KOL225 | Reflections on the Theory of Contract (PFS 2017)

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Kinsella on Liberty Podcast, Episode 225.

This is my speech delivered earlier today at the 2017 Annual Meeting of the Property and Freedom Society, Sept. 17, 2017. Video embedded below. Slides used embedded below (or can be downloaded).

Transcript below.

The subsequent Q&A session for our panel is also embedded below (but not included in the audio RSS stream on this podcast feed).

 

Related:

• Kinsella, A Libertarian Theory of Contract: Title Transfer, Binding Promises, and Inalienability, Journal of Libertarian Studies 17, no. 2 (Spring 2003): 11-37 (to be included in Law in a Libertarian World)
• Williamson Evers, “Toward a Reformulation of the Law of Contracts,” vol. 1, no. 1, J. Libertarian Stud. (1977)
• Rothbard, The Ethics of Liberty, ch. 19: “Property Rights and the Theory of Contracts” (1982; 1998)
• Rothbard “Justice and Property Rights,”Property in a Humane Economy, Samuel L. Blumenfeld, ed. (1974) (online here)
  • Also in Egalitarianism as a Revolt Against Nature and Other Essays (1974) (online here) and later in The Logic of Action One
• Kinsella, “Justice and Property Rights: Rothbard on Scarcity, Property, Contracts…,” The Libertarian Standard (Nov. 19, 2010)
• Kinsella on Liberty podcast: KOL146 | Interview of Williamson Evers on the Title-Transfer Theory of Contract
• KOL197 | Tom Woods Show: The Central Rothbard Contribution I Overlooked, and Why It Matters
• More detail in my “Libertarian Legal Theory” course, Mises Academy (2011), Lectures 3-4 (see KOL118)

 

Transcript

Reflections on the Theory of Contract

by Stephan Kinsella

From the 2017 Annual Meeting of the Property and Freedom Society, Bodrum, Turkey (Sept. 17, 2017)

00:00:11

STEPHAN KINSELLA: Thank you very much, Hans.  Thanks again, once again, to you and Gulcin for the invitation.  I’m honored and happy to be here.  I do believe this is my seventh or eighth time.  I figure that if I keep attending every year that, over time, my percentage rate of attendance will asymptotically approach 100%, sort of like the Bitcoin inflation rate.

00:00:36

Anyway, my topic today is reflections on the theory of contract.  I do have these slides.  I will post them later on my site when I post this talk.  And I have some background material here in the beginning and sprinkled throughout the lecture.  I was going to make a joke that Hans tends to assign me boring-sounding titles.  And I was going through some of the previous ones I’ve done here, which is on property rights and the protection of international investments, patent and copyright, corporations, legislation, and common libertarian misconceptions.  But they actually sound pretty juicy to me.  I guess I’m just a legal geek or something.

00:01:17

But anyway, when you say we’re going to talk about contract, it sounds like it’s a mundane, boring topic, but I believe this is the key, a proper understanding of contract theory is key to having a solid understanding of what libertarian principles are all about.  Libertarians usually view the libertarian theory or principle as the non-aggression principle, or the NAP.  And they’ll usually say something like the initiation of violence against others or aggression is impermissible, and they say so we’re against aggression.

00:01:55

And then they’ll just sort of throw in these other things that are sort of attached to it like ornaments to a Christmas tree.  They’ll say, and you can’t trespass, and you can’t make a threat, and you can’t breach contract, and of course, you can’t commit fraud, as if these are all implicitly part of what it means to commit aggression, and I’ll go over this later.  I think this is—we have to really understand the non-aggression principle is a shorthand for what the libertarian principles are.

