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The Essence of Libety

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Liberty knows no compromise

by Murray N. Rothbard

Chapter 19: Property Rights and the Theory of Contracts

Compiled and Edited

by

Dr. Jimmy T. (Gunny) LaBaume

The right to contract is derived from the right of private property. The only enforceable contracts are those where the failure to abide by the provisions would involve the theft of property. But this is only true where title to property has actually been transferred. For example, assume, Smith gives $1000 to Jones in exchange for an IOU agreeing to pay $1100 one year. Indeed Smith has transferred title to $1000. But now, suppose Jones refuses to pay. Under currently existing law Jones has indeed “promised” to pay, but mere promises are not a transfer of property title. Although keeping one's promises may be moral, such is not the function of law. However, Rothbard's contention is Jones must pay, not necessarily for moral reasons but because his failure to do so means that he has stolen Smith's property—e.g. the original transfer was not absolute but conditional on Jones paying as agreed.

To further explain the fallacy and inconsistency in the currently prevalent “promise” theory of contracts: Suppose that A promises to marry B but then changes his or her mind. The strict believer in the “promise” theory would conclude that this contract must be enforced. But, from the libertarian view, compulsory marriage is a form of involuntary slavery and liberty and slavery are diametric opposites and, therefore, totally incompatible.

A milder form, known as the “breach of promise” suit, which forces the violator of his promise to pay damages is equally invalid. There can be no property in someone's promises because they are only subjective states of mind. Since promises do not involve transfer of title to property, cannot involve implicit theft.

The transfer of title to property is only valid where that property is alienable. All physical property is alienable. It can be given away or sold. However, in natural fact, there are certain vital things that cannot be alienated. No person can alienate his will—his control over his own mind and body. A person's natural rights to control his own person and will is the ground for the phrase in the Declaration of Independence to the effect that man's natural rights are inalienable—they cannot be surrendered.

Suppose, for example, that Smith agrees with the Jones Corporation that, for the rest of his life, he will obey all of its orders. In theory there is nothing to prevent such an agreement. But, the problem arises when Smith changes his mind and decides to leave. Rothbard's contention is that Smith's promise was not a valid, enforceable contract. There was no transfer of title because Smith's control over his own body and will are inalienable. One might feel morally obligated to keep a mere promise, but that certainly could not be legally obligatory. Furthermore, Smith should not be required to pay damages to the Corporation because he has retained none of its just property. He always retained title to his own body and person.

Obviously draftees into the army are compelled slaves. But how about persons who voluntarily enlist? As above, the title-transfer theory would hold the enlistment to be a mere promise, which cannot be enforceable—since every man has the right to change his mind.

In contemporary America everyone has the right to quit his job regardless of whatever promise or “contract” he might have previously agreed to. But, if specified in the agreement, the courts do prohibit a worker from working at a similar job for another employer for the term of the agreement. This is only a small step from compulsory slavery.

The employers do have recourse, however. It is perfectly within their rights to voluntarily agree to blacklist the former employee and refuse to employ him. What is not within their rights is the use of violence to prevent the errant employee from voluntarily working for someone else.

Employers have another recourse. Suppose Smith receives $1,000,000 from the Jones Corporation in exchange for promised future services. Although Smith has the absolute right to change his mind, he would not have the right to keep the $1,000,000 and would be forced to return it because the title to the money is alienable.

Let's take another example. Suppose a famous actor agrees to appear at a theater but fails to show up. Should he be forced to? No. That would be compulsory slavery. Should he be forced to reimburse the theater owner for his expenses? Again, no because his agreement was a mere promise concerning his inalienable will. He did not receive any property from the theater owner and therefore committed no theft. The theater owner may have made a considerable investment but that is their proper risk. He simply made a bad judgment about the reliability of the actor. But as before, if the actor received a payment in advance, then not fulfilling the contract would be theft and he should be forced to return the money.

Most of the problems discussed above could be easily overcome by the use of a performance bond. For example, the actor would agree to transfer a sum of money to the theater owner in case he fails to appear. Since money is alienable and such a contract meets the title-transfer criterion, this would be a perfectly valid and enforceable contract.

In sum, the purpose of contract enforcement is to enforce property rights and to guard against the implicit theft involved when contracts (which transfer titles to alienable property) are broken. It should have nothing to do with “compensation.” Defense of property titles should be the sole business of enforcement agencies.

