Standard Contract Renegotiation: Marriage Edition

There is no de jure default prenuptial contract in the United States. But there is indeed a de facto contract. One with terms and agreements that get awfully onerous the deeper you get into the fine print. Mind you, I don't mean that the terms of a rancorous separation are considerably onerous on men. That a largely common-law court lags rapid social change (in this case, the enormous influx of women into the formal workforce) should surprise no one. No, what I mean is that becoming mired in a family court dispute is dead-wasteful. Every hearing, every plea, every supplication to the bench carries the opportunity cost of missed wages, missed picnics in the park, missed life. And this is in addition to all the explicit court and attorney fees. Divorce is big business.

Much like the taxi cartels of the land, family courts ought to be vulnerable to disruption by nimble, low-overhead competition. Apologies for dragging out a worn meme, but where's the Uber, but for the dissolution of marriage? A standardized, opt-out pre-nup a la Thaler/Sunstein seems like it should be a slam-dunk. What's not to love about freeing up courthouse resources and liberating people during a difficult period of transition?

Some possibilities:

1. Prospect Theory. Newlyweds overestimate the bliss they'll obtain from a lifetime of marriage and underestimate the costs and deadweight losses of divorce. They also overestimate the probability their marriage will survive.
2. Defection. Courts are predisposed to honor prenuptial agreements, but widespread adoption of new default prenup terms is out-of-sample. I don't know how likely it would actually be for courts to declare such agreements invalid, but such risks should make potential customers think twice.
3. Signaling. The dreadful inefficiency of the present system serves a purpose not all that different from an engagement ring: I am exposing myself to this excruciating downside risk; see how serious I am over here, pumpkin? If this is an important enough signal, any efficiency gains from a standardized pre-nup should be captured elsewhere. Instead of 2 months' salary for a polished stone, maybe it's 6. TANSTAAFL.
4. Transitional gains. Perhaps there truly is a preferable equilibrium that doesn't rely on an albatross in a black smock and powdered wig. But if it's a stag hunt game, being the oddball who solicits this new product signals unacceptable nonconformity. Given the preposterous peacockery of the modern Western wedding ceremony, there is at least some evidence that fear of violating the expectations of tying the knot can produce wasteful behavior.
5. Inertia. Mom and dad didn't get a pre-nup. Neither are we. It ain't in the heuristic toolkit.

In the grip of my periodic melancholy, I fancy that point #1 up there is the only thing preserving the institution of marriage for the median American. If folks were perhaps a bit more rational, they might reconsider how strong their instincts for regret aversion should be.

Gordon Tullock's famous advice for transitional gains traps is: "don't set any." In this case, one wasn't set. It just sort of crept up. How to break an emergent state monopoly? Tough question.

Anti-Shoopites The Third: The Revenge of Shake Shake Booty

Is Herbalife a Ponzi scheme? Via @pmarca, Bronte Capital explores the ins and the outs in exhaustive detail. And it appears that there's a great deal to the case, as one might expect with a worldwide operation.

The skinny version: the physical Herbalife product is a nutritional supplement, sort of a meal replacement shake. You drink this once a day in lieu of a meal along with some tea and some aloe water and in a few months, you lose weight. But there's a great deal more to it than the shake mix and the tea. They seem to be in the business of selling local social clubs where like-minded folks gather for a common purpose in a comfortable setting. Participants congregate to share stories, to offer support, and to provide motivation for each other.

Naturally, law enforcement is obliged to intervene. The Federal Trade Commission has some bright-line guidelines for what counts as a Ponzi scheme, including how much of the product is sold for retail purposes and how much is consumed within the distribution network. The stereotypical cases for this are Amway and Koscot. Amway is particularly notable for complying with the letter of the regulations without obeying the spirit (nb, this is an editorial remark: I've known several folks to emerge from the other side of an Amway dalliance severely disillusioned. Still, that's anecdote, useful for filling a parenthetical, nothing more). Herbalife appears to be the converse: it's possible that they've violated the FTC guidelines, but they don't appear to be defrauding anyone. In the terms of the EE conditions, there's no ex post regret.

I think that's the important part from the perspective of the pedestrian moralist. If the shake, the tea, and the aloe water are merely the totems of the enterprise, and what Herbalife is really selling is ersatz ritual, it's silly to launch an inquisition.

Charles Ponzi was a con artist, for sure. But like with many things, so many things, the reaction to his scheming was poorly designed. Madoff was a type II error. Herbalife appears to be a type I error. It can be difficult to know whether or not an investigation is righteous without burning shoe leather. Maybe a centralized bureaucracy like the FTC isn't always the best approach to fraud prevention.

