WEBVTT NOTE The Enforceability of Interest Under a Title-Transfer Theory of Contract 1 00:00:00.000 --> 00:00:06.000 My title is The Enforcibility of Interest under a Title Transfer Theory of Contract. 2 00:00:08.000 --> 00:00:18.000 To many libertarians, the idea that there might be limits to the legitimate enforcement of interest on loans will seem unattractive, a medieval relic of the prejudice against usury. 3 00:00:19.000 --> 00:00:24.000 But such limits may be implicit in what I take to be the most promising libertarian theory of contracts, 4 00:00:24.000 --> 00:00:30.200 Contracts, the Title Transfer Theory, defended in various ways by Murray Rothbard, Williamson 5 00:00:30.200 --> 00:00:34.840 Evers and Randy Barnett, though I certainly don't mean to suggest that those authors 6 00:00:34.840 --> 00:00:39.440 would agree with the implications I draw here. 7 00:00:39.440 --> 00:00:43.600 This account actually seems to pose a challenge to any enforceability of interest in loan 8 00:00:43.600 --> 00:00:45.380 contracts. 9 00:00:45.380 --> 00:00:50.560 For how can the lender legitimately recover from the borrower as interest, a good that 10 00:00:50.560 --> 00:00:53.680 But the lender never transferred to the borrower in the first place. 11 00:00:53.680 --> 00:00:58.720 Indeed, given the double inequality of value, how can we even say that principal plused 12 00:00:58.720 --> 00:01:02.960 interest at a later time is so much as the equivalent of what was transferred at the 13 00:01:02.960 --> 00:01:04.560 earlier time? 14 00:01:04.560 --> 00:01:09.520 I shall defend a solution to this problem while noting the solution's limitations. 15 00:01:09.520 --> 00:01:16.000 That is to say, I shall in part concede and in part resist the anti-interest implications 16 00:01:16.000 --> 00:01:19.340 of the title transfer theory of contract. 17 00:01:19.340 --> 00:01:24.060 The central insight of the title transfer theory is that the enforceability of contracts is 18 00:01:24.060 --> 00:01:29.980 not a basic moral principle, and so must be grounded in something else enforceable, as, 19 00:01:29.980 --> 00:01:36.060 for example, promises and expectations are not. That foundation is property rights. And, 20 00:01:36.060 --> 00:01:41.620 assuming the self is inalienable, the enforceability of contracts, even service contracts, must 21 00:01:41.620 --> 00:01:47.300 be grounded in the enforceability of rights to external property. The bridge between property 22 00:01:47.300 --> 00:01:52.220 Property and Contract is the idea of conditional transfer. 23 00:01:52.220 --> 00:01:56.860 Suppose you transfer to me title to some bit of external property on condition that I deliver 24 00:01:56.860 --> 00:01:59.420 some good or perform some service. 25 00:01:59.420 --> 00:02:05.140 Then if I don't do it, the condition for transfer isn't met and the title reverts to you. 26 00:02:05.140 --> 00:02:11.260 I am now in the same position as anyone else in wrongful possession of someone else's property. 27 00:02:11.260 --> 00:02:14.700 What are my enforceable obligations when I am in wrongful possession of someone else's 28 00:02:14.700 --> 00:02:15.700 property? 29 00:02:15.700 --> 00:02:21.700 First, I have to give the property back, or the nearest equivalent if I've lost or destroyed it. 30 00:02:21.700 --> 00:02:33.700 And second, I have to pay damages. Why damages? Because I need to restore not just the present property, but the past property for the period when it was away from your control. 31 00:02:33.700 --> 00:02:40.700 And since, barring access to a time machine, I can't literally restore the past property, damages are the nearest equivalent. 32 00:02:40.700 --> 00:02:45.700 And here, by the way, I don't think it matters whether my being in wrongful possession is culpable or not. 33 00:02:45.700 --> 00:02:50.700 If I mistakenly walk off with your umbrella, my innocence doesn't entitle me to keep it. 34 00:02:50.700 --> 00:02:55.700 Being forced to restore property and pay damages is not a punishment for wicked conduct. 35 00:02:55.700 --> 00:03:00.700 In the case of damages, how is the nearest equivalent to be determined, 36 00:03:00.700 --> 00:03:04.700 either for the temporary or for the irretrievable loss of some property? 37 00:03:04.700 --> 00:03:07.700 This is a notoriously tricky question. 