00:02:23

But really, aggression is the violence against someone’s body, and all these other things are related to our property theory.  So the common understanding of contract even by libertarians is that contracts are binding promises.  You say something, and you magically create an obligation.  You make something happen.  So I’m going to give a little—I have to have one little stunt here.  I’m going to have a demonstration.  This is my magic wand from Harry Potter.  Lumos!  Okay, it’s magic, right?  The word…

00:02:59

[APPLAUSE]

00:03:01

Thank you.  The point is this is an incantation, a magic word, that made something happen in the idea of Harry Potter and magic.  And this view is similar to what—how most people think of contracts.  You say some magic words like I promise to do this, and therefore, some obligation is magically created.

00:03:23

Now, under the actual law that we’re most used to, which the two main legal systems in the world are the common law and the civil law, which is a type of Roman law.  Under the common law, contract is viewed as if there’s an offer made by someone, and then the person to whom the offer is made accepts it, so we say offer plus acceptance equals binding agreement or contract.  Okay, so A plus B equals C.

00:03:51

In the common law, this contract is only binding if there’s consideration, which means both parties have to give each other something.  However—otherwise, it’s called a nudum pactum.  Sean, I’m trying my Latin here today, or a naked promise, which means it doesn’t have enough consideration to be binding.  However, the common law treats this requirement as basically a formality because it can be something as small as, we say, a peppercorn.  Give me something tiny, which is why contracts often have $1 or $10 that is said to be paid for something large in return, even if it’s not actually paid.  They’re trying to imitate this peppercorn idea or this consideration idea.

00:04:32

The Roman law doesn’t exactly have the consideration requirement.  It’s a little bit more clean, but you need cause, which is the motivation of the parties, which has to be a legal, legitimate cause.  Okay, and before we turn to the—what I think is the correct theory of contract, let me explain in the actual law, the Roman law and also the common law to some extent.  Usually, contracts give rise to obligations, legal obligations.  These obligations are classified as two types.  They’re obligations to do and to give, obligation to do something for someone like an obligation to perform a job, to paint a house, or to sing at a concert.  Or to give means to give someone some property that you own.

00:05:17

The thing is obligations to do are always enforced with damages.  That’s monetary damages.  In other words, if you so-called breach the contract and you don’t perform what you were supposed to do, then the court, in a lawsuit, would award money damages.  They don’t make you perform the action you were supposed to perform.  That would be called specific performance.  And obligations to give something are also enforced by the court ordering you to either give money, which is a type of property, in damages or to transfer the title to the property in some cases, usually with real estate.

00:05:51

So the rule basically is that the courts will not enforce the specific performance.  They will not make you do what you’ve promised to do except in the case of real estate because land is said to be unique.  There’s no replacement for this particular parcel of land because of its location, so they will enforce that specifically, but even in that case, the court is ordering the breaching party to transfer some title to the winning party.  So in reality, all contracts are enforced ultimately by some transfer of property.  It’s never the court will force you to go sing at a concert and put you in jail if you don’t.

00:06:38

Now, the question is, why would this incantation—I hereby obligate myself to do this—why would that be legally bending?  So the law and legal theorists have offered different reasons for why this would be so, and the most common is the expectations, or reliance interests theory.  So the idea is that I promise to do something for you, and then you rely upon what I promised, and then you might change your position.  That’s called detrimental reliance.  You change your position to your detriment if I won’t perform.  So my promise has caused you to change your position relying upon my promise, and therefore, if I’m not held to do that, I’ve harmed you.

00:07:17

So that’s the typical idea that people give.  The problem is that people have pointed out that even Randy Barnett, who is a libertarian, contract law theorist as well, is that this reasoning is circular because the law always says if I promise something and if you reasonably rely upon it, then I could be prevented from denying there was a promise, or I have to follow through with it.  But this reasonable part means that there’s a circularity because it’s not reasonable to rely upon a promise unless it’s going to be legally enforceable.  So if the legal system said promises are not, by themselves, legally enforceable, then no one would reasonably rely upon that, so you see how this is sort of a circular argument.

