Contracts in a Free Society - Who Needs Them?

[RuralRon]

The article below was copied in total from Bytemaster's Blog b/c I felt the information was so fundamental to a free society a simple link just wouldn't convey the importance. I can't force you to read it but I can reduce the obstacles that might get in your way.
 
I am genuinely interested in discussing this. I'm not aware of any podcast by Stefan that goes into depth on the arguments presented here. If they exist please mention them. Search results using the keyword "contract" on the FDR podcast page show two (2133, 1866), but imo don't address the points raised here.
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The Benefits of a Contract Free Society

 

Most libertarians think about contracts as the fundamental building block of a free society. I take a relatively unique position that contracts as we know them are the Achilles heal of attempts to form a libertarian society. I go so far as to suggest that we need a contract-free society because enforcement of contracts presents a significant challenge to the Golden Principle upon which my entire world view is based.

What is a Contract?

Pardon me as I quote wikipedia:

In common law legal systems, a contract (or informally known as an agreement in some jurisdictions) is an agreement having a lawful object entered into voluntarily by two or more parties, each of whom intends to create one or more legal obligations between them.

According to thelawdictionary.com:

A legal obligation or duty is enforced by a court of law, it can be a debt and the legal responsibility to carry out what the law asks.

The very term contract, as commonly understood, is an intent of two or more parties to submit to a government that will interpret and enforce the contract as it sees fit. Note the requirement for the contract to have a lawful object or purpose. If you attempt to construct a contract to insure against getting caught violating the law, then you can bet the government will not enforce the terms of that contract and therefore, by definition, it is not a contract.

Contracts & The Golden Principle
For those of you who have not read my article on “The Golden Principle”, I will summarize it here:

“Do not do unto others what you do not want others doing unto you.“

You don’t want to be imprisoned even if guilty of a crime. If you steal something from someone, you don’t want them using force or trickery to steal it back from you. If you really think about it you don’t want to give up your free will under any circumstances, even if you had previously promised something to someone.

This is a real challenging stance to take and one that will cause many of you to abandon me to my wishful thinking. So I am going to ask you to reserve your judgement and avoid jumping to conclusions until you have had a chance to fully hear me out.

Murray N. Rothbard in chapter 19 of his book “The Ethics of Liberty” outlined the foundation of valid contracts in a way that would be difficult for me to replicate. I am going to quote liberally from his book and comment as I go.

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.

These two paragraphs lay the foundation for a contract free society with the exception of the part regarding “backed by the sanction of legal coercion”. Blockchain technology can entirely automate the management and enforcement of property rights in a non violent manner, but it cannot compel enforcement of promises. There is no need to use legal coercion to compel anyone to do anything. So for now I will simply ask that you assume there exists a non-violent (aka non coercive) means of motivating individuals to fulfill the terms of a contract.

A contract should only be enforceable when the failure to fulfill it is an implicit theft of property.

If Alice lends money to Bob under the condition that it be repaid in a year, then the contract stipulates a transfer of title to the money in one year. Bob has already transferred title of the funds to payoff the loan one year in advance. If the loan is not repaid then that is theft.
Existing law would contend that Bob had “promised to pay” and thus set up the “expectation” of Alice that she would receive money. As we can see such rationale breaks down if applied consistently to all promises and expectations when it comes to enforceability of a contract.
Suppose that Bob promised to marry Alice in one year in a written contract. If Bob jilts Alice does Alice have the legal right to compel Bob to marry Alice? Under the promise theory of contracts this would be the logical conclusion. Our current legal system even enforces a mild version of this by forcing one party to pay damages to the other for losses incurred due to breaking the promise. While forcing one party to pay damages may be less objectionable, it is derived from the same invalid principle.

Lets return to Rothbard:

Let us pursue more deeply our argument that mere promises or expectations should not be enforceable. 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.

Specifically, a person cannot alienate his will, more particularly his control over his own mind and body. Each man has control over his own mind and body. Each man has control over his own will and person, and he is, if you wish, “stuck” with that inherent and inalienable ownership. Since his will and control over his own person are inalienable, then so also are his rights to control that person and will.

This gets to the crux of the matter, you cannot surrender your will and any attempt to use force to compel you to act against your will is almost by definition something you don’t want others to do to you and therefore a violation of the Golden Principle.

