December 19, 2008

Legislation and Regulation in the Libertarian State

A little while back, I argued that the current crisis was not, by any means, the end of libertarianism, and that anyone who says so misunderstands libertarianism both in terms of its practical consequences and in terms of its theoretical basis. What I mean by this is, in the first case, that libertarianism doesn't condone the policies that led to the current crisis and, in the second case, that libertarianism is a deontological theory of political morality, not a theory of political 'utility'. That last claim perhaps needs a translation for non-philosophers: libertarianism is a theory of which things the state should and should not do, and it claims that such actions of the state are right or wrong in and of themselves regardless of their consequences.

William Black of Cato Unbound recently argued that classical laissez-faire economic policy, if it is understood properly, is going to require precisely the sort of regulation that the Bush administration had been dismantling, leading to the current crisis (HT: pferree, via email). As Black puts it, "when you don�t regulate financial activities you de facto decriminalize control fraud because the regulators are the 'cops on the beat.'� In other words, given our current political situation, deregulation (or, as Black prefers to call it, 'desupervision') amounts to decriminalization of fraud, because there is no one else around to enforce laws against fraud besides the regulators. Now, the FBI could theoretically have opened fraud investigations long ago, and it's my opinion that they should have, but that's beside the point. The point I want to make is, rather, that a degree of legislation/regulation is not only permitted but required as part of the libertarian state's mission to protect its citizens from force or fraud.

To see why, consider the definition of fraud. My dictionary says "wrongful or criminal deception intended to result in financial or personal gain." So what the libertarian state is trying to prevent (or, failing that, to punish) on behalf of its citizens is the use of deception to violate someone's person or property. What is deception? To a first approximation, we can say that 'deception' occurs where one person acts in such a way as to bring about false beliefs in another (we will, for the moment, ignore the question of whether such acts have to be intentional to count as deceit or fraud). So when you defraud someone what you are doing is bringing it about that that person has false beliefs and using these false beliefs for your gain at that person's expense.

Suppose I own a certain building, and I put a sign up on the front of the building saying 'Kenny's Restaurant'. Seeing my sign, you come in. I hand you a piece of paper that says 'menu' at the top, and has a lot of nonsense words written below it, with a price for each one. Now suppose, seeing this menu and being an adventurous eater, you order a 'zubast' (thinking it is some kind of foreign food) and pay me $10 in advance. I bring you a rock. You ask for your money back and I refuse.

This is a case of fraud. But why? The word 'zubast' is a word I made up, and I (let us suppose) intended it to mean 'a medium sized rock.' You paid for a zubast without knowing what it was. So I'm not to blame, am I?

The problem lies in the fact that I posted a sign saying 'restaurant' over my door, which means that I am implicitly representing to you that what I am serving inside is food fit for human consumption. (I didn't use the case of food that makes you sick or kills you because such a case shows how fluid the boundary between force and fraud is, and thus complicates the discussion.) Now, the libertarian state is supposed to prevent fraud, which means it must enforce agreements. You handed me $10 in exchange for a zubast. If I took the money and ran, that would be another type of fraud. I have to fulfill the obligations of our implicit agreement. But in order for the libertarian state to be able to enforce agreements it has to be able to interpret them, and this is what courts are for. The court will need to be able to decide both (1) whether any agreement exists between us, and (2) what the contents of that agreement are. So the court will adjudicate between us and rule in your favor that because of my restaurant sign I had (fraudulently) led you to believe that a zubast was a type of food.

But suppose I want to sell zubasts (medium sized rocks) and other people want to buy them. The libertarian state mustn't prevent us from making this sort of agreement. That means that I need to know how to make a non-fraudulent representation as to what it is I'm selling. Other people likewise need to know what my representation means. That is, we need to be able to make the agreement we are trying to make. So now that the court has ruled in your favor, I know that if I tell anyone my establishment is a restaurant that's deception. The court has made a legal definition of what implicit representations are involved in the claim that an establishment is a restaurant. This, of course, only works in a 'common law' system, but this strikes me as a powerful reason why common law systems are good: predictability is essential to good jurisprudence.