00:08:03

Now, what’s the proper way to view contract?  The proper way to view contract is to view it as being embedded in the basic concept of libertarian property rights.  So the entire—as Rothbard pointed out, all rights are property rights because every right determines who has the right to control a given scarce resource.  A scarce resource is something that there can be conflict over, that people could have violent conflict over.  So property theory always answers the question who has the right to control this resource.  And libertarianism is simply unique in our particular set of answers to this question—who owns what?

00:08:41

So there are two basic sets of questions.  One is about human bodies, and this is what non-aggression is really about.  In the case of bodies, our answer is self-ownership.  Every person owns himself, at least initially, at least presumptively.  Okay, and this is actually, a Professor Hoppe has pointed out in some of his earlier work, which has not been translated yet, the right to control one’s body does not really arise from homesteading.  It arises from the fact that we directly control our bodies.  This gives us a special link to our own bodies, so this is libertarian theory of body ownership.

00:09:18

Now, for all other things in the world that are scarce resources, these are basically previously unowned resources.  Our bodies were not previously unowned, which is why they’re not homesteaded.  But other things in the world are at one point not used and not homesteaded, and then they become used by people.  These are external resources.  So to answer the question, who owns that resource when there’s a dispute by two or more people over who has the rightful control of that resource, the libertarian approach is to resort to three basic principles.

00:09:49

The first one is original appropriation, Lockian homesteading, that is, all things being equal, the person who first uses a resource has a better claim to it than others.  As Hoppe talks about, prior owners or prior users have a better claim than late comers.  If this was not the case, there would be no such thing as ownership because anyone’s use of something would just be temporary and subject to the whims of late comers who would steal it from them.  So prior owners have to have a better claim, all things being equal, than late comers unless the prior owner voluntarily transferred the property to someone else.

00:10:27

This is what contract is, so that’s the consensual transfer, or unless the previous owner harms someone, invades their property, thereby incurring an obligation to compensate them.  That’s rectification or restitution.  So in those two cases, you could see that a third party could have a better claim to a resource that was previously owned.  So by resorting to these three principles, we can, in principle, determine who owns any given resource in the world.

00:10:56

So property theory is about the acquisition of resources but also about the transfer of title to resources due to loss or harm or transfer of those resources.  Okay, so involuntary loss that is due to a tort or a trespass or crime, that’s dealt with by punishment theory and restitution theory.  Voluntary transfer is dealt with by contract theory.  So this is what contracts are.  Contracts are not binding promises.  Contracts are simply transfers of title to property.

00:11:29

Now, and if you think about it, this is what property rights are.  Property right means a human being is assigned the ownership of a resource including your body, which means you have the right—it’s called exclusive ownership.  Why do we say exclusive?  Because you have the right to exclude other people from using your property, or you have the right to consent or give them permission or sometimes called license to use your property including your body.

00:11:57

So examples of when you give consent to use your property would be letting someone hug you or kiss you or have sex, getting a massage, having surgery, having a surgeon cut into your body with your consent, entering a boxing match and getting hit by someone, inviting people to a party at your home.  They enter into your home, and they’re using your home, renting your car, renting a car from someone.  You have temporary use of the car.  These are all examples of the owner giving consent to use—to someone else to use their property.

00:12:28

And then nonconsensual would be sex that’s not consented to, which is called rape, or someone sticking a knife into me when I don’t consent, which might be called battery or murder if I die, and someone using my house without my permission is trespass, or someone taking my car without my permission would be theft.  So consent is the key.  Just as consent is the key for determining for who can use property owned by someone, it’s also the key of contract.  So contract is when the owner expresses consent to transfer ownership to someone else of the resource.