Should contracts for gifts be legally enforceable? Once again, that would depend on whether a mere promise has been made or whether there has been an actual transfer of title to property. For example, if A says to B, “I hereby give you $10,000,” then it is obvious that title to the money has been transferred. Therefore, the gift would be enforceable. On the other hand, if he says, “I promise to give you $10,000 in one year,” this would be a mere promise and therefore not enforceable. Yet back on the other hand, if he says: “I hereby agree to transfer $10,000 to you in one year,” then this is a declared transfer of title at the future date and should be enforceable.

This may appear to be mere wordplay but it is not. The important question is always: has title to alienable property been transferred or has a mere promise been made? Thomas Hobbes was not engaging in word-play in Chapter 14 of Leviathan when he said, (To paraphrase): “Words such as tomorrow I will give are a sign (that) I have not yet given, and consequently that my right is not transferred…But if the words be of the time present, or past, as, I have given , or do give to be delivered tomorrow , then this is my tomorrow's right given away today.”

As an example, suppose a grandfather promises to pay his grandson's way through college but, after a year or two, decides to revoke that promise. Under our title-transfer theory, the grandson has no right to the grandfather's property because a mere promise can not confer title. On the other hand, if the grandfather had written: “I hereby transfer $X to you” or “I hereby transfer $X to you at each of the following dates…” then a transfer would have occurred and the money would be the grandson's property.

Also, suppose the original statement of the grandfather was a conditional exchange where he agreed to pay the tuition provided the grandson made weekly progress reports. If the grandson did, indeed, perform such services, then the tuition payment would be his property.

Fraud is failure to fulfill a voluntarily agreed upon transfer of property. Therefore it is implicit theft. For example, if A sells B a package and tells him that it contains a radio when, in fact, it contains only some scrap metal, then A has therefore stolen B's property. The same applies to a product warranty. For example, if a seller claims that a package contains 5 ounces of product but it does not, then the seller has stolen the buyer's money.

Bankruptcy laws would not be permissible in a libertarian legal system because they compel the discharge of a debtor's voluntarily contracted debts which is an invasion of the property rights of creditors. In effect, the debtor has stolen the property of the creditor. Furthermore, if he conceals his assets, then his theft is compounded by fraud. In short, bankruptcy laws confer a license to steal.

A utilitarian economist might reply that the creditor compensates for the extra risk with a higher interest rate and t herefore actions under bankruptcy are not expropriation of the creditor's property. Although that may be true, it doesn't change the fact that bankruptcy laws are violations of the property rights of the creditors, regardless of foreknowledge. It would be absurd for the utilitarian economist to make the same argument to justify mugging or burglary—e.g. he would argue that, since storekeepers know in advance (even before they open the store) of high crime rates and can adjust their insurance and business practices accordingly, then robbery is not to be deplored or outlawed. Crime is crime, and invasions of property are invasions of property.

It should be noted that any individual creditor may voluntarily decide to forgive his own debt. However, no majority of creditors may compel a minority to “forgive” their claims. Also note that voluntary forgiveness may occur after default, or incorporated into the original contract.. The important point is that it is voluntarily agreed upon.

Voluntary forgiveness essentially amounts to a gift. Current legal doctrine questions validity of such an agreement as a binding contract. This doctrine holds that there must be consideration” in order to have a binding contract and, in the case of voluntary forgiveness, the creditor receives no consideration. But our title-transfer principle sees no such problems with forgiveness.

Also under our title-transfer model, a person would be able to sell all or any part of his property and retain the rest. For example, under common-law copyright, an author or publisher sells all rights to his property except the right to resell it. Restrictive covenants on real property are similar. A developer might sell the all the rights to the property except for the right to build a house smaller than a specified size. Regardless, there must always be some existing owner of all the rights to any given property. Then, if the reserved right is abandoned, then the owner of the house may “homestead” this right. In short, covenants and other restrictions cannot simply “run with the property” forever.

In short, all property rights must be in the hands of living persons. Therefore, this rules out entail as an enforceable right. (Entail—typical of feudalism—involves bequeathing land to sons or grandsons with the proviso that no future owner could sell outside the family.)

Now, suppose Smith, who owns land he leases to Jones, sells it to Robinson. Can Robinson oust Jones ? Under the promise theory, Smith made the promise. Robinson did not and therefore he is not bound by that promise. On the other hand, according to the expectations model he cannot because the agreement generated expectations in Jones. However, with our model, Jones owns (has a property right in) the use of the property for the contractual period. Therefore Robinson cannot break the lease unless that condition is expressly included in the lease.

In conclusion, the most important implication of our title-transfer theory is that it refutes all variants of the “social contract” theory as a justification for the State. The social contract is a mere promise of future behavior and, therefore, in no way does it involve the surrender of title to alienable property.

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