White Angus

Jack White thumbs his nose at OU for publishing the details of his contract, including a very specific guacamole recipe. (h/t the one and only king of the skins Martin Atkins)

The recipe in question:

Click for an even more pit-tastic image.

Here, I'll let ol' Diamond Dave explain the logic behind weird contract riders. It makes pretty good sense once you hear it.



Consider the following two explanations for Jack White's refusal to grace OU with his sick guitar chops anymore:

1. He's a petty prima donna who has his knickers in a twist over being publicly embarrassed. Some snotty college kid at the student newspaper wants to make a fool of him? Up yours, OU. Up yours FOREVER. Ha!
2. The game theoretic logic behind strange, specific demands included in contract riders only work as intended when the punishment threat is credible. If White had folded and said "ha ha, It's just a joke you guys, I don't actually care about f'ing guacamole. It's just to keep the venue on its toes. I have a very demanding schedule what with all the traveling and writing new material and the rehearsing and whatnot. All I'm really looking for is one quick signal that the people supporting my show are being thorough and diligent," then future venues could game this bit of information to shirk consequence-free.

Naturally, these two hypotheses are not mutually exclusive. I don't know White, so I can't comment on the quality of his character, but would you be able to reject either hypothesis on the weight of the evidence presented?

People, ever since Altamont (or West Warwick if you're a little younger), audience safety is a pretty serious bit of due diligence. For conscientious performers, disregarding this duty comes with a penalty. Note that White is effectively burning his own future earnings to send a signal to venues that he takes the terms of his contract seriously. He insists on accepting his BATNA to signal his credibility. 

That? That's integrity. Integrity and humility. To have the world (or at least Oklahoma) think less of your character all for the safety of the audience and one's fellow performers is an act of courage. Well done, sir. Well done.

Toward A Theory of Euvoluntary Political Exchange

I had a fun little back-and-forth with SMBC cartoonist and BAHFest organizer Zach Weiner yesterday on Twitter. You can read it here if you're so inclined, but be forewarned: it got silly and a bit scatological pretty quickly. The non-silly modified transcript went something like this:

Z: Are any lawmakers going to do anything about the CIA torture report?
S: What would you have them do?
Z: Punish transgressors. Credibly commit to punish future transgressors.
S: Torture has been around for thousands of years. How will a little extra punishment help?
Z: WTF are you talking about? We successfully outlawed slavery. We can successfully outlaw torture.
S: Slavery still exists, all we did was force it underground.

And then Adam G joined the conversation and it quickly devolved into jokes about the political economy of seasteads (check for yourself if you don't believe me).

It struck me that Zach and I must have very different game theoretic models underpinning our views of how and why the state exists. By suggesting that punishing torturers would produce better behavior, I think Zach basically subscribes to the notion that the telos of the state is to govern, that the sovereign is generally the product of Lockean bargaining, Hobbesian entrepreneurship, or Rousseauian foresight. Zach appears to hold a wildly popular view, both inside the academy and among the general public, that people who hold political power—the power to coerce others—are endowed according to the Enlightenment-era principles described by Jefferson in the DoI:

Governments are instituted among Men, deriving their just powers from the consent of the governed

To Zach, and indeed to any American you'd poll with probably greater than 95% likelihood, this sentiment is accurate. The government is legitimate if and only if it serves the interests of the people, if perhaps not always their direct will. How widespread is belief in this model? I've heard my patron here at EE [obliquely] reference it more than once. If there's anyone in the world I most closely agree with on matters of political economy, it's Michael C. Munger.

But on this matter, I part a bit with first-principles theories of political organization. It might be that the sovereign arises to solve some thorny collective action problem, but that doesn't say very much about what it does once it sticks around. In this sense, I find myself much more closely aligned with Hume, that the continued existence of the sovereign is to encrease his own opulence and dominion. If good public law and order happens to arrive along with this pursuit, all the better, all the more euvoluntary if you will. However, a lifetime of casually following politics, of noting the periodic lapses in ethical behavior of the political elites, of surveying historical episodes of malfeasance, of noting the curiously acceptable practices in politics that are outright illegal in the private sector (insider trading is the most benign example that springs to mind), I find it nearly impossible to conclude that the state exists to serve anyone other than itself.

If the popular model is correct, if Zach is correct, the CIA (and whatever other organizations who've not had extensively-redacted reports publicized) is acting aberrantly when its agents force food and water into the rectums of prisoners with sufficient vigor to result in hemorrhoids, anal fissures, and rectal prolapse. Punishing those who are not acting in concert with the fundamental principles of the organization is sufficient to ensure compliance. Contrarily, if my model is correct, if Hume was right, and the state exists to encrease the dominion of the sovereign, there was no wrongdoing. At least not in the hidden, hermeneutical mission statement of the agency. If I'm right, the only person committing heresy is the whistleblower. If I'm right, Snowden is a criminal, not Rogers. If I'm right, whistleblower statutes need to (a) exist and (b) have no real capacity to protect whistleblowers. If I'm right, prosecutions would be Soviet-style show courts. If I'm right, the only way to ensure that torture is ended is to abolish the CIA entirely, along with the numerous other unaccountable federal agencies that enjoy wide discretion and little Congressional oversight.

