Markets as a Moral Foundation for Contract Law

• Author: Nathan B. Oman
• Position: Cabell Research Professor, William & Mary Law School
• Pages: 183-230

183

Markets as a Moral Foundation for

Contract Law

Nathan B. Oman

I. INTRODUCTION ...................................................................................... 184

II. THE PROBLEM WITH THE EFFICIENCY DEFENSE OF MARKETS ................ 188

III. THE NON-EFFICIENCY CASE FOR MARKETS ............................................. 193

A. POLITICS .......................................................................................... 193

B. WEALTH .......................................................................................... 198

C. VIRTUE ............................................................................................ 201

IV. MARKETS AND CONTRACT LAW .............................................................. 204

A. PROMISSORY THEORIES OF CONTRACT .............................................. 205

B. WHY ENFORCE MORAL OBLIGATIONS? .............................................. 207

C. NOT ALL PROMISES ARE ENFORCED AS CONTRACTS ........................... 211

D. CONTRACT LAW REMEDIES DON’T ALWAYS ENFORCE PROMISES ......... 215

V. CRITICISMS AND LIMITATIONS ............................................................... 219

A. DISTRIBUTIVE JUSTICE ...................................................................... 220

B. HETEROGENEITY AND THE PROBLEM OF PATHOLOGICAL MARKETS .... 224

C. CONTRACT LAW AND PRIMA FACIE JUSTIFICATION ............................. 227

VI. CONCLUSION ......................................................................................... 229

 Cabell Research Professor, William & Mary Law School. I would like to thank Josh

Chafetz, George Cohen, Ali Larsen, Jason Solomon, and Eyal Zamir for comments on an earlier

draft of this project. I presented previous iterations of this Article at the Willia m & Mary Private

Law Theory Workshop, Emory Law School, and George Washington Universit y Law School and

benefited from comments and criticisms in all of those fora. Curtis Bridg eman provided an

especially insightful conversation over curry. As always, I thank Heather.

184 IOWA LAW REVIEW [Vol. 98:183

I. INTRODUCTION

Markets are not natural. Adam Smith noted that mankind has “the

propensity to truck, barter, and exchange one thing for another,”1 but

markets require more than mere exchange, which is present not only in all

human societies but also among certain primates.2 Rather, healthy markets

consist of the widespread allocation of goods and services through a

repeated and ongoing process of impersonal exchange among large groups

of people without resort to violent expropriation or other forms of

predation.

Consider the example of Russia in the early 1990s. In the wake of the

failed coup by hard-line communists, the Soviet Union formally dissolved,

and the Russian government faced the daunting task of transitioning from

an economy in which goods and services were ostensibly allocated by state

fiat to markets.3 Russian policymakers, acting on the advice of Western

economists, opted for a policy of “shock therapy.”4 Every Russian citizen

would be given a share of stock entitling them to some fractional equity

ownership of state-owned enterprises.5 The hope was that simply transferring

ownership to private hands would create incentives that would lead to the

creation of healthy markets.6 While the shock therapy did achieve its main

political objective of forestalling a return to communism, it was not a

startling economic success.7 In some segments of the Russian economy,

healthy markets developed, but criminal and quasi-criminal oligarchs whose

wealth rested in large part on extortion and allies within the state came to

dominate other sectors.8

1. ADAM SMITH, THE WEALTH OF NATIONS 11 (C.J. Bullock ed., Barnes & Noble 2004)

(1776).

2. In experiments with humans, chimpanzees demonstrate the ability to trade food,

including evidence of a conscious strategy of maximizing their gains from trade. See Louis

Lefebvre, Food Exchange Strategies in an Infant Chimpanzee, 11 J. HUM. EVOLUTION 195 (1982).

While chimps have this ability, however, they have not been observed trading in the wild. Id. at

201 (“Food exchange can be thus added to the growing list of sophisticated abilities great apes

show in captivity but do not use in the wild.”).

3. See generally MARSHALL I. GOLDMAN, THE PIRATIZATION OF RUSSIA: RUSSIAN REFORM

GOES AWRY 45–70 (2003) (discussing economic conditions in Russia on the eve of

privatization).

4. See id. at 58–65 (describing the motivations of Yeltsin’s key economic advisors in

implementing “shock therapy” for the Russian economy).

5. See id. at 86.

6. See id.

7. See PREM SHANKAR JHA, THE PERILOUS ROAD TO THE MARKET: THE POLITICAL ECONOMY

OF REFORM IN RUSSIA, INDIA AND CHINA 36–56 (2002) (discussing the effects of Yeltsin’s “shock

therapy” on Russian society).

8. See id. at 37 (“The Mafiya controlled prices and rapidly developed an interest in

ensuring that increases in supply that would force prices down did not reach the market. . . . It

also controlled the entry of new small businesses, and thereby choked the growth o f

entrepreneurship in the country.”).

2012] MARKETS AS A MORAL FOUNDATION 185

Historically, the Russian experience is unsurprising. Commerce and

markets on a limited scale, of course, are common across time and space.

There was trade in ancient Egypt and ancient China.9 On the other hand, in

many societies impersonal voluntary exchange accounted for a relatively

small share of economic activity. Consider, for example, the economic

organization of the Roman Empire. To be sure, there was trade and

commerce, often on a large scale.10 On the other hand, subsistence

agriculture, slavery, and various forms of expropriation such as tax farming

accounted for the bulk of economic activity. In human history, the

dominance of economic life by healthy markets has been the exception

rather than the rule. Indeed, modern economists have noted that even today

most societies are dominated by a social model where “[p]ersonal

relationships, who one is and who one knows, form the basis for social

organization and constitute the arena for individual interaction, particularly

personal relationships among powerful individuals.”11 In contrast, the

set of changes in the economy that ensure open entry and

competition in many markets, free movement of goods and

individuals over space and time, the ability to create organizations

to pursue economic opportunities, protection of property rights,

and prohibitions on the use of violence to obtain resources and

goods or to coerce others12

is rare both historically and globally.

Foregrounding the contingency of healthy markets has potentially

important implications for legal theory, particularly for our thinking about

bodies of law such as contracts that are closely associated with markets. An

assumption that markets are natural or given focuses attention on the role of

law as a regulator, a social mechanism for ferreting out and suppressing

markets in their pathological inflection. If, on the other hand, we see

markets as fragile and contingent, we focus our attention on a different set

of questions, the questions that I seek to discuss in this Article.

Contract law is the quintessential institution of a market economy.

Indeed, historically, contract was a late arrival to the common law. For the

first several centuries of its existence, the common law focused mainly on

issues of personal security—what today we would call torts and criminal

law—and the rights and duties associated with property, especially real

9. See WILLIAM J. BERNSTEIN, A SPLENDID EXCHANGE: HOW TRADE SHAPED THE WORLD 20–

28 (2008) (discussing international trade in the ancient societies of the Fertile Crescent).

10. See id. at 40–42 (discussing trade in the Roman Empire).

11. DOUGLASS C. NORTH, JOHN JOSEPH WALLIS & BARRY R. WEINGAST, VIOLENCE AND

SOCIAL ORDERS: A CONCEPTUAL FRAMEWORK FOR INTERPRETING RECORDED HUMAN HISTORY 2

(2009).

12. Id.