A Spontaneous Order: Contract
By RadCap
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Any theory of contract will be a divisive one, as few people today, even in libertarian circles, see eye to eye on the precise philosophical criteria needed to ground specific ownership claims. This is due, in part, to an ignorance of the foundations of interpersonal ethics. Perhaps the most notable misconception due to such ignorance is the notion that all voluntary agreements, no matter what their content, are justifiably enforceable.
As we learned before, in order for something to be eligible for the status of “property,” it must be scarce. This is because the function of property is to provide a mechanism by which one may determine who has the right to control what resource, and, of course, no such determination would be necessary for any non-scarce good. Thus, the ultimate goal of the concept of property is to assist in the avoidance of conflict between two or more individuals over the employment and use of scarce (aka economic) goods. Though property, and more specifically private property, is in fact a norm, this fact does not render the concept itself meaningless or without significant purpose.
It is commonly accepted that we live in a world where the desires for various resources exceed their availability. Unavoidable conflict would ensue were everyone to engage in a perpetual free-for-all for these scarce goods. This is not to say the adoption of property norms would immediately eradicate all conflict. Rather, it would serve as the logically justified foundation from which to arbitrate inevitable disputes over the control of scarce goods. Therefore, it is important to formulate a theory of property, such that if followed, all violent interpersonal conflict would be avoided from the beginning of its adoption onward and, at the same time, allows for justified action prior to any agreement. Man must have justifiable actions to take – which imply the use of scarce goods – prior to any contact or arrangement with anyone else.
The libertarian theory of property, otherwise known as the “private-property ethic,” accomplishes this task. This theory also demonstrates that any other theory of property which comes into conflict with it, such as the Marxian principle “from each according to his ability, to each according to his need,” only serves to generate conflict, not diminish it. Thus, such competing theories fail the very purpose of a norm.
The original appropriation of goods is necessarily conflict free, as the first user and claimant of a good has no competing legitimate claimants with whom he must contend (such is the nature of being first). Voluntary exchange is also, by definition, free of conflict, as both parties are free to abstain from the exchange.
Finally, to own something means to have the exclusive right to control or employ it without uninvited physical interference, so long as such employment does not entail an uninvited physical interference with someone else’s person or property. Libertarians believe that all individuals are self-owners, in so far as they have exclusive rights to control over their own physical bodies. From the principle of self-ownership, and the subsequent ability to acquire exclusive claims to external economic goods, the Non-Aggression Principle (NAP) is established. The NAP merely restates what is implicit in the concept of ownership, i.e., that no one may justifiably initiate uninvited physical force against another person’s body or justly acquired property.
It is important to note that the above is not meant to be an authoritative proof of private property or the NAP; rather it is simply intended to identify the fundamental concepts of property and ownership as the ground work for expounding upon a theory of contract. Stephan Kinsella defines “Contract” as being “a relation between two or more parties which includes legally enforceable obligations between them.”[1] The term “enforceable,” in this context, means that the use of physical force or the threat thereof would be a justifiable response to any breach of said contract.
There exist two general categories of contract: “to do” and “to give.” The former being an agreement to perform a given task or service, and the latter an agreement to exchange some specified good(s). Regarding the breach of “to do” contracts, otherwise known as “performance contracts,” judges generally prefer to award monetary damages, as such damages are easier to oversee and administer than a compulsion to perform a given task.
For example, if you contract with a singer to perform at your wedding and he fails to do so, it would be quite difficult to measure whether or not any successive performances ordered by a given judge would be of the same quality as that which you originally contracted. That is to say, the singer may feel upset about having to be compelled to perform, and thus deliberately sabotage his own performance. Moreover, to determine whether or not this was the case would be very difficult as performance levels or qualities are completely subjective, whereas a transfer of a given amount of money in damages can easily be objectively verified. Finally, it should be added, that though judges may not be willing or practically able to compel performance, the threat of monetary/property damages and reputation loss provide sufficient incentive to render the process of contracting for such services useful.
It is important to understand what distinguishes a legitimately enforceable arrangement (contract) from a non-enforceable arrangement. Recall the non-aggression principle (NAP), which states that no one may justifiably initiate uninvited physical force against another person’s body or justly acquired property; from this principle one may conclude that the only force which is justified is responsive force. That is, physical force, or the threat thereof, in response to aggression perpetrated by someone else. Thus, the only arrangements which are legitimately enforceable (i.e., are considered “contracts”) are those which, if breached, would entail an NAP violation.
