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

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.