Saturday, April 19, 2014

The Sanctity of Contract

I will start with some history: I recall my fascination when first learning about the concept and philosophy of law during the Middle Ages.  I discovered this through a book written by Fritz Kern, “Kingship and Law in the Middle Ages.”  Through my study of this book, I wrote several posts, which can be found here.

For those not familiar with the concept of law during this time period, the book and these posts are worth a read.  However, I offer a brief summary: law was individual; law was based on custom; for law to be law, it had to be both old and good; the king was not above the law, but subservient to the law – on equal footing with the lords and nobles; the king’s duty was merely to uphold the law, not to legislate.

Most important for the purpose of this post: relationships and agreements (between nobles, between nobles and kings, and even between nobles and serfs) were based on a sacred oath; the two parties would agree via an agreement stronger than a contract, something grounded in their faith.

When reading this history, it struck me how similar this would be to what a libertarian world would look like – not a perfect match, but one of the closer examples I have found in history, and an examples that survived for several centuries.  One important feature was this idea of the sacred oath – what I will now label the sanctity of contract.

Try to imagine a functioning libertarian world without contracts that are respected and, as necessary, appropriately enforced.  I cannot.  Perhaps second (if not equal) to the necessity of respecting private property, the non-aggression principle requires individuals to honor agreements made with one another – not merely for moral reasons (do what you say); trade, in anything more than rudimentary (instantaneous barter) form, is ultimately not possible without such a reliance.  (Boy, I hope I am not making an argument for “thick.”)

More important than honoring the agreements, if interactions between individuals are not governed by private agreements – call them contracts (in whatever form – explicit, implicit, unilateral, etc.), handshakes, a meeting of the minds, whatever – what will govern such relationships in a libertarian society?  How would the non-aggression principle be given meaningful form without private property and contract?

Thus I come to the sanctity of contracts.  It is a slippery slope when libertarians suggest that certain kinds of contracts – otherwise not inconsistent with the non-aggression principle – cannot be consummated between two or more willing participants.

Yet there is a debate in the libertarian community regarding the extent to which one can contract.  Perhaps the two viewpoints can best be presented by Murray Rothbard on the one hand and Walter Block on the other.

Citing Rothbard, from “The Ethics of Liberty:”

THE RIGHT OF PROPERTY implies the right to make contracts about that property: to give it away or to exchange titles of ownership for the property of another person.

Unfortunately, many libertarians, devoted to the right to make contracts, hold the contract itself to be an absolute, and therefore maintain that any voluntary contract whatever must be legally enforceable in the free society.

Their error is a failure to realize that the right to contract is strictly derivable from the right of private property, and therefore that the only enforceable contracts (i.e., those backed by the sanction of legal coercion) should be those where the failure of one party to abide by the contract implies the theft of property from the other party. In short, a contract should only be enforceable when the failure to fulfill it is an implicit theft of property.

For there can be no property in someone’s promises or expectations; these are only subjective states of mind, which do not involve transfer of title, and therefore do not involve implicit theft.

The basic reason is that the only valid transfer of title of ownership in the free society is the case where the property is, in fact and in the nature of man, alienable by man. All physical property owned by a person is alienable, i.e., in natural fact it can be given or transferred to the ownership and control of another party. I can give away or sell to another person my shoes, my house, my car, my money, etc. But there are certain vital things which, in natural fact and in the nature of man, are inalienable, i.e., they cannot in fact be alienated, even voluntarily.

That is the ground for the famous position of the Declaration of Independence that man’s natural rights are inalienable; that is, they cannot be surrendered, even if the person wishes to do so.

Rothbard offers as an example the bride-to-be who, after promising to be wed, decides to change her mind.  Should she be forced to go on with the marriage?

Walter Block takes the counter position, using – as he often will do – the most extreme example in order to make his case; in this case, the possibility of voluntary slavery.  He begins by addressing Rothbard’s point, taken from the Declaration of Independence:

The Declaration of Independence maintains that:

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable rights, that among these are Life, Liberty, and the pursuit of Happiness.

If what is meant by this is that people should have the right not to be murdered, their persons and legitimately owned property should not be invaded, and that they may pursue happiness in any way they wish as long as they do not thereby violate the equal rights of all others to do the same, this is perfectly compatible with libertarianism, the philosophy based on homesteading, personal and property rights, the non-aggression axiom, contract, and laissez faire capitalism.

Unfortunately, however, the doctrine of inalienability as construed by many is very different from this. So much so, I shall argue, that it is almost diametrically opposed to the libertarian notion of private property and free enterprise.

Block goes on to use as his example the poor father of a child with a “dread disease.”  The only hope the father has to save his son is to sell himself into slavery for a price sufficient to pay for the medical needs of his son.  Block concludes that such a contract is not contradictory to libertarian principles.

For now, I will not get into examples or applications.  My immediate concern is principle or theory.  Fair warning: my default position is that the right to contract and the right to enforce the terms of a contract is absolute – as long as the contract is not for an end that initiates aggression toward a third party.  In other words, if it is appropriate and even a necessity regarding property (as Rothbard suggests), why not beyond?

Why do I lean this way?  It seems to me a dangerous and slippery slope when conditions are placed on the right to contract – just as I would say the same regarding conditions placed on rights associated with control, use, and disposition of private property (again, all within the boundaries of the NAP).