Let us apply this concept to a mere promise that involves no transfer of title to scarce goods: Suppose Bob promises his sister Sue that he will attend her wedding, but fails to show up. Would it be justified to initiate force against Bob? Of course not! This is because Bob’s failure to show up did not constitute an uninvited physical invasion of anyone’s person or property. Though there may be moral implications associated with lying or neglecting to perform, they are completely irrelevant to the point of whether or not such an arrangement may be considered a “contract.”
Now, let us examine a separate scenario, where Jill decides to trade Charlie three dollars for his hat. This arrangement is known as a “conditional transfer of title.” This means that Jill would be offering Charlie title to her three dollars on the condition that Charlie offered the title over his hat to Jill in exchange. Thus, if Charlie agreed and accepted Jill’s three dollars yet refused to give Jill his hat, or if he gave Jill something other than his hat, then he would be guilty of stealing Jill’s property (the three dollars), and hence be in violation of the NAP. As such, Jill would be justified in using force, or the threat thereof, to retrieve her stolen property, and perhaps some damages.
From this insight, one may discover that the only arrangements which may be enforceable are those which involve the transfer of title to property. This is what is known as the “Title Transfer Theory of Contract.” However, before we apply our theory to some real world examples, take note of one final implication of any contractual arrangement: the title to any good in a contract must be in the possession of the obliged party (promisor) at the time of specified completion, if it is to be enforceable.
For example, imagine person A (the promisee) lends person B (the promisor) his stereo, on the condition that, in one week’s time, person B transfers title to his yoyo to person A. Suppose person B’s yoyo is destroyed before the week’s end and he comes up empty handed. Would person A be justified in using force or making threats thereof against person B to receive remuneration? No, he would not, because at this point person B would not be causing uninvited physical interference with person A’s property as it no longer exists.
Instead of the exchange being immediate and simultaneous between person A’s and person B’s economic goods, Person A is providing Person B with temporary title to the stereo now on the condition that Person B provides Person A with title to his yoyo in the future. Thus, when Person B utilizes Person A’s stereo in the interim he is not violating the NAP or the arrangement, as use of the stereo in the interim had already been accepted by Person A. Contrary to the previous contract example, Jill only consented to giving Charlie title to her three dollars on the condition that Charlie provides the hat now as well. Since he failed to do so, Charlie was therefore in breach of contract when he accepted her three dollars; any use of Jill’s three dollars on Charlie’s part would be a breach of contract so long as he failed to provide Jill with his hat. Stephan Kinsella elaborates on this seemingly counter-intuitive point:
The simplest title transfers are contemporaneous and manual. For example, I hand a beanie baby to my niece as a gift. However, most transfers are not so simple, and are conditional. Any future-oriented title transfer in particular is necessarily conditional, as are exchanges of title. For example, before dinner, I tell my niece that she gets the beanie baby after dinner if she behaves during dinner. The transfer of title is future-oriented, and conditional upon certain events taking place. If my niece behaves, then she acquires title to the beanie baby. Future transfers of title are usually expressly conditioned upon the occurrence of some future event or condition.
In addition, because the future is uncertain, future-oriented title transfers are necessarily conditioned upon the item to be transferred existing at the designated time of transfer. Title to something that does not exist cannot be transferred. Consider the situation where I own no hamster but tell my niece, “Here, I give this hamster to you.” In this case, “this hamster” has no referent so no title is transferred. Likewise, the future beanie baby transfer is conditional not only on the expressly stated condition—the niece performing the specified action (behaving) —but also on the unstated condition that the beanie baby exists at the designated future transfer time. During dinner, the cat might destroy it, or it might be lost, or consumed in fire. Even if the niece behaves, there is no beanie baby left for her to acquire. In effect, when agreeing to a future title transfer, the transfer is inescapably accompanied by a condition: “I transfer a thing to you at a certain time in the future—if, of course, the thing exists.”[2]
In such future-oriented conditional transfer of title arrangements, it is the buyer of future goods that implicitly bears the risk of default. The buyer of present goods suffers from no default risk – he receives his part of the transaction instantly as soon as the contract is made. In this type of exchange, the promisee agrees to transfer something in the present which is certain. Thus, if he is unable to produce the item at present, then the arrangement ends before it ever begins. However, if the promisee – acting as a buyer of future goods – provides his goods and enters into a future oriented conditional transfer of title arrangement, he is inevitably accepting the risk, because the future is uncertain, that whatever he is expecting to receive in return in the future actually exists upon the completion of his end of the arrangement.