But there is a problem with this: the exact same story could happen with no fraud involved. In fact, you could be using the court as an instrument to defraud me! How? Well, suppose that you and I both speak a peculiar dialect of English in which 'restaurant' means 'a place for buying and eating prepared food, and also for buying rocks,' but the judges speak normal English. Further suppose that the context on the menu makes it plain to anyone in our dialect that a 'zubast' is a type of rock. Then we have actually formed an agreement whereby you give me $10 and I give you a rock, and you are now trying to get your $10 back through the courts. You know the courts will see it in a way that advantages you, since you know that they speak a different dialect than we do, and are using this fact to your advantage to defraud me of my $10.

If all of these sorts of definitions were made by common law, then it would be extremely common for things like this to occur: lacking legal definitions, two people could make an agreement only to have one party successfully get out of it by misinterpreting it in court. On the other hand, two people could also non-culpably form an agreement - even a written contract - where there is no common understanding between them as to its meaning. These cases can never be entirely prevented, but there is a way of mitigating them: by legislative and regulatory bodies creating legal definitions of words before such cases arise. So it is perfectly reasonable for Congress to create a law defining what implicit representations are made when something is called 'food', or from them to delegate the power of such definitions to agencies like the FDA.

There are, however, two libertarian concerns about this picture: (1) what if this power was used to make it impossible to make certain sorts of agreements, in Orwellian fashion? (For instance, what if 'food' is defined as 'items approved for human consumption by the FDA' and the government deems that any time you sell something that looks like a carrot you implicitly represent that it is food? Then we have a case much like the current situation, which libertarians abhor, where individuals are not permitted to buy and sell non-FDA-approved carrots, even if both parties give informed consent.) (2) What if the government defines the terms in question in ways radically different from normal English so that the law becomes an instrument of fraud by those familiar with the law against those who are unfamiliar? (For instance, what if the government defines 'food' to mean poison and I know that you don't know this so I sell you some 'food' and thereby make a profit and kill you? Then you end up forming an agreement radically different from the one you intended to form, to your great detriment.)

Because of these concerns it is necessary to place additional restrictions on this power besides the obvious restriction against applying such definitions ex post facto to agreements made with other definitions in mind. There is one way of dealing with the first problem which is fairly obvious (to me): simply permit people to state, at the beginning of their contract, that they intend to use a different set of definitions than the one set up by the government. If both parties agree to use a different set of definitions, then the court will have to use those in interpreting the contract. (Of course, the words used in the definitions will have to be interpreted either according to normal English or, if they have legal definitions, according to those definitions, so this won't halt a thorough-going Orwellian language reform, but it makes it more difficult.) The second problem will, it seems to me, have to simply be a constitutional principle: courts will have to overrule legislation or regulation which does violence to the plain meanings of words.

This first line of legislation/regulation had to do with the interpretation of agreements. I previously said, however, that the state would also have to make determinations about the existence of agreements. This will lead, for similar reasons, to the development of legislation/regulation regarding standards of consent. Libertarians insist that the government must allow consenting (legally competent) adults to agree to anything which does not violate the rights of non-consenting parties. But that doesn't mean that standards of consent must be uniform across all agreements. In fact, it seems to me that they shouldn't be. For instance, in current US law, there are some things minors can consent to on their own (e.g. paying cash for an ice cream cone), some things minors can consent to if their parents also consent and/or supervise (e.g. seeing an R-rated movie), and some things a minor cannot consent to under any circumstances (e.g. sex with an adult). Likewise, it seems reasonable for adults that different standards of consent should apply to different activities. For instance, it is currently the case in some states that some sort of counseling is required in order to consent to elective medical procedures, especially those that have serious risks associated with them, but there are other things for which verbal, or even implicit, consent is sufficient.

This, it seems to me, is perfectly reasonable. However, the government's power must again be limited so that they cannot set the standards of consent so high as to make consent to certain agreements impossible, either de iure or de facto.

To summarize, the libertarian state has the power to legislate and regulate (1) the interpretation of agreements, and (2) the conditions for consent to agreements. These powers are necessary for it to be able to achieve its purpose of preventing fraud against its citizens. However, these powers must not be exercised in such a way as to prevent consenting (legally competent) adults from entering into agreements which do not implicate the rights of others.

Posted by Kenny at December 19, 2008 8:48 AM
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