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Source link: http://archive.mises.org/6767/property-rights-and-the-theory-of-contracts/

Property Rights and the Theory of Contracts

June 22, 2007 by

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, writes Murray Rothbard, 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. FULL ARTICLE

{ 14 comments }

Matt June 22, 2007 at 8:52 am

The performance bond in an engagement is the wedding ring.

Jesse June 22, 2007 at 8:58 am

“In short, Smith’s original transfer of the $1000 was not absolute, but conditional, conditional on Jones paying the $1100 in a year, and that, therefore, the failure to pay is an implicit theft of Smith’s rightful property.”

I think that this sentence is backwards; it is not Smith’s $1000 property transfer that was conditional, but rather Jones’ transfer of $1100: conditional on Smith providing the $1000 up front. When the loan comes due, if Jones refuses to pay he is not stealing $1000 + unspecified “interest”, but rather the $1100 which was transfered under contract to Smith.

I would suggest that any condition on the title-transfer ought to be fulfilled (or not) by the time that the property is to be transferred. Otherwise — that is, if the property is transferred before the condition either expires or is fulfilled — there will be a time during which the ownership of the property is indeterminate. It may belong to either party in the present depending on the outcome of unknown, future events. Under such conditions neither party could utilize the property freely.

Gabriel June 22, 2007 at 10:05 am

Consider the following situation:

Alice wishes to hire Bob for one year. Alice’s project is on a tight schedule. If Bob uses his right to leave his job before the year is over, Alice’s project will fail, and the loss will cost Alice $10,000. Rothbard suggests that Bob should sign a performance bond for $20,000. However, Alice is not satisfied with this solution because she knows that Bob might be willing to pay the $20,000 if he gets in a really bad mood and decides to quit. What is the solution?

One solution might be for the performance bond to be for a greater amount than $20,000 (e.g. $50,000). However, it would take Bob more than one year of work to get the funds to repay $50,000, and Bob refuses to sign the $50,000 contract because he does not want to risk having to work more than one year for someone. Is there something else Alice and Bob could do?

What about the following solution? Alice writes on a piece of paper, “Bob has completed his job.” Alice signs a contract promising to transfer the ownership of the piece of paper to Bob if Bob completes his year of work. Bob then signs a contract with Alice stating he will transfer the ownership of the piece of paper to Alice in one year. Now would not Alice have the ability to force Bob to work for her for the complete year? If Bob stops working before one year is complete, then he will not be able to transfer ownership of the paper to Alice because Alice will not transfer the paper to him. Since he has agreed to transfer the paper to Alice, Alice will have the right to force him to do so. The only way for him to do so will be to finish his year of work. Thus Alice will be able to force him to complete his work.

Any thoughts?

Jesse June 22, 2007 at 10:59 am

Gabriel,

I would say that since Alice already holds the title to the piece of paper Bob has indeed fulfilled the contract, even though he never actually held the title himself. In any event, Bob cannot be said to have stolen the paper from Alice so long as the paper remains in Alice’s possession.

Even if this were not the case — for example, if an intermediary was chosen to hold the paper — Bob would still not be forced to complete the work. He would merely have to face the consequences of his “theft”. The outcome would, at most, be the same as if a contractual performance bond had been required beyond Bob’s ability to pay. For that matter, if he would not agree to a bond of $50,000, which he presumably could pay, then why would he agree to an even larger bond that he couldn’t pay?

Blah June 22, 2007 at 1:19 pm

But even if the defaulting debtor is not able to pay, he has still stolen the property of the creditor by not making his agreed-upon delivery of the creditor’s property.

So, what Rothbard is saying is that an individual could sign away all of their future income, and the creditor is the only one who could free that individual from their obligation. To me, that is basically slavery, but I know that the counter-argument is that property is alienable.

I guess my question is, if someone agrees to be bound by some unreasonable debt – let’s say, an interest rate that over time ultimately means they owe the creditor many times more than the individual is likely to earn in their lifetime – is there anything, except the creditor’s forgiveness, that could save the individual? I have no problem with an individual having to hand over everything he currently owns, but having to hand over all future income kind of scares me.

Kevin B. June 22, 2007 at 2:03 pm

Blah: “So, what Rothbard is saying is that an individual could sign away all of their future income, and the creditor is the only one who could free that individual from their obligation. To me, that is basically slavery, but I know that the counter-argument is that property is alienable.”

Baboons do not have property rights. By “individual,” you are referring to baboons, correct?

Jesse June 22, 2007 at 2:38 pm

“I guess my question is, if someone agrees to be bound by some unreasonable debt … is there anything, except the creditor’s forgiveness, that could save the individual?”

Basically, no — and that’s a good thing. The (potential) debtor always has the option of not agreeing to “unreasonable” debt. By refusing to enforce their agreement to repay you would eliminate their ability to accept such terms when they believe it to be in their own best interest. Such circumstances are rare, but not difficult to imagine; what parent, for example, would not choose a lifetime of indentured servitude in exchange for significant financial assistance necessary to save the life of one of their children?

