The Dignity of Commerce: Markets and the Moral Foundations of Contract Law

The Dignity of Commerce

The Dignity of Commerce

Markets and the Moral Foundations of Contract Law

NATHAN B. OMAN

THE UNIVERSITY OF CHICAGO PRESS

CHICAGO AND LONDON

The University of Chicago Press, Chicago 60637

The University of Chicago Press, Ltd., London

© 2016 by The University of Chicago

All rights reserved. Published 2016.

Printed in the United States of America

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ISBN-13: 978-0-226-41552-9 (cloth)

ISBN-13: 978-0-226-41566-6 (e-book)

DOI: 10.7208/chicago/9780226415666.001.0001

Library of Congress Cataloging-in-Publication Data

Names: Oman, Nathan, author.

Title: The dignity of commerce : markets and the moral foundations ofcontract law / Nathan B. Oman.

Description: Chicago ; London : The University of Chicago Press, 2016. | Includes bibliographical references and index.

Identifiers: lccn 2016017327 | ISBN 9780226415529 (cloth : alk. paper) | ISBN 9780226415666 (e-book)

Subjects: lcsh: Contracts—Moral and ethical aspects. | Commerce—Moral and ethical aspects. | Law—Philosophy.

Classification: LCC K840 .057 2016 | DDC 346.07—dc23 LC record available at https://lccn.loc.gov/2016017327

This paper meets the requirements of ANSI/NISO Z39.48-1992 (Permanence of Paper).

FOR MORRIS SHEPPARD ARNOLD,

SCHOLAR, JURIST, AND SAGE OF HIPPIE ZEN CAPITALISM

Contents

Preface

CHAPTER 1. Introduction: Shakespeare and the Predicament of Contract Theory

PART 1

CHAPTER 2. Well-Functioning Markets and Contract Law

CHAPTER 3. The Moral Consequences of Well-Functioning Markets

CHAPTER 4. Contract Law, Efficiency, and Morality

PART 2

CHAPTER 5. Consideration

CHAPTER 6. Remedies

CHAPTER 7. Boilerplate

CHAPTER 8. Pernicious Markets and the Limits of Contract Law

Conclusion

Notes

Bibliography

Table of Authorities

Index

Preface

In a sense, I began this book my first semester in law school. I spent a year and a half before beginning law school working as a Senate staffer while my wife completed her graduate degree. I arrived at law school prepared to dive into the great debates over constitutional structure that I had seen played out in the grinding legislative process on Capitol Hill. To my surprise, however, I found that the mysteries of the common law, especially the common law of contracts, captured my imagination. I wanted to understand where what seemed to be the great buzzing, bubbling mass of contract doctrine had come from and what it could possibly be doing. I realized that Why does the law enforce contracts? is a question to which one could offer multiple answers and that the shape of legal doctrine would change depending on which approach one adopted. Fifteen years on, this book offers my considered answer to that question.

When the time came to pursue my research agenda, I turned to the philosophy of contract law. There I discovered what struck me as a deeply unsatisfying division between economic theories of the law and autonomy theories of the law. I found myself persuaded by the normative criticisms of efficiency but dismayed by the dismissal of economic approaches to contract law. It struck me as implausible to assume that the normative justification of contract law was unconnected to the incentives that the law created—incentives that had been studied with such ingeniousness by law and economics scholars. I also felt that economic theorists were fundamentally correct in their focus on market actors and the way in which the law structured market interactions.

My earliest publications explored the division between economic and autonomy theories, seeking possible ways of reconciling them together.¹ I confess that I had a difficult time finding a theoretical approach that I found wholly satisfying.² The idea for this book took shape when I was teaching a seminar on private law theory at Hebrew University in Jerusalem. I was struck by two experiences. The first was shopping in the souks of the Old City and the enormous outdoor Mahane Yehuda Market in Jerusalem. The second was talking with Israelis and Palestinians about the massive wall erected by the Israeli government to limit the ability of Palestinians living on the West Bank to enter Israel. I was struck by the way that, in a place perhaps best known for religious and ethnic conflict, Jews and Arabs, Muslims and Christians were constantly bargaining, trading, and serving one another in the markets of Jerusalem. I was also struck by the fact that one of the losses from the Israeli wall was that it made such commercial interactions more difficult and less common. From those inchoate impressions, I eventually produced the law review article setting forth the basic claim defended in this book.³ The Dignity of Commerce deepens the arguments put forth in that article. With the exception of chapter 6, all the material in this book is new.⁴