However, I am not the hegemon of Plato's Cave. I do not have the luxury of indoctrinating the young while calling it "social studies." I cannot convince you that my model is correct and the popular model is as fanciful as a chocolate unicorn riding a pumpernickel skateboard across a peppermint half-pipe. All I can do is gently encourage you to revisit from time to time the basic model you have for political authority and to ask if the patterns you see in political activity reflect your hypothesis or if they might be better explained by an alternative.

We all want a more euvoluntary relationship with those vested with political authority. To get there, it might be worth reconsidering the terms of the implicit contract. T/F, explain.

Offer and Acceptance

One of the things I miss about living in the Pacific Northwest is that most august publication, The Stranger. In its pulpy folds can be found some of the finest examples of what appears to seamlessly transition between performance art, human perversion, and Old Media trolling. And the locus for all this hilarity? The personals section. Specifically, the "Other" sub-section.

The best example I recall is from ca. 1994, and it ran a little something like this:

Tired of the same old B&D and S&M? I want you to feed me like a baby pelican. I provide the adult diaper and raw herring, you provide the strap-on beak. Serious inquiries only please. No weirdos.

Of course, anything that dead tree media can do, Craigslist can supercharge and strap on some booster rockets. Witness:

Assume this contract was legitimate and that it was struck. Could this be euvoluntary? And if not, who would be exploiting whom? Economics tells us de gustibus non est disputandum, so as long as $175 is worth more to the person accepting this offer, she'll be better off...

So many questions. Are we talking dollar-store ramen here, or some quality noodles? And is it proper ramen, which is actually a highly refined piece of Japanese cuisine? "Seasoning the sauce" isn't an accurate description of how ramen is traditionally made. And is the tub all the way full? How does one person dispose of a tub full of noodles? How does this guy cook all of them? By the kettleful?

The moral dimension engaged here is a way toned-down version of the same one we looked at in the Armin Meiwes case: disgust. This is kinda gross, but in a juvenile way rather than a horrifying way. Idle perversions may sort of shock the sensibilities of the puritanical among us, but I think the natural reaction here is to snicker rather than to outlaw. But I urge my readers to be sensitive about and take seriously Stigler and Becker. Second-guessing folks' peculiar tastes, no matter how alien or outre is besieged by Pareto-destructive risk. It is indeed hard to make folks better off by denying them alternatives.

Even if those alternatives are to whip up a fresh batch of human-flavored ramen.

Terms and Conditions Subject to Change

I teased a post on how flu shots are a scam a little while back. The trouble isn't with the shot itself but rather that medical providers are increasingly mandated to obtain an annual flu shot or lose their job. It seemed a straightforward coercion topic, but it got me thinking about decision-making under uncertainty.

Specialized professions frequently require quite a bit of up-front investment. Workers have to be educated, trained, filtered, sorted, and assigned to tasks. This is neither cheap nor painless. And before any of that is done, workers-in-the-raw have to peer down a hazy game tree and evaluate if it's worth it to even start. One of the easier guides to action is the set of terms in a standard employment contract for the position they're gunning for.

Strictly speaking, that's wrong. What you actually want to aim for is the standard terms you're likely to get over the course of your employment, which is some stochastic transformation of the existing rules. Longitudinal analysis and an appreciation for uncertainty or ergodicity are particularly valuable for this task. Should I train to be a CFA? What do I think the regulatory environment will be like in 2033? What role will alternative currencies play? And even if I can figure that out to my satisfaction for the world of finance, to be unbiased, I have to apply the same analysis to every other potential field I might consider.

Sounds like a daunting task, doesn't it? Gives you an appreciation of the importance of regime certainty for individuals, not just firms.

And when push comes to shove, employment contract terms are softly coercive in the sense that career switching costs are pretty high for established professionals. A 45 year old nursing manager will probably just absorb an extra insult or two to the original bargain rather than walking.

I think that's why Darth Vader's little hallway exchange with Lando Calrissian resonated so well with audiences. Yes, AT-ATs on Hoth were loads of fun, but the political economy of Bespin is what really sold the film to working stiffs.

So the funny bit, to me anyway, is that firms are enabled to make these thousand-cuts insults to their employees by multitude labor market regulations. It's harder to opt out of your job when your boss indulges a taste for petty tyranny if you're bound in red tape when jumping ship.