Contracts depend upon Enforcement
What good is a contract that cannot be enforced? Is it still a contract or is it something else? Without enforcement a contract is nothing more than documentation of an agreement among honorable men. The parties to an agreement understand that the sole purpose for writing the agreement is to help aid them in voluntarily resolving disputes without violence.

At first this might seem like a rather weak foundation upon which to build a free society, but as you will see it is actually the only foundation and much stronger than alternatives at that. You see, Rothbard’s definition of a contract is so narrow and restrictive that it becomes difficult for society to accept. People intuitively feel that promises should be enforced somehow and yet Rothbard’s approach makes that impossible.

The key to enforcing a documented agreement is coordinated voluntary shunning of those who fail to abide by their promises as decided by an independent agency to which an individual has voluntarily consented to judge them. Coordinated shunning is almost like a prison without walls. You become an outcast until you make restitution. The nice thing about coordinated shunning is that it does not use any force or violence against any party and yet has been proven extremely effective at “compelling” an individual to act.

Dropping the Term Contract
The reason I argue for a “contract-free” society is because we live in a society where the government as co-opted the language and defined terms. If you have an informal verbal agreement to meet at a particular time and place for dinner then there is little anyone can do to compel to attend or punish you for failure to attend. Even if you wrote it down in an email or text message, it is not a “legally enforceable contract” and thus the government has no standing. The reason the government lacks standing is because, despite the agreement, there was not an intent to create a legal obligation.

There are many laws on the book governing contracts and what kind of contracts you may or may not enter into. You cannot sell debt or stock to the public because those contracts are regulated contracts and require SEC approval. You cannot insure against getting caught breaking the law. You cannot contract for certain work unless you have a license.
While you may require a license to contract certain kinds of work, there is no license requirement for performing the work without a contract. If the work performed was a gift then the laws often don’t apply.

So while you may want to argue that I really do support contracts and that all I am doing is changing the enforcement mechanism, there are other reasons for forgoing the term all together. I would argue that the coordinated shunning approach isn’t enforcement at all because it specifically lacks the use of force. The effect is the same, but its nature is completely different.

Blockchain Technology
Rothbard’s definition of valid contracts is actually quite useful. Lets review it one more time:

…the only enforceable contracts … should be those where the failure of one party to abide by the contract implies the theft of property from the other party.

This is where BitShares and distributed ledgers come to play. A distributed ledger is designed to track property rights in clear unambiguous terms. Rothbard’s definition of a contract could be entirely encoded into a block chain because “all legitimate contracts implies theft of property”. It is fairly easy to ascertain whether or not property has been transferred and who owes what when you have a public ledger.

With smart contracts it is also fairly easy to automate the change of ownership in such a way that no one can “enforce” a contract and no one can “fail to enforce” the contract. It doesn’t matter who you coerce, the block chain is going to execute the smart contract and everyone will automatically respect the resulting change in property rights.

You can think of an automated forced transfer of digital assets as a form of coordinated shunning. Everyone refuses to acknowledge the prior purchasing power of one individual and voluntarily honors the purchasing power of a new individual.

Imagine if every body had a bond and arbitration agent on file with the block chain. Imagine everyone refused to do business with someone who had an unpaid judgement against them because their own bond was at risk if they did.

BitShares is the foundation of a non-violent consensus on property rights that replaces the use of force to physically reallocate property.

The Contract Free Society
In a contract free society agreements are documented but everyone understands that there is no force that can compel any individual to abide by any contract. An arbitration agent is not compelled to make any decision. No one is compelled to act. There is no need to force anyone into court. There is no need for government.

So long as we insist on living in a world of enforceable contracts we will continue to empower the very beast that enslaves us. We are operating on the implicit expectation of the right to use force and in turn manifest a society built on violence and coercion rather than love.
You cannot change others, but you can change yourself. I specifically avoid committing to legally binding contracts when ever possible. It can be very challenging for some people who feel the need to reserve the right to sue you and coerce you into fulfilling your promises. In general these are the type of people we should be shunning. Every time we give business to someone who demands a legal contract we are supporting our own enslavement. So I challenge you to release your need to control others and instead learn how to interact with others entirely without any legal obligations what-so-ever.

 

Discuss this subject at bitsharestalk.org.