In contrast, if person B did indeed possess title to the yoyo in question, and was simply refusing to give it up, then this would constitute a violation of person A’s property right to the yoyo, and would entail a situation in which person A may justifiably use force against person B in response to said violation. There are, of course, ways in which the effects of such a default may be mitigated or remunerated through other contractual mechanisms, which will be discussed shortly. Finally, such title transfers do not have to be written on a piece of paper. They may simply be formed by “manifesting one’s intent to transfer ownership or title to another.”[3]
Let us now apply this theory to a monetary loan contract. A loan is simply one more example of a future oriented, conditional transfer of title, whereby the creditor (the promisee) grants title to the debtor (the promisor) over a specified amount of money now (the loan), on the condition that the debtor pays back the principal of this loan, plus interest, at some specified time in the future.
Remembering the condition that the promisor must have title over this loan, plus interest, at the time specified in order for the creditor to expect full repayment, the creditor may decide to proactively add certain clauses to this contract to mitigate financial losses in the case of default. These clauses may say something to the effect of: “on the condition the debtor (promisor) is unable to pay back the loan, plus interest, at the agreed time, we will garnish 30% of his wages from that point forward until the loan has been fully paid.”
This, of course, is just one of many non-aggressive solutions to the problem of default risk. Introducing default terms in the contract stipulates what is to follow should a promisor be unable to fulfill his agreed to conditions due to a lack of title to the amount of money owed in full at the time of the contract’s completion. Requiring collateral be placed as a precondition to entering into a loan contract is another solution. Such a contract may read as “I hereby transfer to you title to my car on the condition I do not fulfill the loan obligation at the specified time.” This is a way of creating incentive for the debtor to make good on the loan. Perhaps title to the car would be held in escrow until the loan has been paid in full. Details of the collateral transfer can take as many forms as the parties wish. Another, and perhaps more obvious, proactive measure a creditor may take to reduce the risk of default is to run a credit check on the prospective debtor prior to providing him/her with a loan. Such a credit history would help the creditor determine the likelihood that the prospective debtor will make good on the loan. With this information in mind the creditor may very well decide not to offer this prospective debtor with a loan at all.
At no point would it be justified to place debtors into a “debtor’s prison” if they fail to pay their loans in full due to their lacking title to the full amount owed. Recall earlier that the implicit assumption of future oriented, conditional transfer of title contracts (for instance, a loan contract) is that whatever is being contracted for exists at the time of the contract’s completion. Thus, if the debtor simply does not have enough money to cover the loan in full, then he cannot be justifiably punished via violent means or threats thereof. Put differently, the debtor is not causing a rights violation as the creditor voluntarily exchanged titled property for a promise of future goods. If the future goods fail to manifest, there can be no title issued nor transferred for them. Hence, the debtor is in no way violating the NAP, and therefore any force used against him would be considered aggression and therefore unjustified.
With regards to employment arrangements, they are generally not binding on the part of the employee, as they are typically set up in the following manner: “I hereby transfer title to X amount of money to you on the condition you perform task Y.” Thus, if the employee decides not to perform task Y, then he/she simply is not compensated with pay X. However, if the employer wanted some assurances that the employee would not refuse to show up to work, he may provide an employment contract that reads something to the effect of: “I hereby transfer title to X amount of money to you on the condition that you perform task Y; on the condition you fail to perform task Y, you hereby transfer title to Z amount of money to me (the employer).” Of course, additional clauses similar to the ones delineated in the defaulting debtor case may be applied to the case of a defaulting employee.
Adjacent to discussions of contractual employee obligations are discussions of voluntary slavery. Kinsella notes the difference between owning a body and owning external goods:
…the modified title-transfer theory proposed here [Kinsella’s modifications on Rothbard’s title-transfer theory] recognizes that the body is ‘owned’ only in the sense that a person has the sole right to control the body and invasions of its borders. But the body is not homesteaded and acquired, and cannot be abandoned by intent in the same way that homesteaded property can.[4]
The act of originally appropriating a scarce good or receiving it through voluntary exchange creates a superior, objectively ascertainable link with the owner that enables him to demonstrate his claim to said good to any third party. This is the practical condition required to put the private property norm into practice, and to enable a third party to enforce it. If one claimed to be the owner of a good, but had no demonstrable evidence of ownership, then a third-party arbiter would have no objective basis from which to render a verdict. A superior, objectively verifiable link to specific scarce resources is what grounds legitimate ownership claims and separates them from baseless decrees or declarations.