This is the first book that I have ever written, and finishing it proved more onerous than I’d anticipated. Along the way, I have incurred debts to many. At the risk of forgetting names that ought to be included here, I want to acknowledge those debts. None of those thanked are responsible for the errors that remain. Several of my colleagues at William & Mary provided extensive feedback on early drafts of portions of this book or the arguments presented here, including Pete Alces, Darian Ibrahim, Eric Kades, Alan Meese, Thomas McSweeney, Sarah Stafford, and James Stern. I presented an earlier draft of chapter 1 at the North American Private Law Theory Workshop hosted by McGill University. I am grateful to Stephen Smith for the invitation to participate in that conference and to the participants for their feedback. I also presented that chapter as the annual Blackstone Lecture at William & Mary Law School, where I received useful criticisms in the question-and-answer session after the lecture. I presented an early version of chapter 8 at the William & Mary Private Law Workshop, where I received excellent suggestions from Henry Smith, Andrew Gold, Brian Lee, and Chris Essert. In addition, I have received helpful comments and suggestions from Brian Bix, Russell Arben Fox, Michael Helfand, Chaim Saiman, Rosalynde Welch, Eyal Zamir, Ben Zipursky, and Todd Zywicki. Curtis Bridgman sharpened much of my thinking over curry at a meeting of the Association of American Law Schools. Roy Krietner pushed my arguments in his reply to my original Iowa Law Review article.⁵

At William & Mary, Dave Douglas has always been a wonderfully supportive dean, providing me with multiple summer research grants to work on this book. In writing it, I also held in succession the Cabell Research Professorship, the Taylor Research Professorship, and the Elizabeth and Robert Scott Research Professorship. In addition, the Plumeri Award for faculty excellence in research from the College of William & Mary supported my work. I am particularly grateful to the men and women of commerce whose diligence, good fortune, and generosity funded these awards. William & Mary Law School students Colleen Dick, Lauren Ford, Alex Lurie, Henry Aldefer, Derek McMahan, Connor Baer, Bria Cunningham, and Evan Feely have provided excellent research assistance. Felicia Burton, Derek Mathias, Clara Hardy, Gladys Kratsas, Cody Watson, and Nancy Orr, in faculty support at William & Mary, assisted with the preparation of the manuscript. At the University of Chicago Press, I am grateful to Chris Rhodes, who first championed the manuscript before his untimely death in 2015, and Joe Jackson, who has shepherded the book through the process of publication. I also benefited from the comments of the anonymous peer reviewers.

As always, I thank Heather.

CHAPTER ONE

Introduction

Shakespeare and the Predicament of Contract Theory

This book presents a normative argument about contract law and its relationship to markets. Stated as simply as possible, well-functioning markets are morally desirable, and contract law should be organized to support such markets. Contracts are such a ubiquitous part of market exchange that one would think that the moral status of markets would be entwined in contemporary scholarship with the moral status of contract law. Such is not the case. Markets, however, have not always been absent from the moral discussion of contract law. Indeed, they were present at the birth of the common law of contracts. William Shakespeare captures a sense of the moral complexity of markets at that moment of birth and points modern students of contract law toward a richer sense of the moral importance of commerce in justifying that law. A reconsideration of his play is a good place to begin this book’s argument.

Shakespeare and the Birth of Contract Law

The Merchant of Venice provides a dramatic window into the world that gave birth to the common law of contracts. As we shall see, its debut corresponded almost exactly with the birth of what became the common law of contracts, and, as a historical document, it provides insight into some of the ideas about contracts and commerce swirling through England at the time. Beyond its historical interest, however, Shakespeare’s play frames the basic question of why the law should enforce voluntary agreements.¹ Written at a time when large-scale international trade and commercial society were still a novelty, The Merchant of Venice presents the enforcement of contracts not in terms of personal morality but in terms of maintaining a particular kind of social arrangement: the market.

