Mises Wire

Freedom of Contract and Property Rights

The classical liberal defense of contractual freedom is derived from the principle of individual autonomy. Freedom of contract entails the right to enter into or exit from contracts at will. As Richard Epstein argues in his defense of the contract at will:

The first way to argue for the contract at will is to insist upon the importance of freedom of contract as an end in itself. Freedom of contract is an aspect of individual liberty, every bit as much as freedom of speech, or freedom in the selection of marriage partners or in the adoption of religious beliefs or affiliations (p. 953).

Utilitarian classical liberals, like Epstein himself, who agree with him on the value of individual liberty therefore defend the widest possible scope for contractual freedom. They would only accept limits on that freedom in exceptional cases which Epstein defines as “the infrequent cases in which discharge of the contract at will is inconsistent with the performance of some public duty or with the protection of some public right.”

By contrast, from a natural-rights libertarian perspective freedom of contract is derived from the right to self-ownership: “The right to contract is strictly derivable from the right of private property” (Rothbard, Ethics of Liberty, p. 133). This entails the right to enter into agreements in respect of oneself or one’s property: “the right of property implies the right to make contracts about that property to give it away or to exchange titles of ownership for the property of another person.”

From a Rothbardian perspective “the only enforceable contracts (i.e., those backed by the sanction of legal coercion) are those where the failure of one party to abide by the contract implies the theft of property from the other party [or] where the failure to abide by the contract means that the other party’s property is retained by the delinquent party, without the consent of the former (implicit theft)” (p. 133). As Rothbard explains, all rights are property rights, and there are no rights that are not also property rights. From this perspective there is no right to enforce a contract for “public policy” reasons, nor does “public policy” constitute the rationale for why particular contracts should not be enforced.

Nevertheless, in practice there is a great degree of overlap between Epstein’s and Rothbard’s perspectives because libertarian boundaries of property rights (where one person’s property encroaches upon another person’s property) often coincide with the specific types of public policy which Epstein has in mind in his defense of the contract at will. In Epstein’s view “the principle [of the contract at will] must be understood against a backdrop that prohibits the use of private contracts to trench upon third-party rights, including uses that interfere with some clear mandate of public policy, as in cases of contracts to commit murder or perjury.” From a Rothbardian perspective a contract to commit murder would violate the right to self-ownership and a contract to commit perjury would in many cases constitute fraud (implicit theft) so such contracts would violate property rights and there could be no grounds for enforcing them.

The example of promises to marry

To understand the boundaries of enforcing contracts the example of marriage contracts is instructive. The law for centuries treated a promise to marry as legally binding. Writing in 1929, Robert C. Brown observes that “One of the lurid and sensational forms of American court activity is the suit known technically as a suit for the breach of a contract to marry, but more popularly by the simple designation of a ‘breach of promise’ suit.” As Brown highlights, the remedy sought in these cases, as in all cases of breach of contract or tort, was damages as compensation either for losses incurred or for defeated expectations:

…when the term “breach of promise” suit is used, neither lawyer nor layman has any difficulty in understanding what is meant. It is that action dear to the heart of the reporter for the sensational newspaper, which is normally brought by young and attractive but sophisticated women against mature and wealthy men, and where the plaintiff very often wins a competence for life.

If necessary, the courts could even arrest the delinquent party, for example if he seduced a woman and failed thereafter to marry her and haul him to court to account for his conduct. This example arose in the following 1892 case:

…the defendant, by false and fraudulent representations as to the nature and consequences of the act he solicited, and by means of undue influence, taking advantage of the position of the plaintiff as his affianced wife, the trust and confidence thereby obtained, and her absence from her relatives and friends and natural protectors, and her isolation in his home and dependent position there, inflicted this gross wrong and outrage upon her, and thereafter abandoned her, leaving his home for a distant place and refusing to marry her (Hood v Sudderth, Supreme Court of North Carolina, 1892).

It may be morally abhorrent to resile from a promise of marriage after stringing a woman along in such circumstances (such cases were almost exclusively brought by or on behalf of women), but few people in liberal Western society would argue that there ought still to be a legal remedy for breach of such contracts:

Breach of promise, although not actionable in most jurisdictions, is a breach of a promise to marry another; in other words, it is a broken engagement. It is a tort against the breaching party. The principle of breach of promise treats the promise to marry as an enforceable contract which may entitle the non-breaching party to receive damages. However, such an action has been barred in most of the jurisdictions and does not give rise to a valid cause of action.

The marriage analogy is a powerful illustration of what classical liberals mean by individual liberty. As Rothbard observes, “Compulsory marriage is such a clear and evident form of involuntary slavery that no theorist, let alone any libertarian” would insist that people be forced to enter into a marriage simply because they have promised to do so.