Currently, one can only indirectly control external goods. Manipulation of an ax first requires the usage of muscles, tendons, and appendages; control of the ax is indirect because one integrates it into his plans only through an intermediary – the muscled arms of his physical body – which he directly controls with his will. Once an external good becomes homesteaded, it can only be assigned a new owner through voluntary exchange or abandonment of the good and a re-appropriation before another may legitimately claim to have a superior, objectively verifiable link and therefore title. Despite being a self-owner, however, it is impossible for one to relinquish ownership of his body. What marks one’s ownership over his body is his uniquely direct control over it, which itself constitutes a superior objective link. This direct control is evidenced by his ability to physically animate his body by will alone – that is, without the assistance of a separate, physical medium. Because one cannot alienate this direct control, one cannot create in another a superior objective link to his body, and therefore it is impossible for him to legitimately transfer title over his body to another person via contract. For this reason, one cannot sell himself into slavery. Hoppe elaborates on the issue of body-ownership:
The answer to the question what makes my body “mine” lies in the obvious fact that this is not merely an assertion but that, for everyone to see, this is indeed the case. Why do we say “this is my body?” For this a twofold requirement exists. On the one hand it must be the case that the body called “mine” must indeed (in an intersubjectively ascertainable way) express or “objectify” my will. Proof of this, as far as my body is concerned, is easy enough to demonstrate: When I announce that I will now lift my arm, turn my head, relax in my chair (or whatever else) and these announcements then become true (are fulfilled), then this shows that the body which does this has been indeed appropriated by my will. If, to the contrary, my announcements showed no systematic relation to my body’s actual behavior, then the proposition “this is my body” would have to be considered as an empty, objectively unfounded assertion; and likewise this proposition would be rejected as incorrect if following my announcement not my arm would rise but always that of Müller, Meier, or Schulze (in which case one would more likely be inclined to consider Müller’s, Meier’s, or Schulze’s body “mine”). On the other hand, apart from demonstrating that my will has been “objectified” in the body called “mine,” it must be demonstrated that my appropriation has priority as compared to the possible appropriation of the same body by another person.
As far as bodies are concerned, it is also easy to prove this. We demonstrate it by showing that it is under my direct control, while every other person can objectify (express) itself in my body only indirectly, i.e., by means of their own bodies, and direct control must obviously have logical-temporal priority (precedence) as compared to any indirect control. The latter simply follows from the fact that any indirect control of a good by a person presupposes the direct control of this person regarding his own body; thus, in order for a scarce good to become justifiably appropriated, the appropriation of one’s directly controlled “own” body must already be presupposed as justified. It thus follows: If the justice of an appropriation by means of direct control must be presupposed by any further-reaching indirect appropriation, and if only I have direct control of my body, then no one except me can ever justifiably own my body (or, put differently, then property in/of my body cannot be transferred onto another person), and every attempt of an indirect control of my body by another person must, unless I have explicitly agreed to it, be regarded as unjust(ified).[5]
One can, however, forfeit a portion of rights over his own body if he commits aggression against the person or property of another. According to Kinsella’s estoppel theory, aggressors are unable to coherently object to force applied against them. By their committing a tort, they implicitly have accepted the premise that initiatory force is acceptable. Of course, there is a limit to what degree of force used for retribution may be justly applied.[6]
Whenever physical interference is involved with the bodies of others, it is crucial to determine the target’s most recent consent or refusal prior to the interaction. Barring the objections of aggressors, this criteria determines whether force applied was just or not (whether aggression has been committed). For instance, all gentlemen understand the difference between rape and seduction; it is the lady’s most recent act of consent or refusal. Should either party change their mind, the most recent decree would override the earlier approval. Ownership over things, including bodies, implies the right to change one’s mind as to how it is to be employed in the immediate or remote future. Unlike bodies, which we are, for better or worse, stuck with, external goods can be relinquished and a property title ultimately dispensed for them. Either party’s consent to sex earlier in the night is not tantamount to a transfer of title, partial or otherwise, of one’s body. Once again, one is unable to make such a binding transfer of title over his body to his partner or to anyone else. Indeed, the very fact that someone is unable to transfer title to his body explains why mere promises of performance are unenforceable. This is because they would imply, to some degree, a transfer of title over one’s body to another. Only if it were possible to alienate the direct control of one’s body and furnish a title for it could one be able to justifiably initiate uninvited force against another, or make threats thereof, as a means to compel him to perform a given act or service.