The Merchant of Venice is a play about contracts. The initial driver of the plot is Bassanio, who proposes to earn money the old-fashioned way by marrying Portia, a widow richly left.² It takes money to make money, however, and Bassanio enlists the help of his wealthy friend Antonio. Antonio is a merchant. His wealth doesn’t take the form of land or even hoards of gold. Rather, it is in commercial ventures, argosies with portly sail . . . pageants of the sea.³ It’s an unstable kind of wealth, subject to constant risk, managed through diversification—my ventures are not in one bottom trusted⁴—and illiquid. In Antonio’s words, all my fortunes are at sea; neither have I money nor commodity to raise a present sum.⁵ Antonio, however, has another asset, one even more ethereal than his argosies with portly sail: his creditworthiness. Try what my credit can in Venice do, he tells Bassanio, and the two go to Shylock the Jew to borrow 3,000 ducats for Bassanio’s romantic venture. Shylock famously demands that Antonio stand as surety for his friend:

Go with me to a notary, seal me there

Your single bond; and, in merry sport,

If you repay me not on such a day,

In such a place, such a sum or sums as are

Expressed in the condition, let the forfeit

Be nominated for an equal pound

Of your fair flesh, to be cut off and taken

In what part of your body pleaseth me.⁶

Much of the rest of the plot of the play revolves around this contract and the ultimate question of its enforcement.

In many ways the play trades on the moral discomfort created by the transition from a medieval worldview to that of an emerging commercial society. Medieval influences on the play can be seen in the sources from which Shakespeare drew in writing it and its anti-Semitic framing of the issue of usury. The evil and wealthy Jew was a stock character in the melodramas of the Middle Ages, a tradition that The Merchant of Venice draws on to create the character of Shylock. Shakespeare’s play was also clearly influenced by a contemporary work, The Jew of Malta by Christopher Marlowe.⁷ Marlowe’s villain, Barabas, is also a merchant, but we do not see him trading. Rather, having lost his wealth to a Christian prince in the course of the latter’s crusade against the Turks, Barabas pursues a course of Machiavellian revenge, murdering those who have taken his wealth and those who seek to expose his crimes. Shakespeare, however, transposes his Jew from the crusader outpost of Malta to the commercial entrepôt of Venice. Shylock’s vice is not murder but usury. Thus, The Merchant of Venice, unlike The Jew of Malta, is not a story of political machinations but of the dangers of commercial contracts.

Shakespeare’s story also displays a medieval outlook in how it links Judaism and usury. The relationship between Shylock and the other characters in the play is defined in part by the former’s status as a usurer. Antonio proudly insists that he does not lend nor borrow upon advantage,⁸ and Shylock hates Antonio because the latter complains in the Rialto about Shylock’s moneys and . . . usances.⁹ Shylock responds with two well-worn defenses of usury.¹⁰ The first is to invoke the biblical story of Jacob,¹¹ who gained wealth through the increase of his father-in-law’s herds. Antonio insists, however, that this was a venture—in other words, what we would today call an equity investment rather than a loan. Is your gold and silver ewes and rams? he contemptuously asks Shylock.¹² Second, Shakespeare is at some pains to emphasize that Shylock regards all Christians as his enemies, an important premise in a medieval Jewish argument over usury. The Torah states, to a foreigner you may lend upon interest, but to your brother you shall not lend upon interest.¹³ Medieval rabbis interpreted this as permitting usury as long as a Jew was lending to a Christian.¹⁴ At the same time, the early canon lawyers relied on the so-called Exception of Saint Ambrose, which held that it was permissible to demand usury of an enemy.¹⁵ So far, so medieval.

Notice that the early framing of usury assumes a basic enmity between the two parties to the contract. The assumed context of the exchange is ultimately war—or at any rate, an uneasy truce between warring enemies. In The Jew of Malta, war was literally the context for Barabas’s story. Marlowe’s is a medieval story of crusaders, heathens, and infidels. In The Merchant of Venice, however, war is wholly absent from the plot. Rather, the market looms large. First, there is the ubiquitous image of the Rialto, the great international marketplace of Venice. Antonio’s access to wealth comes not from hard assets but from his ability to create relationships on the Rialto, even with Shylock. He is a merchant rather than a duke or some other grandee whose wealth was based on land. The very attraction of Venice as a setting lies in the sense of adventure and glamour wrought by commerce. There are fortunes being made here not through the staid accumulation of land by family but through trade, the pageant of the seas. At the same time, there is anxiety over the way in which the market structures relationships between individuals. Antonio contrasts his open-hearted loaning of money without interest to Bassanio with Shylock’s mercenary motives. If thou wilt lend this money, lend it not as to thy friends, for when did friendship take a breed for barren metal of his friend?¹⁶ Likewise, Bassanio, for example, describes his friendship with Antonio in the language of commercial debt. To you, Antonio, I owe the most, in money and in love, and from your love I have a warranty to unburden all my plots and purposes.¹⁷ There is a sense throughout the play that something different and morally complex happens when the Rialto emerges as the structuring context for relationships.