38 00:03:07.700 --> 00:03:13.860 question. Going by prevailing market value may be unfair if what was lost had special 39 00:03:13.860 --> 00:03:18.480 sentimental value, or if the owner had been relying to his detriment on the unexpectedly 40 00:03:18.480 --> 00:03:23.980 absent item. On the other hand, placing too much emphasis on sentimental value runs the 41 00:03:23.980 --> 00:03:28.660 risk of placing the restitutor at the mercy of the owner's testimony as to subjective 42 00:03:28.660 --> 00:03:34.400 valuations difficult to verify, and placing too much emphasis on reliance ignores the 43 00:03:34.400 --> 00:03:41.400 are the difficulty of determining what counterfactual opportunities really were foregone as the result of the item's absence. 44 00:03:41.400 --> 00:03:46.400 These are issues at least as much for wise particular judgment as for abstract theory, 45 00:03:46.400 --> 00:03:52.400 and so may belong in part to the province of the arbitrator rather than to that of the philosopher. 46 00:03:52.400 --> 00:04:00.400 In a competitive judicial system, arbitrators with a reputation for wisdom and fairness will have a chance to out-compete their rivals. 47 00:04:00.400 --> 00:04:18.400 So then, if you transfer property to me on condition that I do something that I then don't do, the ownership reverts to you and I thus have an enforceable obligation to return the property, or when that's impossible, the nearest equivalent, as well as to pay damages for the period of deprivation. 48 00:04:18.400 --> 00:04:25.400 What I do not have, according to this theory, is an enforceable obligation to do the thing I originally agreed to do. 49 00:04:25.400 --> 00:04:30.400 Since the self is inalienable, I cannot transfer title to my future services. 50 00:04:30.400 --> 00:04:35.400 What if what I agreed to do was hand over a good rather than perform a service? 51 00:04:35.400 --> 00:04:41.400 Here it depends whether what I was agreeing to was A, to transfer title in the future, 52 00:04:41.400 --> 00:04:46.400 or B, to transfer title now to some good to be delivered in the future. 53 00:04:46.400 --> 00:04:50.400 Rothbard seldom quotes Hobbes favorably, but he does so on this point. 54 00:04:50.400 --> 00:04:53.400 So here's a quote from Hobbes. 55 00:04:53.400 --> 00:04:58.400 Words alone, if they be of the time to come and contain a bare promise, 56 00:04:58.400 --> 00:05:02.400 are an insufficient sign of a free gift and therefore not obligatory. 57 00:05:02.400 --> 00:05:06.400 For if they be of the time to come, as tomorrow I will give, 58 00:05:06.400 --> 00:05:11.400 they are a sign I have not yet given, and consequently that my right is not transferred, 59 00:05:11.400 --> 00:05:14.400 but remaineth till I transfer it by some other act. 60 00:05:14.400 --> 00:05:21.360 But if the words be of the time present or past, as I have given or do give to be delivered tomorrow, 61 00:05:21.360 --> 00:05:25.520 then this is my tomorrow's right given away today. There is a great difference in the 62 00:05:25.520 --> 00:05:31.280 signification of the words between I will that this be thine tomorrow, and I will give it 63 00:05:31.280 --> 00:05:35.760 thee tomorrow. Further, the word I will in the former manner of speech signifies a promise of 64 00:05:35.760 --> 00:05:40.320 an act of the will present, but in the latter it signifies a promise of an act of the will to come. 65 00:05:40.320 --> 00:05:59.320 What would have to look at the wording and the circumstances of a contract to determine whether it is best interpreted as a present transfer of title or as a promise to transfer title in the future? 66 00:05:59.320 --> 00:06:05.320 If it is the former, then I may legitimately be compelled to deliver the good up to you since it is now yours. 67 00:06:05.320 --> 00:06:11.320 If it is the latter, then I may keep the good, paying you instead the original consideration plus damages. 68 00:06:11.320 --> 00:06:25.320 There is one circumstance in which a contract must be interpreted as a promise to transfer title in the future, rather than as a present transfer of title, and that is when the contractor does not currently possess title to the good in question. 69 00:06:25.320 --> 00:06:31.320 You cannot transfer what you do not have, and this is where the enforceability of interest can become problematic. 70 00:06:31.320 --> 00:06:40.320 Suppose you lend me $1,000 today, on condition that I pay you back the same amount plus an additional $100 a year from now. 71 00:06:40.320 --> 00:06:45.320 If I don't meet the condition, the ownership of the $1,000 reverts to you and I must pay it back. 72 00:06:45.320 --> 00:06:52.320 If I've spent it all, I still owe it to you, just as if I stole off with your umbrella, whether intentionally or by mistake, 73 00:06:52.320 --> 00:06:57.320 I owe you back the umbrella or the value equivalent, even if I've since destroyed or lost it. 74 00:06:57.320 --> 00:07:08.320 You may not be able to collect the thousand from me right now, but once I am able to pay, you may forcibly collect, though there may be issues of proportionality as to how much of my total possessions you may seize at one time. 75 00:07:08.320 --> 00:07:14.320 But what about the additional $100 of interest? Can you collect that as well? It depends. 