So I think I was a bit off the mark. It's not so much that flu shots are a scam, it's more that unexpectedly mandatory flu shots in a non-ergodic labor market with high switching costs and bureaucratic sclerosis is a scam. I perhaps should not have sacrificed accuracy for pithiness. Words are cheap. Unless they're written down by a legislature. In that case, they're anything but, and it is we that must pay their price.

Contracting: Is the Frequent Flier Arrangement Really Voluntary?

This gentleman claims that he was cut off, after the NW/Delta merger, because they "wanted to get rid of all their high-mileage customers."

Appalling ignorance of airline economics aside, should the airline be able to cut off people who complain too much?

Toward a Euvoluntary Military Service

From Anthony Gregory, writing in Reason:

Rather than reinstating the draft, a less drastic proposal exists, one more consistent with human rights, more conducive to peace, and more respectful of those on the front lines: a truly voluntary military. Today, unlike most any other U.S. institution, the armed forces practice indentured servitude: Employees agree to a term of service and face imprisonment or even execution should they quit. We do not consider it a "voluntary" job if a warehouse or factory forcibly prevents workers from quitting at will. Those who wish to honor the humanity of America’s soldiers should agitate not for conscription but for the freedom to resign. The remaining soldiers would be there by choice, and if they continued fighting unjust, counterproductive wars, it would be harder to regard them as victims of bad leadership and an apathetic populace.

ATSRTWT

 This is actually part of Chapter 3 of my dissertation, so I could discuss it at length. I'm cruel, but I'm not that cruel. Instead, I want you to ask yourself if the nature of a fixed labor contract for military service is necessarily coercive on net. Be sure to show your work. Remember that in order to establish systematic bias, you need to have some evidence of fraud or of an admixture of excess kurtosis coupled with excessively high discounting.

It's easy enough to model a coercive military service using an extensive form game, but it might be less easy to provide empirical evidence to support that theory. How would you build your case?

Adjustable-Rate Mortgages

I am a home owner. Or if I've been playing too many video games, I am a home pwner (your domination is my vacation). Because of this, I tend to get reams of junk mail offering me fantastic refinancing deals. Hooray!

Now, since you've likely deduced that I've a bit of a training in economics, it naturally follows that I have no idea what the yield curve looks like on any particular day. I am however unusually blessed with an eagle-eyed spouse who takes every opportunity to keep from forking over cash moneys to lenders. She loathes interest, whereas I'm stupid enough to think its social benefit is all unicorn glitter and ballerinas pirouetting in a, I don't know, a glade or something. I flatter myself to think I'm on the side of a larger truth, whereas she actually keeps our household ledger in the black. It should be immediately obvious to anyone that she far and away provides a much larger marginal benefit to our household, so it should come as no surprise that she tracked down a few of these offers and looked a little closer.

Surprise, surprise, the ones that sound too good to be true are precisely that. They're either 15 year mortgages (we're not even remotely able to handle that) or they're adjustable rate.

For those of you who've never had to wrangle with the niceties of home financing, an ARM works a little like this: you start out for a couple of years with a relatively low fixed (say, 3%) interest rate on your loan, and when this sweetheart period is up, you start paying interest a bit over the floating market rate. Here, look at this:

That's what a yield curve looks like when it's at home. Source. How you'd calculate your floating rate is that you'd consult your crystal ball to see what this guy will look like each payment cycle down the life of your loan, find the time left on your mortgage on the abscissa, follow it up to the curve then head West young man to the rate on the ordinate. Since you're not the US Treasury, you pay some basis points above that (I'm not sufficiently familiar with the system to say exactly how much). If you're lucky enough, the yield curve will remain nice and low so that you don't get rear-ended by bigger and bigger interest components of your mortgage payment.

Which is what happened to folks in 2008.

Five years ago.

I'll not try to parse the substance of the response to the financial crisis. What I will do is ask why the Ban Barnstormers haven't so much as wiggled their wings at what seems to be an exploitative lending practice. Compared to, say, payday lending, the ARM seems a hell of a lot more deceptive.

Or does it? There's really no information asymmetry to speak of, right? Borrowers in effect become speculators, taking rather large uncovered positions over future market movements (think of the tremendous downside risk implicit here), but it's not like they're being tricked by lenders. In contrast, under a fixed rate mortgage, it is the lender (well, actually the taxpayer so long as we have Fannie and Freddy) who accepts the long-tail downside risk. But who should (normative claim alert!!!) accept the downside risk? It seems to me as if most folks hew to the opinion that it ought to be the big, faceless, indifferent corporations. People get all bent askew over Glass-Steagall (really!), but not so much as a lifted eyebrow when there's this huge industry-wide practice that heaps systemic risks on the shoulders of ordinary citizens.