The ideas of market and contract come together in the play’s climax. Bassanio is unable to pay Shylock, and Antonio’s argosies have all failed. May Shylock now execute his bond on a pound of the merchant’s fair flesh? In answering this question, the play offers a particular vision of the normative foundations of a contract—one that links the law decisively to the support of commerce. From the point of view of contract theory, the climax is interesting for what it doesn’t do. The dramatic logic of Antonio’s tragic moment does not rely on the idea of promissory morality. He is not presented as a man of honor forced into the terrible position of forswearing himself. Absent from Shakespeare’s play is the intense concern with fidelity to promises that one sees in a medieval work such as Sir Gawain and the Green Knight, for example.¹⁸ One of the central plot elements of that fourteenth-century story is Sir Gawain’s struggle against all odds and temptations to keep his solemn promise to an enemy. Nothing in the dramatic logic of The Merchant of Venice, however, suggests that Antonio should be understood as facing a similar crisis of personal honor and fidelity to his word. Rather, he is a merchant tragically caught in the demands of the market on which his status depends. The tragedy is not that he will break his word to Shylock but that the logic underlying the law’s support for the Rialto cannot relieve him of his contractual obligations. As Antonio acknowledges earlier in the play:

The Duke cannot deny the course of law;

For the commodity that strangers have

With us in Venice, if it be denied,

Will much impeach the justice of the state,

Since that the trade and profit of the city

Consisteth of all nations.¹⁹

Yet Shakespeare has structured the play so that the audience sees Shylock as in the wrong. The virtue of mercy demands that he not execute on Antonio’s bond. The enforcement of the contract is morally questionable. When Shylock calls on the Duke of the city to judge the case, however, the Duke stands ready to regretfully enforce the bond. Like Antonio’s earlier statements, Shylock’s argument to the Duke also invokes the good of the city’s commerce. If you deny it, let the danger light upon your charter and your city’s freedom.²⁰ Strikingly, when Portia appears disguised as a jurist to decide the case, she maintains the integrity of the contract. Bassanio urges her:

I beseech you,

Wrest once the law to your authority.

To do a great right, do a little wrong.²¹

Her reply again invokes the importance to the city of honoring contracts.

It must not be. There is no power in Venice

Can alter a decree established.

’Twill be record for a precedent,

And many an error by the same example

Will rush into the state. It cannot be.²²

Rather than presenting contractual obligations as a reflection of promissory morality, the play examines their enforcement in social and communal terms. Shylock can stand on his contract not because Antonio is bound by honor or morality to perform his obligation but because allowing Shylock to demand enforcement makes Venice into a commercial hub. Contracts must be enforced not because of the inherent moral obligations that they create or represent but because their enforcement fosters commerce on the Rialto. Antonio is only saved because Portia insists on the letter of the contract. Shylock may have his pound of flesh, but he may not take any of Antonio’s blood. The merchant, the law, and the Rialto are all saved in a neat comic denouement.

The Merchant of Venice was first performed in 1596 or 1597.²³ As it debuted, English judges were hearing the case that would give birth to the common law of contracts. Like the characters in Shakespeare’s comedy, they were struggling to adapt medieval habits and practices to a new world of commercial society. During Lent, 1595, a year or two before Shakespeare’s play premiered in London, John Slade sued Humphrey Morley before the Devon Assizes. Slade claimed that he and Morley had agreed in May of that year that Morley would purchase his grain crop for £16 at harvest time. Morley failed to pay on the appointed day, and Slade brought an action against him of indebitatus assumpsit.²⁴ From the Devon Assizes, the case was appealed to the court of King’s Bench,²⁵ and from there the final appeal was heard in 1597 by the Exchequer Chamber, where it was debated again in 1598 and 1601 before finally being decided in 1602.²⁶ Contract was a relatively late arrival to the common law, which lavished the bulk of its medieval attention on the law of real property. Prior to the seventeenth century, actions on agreements to pay a sum of money could be brought using the writ of debt. Later, courts modified the writ of trespass to create the writ of assumpsit, which allowed actions based on a theory of deceit where a party had made a promise to do something and subsequently reneged.²⁷ The protracted litigation over John Slade’s unpaid £16 resulted from a judicial disagreement about the relationship between these two writs.

