Social Contract

In a strictly personalized sense, any person’s ideal situation is one that allows him full freedom of action and inhibits the behavior of others so as to force adherence to his own desires.

James M. Buchanan, 1974¹

The reconciliation between morality and self-interest that mutual advantage the­orists seek is hard to achieve, since the rules of justice creates a classic prisoners’ dilemma: even if you and I jointly benefit from the rules, I will do still better if you obey them and I allow myself to violate them when it suits me.

Daniel M. Hausman and Michael S. McPherson, 2006²

The financial crisis of 2008 provoked a lively debate among economists, inves­tors, and consumers. For some, the collapse of the housing market stemmed from “progressive” attempts in the 1990s to make housing more affordable for the less well-off. For others, it was the result of “neoliberal” efforts to roll back regulation of the free market. Whatever the cause, the government’s response was clear: a bailout for the banks nearly equivalent to the earnings of the top 1 percent of American income earners from the prior decade.³

Roots of the crisis aside, how did we reach a point where such a bailout could become the consensus response? Property transfer laws, lax financial regulations,

¹ James M. Buchanan, The Limits of Liberty: Between Anarchy and Leviathan (Yale University Press, 1974), 92.

² Daniel M. Hausman and Michael S. McPherson, Economic Analysis, Moral Philosophy, and Public Policy, 2nd ed. (Cambridge: Cambridge University Press, 2006), 210-211.

³ US Senator Bernie Sanders reports in an online op-ed column that the wealthiest 400 American citizens had a wealth increase of $670 billion over the past eight years, www.sanders.senate.gov/ news/record.cfm?id=303 313,posted September 19, 2008; these figures are consistent with theUS Bureau of Census 2002 Current Population Survey figures used by Robert Rector and Rea Henderman Jr., “Two Americas: One Rich, One Poor; Understanding Income Inequality in the US,” The Heritage Foundation, August 24, 2004; for recent commentary, see “Workingman’s Blues,” The Economist, July 24, 2008.

175 and neoliberal political philosophy all underlie the practices that led to this eventuality and its relative acceptance. According to the neoliberal Prisoner’s Dilemma theory of the social contract, no income disparity is too great. So long as the least well-off are better off than in a state of nature, they have little ground for complaint. In this increasingly individualized and privatized economy, the worth of citizens depends solely on their command of resources and earnings potential. The financial crisis is indicative of late-modern neoliberal economics, which by applying the tool of noncooperative game theory and expected utility theory emphasizes the Prisoner’s Dilemma model of the social contract and exchange and therefore inevitably condones profiteering through displacing costs on others. The neoliberal approach to economics also condones coercive bargaining by which negotiator’s own profit margin is enhanced by threatening to minimize the best worst-case outcome for rivals.

This chapter and the two that follow examine two leading schools of neo­liberal political economy: public choice and law and economics. Public choice promotes a concept of individualized pay-as-you-go responsibility akin to that embraced by the Thatcher and Reagan administrations of the 1980s. Law and economics, which views the role of justice to be that of maximizing the genera­tion of wealth independent from either distributional considerations or indivi­duals’ consent, has become a formidable approach to jurisprudence in the United States. These chapters demonstrate how the social contract derived from the Prisoner’s Dilemma, which has become the accepted replacement for the classical liberal social contract of mutual benefit, inevitably accepts both the unremitting coercive bargaining of public choice theory and the legally con­doned wealth extraction of law and economics.

James M. Buchanan, who received the Nobel Prize in economic science in 1986, is arguably the most influential founder of public choice theory, which has over time been absorbed into conventional economic and public policy analysis.^[423] However, Buchanan’s neoliberalism marks a sharp break from classic liberalism.

Throughout this chapter and into the next two, we can identify four distinct positions on the justification and maintenance of property rights. Classical liberals differ on the extent to which they view the right to private property as self-evident prior to a social contract, with Adam Smith and Robert Nozick arguing that the transparency of property rights claims preexists incorporation into a state, and both John Locke and John Rawls leaving latitude for the state to specify the particulars of ownership if the two caveats articulated by Locke are not met. Locke’s limitation on individuals’ legitimate ownership of produc­tive means comes into play if either insufficient raw resources (Rawls primary goods) are left in common for those without to sustain themselves or spoilage would occur without permitting legitimate transfers of ownership. Public choice and law and economics similarly differ in their emphasis on whether the content of and claim to property ownership exists prior to or after the constitution of a state. The former stresses that individuals exercise their claim over possessions before entering into a constitutional order but differs from classic liberals in deriving individuals’ claims from their de facto possession of goods rather than a normative rationalization. The latter view the practice of property rights to be coextensive with and dependent on the rule of law, yet they differ from classical liberals in treating property rights as arbitrary and at the discretion of the sovereign if a property claim is in the hands of individuals not making efficient use of it.