From this, we may be able to conclude that contracts only pertain to the transfer of title to external goods. This does not preclude selling one’s own body parts, for as soon as they are removed, they would then naturally become ‘external’ goods. Finally, this reaffirms the fact that the only justifiable inter-human force is force that is either invited or responsive to uninvited physical interference initiated against one’s person or property.
Now, let us deal with the issue of fraud. Fraud is, quite simply, another form of theft. For example, let’s imagine that I decide to enter into a trade with a friend whereby I agree to transfer title of my five dollars to her on the condition that she transfer title to a basket of edible apples to me. If I proceed to give her the five dollars and she hands over to me a basket of wooden apples, then she has stolen from me.
The transfer of title over the five dollars was conditional on her providing me with edible apples. So, because she failed to uphold her end of the contract, I would remain the proper owner of the five dollars, and she would be in possession of my property without my consent. Acquiring possession of someone else’s property without their consent is the very definition of theft; in the preceding scenario, such theft happened to take the form of a fraudulent transaction. Suppose, however, I manifested my intent to purchase my friend’s ornate, painted apples under the impression that said apples were edible, yet in reality they were wooden. In this scenario, the transfer would not be fraudulent as the content of the contract, as evidenced purely by demonstrated preference, expressed merely a desire to exchange my five dollars for my friend’s apples. Nothing in this act alone would indicate in any objectively verifiable manner that a condition of this title transfer be that the apples are edible, sweet-smelling, durable, or have any particular attribute. My action of purchasing an apple, without any mutual understanding of context or purpose, only demonstrates a preference for a particular, individual item as-is. As such, I would have to bear the costs of my faulty assumption.
One final and perhaps obvious component to any just contract is that the titles to whatever is being transferred must legitimately be owned by the parties engaged in the contract. For instance, if I stole Johnny’s model train and traded it to Debra for a pack of bubble gum, then this would constitute an illegitimate transaction. Johnny would have every right to approach Debra and demand his train despite the fact that she exchanged with me in good faith. Of course, Debra would then be able to retrieve damages from me, as I would have fraudulently taken her bubble gum. This is because her transferring of the bubble gum to me was conditional upon my transferring title of the train to her. Because I never acquired legitimate title to it and yet proceeded to take her bubble gum, my act would be considered theft.
Lessons from the Title Transfer Theory of Contract can also be applied to the “social contract.” For the same reasons my exchange with Debra was illegitimate because it involved Johnny’s stolen property, so too can the State’s “social contract” be deemed illegitimate. Social contract theorists argue that utilization of State-provided resources, such as roads, defense, education, law, etc., gives agents of the State the right to impose laws and command obedience to them by physical force or threats thereof. Beyond this, States claim the right to compel performance of services; such is the case with taxation, conscription, compulsory education, etc. Should one fail to surrender property to the State in the form of taxes, or fail to abide by the laws created by it, then this entity claims the right to kidnap and detain the offender in a cage. Should one resist such an arrest, the State grants its agents the authority to end his life with overwhelming force. This behavior does not generate public outrage, for nearly everyone to some degree believes agents of the State are morally exempt from laws that govern our own behavior. They are given a superior status over normal members of society. Acts such as extortion and murder become euphemized into “taxation” and “execution of the law.”
Most people are complicit with this paradigm, as they see the State providing much-needed services to the general public, including the building of infrastructure, national defense, public education, adjudication of disputes and more. However, all of the resources the State and its agents use in order to provide these services are paid for with stolen funds, i.e., the revenue acquired from taxes. The act of taxation constitutes aggressive interference with others as a means to compel them to relinquish their property to the State. This is institutionalized robbery. The State must acquire funds before it can provide services. Thus, the State’s act of providing “public services” on social contract grounds cannot be supported as it begins in naked robbery. Because all of the State’s services and functions are only made possible by first committing mass theft against its “citizenry,” we can readily judge “social contract” justifications for the State to be invalid. No contract which involves robbery and the transfer of stolen property is just or legitimately enforceable, yet the “social contract” appears to be exactly that: a contract involving the transfer of expropriated goods.
References
[1] Stephan Kinsella, “A Libertarian Theory of Contract,” in Journal of Libertarian Studies 17.II (2003): 12.
[2] Kinsella, “A Libertarian Theory of Contract,” 12.
[3] Kinsella, ibid, 21.
[4] Kinsella, ibid, 32
[5] Hans-Hermann Hoppe, Eigentum, Anarchie Und Staat: Studien Zur Theorie Des Kapitalismus (Opladen: Westdt. Verl., 1987).
[6] See Stephan Kinsella’s essay on ‘Punishment and Proportionality: The Estoppel Approach‘
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