The court of Common Pleas took the position that one could not bring an action in assumpsit if an action in debt could also be brought.²⁸ The court of King’s Bench, in contrast, held that an action of assumpsit could be brought without first bringing an action in debt.²⁹ The distinction was important because the action of debt was subject to the defense of wager of law. A defendant could escape liability by simply swearing that he was not liable and bringing oath helpers into court who were willing to swear to the truth—or, at any rate, the trustworthiness—of his oath.³⁰ Although wager of law seems bizarre by modern standards, in the context of a close-knit medieval economy, it made good sense. As one scholar has observed:

Within the framework of local markets and regimes of credit discipline, where a trader’s good name, personal honor, and reputation for performing his obligations were his principal assets, the risk attendant to false swearing were material as well as spiritual. A tradesman who acquired a reputation for failure to pay debts or for false dealing of any sort would soon find that his credit was naught, or nearly so.³¹

Beyond such practical considerations, however, wager of law traded on the theological power of oaths. To be foresworn was still a sin, a grave moral lapse that could put one’s soul in danger of hellfire. As markets expanded in early modern England, however, commercial transactions became increasingly impersonal. Without the immediate fear of reputational sanctions, the temptations to perjury increased and wager of law became an impediment to the enforcement of the informal contracts that increasingly came to dominate commerce.³²

The judges of Common Pleas also sat in Exchequer Chamber, where they overruled cases brought in assumpsit in the court of King’s Bench.³³ Rather than bow to the higher court, however, the judges of King’s Bench stuck to its position, creating uncertain and conflicting common law rules depending on the court in which one’s suit landed. Thus stood the law when John Slade and Humphrey Morley brought their case before the Exchequer Chamber. The details of the litigation are uncertain. Two of the most celebrated lawyers of the time argued the case. Slade retained Sir Edward Coke, while Sir Francis Bacon represented Morley. Through some mechanism that remains unclear, the judges of King’s Bench invoked a disused custom and sat with the judges of Common Pleas in the Exchequer Chamber. After nearly five years of debate, the position of King’s Bench prevailed. Thereafter, suits could be brought in assumpsit even where the action of debt—and, with it, wager of law—was available.³⁴ Picking origins is always arbitrary, but the 1602 decision in Slade’s Case has as good a claim as any other moment for marking the birth of what became the common law of contracts. It was the opening up of assumpsit that allowed the common law to gradually develop into a fit instrument for the enforcement of contracts in the rising commercial economy of seventeenth- and eighteenth-century England.

The Merchant of Venice offers us a window into the world that gave birth to the common law of contracts. It was a world in which commerce was increasingly important. It is certainly not accidental that Slade’s Case and the rise of the action of assumpsit corresponded with an economic revolution in which trade and market exchange came to rival land as a source of wealth. In the play, the law enforces contracts in order to make commerce on the Rialto possible. It is difficult to divine the precise intentions of the judges of Exchequer Chamber that decided Slade’s Case, but we do know that during this period commerce was making contract disputes more common and the various common law courts were competing to capture this new judicial business.³⁵ One of the reasons that King’s Bench obdurately stuck to its liberal position on the writ of assumpsit in the face of conservative opposition from the appellate courts was surely a desire to create a forum more congenial to the rising tide of commercial litigants.³⁶ To be sure, the common law developed slowly, and it took time for its law of contracts to become a fit instrument for commerce. A historian could still write that, when Lord Mansfield ascended to King’s Bench in 1756, English lawyers had been so long preoccupied with the problems of real property that they felt themselves strangers to a generation that knew not feudalism.³⁷ By the eighteenth century, however, contract law was becoming intimately entwined with questions of commerce, as illustrated by Mansfield’s dictum in Pillans v. Van Mierop that the law of merchants, and the law of the land is the same.³⁸

Nothing as complicated and as historically contingent as the common law of contracts can be said to have a simple origin or represent a single normative concern over the centuries of its history. Nor do contemporary theorists owe a debt of filial piety requiring that they construct their theories in accordance with their field’s origins. Nevertheless, The Merchant of Venice and the parallel rise of contract law and commercial society testify to the intimate connection between markets and contract law. In the play, the central point of enforcing contracts is to sustain markets and commerce. None of this is surprising. The link between contract law and markets is so palpable, however, that the relative absence of markets and commerce as a topic of moral theorizing in contemporary contract law theory is striking. One would expect that the moral status of markets would be front and center in discussions of the moral status of contract law, yet this is not the case.