00:13:06

Okay, so the owner of the resource has the right to loan it temporarily or to allow someone to use it or to permanently and completely transfer the title, that is, to alienate title.  So it just depends upon what the terms of the contract are.  And by the way, contracts do not have to be written.  A lot of people think that a piece of paper with words on it is the contract, which is not the case because you could have oral contracts, and by the way, most contracts are verbal.  Written contracts are verbal because words are used, so people often say verbal to mean oral.  But contracts need not even be verbal.  Sometimes you could have two people that don’t speak a language, and they engage in a transaction by just gesturing or pointing that they understand I want to buy that newspaper for $1.  No words are exchanged.  That’s a nonverbal contract, but even that’s a contract.  It’s a transfer of title to property.

00:13:59

All this is the result of some pioneering work by two libertarian theorists—Williamson Evers, who is still living, and Murray Rothbard, which is—actually, I believe this is one of Rothbard’s most important achievements and overlooked achievements, and it’s even more surprising because neither Rothbard nor Evers are lawyers or legal theorists, and that they came up with this, to my mind, is astonishing.

00:14:28

M: [indiscernible_00:14:28]

00:14:30

STEPHAN KINSELLA: It’s okay.  As an indication of how Rothbard viewed the importance of this, Williamson Evers published his pioneering article on this in volume 1, issue No. 1, the first article of the Journal of Libertarian Studies in 1977.  And then a few years later, Rothbard had a chapter in his Ethics of Liberty based upon Evers’ work where he elaborates this theory as well.  So my initial thinking was that Evers was a genius, and he is, and he came up with this idea, and then Rothbard built upon the work.

00:15:06

But later I discovered that in 1974, three years before Evers’ article, Rothbard has this really important article, Justice and Property Rights, where he has a few paragraphs hinting and suggesting at the basis of this contract theory.  So what I believe happened is that Rothbard—this is really Rothbard’s theory.  He had discussions about it with Evers, so Evers took it and wrote his article.  Rothbard published it in issue No. 1 of the JLS, and then Rothbard built upon it.  So this is honestly Rothbard’s theory as elaborated by Evers.  And I finally tracked down Bill Evers about two years ago after trying for maybe five or 10 years because he’s difficult to get a hold of, and he’s not initially very friendly.  But I finally reached him through persistence, and he agreed to do a podcast with me about this, and he basically agreed with what I had surmised about the chronology of this.

00:16:03

Okay, now, I’m going to just go through types of contracts under this understanding, and some of these classifications are in common with the way the Roman law does it but not exactly because Roman law and the common law view contracts as binding obligations, whereas we would not view contracts as obligations but simply as transfers of title.  So you could say that a contract has to include either one or more transfers of title, and these could be conditional or unconditional, and they could be present or future-based transfers of title.

00:16:40

So let me just give a couple of examples.  So a donation or a gift is when I transfer some resource to you, so I’m giving you ownership of something.  Now, that would be a one-way because it’s only going from me to you.  There’s not something coming back.  It’s unilateral, and it’s unconditional, and it’s present.  Because I’m giving it to you now, there’s no conditions.  You get it.

00:17:02

Now, what it—imagine someone telling their granddaughter, if you make good grades next year, I’ll pay your tuition.  So that’s a gift.  It’s a donation.  It’s one way because she doesn’t give anything back, no title to any property back.  It’s unilateral.  It’s conditional though, so it will only happen if the condition is satisfied, that is, if she makes good grades.  And it’s also in the future because he’s going to pay her at some time in the future after the condition is determined to have happened or not, which also makes it conditional because the future is uncertain, as Austrians have pointed out many times.

00:17:40

Another more common type of contract would be a two-way and a bilateral.  Bilateral means each obligation—each title transfer is dependent upon the other, and there is—each person is transferring something to the other.  And it can be contemporaneous like a purchase of an apple.  I give you a coin.  You give me the apple.  It happens.  These are not conditional—they’re conditioned only on each other like the title to my coin is conditioned upon you giving me an apple, and the title to the apple is conditioned upon you giving me the coin, but it’s not based on the future.