Don't get me wrong, I think that as long as folks actually understand what it is they're agreeing to (and they have a pretty strong incentive to learn about what it is they're agreeing to for the next thirty years!), any ex post regret is their own ever-loving fault. But I also think that this moral and economic calculus applies in equal measure to other lending markets that people have at various times lit the pitchforks and grabbed the torches over.

So how about it? Are the regrets felt by ARM holders of the right type to make this type of loan non-euvoluntary? What does that imply for the regulatory scheme? Do we have different caveat emptor goalposts here? What to do about it?

High Frequency Corn Trading

High Frequency Trading (HFT). It sounds like one of the knobs on an old cabinet-style cathode ray tube television set. It isn't. It's computer-assisted finance that yields a whole bunch of tiny returns. Instead of periodically dropping a brick into your account, it sifts dust in.

Is it euvoluntary to trade for fractions of a penny on contracts that last fractions of a second?

Let's pause for a moment to remind ourselves of the function of the finance. In a fundamental sense, finance is about information. It's a way of pooling and relaying enormous amounts of distilled market signals in the form of prices, of balancing beliefs about future states of the world and permitting folks to share what they know and what they expect. When I list an IPO, investors tell me quite bluntly whether or not they think my venture is worth a tinker's damn. When I write a pork belly future contract, I lock in the sale price and let some Chicago hot-shot bear the risk that my little piggies get swine flu before the end of the season.

When I leverage the hell out of a margin call on a Russian bond spread, it's because I have fancy models that tell me there's arbitrage in them thar hills.

Yikes!

Okay, so finance is obviously not euvoluntary when it introduces systematic risk that snares taxpayers in its briars, but that strikes me as an error to be laid at the feet excessive latitude in constitutional interpretation. I don't know about you guys, but I've gone over the articles and despite my best efforts cannot endeavor to lay one bent knuckle on that passage which authorizes Congress the bailout authority it has so graciously endowed itself.

Recall also one of the chief pillars of economics: nothing is free. The opportunity cost of a CBOE trader is whatever else she might have done with her life, and considering that traders tend to be smart, driven folks, that cost could be high indeed. I imagine there's some costs of capital in there too for buildings and computers and all that, so let's say that's consistent with most other industries and that it's about 1/3 of total income. Good traders earn hefty returns to their efforts, and HFT is part of this environment. Still, this doesn't tell us whether or not there's any residual value captured on the other side of the exchange. When I buy a taco from the truck, I'm better off to the tune of [my subjective value of the taco]-[whatever else I could have spent the cash equivalent on] and Carlos is better off by [the goods he can buy with the money I hand over]-[the time, effort, and materials it took to make and sell me the taco]. BATNA disparity is at least partly driven by the comparison between these two differences. If Carlos is struggling to make ends meet and I'm a high-falutin' aristocrat, the pedestrian morality cuts against me. Contrarily, if we're back in the desert, Carlos is the one with the advantage.

The point of HFT is that neither one of us captures that much excess value per trade. My taco is microscopic and I pay Carlos fractions of a cent. Enough of these trades, and I've got a thermos of taco slurry and Carlos has a pile of zinc shavings. I fear this analogy has fallen apart.

The thing I'm asking is whether or not HFT is marginally welfare-enhancing. The opportunity cost of HFT is the old-style buy-and-hold trading and maybe some brainpower bent to writing algorithms. On this margin, is the change euvoluntary? If not, which condition is violated? If it's nothing at all, then why do I hear my favorite bellwether groaning (Planet Money) from time to time? Is there something else troubling about HFT that doesn't clearly rest on pedestrian morality? Please feel free to sound off in the comments.

Education is not Euvoluntary: Implicit Contract Edition

A friend of mine asked me recently for a spot of advice. It seems that one or more of his students did not attend the scheduled final. Mr. M. found himself at loggerheads with his conscience. What's the greater offense, to dole out a passel of zeros and have to wrestle with the hassle of failing students (and those of you in the academy can testify what a pain that can be) or to indulge the students' irresponsible behavior?

I offered what I thought was reasonable advice (zeros all around), but it occurred to me that perhaps I have a different notion of what constitutes the de facto college contract.

Now, there is a de jure contract. That's all the boilerplate you agree to as an undergrad: don't cheat, don't accept payment for athletic services rendered blah blah blah. But none of that stuff is in the actual contract as she is understood. What's worse is that this tacit contract is largely invisible to all these poor, sleep-deprived grad students that end up teaching. We have a different contract in a PhD program, one that just doesn't apply to the typical undergrad. And you know what's worse? We harried grad students believe that nothing of substance has changed in our university contract. How's that for loony?

So what's actually in the standard undergrad contract?