Markets and Contemporary Contract Theory

Broadly speaking, two contending families of arguments dominate modern contract law theory. On one hand, there are legal moralists who see in contract law a set of legal obligations that correspond to some roughly analogous set of moral obligations. The best-known contemporary example of such a theory is Charles Fried’s claim that contract is a legal instantiation of the moral obligation to keep a promise.³⁹ Fried, however, is not the only promissory theorist, and promissory theories are not the only approaches to contract law that seek to ground the legal obligations imposed by contract in more primitive but analogous moral or political obligations.⁴⁰ The other contending family of theoretical arguments arises from the law and economics movement. These arguments claim that the normative goal of contract law is to create incentives for contracting parties that will lead to the economically efficient allocation of resources. There is substantial disagreement among law and economics scholars on both methodological and normative questions. Methodologically, they are divided between those who adopt an essentially neoclassical economic framework, represented most prominently by Richard Posner, and those who take a more behavioralist approach.⁴¹ Normatively, they are divided between those who believe that normative discussions are exhausted by efficiency concerns and those who believe that efficiency should be paired with other normative goals.⁴² Although the ancient enmity between autonomy theorists and efficiency theorists frequently breaks forth into new munity, they share a surprising indifference to the moral status of the market in relation to contract law.

Fried posits a relatively tight relationship between contract law and promissory morality. Since contracts invoke and are invoked by promises, he writes, it is not surprising that the law came to impose on the promises it recognized the same incidents as morality demanded.⁴³ For Fried, the promise principle is a postulate of liberal political morality, a reflection of human freedom and the state’s respect for the choices of its citizens. If we do not enforce someone’s undertakings, we infantalize him, as we do quite properly when we release the very young from the consequences of their choices.⁴⁴ He is quite explicit, however, in insisting that contract law’s normative foundation does not lie in the value of markets. Hence, he rejects the idea that contract law rests on a distinct collective policy, the furtherance of economic exchange.⁴⁵ In other words, on Fried’s view, the relationship between contract law and markets is entirely accidental. It may be that market exchange is valuable, but this has nothing to do with contract law. To the extent that contract law facilitates markets, it is a mere by-product of showing a proper legal respect for promising. It may be a happy or an unhappy by-product, but contra the characters in The Merchant of Venice, the purpose of enforcing contracts is not to support commerce on the Rialto.

Others applying nonpromissory moral theories to contract law also largely ignore markets in their arguments. Consider so-called transfer theories of contract.⁴⁶ According to Andrew Gold, for example, contracts consist of the transfer of property rights.⁴⁷ The difference between a contract and the conveyance of a chattel or a piece of real estate is that in the latter case property is acquired in a physical thing; in the case of contract, property is acquired in the promisor’s future performance. Furthermore, Gold grounds the requirement of consideration—a quid pro quo—as necessary for the just acquisition of a property right in another’s performance.⁴⁸ Having located contract within the context of exchange, one would think it natural for Gold to link the normative basis for contract with the normative value of the widespread social practice of exchange—namely, markets. This, however, he does not do, insisting that the legal instantiation of exchange is rooted instead in ideas of self-ownership and personal autonomy. His theory focuses on justice between parties to a contractual dispute, rather than focusing on broader prospective effects of a chosen contract doctrine.⁴⁹ Again, the fact that contract law serves to support markets is entirely accidental, a fact about the law that has nothing to do with its normative justification.

