What limits should be placed on the ability of individuals to enter into negotiable agreements?
It’s tempting to say, “none.” But there are some “agreements” — those reached under duress or in restraint of trade or other rights of third parties — that the state may decline to enforce, or outlaw completely. Presumably, if an exchange is truly voluntary, the state should allow it. But what if the exchange is not really voluntary? Should we be concerned with consequences, or what philosophers call “non-worseness”?
I have been working for some time on the problem of “truly voluntary” exchange, coining the word “euvoluntary” to describe the ideal negotiation setting. I took the Greek prefix eu, meaning good, well, or true, and the Latin voluntaris, and combined them.
Euvoluntary exchange requires:
(1) conventional understanding and application of ownership of items, services, or currency by both parties; the “seller” must own the item or legitimately own the means of providing the service; the “buyer” must own the money or barter item to be offered in exchange;
(2) conventional capacity to transfer and assign these ownership rights to the other party, and the actual agreement to do so is communicated;
(3) the absence of regret, for both parties, after the exchange, in the sense that both receive value at least as great as was anticipated at the time of the agreement to exchange;
(4) no large-scale or dangerous uncompensated externalities, or costs imposed on third parties without their consent (and the third-party consent would have to be explicit, and elicited under circumstances that themselves otherwise approximate euvoluntary exchange);
(5) that neither party is coerced in the sense of being forced to exchange by threat (“If you don’t trade I will shoot you!”);
(6) neither party is coerced in the alternative sense of being harmed by failing to exchange (“If I don’t trade I will starve!”).
Categories 1-4 are standard requirements for a valid contract in the common law. Likewise, categories 5 and 6 could be summarized as “no duress,” also a requirement for valid contracts under the common law. The fifth requirement is a routine aspect of “voluntary” action; in the political world, “power” means a person (group) can impose his (its) will on others through the threat of violence. That is the sense of “coercion” in 5 above.
In the economic world, many people claim that power and even duress may be different, in a way captured in category 6: harm can be caused by being “forced” to exchange. Most of us have a sense that artificial, unearned monopoly is not only economically inefficient, but immoral.
Of course, the decision by a consumer whether to purchase a product marketed by a monopoly is not coercive in the same sense that political power is coercive. But if the product is desperately needed, the choices of the consumer faced with a monopoly do not seem euvoluntary. The question is, If the exchange is not euvoluntary, is it morally acceptable?
When you start to think in terms of this notion of euvoluntarity, a number of previous examples become clear. In particular, I would claim that euvoluntarity was the idea Robert Nozick was reaching for, in his famous “Wilt Chamberlain” example:
There is no question about whether each of the people was entitled to the control over the resources they held. Each of these persons chose to give twenty-five cents of their money to Wilt Chamberlain. They could have spent it on going to the movies, or on candy bars…. But they all, or at least one million of them, converged on giving it to Wilt Chamberlain in exchange for watching him play basketball. (Nozick, 1974: 161)
The point is that the fans owned the money, they had alternatives, no one was holding a gun to their heads, and the alternative to a night out at the basketball game was not starvation. This was a euvoluntary exchange. Yes, Wilt Chamberlain was much better than other basketball players of his time, and he attracted enormous rents; that wealth may in some sense have been undeserved, because it was a result of bargaining power — Chamberlain was much better than the next-best player. But since Chamberlain’s wealth was the result of many individually voluntary, and in fact euvoluntary, exchanges, he is entitled to his position in the highly unequal distribution of wealth that results.
There may be valid objections to my claim of the importance of euvoluntarity, from the pro-market side. Most people would agree that coercion by human agency (Jane holds a gun to Matt’s head) disqualifies a contract’s validity, but should coercion by circumstances (Jane has water in a desert, and Matt is dying of thirst) also invalidate the ability to make binding agreements?
Many on the left hold exactly this “coercion by circumstance” view, claiming that a choice can’t be voluntary if it is not a choice. Michael Sandel (1998: 78) formulates the objection in this way:
The … objection [to the claim that an exchange is truly voluntary] is an argument from coercion. It points to the injustice that can arise when people buy and sell things under conditions of severe inequality or dire economic necessity. According to this objection, market exchanges are not necessarily as voluntary as market enthusiasts suggest. A peasant may agree to sell his kidney or cornea in order to feed his starving family, but his agreement is not truly voluntary. He is coerced, in effect, by the necessities of his situation.
