George Mason School of Law

George Mason School of Law Contracts I Bargaining Gains F.H. Buckley fbuckley@gmu.edu

Last Day: A Challenge • How to explain why we ought to perform our promises or contracts

What books did the Founders read? • Don Lutz, Origins of American Constitutionalism (1988)

What books did the Founders read? • The Bible

What books did the Founders read? • The Bible • The “celebrated Montesquieu”

What books did the Founders read? • The Bible • The “celebrated Montesquieu” • Blackstone

What books did the Founders read? Henry Fonda as Young Mr. Lincoln

Sir William BlackstoneWhy did the Founders read him? “This review of our situation may fully justify the observation of [Montesquieu] that [England] is the only country in the world where political and civil liberty is the direct end of its constitution.” Commentaries I.1

Sir William BlackstoneSo where did English liberties come from? But the systems of jurisprudence, in our courts both of law and equity, are now equally artificial systems, founded in the same principles of justice and positive law.” Commentaries I.3

Blackstone was simply adopting what Sir Edward Coke had said 150 years before Then the King said, that he thought the Law was founded upon reason, and that he and others had reason, as well as the Judges. To which it was answered by me, that true it was, that God had endowed his Majesty with excellent Science, and great endowments of nature; but his Majesty was not learned in the Lawes of his Realm of England, and causes which concern the life, or inheritance, or goods, or fortunes of his Subjects; they are not to be decided by naturall reason but by the artificiall reason and judgment of Law, which Law is an act which requires long study and experience, before that a man can attain to the cognizance of it; 12 Co. Rep. 63

Things which cannot be explained naturally, without artificial reason

How did IOU’s get reified (turned into a species of private property)?

How did IOU’s get reified (turned into a species of private property)? UCC 3-201. Negotiation means a transfer of possession, whether voluntary or involuntary, of an instrument by a person other than the issuer to a person who thereby becomes its holder.

So what purposes do such legal fictions serve? • We seem to need a justification from outside, in the consequences which flow from adopting the institution.

So what purposes do such legal fictions serve? • Autonomous lives are happier ones—but why this kind of autonomy? • Why promissory games and not tiddleywinks?

A Natural Law account of promising? • “X is unnatural.” • “It follows that we ought not to do x.”

A Natural Law account of promising? • “Promise-breaking is unnatural.” • “It follows that we ought not to break our promises.”

Let’s look at that… • “Promise-breaking is unnatural.” Really?

A Natural Law account of promising? “No trustworthy primitive record can be read without perceiving that the habit of mind which induces us to make good a promise is as yet imperfectly developed, and that acts of flagrant perfidy are often mentioned without blame, and sometimes described with approbation.” -- Ancient Law, 1861

And even if it were otherwise… • Just what would that tell you?

Hume’s Challenge to Natural Lawyers • The “is-ought” distinction In every system of morality, which I have hitherto met with, I have always remark'd, that the author proceeds for some time in the ordinary ways of reasoning, and … makes observations concerning human affairs; when all of a sudden I am surpriz'd to find, that instead of the usual copulations of propositions, is, and is not, I meet with no proposition that is not connected with an ought, or an ought not. This change is imperceptible; but is however, of the last consequence. For as this ought, or ought not, expresses some new relation or affirmation, 'tis necessary that … a reason should be given; for what seems altogether inconceivable, how this new relation can be a deduction from others, which are entirely different from it.

Hume’s Challenge to Natural Lawyers • To say that people generally act in a certain way is not to say that they ought to do so unless some value is independently attributed to the act.

Can one derive an “ought” from an “is”? John Searle thought so. • Promising is an institution in our language under which those who promise ought to perform. • It is the case that I have promised. • Therefore I ought to perform

Can one derive an “ought” from an “is”? John Searle thought so. • Promising is an institution in our language under which those who promise ought to perform. • It is the case that I have promised. • Therefore I ought to perform • But suppose I think the institution an evil—or morally indifferent one.

Can one derive an “ought” from an “is”? John Searle thought so. • But suppose I think the institution an evil—or morally indifferent one. • If I promise and fail to perform I will weaken the institution—but so what? • The case of dueling

Let’s turn the syllogism around • Promising is a just institution and those who promise ought to perform. • It is the case that I have promised. • Therefore I ought to perform

After Hume, we distinguish positive and normative theories • Positive theories explain what is • Normative theories explain what out to be.

Posner’s Positive Thesis The common law IS efficient

A Normative Thesis • The common law ought to serve efficiency goals.

A Normative Thesis • The common law ought to serve efficiency goals. • Whoa…

A Normative Thesis • But in the case of promising, is there anything else going on?

A Normative Thesis • The institutions of promising and contract law promote trust and permit people to rely on each other.

A Normative Thesis • The institutions of promising and contract law promote trust and permit people to rely on each other. • And that results in a wealthier society.

A Normative Thesis • The institutions of promising and contract law promote trust and permit people to rely on each other. • And that results in a wealthier society. • And that results in a happier society.

A Normative Thesis • In which case, the normative theory of promising comes down to a form of utilitarianism • Social and legal institutions should promote the happiness of their members.

That’s not to say you have to buy into this “What’s so good about happiness? It can’t buy you money” George E. Jessel

Charles Baudelaire I feel sorry for you, M’sieu, that you are so easily made happy.

But what value would we want our legislator to embrace?

Why Enforce Contracts:An Economic Analysis of Bargaining Gains

Modeling Bargaining Gains • Indifference Curves • The Budget Line • Consumer Choice • Beneficial Reliance • The Edgeworth Box Function • Pareto-Superiority and Pareto-Optimality

Two dimensional Commodity Space:Every point represents a combination of the two commodities Y axis Commodity y X axis 0 Commodity x

Two dimensional Commodity Space:Every point represents a combination of the two commodities Y axis A • Y* X axis 0 X* 44

The Commodities: Dollars in Two Time Periods Dollars in Time 1 A • Y* Dollars in Time 2 0 X* 45

Commodity space:Dollars consumed in two time periods Dollars in Time 1 More of both Dollars in Time 2 0

The Budget Line: Allocating $100 between two periods Dollars in Time 1 100 The budget line in red represents every trade-off of $100 in two periods Dollars in Time 2 0 100

Indifference Curves: Preferences about Consumption Dollars in Time 1 An indifference curve represents a set of trade-offs to which the subject is indifferent Dollars in Time 2 0

A  C: Subject is willing to give up $BC in Time 2 for $AB in Time 1 Dollars in Time 1  A B   C 0 Dollars in Time 2

A  C: Subject is willing to give up $BC in Time 2 for $AB in Time 1 Dollars in Time 1 Convexity (curve bends inward) assumes decreasing marginal utility  A B   C 0 Dollars in Time 2

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