To be sure, there are noneconomic theories of contract that have inched toward a greater appreciation for the way in which contractual relationships are ubiquitously embedded in markets. Dori Kimel has offered a painstaking analysis of promissory theories of contract, taking Fried as his archetypal example.⁵⁰ Building on the work of Joseph Raz, Kimel notes that the kind of mutual trust engendered by a promise generally depends on some kind of ongoing relationship between the promisor and the promisee.⁵¹ To make an efficacious promise to a stranger, one must convince the stranger that you will treat him or her as though you had some kind of ongoing relationship, even though, by definition, you do not. This is not, however, the case with contracts. Contract, according to Kimel, is more than a legal reflection of promissory morality. Rather, it makes possible a particular form of relationship that is different than the core case of a promissory relationship. He writes, the practice [of contract] as a whole is designed, first and foremost, to facilitate co-operation or mutual reliance between strangers (so that the invocation of the practice in the context of personal relations can sometimes be utterly inappropriate).⁵² Kimel, however, does not identify the value of such relationships with strangers in terms of supporting commerce and markets as a social practice. Rather, his focus is more individualistic. The value of contracts lies in their ability to facilitate cooperation with someone without being required to know much or form opinions about the personal attributes of others, without having to allow others to know much and form opinions about oneself. It is, if you like, the value of personal detachment.⁵³ It is not, however, the value of supporting the Rialto.

The moral theorist who has focused most explicitly on the market and its relationship to contract law is Daniel Markovits.⁵⁴ Like Kimel, Markovits focuses on the way in which contract law allows for cooperation without creating thick relationships structured around moral or political solidarity. Contract provides a way for people to engage in a kind of respectful collaboration with one another—a form of human relationship that Markovits takes to be valuable in and of itself. As will become clear in the chapters that follow, I am sympathetic to Markovits’s argument. I agree with him that contract supports exchanges whose virtue lies in part in the way that they facilitate cooperation without deep solidarity. My quarrel with Markovits’s argument lies in the way that it simplifies the good of market exchange and in particular in the way that it focuses exclusively on the individuals involved in a transaction rather than considering the market as a broader social process. Put another way, the kind of respectful collaboration that Markovits lauds could exist without a widespread practice of economic exchange, as, for example, when neighbors collaborate to spruce up a local playground or engage in some other kind of cooperation that does not clearly involve market activity. What it misses is the way that contract undergirds markets and commerce as collective, ongoing social practices.

Economic theories of contract have paid far more attention to markets than have promissory theories. Generally speaking, economists are celebratory of the power of markets to efficiently coordinate resources, and this positive attitude toward the allocative potential of markets has been hardwired into the economic analysis of law. Most famously, Ronald Coase argued that, in the absence of transaction costs, any initial allocation of resources will result in an efficient final distribution through exchange in the market.⁵⁵ Coase’s point, of course, is that, in the real world, there are always transaction costs, and therefore the allocation of resources via legal entitlements matters. Building on this insight, Richard Posner originally framed the normative stance of law and economics in terms of ideal markets.⁵⁶ Legal rules should be specified, he argued, so that the allocation of resources mimics the allocation that would obtain in a Coasean market of no transaction costs.

Law and economics scholarship has become considerably more sophisticated since Posner’s first efforts in the 1970s. It has largely, however, remained focused on the issue of transaction costs. For example, the literature on contract law has employed the idea of a perfectly specified contract.⁵⁷ Such a contract would provide guidance to the parties on the proper outcome of the transaction for every possible state of affairs. Of course, a perfectly specified contract is impossible, but it provides a normative guide for contract law. The law should provide the parties to a contract with the terms that they would have chosen had they been able to bargain over the terms. Such rules will, like Posner’s market mimicking rules, result in an efficient allocation of resources.

Despite the apparently positive attitude of economic analysis of law to markets, there is an important sense in which efficiency analysis is largely indifferent to commerce. The concepts of efficiency and welfare employed by economists are deeply problematic as a normative guide. They generally define welfare in terms of the satisfaction of preferences and assume that preferences have a stable and transitive structure. Each element of this conception of welfare is mistaken. For normative purposes, we should not treat the satisfaction of preferences per se as a worthy goal. For example, the satisfaction of evil preferences is not morally desirable. The world is not better if a twisted sadist can indulge his desire to watch violent child pornography, even if no children are harmed and the twisted sadist’s actions have no other third-party effects. Furthermore, our desires are often conflicting, inconsistent, and changeable. Giving me what I want now is not necessarily good if I also want something utterly inconsistent with what I get and my desires change tomorrow. On these questions I side with Edmund Burke over Alfred Marshall. Burke wrote:

The nature of man is intricate; the objects of society are of the greatest possible complexity; and, therefore, no simple disposition or direction of power can be suitable either to man’s nature or the quality of his affairs. When I hear the simplicity of contrivance aimed at and boasted in any new political constitutions, I am at no loss to decide that the artificers are grossly ignorant of their trade or totally negligent of their duty.⁵⁸

Efficiency as a