Social Contract, Free Ride. Anthony de Jasay

      Non-self-enforcing contracts “need enforcement” in two senses. In the first, the defaulter must be forced to fulfil his promise by specific performance, repair the harmful consequences of his nonperformance, or possibly both, depending on circumstances. In the second sense, there must be some general presumption in favor of keeping promises as a matter of prudential policy on the part of promisors. Enforcement of some random sample of contracts is a prudential argument against default in all others, for it lengthens the odds, if only subjectively, against being able to default with impunity. The mere probability of successful enforcement, and the ensuing liabilities, will act as a general deterrent to default and contribute to a climate of respect for contractual obligations. This deterrent is an “externality.” It is generated by one’s contribution (effort, trouble, cost) devoted to the enforcement of certain contracts, while the benefit accrues both to the contributor and to others, in that all default becomes a little less likely and reliance on contracts more acceptable to everyone. Reliance on the “practice” of contracting is a classic case of public good created for all by the contributions of some.

      Enforcement is a blanket term, standing for a wide spectrum of alternative means, of varying efficiency and cost. At one end of the continuum, there is basic self-help ("If you break your word, I and my friends will make you regret it") and the help of bystanders who are not directly concerned with the contract in hand, but who have a general interest in discouraging default ("If you break your word, the people of goodwill who know of your promise will make you regret it"). Beyond this, there is enforcement by systematic, at least tacitly pre-arranged mutual aid; a perhaps quite small and informal coalition can advance its specific interest in the reliability of contracts in some field by acts of solidarity against promise-breakers. It can contribute to a precedent-based local climate of respect for promises, where a would-be defaulter must take some account of the probability of sanctions ("If you break your word, you will come to regret it, as did X"). Contract law and tort law are, of course, in this manner jointly enforced by the same powers, applied in response to the same incentives. “Enforced” in its second sense, as an externality, must be understood throughout as a matter of degree, as an increased probability of defaults being sanctioned, specific performances extracted from the defaulters, and torts repaired.

      A special case of self-help is bought help, the purchase from specialized providers of protection against default and torts; debt-collectors, insurance adjusters, guard services fulfil some of these functions. More special still, protection rackets not only protect their clients’selected property and contracts (notably labor contracts and loans) in exchange for ransom, but they also try to suppress the “externality,” the free-rider benefit non-payers of ransom derive from the ransom-financed activity of the racketeer when he discourages interloper banditry, theft, arson, default on debts, and strikes. The protection racketeer will actually attack the non-client, burn him out, organize a strike by his employees, etc., to induce him to become his client by denying him the free-rider benefit.

      Self-help, bought help, and mutual aid involve being judge and judgment-enforcer in one’s own cause, or, in the cause of a member of one’s coalition, vis-à-vis a non-member. This is generally condemned, though often it is a lesser evil or simply unavoidable. Manorial jurisdiction in matters between the lord and his serfs, and royal and republican jurisdiction in matters between the state and its subjects, have throughout history seldom produced quite the monstrously unjust results a priori reasoning would lead one to expect. The judge’s temptation to find merit in his own cause is generally tempered by the risks of abusive behavior. High-handedness always involves a danger, whether or not accurately gauged, of provoking tit-for-tat retaliation, hostile coalition-forming, and disproportionate reactions, from hayrick-burning and sabotage to “exit” (the flight of serfs, the emigration of taxable subjects) damaging to the abusive judge, and possibly even to revolt, though the latter raises special problems.

      Further along the range of what one might call private, decentralized or micro-means of enforcement there is, at least conceptually, some room for institutions that are recognizedly not the instruments of one party, but are meant to stand between litigants. A neutral stance lends them some authority, hence they regain, or more than regain, in efficiency of enforcement what they lost in motivation, in incentive to enforce. History has in fact had a large place for such institutions, from councils of elders to parish priests, until they were gradually undercut and pushed aside by the agencies of the sovereign state. In many parts of pre-feudal Europe there were peasant guilds which impartially assumed their members’ duty of revenge against other members in cases of homicide, mutilation, or harm to livestock, awarded damages, and sanctioned tricky dealings. Where, as in the core area of post-Carolingian Europe, feudalism had a chance to develop properly and its justice superseded the co-operative justice of the peasantry, the lord was technically neutral when dealing with disputes among tenants, though of course he was judge and party in matters affecting manorial rights. In enforcing the basic medieval contract of service tenure, however, feudal justice was bound by the “custom of the manor” which the unjust lord could not transgress without some peril to his own interests. In commerce, fair courts and staple courts stood between the parties, settling disputes and enforcing bargains with a power and efficiency we moderns are surprised to find in non-sovereign, co-operative institutions.

      Guild, town, and merchant jurisdictions spread the general benefit of an increased probability of contract enforcement and hence of observance; in this they acted as providers of a public good. In addition, they were selling the private good of justice in civil cases to individual litigants, the profits of the latter helping to “finance” the emergent general benefits of the former. It was above all the revenue derived from selling justice in matters of property, source of the fattest fees, both in the narrow field of contracts and in unrequited transfers by marriage and inheritance, that most excited the competition between rival communal, ecclesiastical, manorial, and royal jurisdictions, and whose end-result was the emergence of the near universal monopoly of a single public, sovereign agency of law-enforcement. Within this trend there was, at least in England from the fourteenth century onwards, a secondary but none the less portentous development, namely the rise in importance of Chancery as opposed to the common-law courts—a development which, through a few ups and downs, has continued to this day on both sides of the Atlantic, and is giving us the benefits of social policy-making by judicial discretion.

      One should perhaps tentatively set down a few markers at this point. The more “micro,” decentralized, and private is contract enforcement:

      1. the greater is the share of the total cost of enforcement contributed by those for whom it is a private good, paid for in proportion to their recourse to it;

      2. the smaller is the unrequited benefit non-contributing free riders derive from enforceability, hence, from the public good of safe reliance on contracts in general.

      The polar case of privateness is that where the seller of enforcement succeeds in completely shutting out non-contributors from the benefits of safe reliance on contracts. The labor racketeer who makes sure that an employer who does not pay him ransom will have his plant struck can be said to accomplish this to the full; he ensures that only those promises are kept whose promisee has paid enforcement costs.

      The opposite extreme is purely public enforcement, where recourse to it is costless to the litigant and every promisee benefits from the general reliability of contracts as a free ride.

      Generalizing the concept of enforcement over a range from the wholly private to the purely public, involving an unspecified variety of means and practices, a variable dose of externality, and no doubt a varying degree of imperfection and injustice, is perhaps unusual and calls for an apology. The object is to dissipate two facile notions that seem to pervade all discussion of these matters.

      One is that contracts are either enforceable or not, instead of enforceability and reliance being stochastic, more or less probable. The other is that only the sovereign state is capable of enforcing contracts. The same unproven and gratuitous supposition underlies the idea of the rule of law being a necessary condition of a “market order.” If this were the case, the political authority would be logically prior to the institution of contract. It would then be difficult, to put it no higher, to view contract as one of the two