 

Recent Articles by Daniel Larimer:

• The Benefits of a Contract Free Society
• Provably Honest Online Elections are Possible
• How to Create a Free Society
• What is BitShares?
• Why BitShares is Public Domain
• Libertarianism for New Agers
• The Golden Principle
• Genesis Post
• Own Your Identity with BitShares
• Subjective Reality Simplified

[shirgall]

All committed agreements are implicit contracts, the point of the written contract is to merely think about the edge cases and agree on how to handle them. There doesn't have to be a forceful component to it, but in general people want to know how they are covered if something goes wrong. If I ask someone to build me a house and I decide to break the contract, what happens? It could be as simple as an insurance policy that pays the guy that built half a house for his efforts. It doesn't have to be liens.

[autowagon]

a contract simply establishes what is considered equal.  It backs up the golden rule.  It doesn't create enforcement issues.  Force only comes when inequality occurs, contract or no contract.

[Pepin]

I generally agree with the article. Stefan has said much of the same as well, that contracts are not enforceable and that social ostracism is a possible solution. Another solution is the idea of a contract rating, which is similar to a credit rating, but for contracts. When you fulfill a contract, it adds to your reputation, and when you fail to fulfill the contract, it leaves a negative mark. An individual who breaks many contracts will not be able to find to many people willing to contract with them.

 

I am a little confused about the problem below.

 

 

 

If Alice lends money to Bob under the condition that it be repaid in a year, then the contract stipulates a transfer of title to the money in one year. Bob has already transferred title of the funds to payoff the loan one year in advance. If the loan is not repaid then that is theft.

 

Existing law would contend that Bob had “promised to pay” and thus set up the “expectation” of Alice that she would receive money. As we can see such rationale breaks down if applied consistently to all promises and expectations when it comes to enforceability of a contract.

 

Suppose that Bob promised to marry Alice in one year in a written contract. If Bob jilts Alice does Alice have the legal right to compel Bob to marry Alice? Under the promise theory of contracts this would be the logical conclusion.

 

Does the promise theory of contracts only take into account the promise and ignore the contents?

[RuralRon]

Thanks for the replies. Looking for a more "in depth" analysis than I've seen from most of the replies here so far.

 

In response to shirgal I would say the "edge cases" of contracts actually anticipate and perhaps even encourage violations. I think of the contract more like a spec to declare what I need, certainly not as a means of punishment or sanction against unfulfilled and inconsequential clauses so frequently found in boiler plate agreements of today.

 

The [en]force[ment] of all contracts is implied, that's the primary issue he raises, and in today's world that provides an invitation for The State to be involved. Arbitration isn't force if all contracting parties agree to it, so long as no coercion is involved and the arbitration is truly benevolent and no conflict of interests between the parties exists.

 

To autowagon I think you missed the point entirely. Equality is totally irrelevant. Do you actually think a contract between a huge mufti-billion dollar corporation and a contract mechanic puts them on equal footing in any way? It's about performance not equality.

 

I generally agree with the article. Stefan has said much of the same as well, that contracts are not enforceable and that social ostracism is a possible solution. Another solution is the idea of a contract rating, which is similar to a credit rating, but for contracts. When you fulfill a contract, it adds to your reputation, and when you fail to fulfill the contract, it leaves a negative mark. An individual who breaks many contracts will not be able to find to many people willing to contract with them.

 

I am a little confused about the problem below.

 

I agree, the first example quoted is indeed confusingly written. The second one about the marriage proposal is more illustrative.

[shirgall]

Actually, the edge cases I encounter in contracts are usually related to whether some material condition of the performance has changed (it cost me more than I expected to do the work, or the business requirements have changed). I don't see them as encouragement, as usually the path through the edge cases costs more than simple performance of the contract. I write up change orders to a project, and the agreement, as a matter of course. I seldom make it cheaper, and it ends up costing my team the time to re-estimate the work, and write up the change as well.

[RuralRon]

Actually, the edge cases I encounter in contracts are usually related to whether some material condition of the performance has changed (it cost me more than I expected to do the work, or the business requirements have changed). I don't see them as encouragement, as usually the path through the edge cases costs more than simple performance of the contract. I write up change orders to a project, and the agreement, as a matter of course. I seldom make it cheaper, and it ends up costing my team the time to re-estimate the work, and write up the change as well.

 

OK, I understand that scenario. It's one of the primary challenges to writing a good contract and estimating costs. Nobody can predict the future and contracts are so often written not as a spec of what is necessary but rather how to deal with the unknowns and what ifs and to assign a cost (i.e. blame/responsibility) to a party for them.