Well, in return for being an FTE and going into deep hock for the next quarter century, the institution agrees to boost the student's labor market potential, to indulge a modern, secular version of what the Amish call rumspringa and to give parents a sense of pride and accomplishment. Other terms are available a la carte to any student at no additional charge. Free speech not included. Consult upperclassmen for details on additional riders. Don't poke the MBAs.

For your typical grad student, the contract is all that a la carte stuff: expanding your mind, developing critical thinking skills, learning how to be a more effective communicator, discovering how to navigate the academic job market, making solid professional connections... all that jazz. That stuff is great, but you're fooling yourself if you think that these things have anything to do with the purpose of college as understood by the median student. Now, in a perfect world, these elements might well be the core of the university experience, and I think they've all got a whole lot of merit. Perhaps in a world where the marginal student is motivated differently and where the labor market finds its signals elsewhere (and where kids can go off on a drunken bacchanalia in lands far from the lights of civilization should they so choose), things might be better sorted. But that's not the world in which we live.

I'm more or less confident that veteran professors have this all figured out. I know for sure that my patron here at EE is wise to all this. But for all my novice readers, I encourage you to be more sensitive to the possibility that the rhetoric you hear from the academy might be no different in kind than the kayfabe that spills from the mouths of elected officials.

Education ain't euvoluntary. Confusion and disagreement over the terms of the contract does not help make it more so.

They Go Together Like a Horse and Carriage

It seems like all voluntary domestic living arrangements should also be euvoluntary. It seems like the only EE condition we might butt up against is ex post regret, and it also seems like the way around regret is to preserve no-fault divorce as the default common law dissolution arrangement. It seems like the role of the state should extend no further than ensuring folks aren't being coerced or defrauded into entering into a marriage contract. It seems like as far as the government is concerned, there isn't ten cents' difference between a nuptial contract and, say, an insurance policy.

It seems like it should be that way, but that way it sure ain't.

I make a big deal out of political kayfabe, but I don't mean by this to claim that there isn't religious and corporate kayfabe as well. The reason I focus so closely on the bloviations of elected officials is that they enjoy an unchecked monopoly not found in either the pulpit or the boardroom. Well, at least in the US. Here though is an interesting example where religious kayfabe may well mask an underlying aesthetic objection to alternative forms of marriage. I think there's pretty good Biblical evidence to allow Christians to support a clear division between the roles of Leviathan and Pontiff (Matthew 22:21, eg.). I see no necessary tension between believing that (a) Leviticus 20:13 has something interesting to say and (b) the state should act as an impersonal arbiter of contract terms. When this division goes unobserved, when folks strive to resurrect collusion between the first and second estates, I find myself puzzled about the moral intuitions underpinning this urge. It seems possible that the moral dimension is Haidt's sanctity/degradation, which always struck me as girded by atavistic aesthetics rather than deliberate moral or ethical calculus.

If there's an issue of fiscal externalities, where a baker or a photographer can be sued in court for refusing to provide wedding services for a ceremony they find offensive, this highlights a flaw in civil law. If the problem is with children being raised in unorthodox households, we've got a reasonable empirical question that must be answered with good empirical analysis (instead of evidence-free appeals to imagination as seems commonplace). If the problem is a weakening of the national moral fiber or something, I think I'd like to see a better explanation of how it is that the boundaries of an optimal moral zone are simultaneously determined with political borders. In what sense did the Louisiana Purchase extend the particular sphere in which the median American voter was granted legitimate authority to impose moral calculus on others?

Look, there are reasons to debate the form and function of the relationship between contract arrangements and state enforcement. But let's not kid ourselves when it comes to the source of our disagreements. De gustibus non est disputandum, sed de gubernum fortitori est*. The scope of government is applied inappropriately when it's granted the authority to determine winners and losers in the game of matrimony just as surely as it's misapplied when determining winners and losers in mineral exploration or agricultural production. I can sort of understand some sort of (extremely cautious) state intervention in non-euvoluntary exchange, but intervention when the arrangement is, but for other existing public policy, entirely euvoluntary seems an untoward usurpation of the common presumption of liberty.



* My Latin is terrible, so that's probably grammatically incorrect. Apologies.

It's for your own good, ma'am. Now, go clean toilets.

A quote:

Two years ago, the Icelandic Parliament – led by female prime minister Jóhanna Sigurðardóttir  -  successfully banned all strip clubs on the grounds that they violated the civil rights of the women who worked there and were harmful to society. 

Yes, really. 


At best, there is a trade-off here.  A person "A"  is being denied the right to enter into a contract, because someone ELSE "B" thinks it must not be voluntary for "A" to do that, because "B" would not do that.  So B is restricing the liberty of A, for the moral smugness and feel-goodism of B's own enjoyment.