Kevin B. June 22, 2007 at 3:08 pm

Jesse: “…a lifetime of indentured servitude in exchange for significant financial assistance necessary to save the life of one of their children”

I apologize, Blah, for my lack of imagination.

“By refusing to enforce their agreement to repay you would eliminate their ability to accept such terms when they believe it to be in their own best interest.”

How true.

Alex MacMillan June 22, 2007 at 3:19 pm

Unfortunately, Kevin, there are lots of your “baboons” around, transacting here and there with non-baboons. Non-baboons have a greater knowledge and ability to gain from transactions with baboons than baboons have to gain from transactions with non-baboons. Should we never care about stupid baboons? I guess the libertarian response is that baboons should be left on their own to transact with non-baboons, otherwise we’ll simply end up with more baboons. I usually agree with this position but sometimes find it a little unsettling.

Jonathan Bostwick June 22, 2007 at 4:05 pm

“So, what Rothbard is saying is that an individual could sign away all of their future income, and the creditor is the only one who could free that individual from their obligation. To me, that is basically slavery, but I know that the counter-argument is that property is alienable.”

Perhaps you should read the article more closely. Or did you read it at all?

Contracts are for transfer of little. Rothbard’s definition of contracts protects individual’s “who sign away all of their future income” much better than our present system.

Rothbard said:

“One more recourse would be permissible. Suppose that Smith, when making his agreement for lifelong voluntary obedience to the Jones Corporation, receives in exchange $1,000,000 in payment for these expected future services. Clearly, then, the Jones Corporation had transferred title to the $1,000,000 not absolutely, but conditionally on his performance of lifelong service. Smith has the absolute right to change his mind, but he no longer has the right to keep the $1,000,000. If he does so, he is a thief of the Jones Corporation’s property; he must, therefore, be forced to return the $1,000,000 plus interest. For, of course, the title to the money was, and remains, alienable.”

Kevin B. June 22, 2007 at 4:48 pm

“be forced to return the $1,000,000 plus interest”

I am not sure how interest comes into play, unless it is specified in the contract. Ideally, in a free society, one brought on charges would agree to the court ruling of interest or else face the consequences of some sort of outcasting, etc.

But what about the one who chooses to be outcast? Surely Smith still owes the $1M to the Jones Corp., who may rightfully attempt to retrieve their property. But if, hypothetically, Smith neither previously agreed to an interest rate, nor did he agree to the court system in the first place, then how may Jones Corp. rightfully attempt to retrieve more than the original $1M?

David Hillary June 23, 2007 at 12:19 am

This article sheds a lot of light on why people like Rothbard come to very different conclusions to others in various areas, for example in banking. For example, modern contract law regards a bank note as a promissory note made by a banker payable to bearer on demand, but Rothbard regards it as a claim on property rather than a claim on the bank. A promissory note is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand, or at a fixed or determinable future time, a sum certain in money to or to the order of a specified person or to bearer. But really, if Rothbard’s theory is applied to a bank note such as a Bank of Scotland note reading ‘THE GOVERNOR AND COMPANY OF THE BANK OF SCOTLAND PROMISE TO PAY HERE TO THE BEARER ON DEMAND TWENTY POUNDS STIRLING, [signed -- Governor and Treasurer & Managing Director]‘ then the Bank of Scotland has not made any title transfer whatsoever and its promise is totally unenforceable!
In the same way a bill of exchange, being an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand, or at a fixed or determinable future time, a sum certain in money to or to the order of a specified person, or to bearer, is not enforceable against the drawer, since a bill of itself does not operate as an assignment of funds in the hands of the drawee available for the payment thereof. Note: the most common example of a bill of exchange is a cheque, which is defined as a bill of exchange drawn on a bank and payable on demand.

The manner of commercial exchange should be better understood as follows: Economic transactions are between two persons, who offer and accept the terms and conditions of an exchange of claims on each other. Thus the claims are against persons, not property. For example a contract to borrow money is an exchange of promises for an advance from one party, and repayments from the other party. Title to the money both advanced and repaid only transfers upon payment, but the exchange of promises and claims occurs when the contract is agreed.

Chris Heath June 24, 2007 at 8:43 am

Contracts should state if there is to be interest paid, however if there is a dispute and it drags on for a long period the monies being held are subject to a loss of opportunity and this loss of opportunity should be compensated by an inclusion of interest being added to the borrowed sum

Kevin B. June 25, 2007 at 12:07 pm

Chris,

I assume your comment is an attempt to answer my question.

One problem with your answer is that opportunity loss is incalculable. In the case where one agrees to be bound by laws stipulating a penalty such as the market rate of interest, court rulings, etc., there is no problem. But in this case there is no such agreement.

Unless there is prior agreement, I see no rightful basis in a free society for the charge of interest on an owed amount.

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