Sandel has a good point. But it’s not a great point, and it doesn’t win him what he thinks it wins. Suppose you go to that desperate peasant and announce you are here to help: you have arranged for some soldiers to point guns at the peasant and prevent him from selling his cornea.
Will he thank you? Of course not; you have violated the non-worseness condition. It’s true the peasant shouldn’t have to sell his cornea to save his daughter. But your “help” means that he can’t sell his cornea, and so he can’t save his daughter. You have done nothing to improve the situation of the person you claim to care about; all you did was make your own conscience feel better by preventing, using force, an exchange he desperately needed to make. Was the exchange voluntary? No, it wasn’t. But that doesn’t mean it should be blocked.
To eliminate the ambiguity in the meaning of voluntariness, I proposed the formal notion of euvoluntariness, or “true voluntariness.” The primary additional condition, added to what economists think of as voluntary exchange (no external coercion) is something like freedom of choice (no coercion by circumstance). This additional condition is controversial, at least on my side of the debate, but I think that it connects with what Sandel means.
Contracts are invalidated if they are “unconscionable,” imposing a general moral restriction on the terms that can be negotiated. An example can be found in the decision Post v. Jones of 1856. The précis is simple: No contract is valid if there is no market, no competition, and one party has absolute bargaining power.
Here’s the short version: A whaling ship, the Richmond, with a substantial load of valuable whale oil, runs aground on dangerous rocks and will almost certainly be wrecked. All its cargo will be lost. The “rescuer” ships in effect negotiate a deal where all the oil becomes the property of the rescuer. The rescuers then auction off the oil, receiving an amount much greater than the salvage fee would have been.
The owners of the wrecked ship argue that the agreement was “negotiated” under duress. There was no market and no competitive setting for the negotiation. Therefore the implicit contract was not enforceable, because it was unconscionable. In my terms, that just means that the contract was not euvoluntary.
Still, wait; what about non-worseness? Suppose the captains of the rescuing ships know that no contract for more than minimal salvage fees will be enforceable. But the situation close to the rocks is very dangerous, and they (prudently) decide not to attempt the rescue. The captain of the Richmond offers more than the salvage fee, because that is what is required to induce an increase in “supply” of rescue services.
But since that offer is not enforceable, and will in fact be reversed by a court once the rescue is effected, the rescue does not take place. The captain of the Richmond would have been better off being rescued at the higher price, but he cannot offer a higher price, even if he wants to (and he does want to, very much!).
Interestingly, in the case of the Richmond, there was an obvious institutional solution, implemented by the companies that wrote insurance against such risks. These companies had every incentive to make sure that “unconscionable” (that is, non-euvoluntary) contracts were enforceable, because it costs less to pay high salvage fees than to pay for an entire ship and cargo that is not rescued. So a commission was established which would pay a guaranteed price, a price that would be unconscionable if negotiated under duress but acceptable if agreed upon in advance. Interestingly, this meant that the ship captains accepting such an insurance contract were behind a Rawlsian “veil of ignorance,” because ex ante they didn’t know if they would be the rescuers or the rescued.
In a nutshell, that’s the argument for allowing non-euvoluntary exchanges, even if they seem unfair. Ignoring non-worseness means that your concern for the poor and desperate actually harms the poor and desperate; non-worseness says that the position of the object of your moral concern is more important than your moral intuition that the exchange is unjust.
A more quotidian example is the sweatshop: Billions of people whose parents or grandparents toiled in sweatshops or small farms, first in the U.S. in the 19th century and in much of Asia in the 20th century, are now much better off. As the research of economist Ben Powell has shown, working in a sweatshop actually tends to lead people out of poverty.
If you shut down sweatshops because you think people shouldn’t have to work in such bad conditions, are you really helping the poor folks who work there? Or have you just removed another option from the lives of people who had desperately few options to begin with? As with the earlier example about the peasant selling his corneas, finding a policy solution to address the real problem here is more complicated than it may first appear.
You have to be careful not to let moral considerations harm the very people you claim to care about. Working within the local constraints of time and place — and focusing not on the intentions of a policy but its actual effects — will make for better policy and a more useful basis for research.
Michael Munger is Professor of Economics at Duke University and Senior Fellow of the American Institute for Economic Research. His degrees are from Davidson College, Washingon University in St. Louis, and Washington University.