00:18:17

Now, take the example of employment or paying someone for a service.  I pay you to paint my house, or I pay you to show up at my factory.  That is one-way, not two-way.  Most people think of that as a two-way contract because you’re exchanging services for money.  And economically that might be the right way to think about it because economically it’s an exchange.  But legally it is not an exchange because you don’t own your labor.  You don’t own your actions.  It’s just something that you do.  You could think of the action that is performed, the labor as one of the ways of satisfying the condition of the one-way title transfer.

00:18:58

So, for example, a wage contract really is if you paint my house, if you show up at my factory for a week, eight hours a day, then I will transfer $1,000 to you.  So you see the only title transfer there is the $1,000.  Saying that you’re selling your services is, I believe, I a metaphorical way of describing it or maybe an economic way, but it is a confusing metaphor.  And I believe this kind of mistake helps lead to the labor theory of property in intellectual property ideas because people start thinking of they own their body.  They own their labor because, after all, I sell my labor.  I must own that labor if I’m selling it, and if I own my labor, then I own anything that’s the fruit of that labor, so I own everything I create that’s of value.  So you see how you get to the intellectual property idea if you have a confusing understanding of contract theory itself.

00:19:51

Okay, a loan is another example of a contract, which is a two-way and bilateral, and it’s partly conditional, partly unconditional, partly present, partly future.  What I mean by that as a loan is I give you money now, and you give me money in the future.  So the future money is necessarily uncertain because it might not exist because the future is uncertain.  I might—the debtor may have no money in the future.  His project may go bust.  He may be bankrupt.  He may be dead.  The world may have exploded.  So the future money is, what we call in the civil law, hope, is the sale of a hope.  It’s something that doesn’t exist. ¹

00:20:32

So the exchange is conditional only in the sense that I’m only transferring this present money to you conditioned upon you agreeing now to transfer future money to me in the future.  So that’s the condition, but the present money, the loaned amount, is given unconditionally in the sense that the debtor owns that money completely because he needs to be able to spend it on whatever purpose he is borrowing it for.

00:20:59

Now, there’s other types of contracts: wagers, like a bet, leases, rentals, giving someone permission to enter your house, restrictive covenants, which is agreements entered into between homeowners that neighbor each other not to do certain things with their property, things like this.  So again, I just want to call attention to the fact that all future transfers have to be conditional, and this is important.  It’s important for analyzing issues like fraud and theft as I’ll get to later if I have time, and if not, I have a long article on this, which interested parties can research later.

00:21:37

By the way, one of my lesser-known books among libertarians and Austrians is a legal book I wrote about five years ago.  It’s a dictionary of Louisiana civil law terms, which is a Roman law-based system, and actually, a lot of the classification terms that we would use to classify different types of contracts, which I did not use here because I wanted to keep it descriptive and understandable.  But we have words like aleatory contracts, synallagmatic contracts, onerous, gratuitous, commutative, accessory contracts.  So you could see how there’s different classifications of contracts according to the mixtures of things that you do, the conditions you put on them, the nature of the things being transferred.

00:22:19

Okay, what do we have, about five minutes, Hans?  Okay, all right, now, in essence, what you can see is that there’s almost no difference in result of this Rothbardian and Evers’ view of contract and the way the law really operates.  The way the law really operates is they say that contracts are binding promises and binding obligations, but in reality, all the courts do is award damages or award a piece of real estate.  So all the court really does is enforce the transfer of title to property.  They never force people to abide by their obligations.  So why say that there’s a breach of contract with damages and money?  Why not just make them what they are?  Why not regard contracts as what they are, which is transfers of property?

00:23:15

So, for example, even Rothbard himself slips up a little bit when he tries to analyze inalienability is his contract article I think just because he was not a deep legal theorist, and he went so far in this article.  It’s incredible.  But he tries to say why would not debtors’ prison be legitimate?  Because if you view contracts as binding obligations and if you have an obligation to repay a loan and you don’t repay the loan, well, then you’re breaching your contract, and you’re arguably committing theft, which is what Walter Block views.

