform, (and there has to be such a mechanism if com­petition is to be true), there also has to be a mechanism for the creation of new entities or states. If this was not so, competition would become gradually less as the number of states dwindled. The barriers to entry should be as low as possible to ensure as much diversity and competition among the states as possible. The lower the barriers to entry, the more likely that government will respond to the needs and wants of the people.

The section on Self-determination provides for the peaceful erection of a new state. Ease of erection is ensured by: a) The decision is left to the population within the proposed new state boundaries. and b) There is no limitation on the size either in terms of population or in terms of area of the new state.

These rights are enforceable by confederate authorities.

Removal of artificial restraints

Competition between states may not be reduced through artificial restraints. The mobility of people, with their goods and capital is ensured by section 2.3. Section 2.4 prevents the discrimination of out-of-state citizens.

1.4 Summary

Vertical competition

Enhanced vertical competition rests on the same assumption as any other competition; for it to take place at least two requirements has to be fulfilled: a) A multiplicity of choice and b) Someone to choose. The "requirements" of perfect markets address how to secure the multiplicity of choice. It shouldn't be forgotten however, that the purpose of all this choice is to enhance the lives of those that are to choose, the people itself, in its individualistic, group and collective capacity.

Parallel and independent governments

The main element of the proposed system of vertical competition is to create two or more parallel governmental layers (the Con­fed­eration, the regional bodies and the states). Each layer acts independently, its authorities overlap those of the other layers and the decision about which tasks each layer is to perform is left to the people as consumers of governmental services. A payment mechanism is introduced to encourage competitive behavior.

Vertical competition is complementary to horizontal competition. It is not a substitute.

Resource mobility into and out of the central government sector is covered in a separate chapter on confederate taxation.

Horizontal competition

Horizontal competition is increased by allowing for the movement of lines on pieces of paper (borders) rather than physical resources (people, buildings, machinery etc.), and by the ease of erection of new states.

As for most federal constitutions, regulations easing the physical mobility of resources (people, goods etc.) are retained.

Revised: 2004-07-02

Copyright © 1991-2003 John F. Knutsen

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