Therefore, I am inclined to be favorable to Block’s position as opposed to Rothbard’s.  For this reason, I will offer my views on certain of Rothbard’s statements:

Their error is a failure to realize that the right to contract is strictly derivable from the right of private property…

…there can be no property in someone’s promises or expectations; these are only subjective states of mind, which do not involve transfer of title, and therefore do not involve implicit theft.

Why?  Just as “the right to contract is strictly derivable from the right of private property,” the right of private property is only derivable from the right to life.  Is it therefore not reasonable to conclude that “life” (as represented in time, labor, whatever) can be subject to contract?  Why is property (the combination of my labor with unclaimed material resources, or whatever definition you want to use) subject to contract, but my labor (by itself, before being combined with unclaimed material resources) not subject to contract?

I will now offer the most basic example – not as difficult as the reluctant bride or as controversial as the voluntary slave: a typical employment contract.  If the right to contract seems not inconsistent with libertarian theory in this example, it would seem that the distinction made by Rothbard may not be appropriate.

In this scenario, I agree with my prospective employer to work for him for a period of three years.  He agrees to pay me for the term.  We are both reasonably sophisticated in the ways of contract, and we each have appropriate legal counsel.  After several negotiating session, we sign the contract.

At some point after we sign the contract, either before I start or even during my term, I change my mind.  Often, this will result in the two parties simply parting ways – an employer usually doesn’t want to keep an unhappy or unwilling employee.

I believe Rothbard would accept that this contract could be enforceable only if a significant signing bonus or some other property-compensation was paid as consideration for serving the term (an exchange of property); alternatively, I believe Rothbard would suggest that by returning the signing bonus (or other consideration), the employee would be entitled to leave under properly applied libertarian theory.

But what if the employee has unique capabilities, skills that were critical to the employer’s business plans – perhaps critical to the employer’s decision to make a significant investment?  There is often language such as the following in an employment contract for such an individual:

It is further understood and agreed that any breach of this agreement by you [the employee] will result in irreparable harm to the company, that money damages will not be a sufficient remedy for any such breach of this agreement and that the company will be entitled to equitable relief, including injunction and specific performance for any such breach or any threatened breach, and that you shall not oppose the granting of such relief. (emphasis added)

The contract – one signed after appropriate counsel – specifies that the employer can require the employee to complete the term of the agreement, via specific performance:

Specific performance is an order of a court which requires a party to perform a specific act, usually what is stated in a contract. It is an alternative to awarding damages, and is classed as an equitable remedy commonly used in the form of injunctive relief concerning confidential information or real property. While specific performance can be in the form of any type of forced action, it is usually used to complete a previously established transaction, thus being the most effective remedy in protecting the expectation interest of the innocent party to a contract.

Needless to say, I would only consider the “used to complete a previously established transaction” form and not the “any type of forced action” as appropriate for enforcement.

Under the common law, specific performance was not a remedy, with the rights of a litigant being limited to the collection of damages. However, the court of equity developed the remedy of specific performance as damages often could not adequately compensate someone for the inability to own a particular piece of real property, land being regarded as unique.

What if my labor is regarded by my employer as unique?  In any case, I am not concerned with the application by courts today – I am attempting to consistently apply my understanding of libertarian theory.

Now, just because a contract has this language does not mean it conforms to libertarian theory – specifically, is it a violation of the NAP?  But I ask: if it is a violation, how?  Why?  The employee voluntarily agreed to terms that do not violate the rights of any third party.  The employer relied on these terms for his future plans.  The employer’s reliance was certainly reasonable.

If I can contract for property, why can I not contract for the root of property – being life (as in time, labor, etc.)?

I will, for now, not make a more definitive statement on this.  When a mosquito is walking on the hallowed ground between two giants such as Rothbard and Block, it seems better to remain discrete…at least humble.

However, I will offer again my concern – the slippery slope: It is a slippery slope when libertarians suggest that certain kinds of contracts – otherwise not inconsistent with the non-aggression principle – cannot be consummated between two or more willing participants.

Therefore, it seems to me that the idea that certain types of legitimate (meaning not otherwise in violation of the NAP regarding a third party) contracts are not enforceable under libertarian theory is a concerning one.  To advocate against such contracts, the evidence, in terms of theory, must be overwhelmingly supportive.

In other words, I view that the burden of proof is on those who hold a view similar to Rothbard’s – and the hurdle is high.  For me, Rothbard has not met the hurdle (I write, while dodging the stomping feet of the largest giant).  Thankfully, I have someone like Block on my side….

This idea – the sanctity of contract – has application, I believe, to several issues of disagreement amongst libertarians: abortion and the unborn child’s property right to the womb, fractional reserve banking (as the term is commonly understood), and intellectual property all come to mind.  Before you click the links – and in case you are not familiar with my thoughts on these subjects – fair warning: in all cases I come out on the opposite side of the issue relative to Rothbard (although on IP I believe Rothbard is mixed).  Perhaps, at least partly, this is due to different views regarding the applicability of contract.  Also, in all cases I have written multiple posts – the links provided are only to individual posts that perhaps provide my best overview.  (For completeness, each topic has its own label – look to the right).

I conclude by reiterating: it is a slippery slope to consider that a contract – otherwise not in violation of the NAP – is not considered absolute under libertarian theory in the same way that private property must be.

Absent a compelling case of where on the slope to draw the line, I suggest libertarians not even peek down the mountainside.

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