76 00:07:14.320 --> 00:07:19.320 I don't think I can be interpreted as having transferred title to $100 to you. 77 00:07:19.320 --> 00:07:25.320 First, I may not have title to an extra $100 at the time of contract, and what I do not have, I cannot transfer. 78 00:07:25.320 --> 00:07:30.320 and Transfer. If I title to it without having possession of it, as for example, if someone 79 00:07:30.320 --> 00:07:34.800 else had stolen it, I could transfer title whereupon you'd be entitled to recover from 80 00:07:34.800 --> 00:07:40.280 the wrongful possessor. Second, even if I do have title to an extra $100, I don't think 81 00:07:40.280 --> 00:07:45.760 I could be interpreted as having transferred title over it to you, conditionally or otherwise, 82 00:07:45.760 --> 00:07:49.880 because barring contractual stipulation to the contrary, as in the case of bonds or collateral 83 00:07:49.880 --> 00:07:59.880 Does that mean that interest payments are unenforceable in the case of unsecured loans? 84 00:07:59.880 --> 00:08:04.880 No, because in addition to returning the principal, I also owe you damages. 85 00:08:04.880 --> 00:08:08.880 And while we've seen that the determination of damages can be tricky, 86 00:08:08.880 --> 00:08:14.880 it's surely easier when both parties have committed themselves on paper to what they take the nearest equivalent to be. 87 00:08:14.880 --> 00:08:24.880 Thus, if contractors stipulate that $1,000 now is being exchanged against $1,100 a year from now, it is not unreasonable to set the damages at $100. 88 00:08:24.880 --> 00:08:31.880 So the interest agreed on is a rough or provisional guide to damages, but it cannot, I think, be decisive. 89 00:08:31.880 --> 00:08:41.880 Suppose that in desperation you agree to pay me $10,000 a year from now in exchange for $100 now, but when the time comes you are unable to do so. 90 00:08:41.880 --> 00:08:47.880 To keep things simple, let's also stipulate that I don't rely to my detriment on the promised $10,000. 91 00:08:47.880 --> 00:08:55.880 So you owe me $100 plus damages. But is it really plausible to place the value of the damages at $9,900? 92 00:08:55.880 --> 00:08:59.880 After all, keeping in mind the Austrian principle of the double inequality of value, 93 00:08:59.880 --> 00:09:09.880 the valuation of interest in the contract was not, strictly speaking, the $100 at time 1 and $10,000 at time 2 were of equal value. 94 00:09:09.880 --> 00:09:13.800 If that had been the case, neither contractor would have bothered to make the exchange. 95 00:09:13.800 --> 00:09:19.640 All it shows is that you valued $100 at time one more than $10,000 at time two, 96 00:09:19.640 --> 00:09:24.360 and that I valued $100 at time one less than $10,000 at time two. 97 00:09:24.360 --> 00:09:29.640 That indicates only that paying me $10,000 at time two would be sufficient to make me whole, 98 00:09:29.640 --> 00:09:34.680 not that it would be necessary. And it is my valuations, not yours, that count, 99 00:09:34.680 --> 00:09:40.680 Since the point of restitution is to make me whole, rather than, as it were, to make you unholy. 100 00:09:40.680 --> 00:09:46.680 As I've described the case, it is unlikely that making me whole requires paying me the entire contracted amount. 101 00:09:46.680 --> 00:09:54.680 Though figuring out what it actually does require will again be, at least in part, the province of arbitratorial judgment, rather than philosophical argument. 102 00:09:54.680 --> 00:10:02.680 And this suggests that in a just libertarian society, there will indeed be limits to the enforceability of quote, usury, end quote. 103 00:10:02.680 --> 00:10:15.680 This does not mean, however, that highly usurious contracts will never be in the interest of contractors. 104 00:10:15.680 --> 00:10:23.680 For there are ways of securing compliance with agreements other than by force, such as by reputational effects, credit reports, and the like. 105 00:10:23.680 --> 00:10:29.680 Such effects may well give lenders sufficient expectation of repayment to make it in their interest to enter into such contracts, 106 00:10:29.680 --> 00:10:36.680 in its predictions of the effects of freed markets on poverty, it is likely that borrowers will stand in need of highly usurious loan contracts far less often than they do at present.