That is reprehensible. 

With a nod to Michael Hartwell, of YH&P...

Barter?! But I Just Met Her!

Bartering is a high-trust activity. My in-laws hail from a small Lithuanian farm. To this day, they still plow the fields with those stout little Baltic horses that look like 3/4 versions of proper draft animals. Things being as they are, it's not at all uncommon for them to round up a few folks from the village and get them to help out at harvest time in return for a heaping helping of delicious Lithuanian vodka. For skilled help, neighboring farmers rely on an informal intertemporal labor pool. You help me yank potatoes out of the ground this fall, I help you fertilize the rye field next spring.

Both of these types of transactions rely on trust. The point transactions are of the caveat emptor type: I'm getting decent labor (while it's still sober) and my hands are getting quality ethyl spirits. The longer-horizon arrangements are part personal trust, part trust in the informal institutions (and maybe some trust in regime continuity, but for bucolic kaimietiai, the goings-on in Vilnius are mostly irrelevant political theatrics). Because trust suffuses these exchanges, it's probably reasonable to expect them to be mostly euvoluntary.

Bartering is likely to be something that happens when both parties are similarly desperate and not especially disparate. That is, barter is an institution poor people of mostly equal station resort to when times are tough. Moral intuitions towards barter transactions are probably predicated on this, so I have a hunch that comfortably wealthy, pampered Westerners might cluck their tongues at the plight of barterers, but they are unlikely to cry exploitation. I can also claim that should such wealthy, pampered Westerners find themselves in a bargaining situation with these poor, benighted souls abroad, they will find themselves utterly fleeced [I cite personal experience here].

I do wonder how portable the moral intuitions are behind barter. How would folks in the West react if they found out oil firms were paying local derrick workers in goats rather than cash? Even if the goats were more valuable than their cash equivalent to the workers, do you suppose network news viewers would be filled with grand indignation? I'd bet even odds they would be.

Barter is unsophisticated trade: it's used by children and underdeveloped societies. Reverting to barter in a cash economy carries with it social and emotional freight. It's fine for close equals to barter, but that's probably the extent of it. Anything else smacks of condescension, rightly or wrongly, irrespective of the opinions of the nominally disadvantaged trading party.

I usually like to close posts like this with a meaningful conclusion or some follow-up questions, but I don't have anything for you today. I suppose that if you're interested, you might ask some people you know about their feelings towards barter. I think you might find that people have interesting and perhaps ill-examined attitudes towards cash transactions. This is one of the reasons I don't much care for monetary economics: I see economics as a holistic discipline and plumbing the public's attitude to media of exchange is probably more challenging than many economists suspect.

Euvoluntary Exchange, Efficiency Criteria and the Social Contract

The classroom description I usually give for Pareto efficiency is something like this: an outcome is Pareto efficient if no one can be made better off without making somebody else worse off. When discussing economic efficiency, this is usually a pretty good place to start. Unfortunately, it's not an especially good guide for allocation. Very few actions are truly costless and someone always bears the cost, which is why economists are fond of what might be in contention for the most awkward acronym of  all time: "TANSTAAFL", There Ain't No Such Thing As A Free Lunch. If we had to rely on Pareto criteria to make any changes to the status quo ante, we'd be paralyzed. That's why when evaluating what it is economists evaluate (a list that seems to get bigger by the year), we rely more commonly on the Scitovsky criterion, more commonly called Kaldor-Hicks efficiency or just cost-benefit analysis. K-H efficiency relaxes the Paretian concern over making no one worse off by simply insisting that the total benefits to exchange or production or whatever exceed the total costs. That is to say that when someone else is made worse off, they could be compensated using the residual value generated by the economic activity.

It sounds simple, but like with many seemingly simple things, there are hidden depths that complicate matters.When we're talking about routine exchange choices, it's pretty easy to identify the affected parties. When I buy a bucket of ice cream (euvoluntarily), I'm better off, my grocer is better off, and to the extent that sufficient stock remains that the next guy who wants rocky road is able to find what he's looking for, I'm not harming anyone. It might be true that I'm ever so slightly bidding up the price for ice cream in my gluttony, but by K-H criteria, the imperceptible effect my purchase has on the market is swamped by the surplus claimed when a deal is struck. But what happens when the parties to a decision don't yet exist?

Smarter people than me (like Scitovsky himself) have rigorously proven that Pareto improvements are necessarily K-H improvements, though the reverse need not be true. I am willing to make the intuitively plausible claim that euvoluntary exchanges are local* Pareto improvements under condition 4, no uncompensated externalities, and local K-H improvements in the absence of condition 4, as in the GTM's original paper. Note that this does not necessarily imply that all K-H improvements need stem from euvoluntary exchanges, but it does mean that if a trade is not K-H efficient, it cannot be euvoluntary.