By extrapolating from the example of marriage contracts it is easier to see why contracts – other than contracts in relation to property rights - ought not to be legally enforceable. Forcing anyone to be bound by a contract against his will is a form of slavery. If contracts that violate the principle of self-ownership were enforceable then chattel slavery itself could be justified if the slave willingly agreed to it. While a classical liberal would reject that outcome as being against “public policy,” some libertarians wrongly think that in theory, as in Walter Block’s thought experiment, contracts to enslave human beings would be legally binding and enforceable as long as the agreement is entirely voluntary. To the contract absolutist the rationale for not enforcing such contracts would simply be their involuntary character. Unbound by the public policy concerns of classical liberals, contract absolutists make the error of treating freedom of contract as absolute in the sense that any contract is legally binding and enforceable if all parties willingly agree to it. This was the defense put forward in a German case involving a contract between Armin Meiwes and Bernd Brandes to eat and be eaten:

In one of the most extraordinary trials in German criminal history, the self-confessed cannibal admitted that he had met a 43-year-old Berlin engineer, Bernd Brandes, after advertising on the internet, and had chopped him up and eaten him … Crucial to the case is a gruesome videotape made by Meiwes of the entire evening, during which Brandes apparently makes clear his consent.

The confusion surrounding this case arose because of that element of consent: “The unprecedented case has proved problematic for German lawyers who discovered that cannibalism is not illegal in Germany.” This highlights the gravity of the error into which contract absolutists fall, when they suppose that anything people agree to must be enforced without regard to the reason why any contracts should be enforced in the first place.

The importance of self-ownership

The right to private property is derived from the principle of self-ownership which is rooted in human nature and the inalienable liberty and free will of human beings. No human being can consent to be a chattel, much less consent to volunteer himself as dinner for a cannibal. As Rothbard explains:

Unfortunately, many libertarians, devoted to the right to make contracts, hold the contract itself to be an absolute, and therefore maintain that any voluntary contract whatever must be legally enforceable in the free society. Their error is a failure to realize that the right to contract is strictly derivable from the right of private property (p. 133).

To avoid confusion about which contracts ought to be enforceable Rothbard highlights the importance of identifying the reason why contracts other than those involving property rights are not enforceable. He asks: “Clearly, liberty and compulsory slavery are totally incompatible, indeed are diametric opposites. But why not, if all promises must be enforceable promises?” (p. 134). The reason why contracts are not generally enforceable is that enforcing an agreement is incompatible with the other party’s freedom to exit from the agreement at will. We may exhort one another to keep our word and not break our promises as reflected in the old adage that a man’s word is his bond, and people may choose to shun us if we break our promises, but force cannot be deployed to force us to do as we agreed. Agreements may or may not be morally binding, but they are not legally enforceable:

…it may well be the moral thing to keep one’s promises, [but] it is not and cannot be the function of law (i.e., legal violence) in a libertarian system to enforce morality (in this case the keeping of promises) (p. 133).

Based on the right to private property, it can be seen why Rothbard argues that a contract would only be enforceable in a case which amounted to theft or implicit theft (e.g. fraud), as this would entail the enforcement not of the promise itself but of the property rights alienated under the agreement. The simplest example would be a contract to purchase property where the buyer takes possession of the property but reneges on his agreement to pay for it.

Employment at will

Applying this analysis to the employment contract, it is clear that just as we no longer think a husband owns his wife, so we no longer think a master owns his servant or an employer his employee. The contract of employment is simply an agreement by a free person to work in return for a wage paid by another free person. Either party is free to leave the contract at will and has no duty to give reasons or show just cause for doing so. Epstein argues that there are no policy reasons to constrain that liberty and shows that on the contrary public policy falls in favor of the freedom to hire and fire at will. As with the case of the broken marriage engagement, upholding one’s agreement may be the moral and kind thing to do and willful breach of a promise may ruin one’s reputation, but it ought not to be legally enforceable. Thus, the ruling in Payne v. Western & Atlantic Railroad (1884) was correct:

[M]en must be left, without interference to buy and sell where they please, and to discharge or retain employees at will for good cause or for no cause, or even for bad cause without thereby being guilty of an unlawful act per se. It is a right which an employee may exercise in the same way, to the same extent, for the same cause or want of cause as the employer.

Based on the principle of self-ownership, the libertarian analysis yields the same result. The libertarian rationale for defending employment at will is clear: “there can be no property in someone’s promises or expectations.” (Ethics of Liberty, p. 134).

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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