 

But what if a dispute arises between you and your client, one that they won't bend on? How would you resolve it if they refused payment or refused to acknowledge important facts - would you just eat your losses, sever all interaction and refuse to do business with them again?

 

Obviously diplomacy, tact and discussion should be used to try and resolve any conflict, but if the other party refused to be rational you don't have much choice than to involve a third party or eat your losses. The 3rd party usually relied on in today's world is The State. In a future free society the choices would be enforcement (through shunning) and take a loss, or possibly collect from some type of insurance policy you may have bought to guard against such a breach of contract or failure to perform or as a way to "hedge" the risk of unforeseen problems that might arise.

 

In a free society it may not be possible to obtain an insurance policy without a contract, or if it is possible the cost would certainly be higher, maybe prohibitively so, thus incentivizing most to put contracts in place.

 

I don't believe there are any easy answers, but crying to The State to resolve a disputed contract is definitely not a solution, as it perpetuates The State's power and that is not a step in the right direction.

[shirgall]

But what if a dispute arises between you and your client, one that they won't bend on? How would you resolve it if they refused payment or refused to acknowledge important facts - would you just eat your losses, sever all interaction and refuse to do business with them again?

 

This is why we argue about those cases when negotiating the contract instead of when the problem arises. There's no "sunk cost" fallacy on top of the negotiation to make it more complicated at that point. I've occasionally had to eat a bad deal, but I've never had to deal with a lawsuit.

[autowagon]

I didn't miss the point you missed it.  The whole point of a contract is to protect the interests of BOTH sides-equal standing.  That's what a 'deal' is.  It has to 'benifit' both sides or it is not a 'deal' or 'agreeable' for both sides.  Don't sign or 'authorize' your own abuse.  The whole point of a contract is to protect a person from being taken advantage of.  You take my widgets and don't give me my whatsits you must compensate me.  A contract REINFORCES the golden principle. A contract is about maintaining equal standing, equality.  It prevents exploitation and reinforces benevolance.  It safeguards you from being taken advantage of that's the whole point of a contract!  Equality.

WIthout a contract it is difficult to make your case no matter who you'd make it to.  Government or community.
 

[RuralRon]

This is why we argue about those cases when negotiating the contract instead of when the problem arises. There's no "sunk cost" fallacy on top of the negotiation to make it more complicated at that point. I've occasionally had to eat a bad deal, but I've never had to deal with a lawsuit.

Not sure I understand what you mean by "sunk cost fallacy" shirgal, would you explain that?

 

The point you missed (again) autowagon is that a piece of paper won't compensate you when the terms on it are violated against you, that takes enforcement. If all parties are benevolent, reasonable and rational perhaps the violation would be recognized and a just compensation / adjustment could be reached.

 

What if the parties are not reasonable or virtuous, what then? shirgal stated a good approach but that assumes all potential variables can be known in advance. We can't predict the future. We can do our best to anticipate but it isn't always adequate.

 

Some type of enforcement is implicit when the terms of the contract are broken and the situation is not adequately addressed by the contract. In today's world that usually invites The State to step in to provide a remedy (tho it usually only makes the situation worse in the long run).

 

The author suggests the solution is enforcement via shunning. Stefan has also spoken of shunning as a punitive measure of enforcement. That alone will not provide remedy; remedy could however be provided thru escrow agreements and insurance contingencies written into the contract and agreed to up front, all of which still require some form of agreement.

 

Are agreements synonymous with contracts? Is this only about semantics? It seems to me the crux of the position to eliminate enforcement issues implied by contracts today is the key, which is why the author detailed the definitions and first principles of property contracts rely on. Language is important, and the legal definition of contract as recognized by The State and it's courts rely on their power to compel (i.e. force) contracting parties to comply with their decrees justly rendered or not.

 

Formalizing agreements thru documentation is the essence of contracts. I don't see how that should or could be eliminated. And since every little detail and anticipated problem can't possibly be known when an agreement is executed, the only reasonable measure to cover the unknowns is a clause empowering an independent review panel of some type, like 3rd party arbitration is the only non-State option I can think of.

 

No amount of due diligence will eliminate the possibility of entering into an agreement with untrustworthy bad actors. Someone has to be the first "sucker" or the first be involved after a good actor goes bad. If a person makes choices that ruin their reputation and break agreements then perhaps coordinated shunning is the only recourse.