00:23:53

And so if you have a strict legal system, then you could be punished, be put in jail for theft.  And so debtors’ prison used to be actually employed.  Rothbard wants to say that that is not legitimate, so he argues that it’s disproportionate.  I think the better argument is that it’s not theft.  It’s not theft because, remember, in a loan the transfer is money now.  It’s used by the borrower according to the consent of the lender.  Later, the borrower has no money to repay the loan.  Remember, that future money was an uncertain thing, and it doesn’t actually exist now.  So if I don’t repay you today because I’m penniless, there is nothing to steal.  So Walter says something like, well, the original money was stolen because it was only given conditionally.  But it wasn’t given conditionally because, if it was given conditionally, that means the borrower wouldn’t have been able to spend it.  So that had to be given fully in the beginning.

00:24:57

Now, let me mention one more thing.  In my article on this, I go into why this view of contracts explains whether our bodies are alienable or not.  So I think contracts are used to transfer title to these external resources, which are alienable.  Our bodies are not alienable.  If I promise to be your slave—I try to sell title to my body to you—under the original theory of contract, the mainstream theory, there’s no clear reason why that wouldn’t be binding because a promise is a binding obligation.  I promise to be your slave.  I promise to do what you tell me to do.  If I don’t do that, if I don’t follow your orders, then I’m breaching the contract.

00:25:45

Under our theory, the question is simply can you transfer title to your body?  I believe you cannot, and this is because of the difference, which I mentioned in the beginning, the difference between ownership in the body and in external resources.  The body is not homesteaded.  The body is owned because of our direct connection to our body, our direct control over the body.  And that direct control doesn’t go away after you make a promise to someone to be their slave, so you’re still the owner of your body because you still have the best link to your body.

00:26:15

External resources, on the other hand, are things that are previously unowned.  At one point, they were unowned, and they become to be owned by an act of original appropriation, which means they are appropriated.  They are homesteaded.  Homesteading is an act of an intent to own by a human actor, which means that you can abandon these things.  You can own it, and then you can unown it with your consent.  Just like you can consent to someone borrowing your property, you can consent to them having it.  You can consent to abandoning it and relinquishing your intent to own it, and then the next person can re-homestead it, so to speak.  So this is why a contract to sell an item that you own is enforceable and is effective, but a promise to sell your body is not.

00:27:07

I go into that in more detail in this article, so I think the Rothbardian and Evers’ view of contract actually explains—points to the right way to view the inalienability question.  Also, fraud, which I think I don’t have time to get into this now, but fraud is an outcome of the fact that title transfers can be conditional.  So if I transfer some money to you conditioned upon you giving me an apple, by the language being used, by the meanings being shared by the parties to the contract, by apple I mean something, and he means something.  We mean an actual healthy apple that’s not a bomb or not loaded with poison.  So if he gives me a poisoned apple on purpose or a bad apple and he takes my coin, he knows that my coin title transfer is conditional upon his giving me an apple and he knows he’s not doing that.  So he’s basically receiving possession of my coin but not title to it.  He’s receiving it by trick.  This is what fraud needs to be viewed as, not just some kind of dishonesty or lying to people.  It has to be part of a contract, contractual interaction.

00:28:17

In any case, I think I’ll wrap up here, but I will say that I’m going to put these notes on my thing.  But I did have a long discussion with Tom Woods on his podcast a couple years ago about this, about this whole theory, and I also have two of my lectures in the Mises Academy series on libertarian legal theory I did a few years ago, which deal in depth with this contract theory.  So people can look that up there or read my long article on it.  So I’ll close now.  Thank you very much.

00:28:48

1. See La. Civ. Code art. 2451: “Art. 2451. Sale of a hope: A hope may be the object of a contract of sale. Thus, a fisherman may sell a haul of his net before he throws it. In that case the buyer is entitled to whatever is caught in the net, according to the parties’ expectations, and even if nothing is caught the sale is valid.” [↩]