[PatrickC]

I know when I was in the building industry in the 80's/90's we rarely wrote contracts. Nearly all verbal with some written 'estimates'. Estimates being the operative word, as one had to hold out for unknown contingencies along the way. No one wanted to hold another to a contract that became unprofitable or worst still a net loss to them. As this could put other connected contracts in jeopardy. Depending if it were a large budget, contingencies would often be restricted to 10-15% of the full cost, which would always be written into the estimate itself. This was the closest I ever got to a written contract. Certainly courts would accept estimates as contracts with all the necessary mitigations as I've mentioned.

 

In most cases, if a company failed to meet their obligations they were soon out of business, as no one would use them after word got round. The building industry relies heavily on reputation, so this rarely happened to the medium to high level business, as they understood only too well the outcome for them. It nearly only ever happened to the smaller businesses with less experience and capital behind them. Any leftovers following a bankruptcy they might grab during a liquidation. But mostly it just wasn't worth going after someone or a company with no money. The only court cases I ever saw were from employees not being paid their wages.

 

So in theory, I found contracts to be rarely enforceable even in our current system. As far as I understand in a free society the same is likely to apply. Albeit with perhaps a far more sophisticated and reliable reputation system built in, with better insurance options. That said, as far as I understood the DRO model, that it wasn't about enforcement but more about limiting access to resources and future contracts. Whilst giving them the option to compensate their way out of it by degrees.

 

By the way I'm mostly using the term 'contract' here as means to describe a chosen obligation, not in the legal sense that wikipedia defines it as such.

[autowagon]

there is no force involved in a contract since it is not a lop sided imposition on someone but an equal standing agreement.  You are defining a contract as theft.  You are saying if someone steals from you or violates your contract than it wasn't them that created the violation but that the contract created it.

[shirgall]

Not sure I understand what you mean by "sunk cost fallacy" shirgal, would you explain that?

 

The "sunk cost fallacy" is where you put too much value into what has been spent than the value of what you need to spend to rectify a situation. You don't have to deal with it when you haven't started work, but if you have done a bunch of things and realized the agreement is failing, you hold in your mind the cost of what has already been done which makes negotiation harder. The negotiation is better able to succeed if you focus on fixing the situation.

 

Remember that to me the contract is not the piece of paper it is the notion of agreement that the piece of paper attempts to document. What compensates you is the willingness of the parties to execute the agreement, a willingness exposed through the process of negotiation and reinforced by the trust both parties engender in each other in both the negotiation and execution. If I approach a party that is not known to benevolent I might start with contracts of smaller scope and cost than I would if I approached a party with a huge track record and a reputation to protect.

 

I don't predict the future perfectly, but I evaluate the risks in every engagement, and act accordingly.

 

The essence of contracts is the agreement and the steps you take to make the agreement work. The piece of paper and signing it are only some of those steps.

[RuralRon]

Thanks for the explanation shirgal. FYI the legal phrase used to describe what you wrote in your second paragraph is an agreement in "good faith". Good faith is a rather interesting choice of words, don't you think?

 

That said, as far as I understood the DRO model, that it wasn't about enforcement but more about limiting access to resources and future contract

 

Isn't that the same thing as enforcement? It's at least a form of shunning.

[shirgall]

 

Thanks for the explanation shirgal. FYI the legal phrase used to describe what you wrote in your second paragraph is an agreement in "good faith". Good faith is a rather interesting choice of words, don't you think?

 

Legal terms like "good faith" and "made whole" are ancient constructions from the same kind of people that write dictionaries. It's no small wonder that there's a lot of value packed into such small terms of art.

[PatrickC]

Isn't that the same thing as enforcement? It's at least a form of shunning.

 

Well no, enforcement involves taking something from someone. Shunning someone if they don't follow through with a chosen obligation doesn't involve any action at all. That said, I'm sure there might well be businesses that will still do business with them, but probably at a higher cost, due to their prior risk of failing to comply.

 

For things to get to this point would be probably considered quite serious. As I'm absolutely certain that negotiations could remedy any outright and total shunning. Even today people want to find a solution to a failing company they are doing business with, because they wont to see through their already sunk costs. The trouble with today is that people can just go bankrupt and ignore their obligations under Limited company status.