Why is this important and what does it have to do with contracting with not-yet-existent parties? Quite a bit, really. Consider an honest-to-goodness Hobbesian wilderness: all against all, two men enter, one man leaves, you scratch my back, I bludgeon you and steal your stuff. From this condition, a Rosseauvian social contract is unquestionably a Kaldor-Hicks improvement. Future generations benefit twofold: first, they can enjoy law, order, and the social welfare and eventual economic growth that accompanies peace. Second, they get to exist. The easiest way to anthropomorphically increase the Earth's human carrying capacity is to cooperate. I am obviously better off for my ancestors' decision to form rules of law. Despite this, I have a hard time concluding that the social contract is euvoluntary. If for no other reason than confederacy with the state is not alienable nor are terms negotiable, the social contract does not conform to contract law. There is no meeting of the minds, no offer, default acceptance under penalty of imprisonment, no intent, and no remedy for usury or breach of merchantability. Lest I sound too glib here, let me give more concrete examples. Suppose I oppose a portion of my income bent towards violence against foreign nationals or directed towards the oppression of recreational drug users. Under normal contract law, I would be able to explicitly stipulate the acceptable use of my contribution towards services rendered. Under the social contract, if I'm in breach of terms I never agreed to, I become a tax cheat and a felon. I cannot for the life of me square this with the principles of euvoluntary exchange, even if I'm unmistakably better off living under the social contract. This suggests to be that this Euvoluntary Exchange project has even more to offer than is evident at a casual glance.

Indeed, we might use EE as another tool to examine the ethics of transacting across time and with absent parties. This is especially true of directional vs. destinational euvoluntarism. Perhaps when pondering how to treat unborn generations, we might also use an EE yardstick in addition to K-H and Pareto criteria when making sticky meta rules or writing constitutions.

Some questions for consideration:

• Can ex ante institution creation be purely euvoluntary? If so, what are the natural limits to those institutions?
• What components, if any, of EE should meta rules consider?
• To what degree are EE conditions substitutes for standard efficiency criteria? To what degree are they complements?
• When are constitutional rules not coercive over future generations? Does this question ultimately matter?
• How do you suppose ordinary folks develop moral intuitions towards the social contract?

* by "local" I mean here that we're ignoring any psychic discomfort felt by curmudgeons who bear an aesthetic grudge against what ordinary people would regard as mundane, acceptable trade.That is, I mean to exclude the reductio ad absurdum often brought to bear against the Paretian criterion.

A Man of Wealth and Taste

Are sales of souls euvoluntary? Before you think I'm asking a silly, facetious question, consider that animistic religions are alive and well in many of the poorest regions of the world. Europeans and their kith have long strove to quell the native religions, be it by bell, book and candle, by the sword, or by the slaver's net. Behind the entire sordid history of the intersection of Rome and the rest of the world is the Faustian trope.

Poor kid, hard on his luck, but with ambition and talent trades his immortal soul for a chance to grab the brass ring. Maybe it's playing a mean trumpet, maybe it's batting .400, maybe it's EGOT, maybe it's bulls-eyeing womp rats in your T-16 back home. Whatever the prize, there's a deal struck at midnight at a crossroads, perhaps in the presence of a dead cat in a burlap sack. The contract is occasionally voidable (See, eg. Treehouse of Horror IV), but typically ends with Italian poets paying you a visit under the watchful care of the author of The Aeneid.

With These Rings

Abstracting a bit from marriage as a social, cultural institution, one might make the case that the state's role in marriage is in contract enforcement. A marriage is a bit like a firm: the basic rules of organization are circumscribed by common law, but the specific arrangements are left to the founders of the organization. The state recognizes the contract and honors its terms, including implied boilerplate like rights of inheritance, powers of attorney, et al. The recent tussle over same-sex marriage has cast a spotlight on the common-law circumscriptions of the institution. I do think it's fair to ask what are reasonable limits on the type of marrigae contracts that can be written.

Luckily, the common law already provides some pretty good guidance. Adults of sound mind absent coercive pressures are able to write contracts. If you think of a family as a species of firm, you really have to seriously ask why organizational contracts are limited to a joint partnership of only one man and only one woman. What reason is there to prohibit plural marriage?

Lest I appear to be baking two cakes in the same oven, I must stress that this is indeed an entirely different question than same sex marriage. Plural marriage considerations question the validity of the prescribed form, but same sex marriage considerations are an appeal to what North, Wallis and Weingast refer to as impersonal exchange: that the class identity of the contracting parties is irrelevant. The only things that should matter are considerations of competence and duress. Plural marriages challenge the universe of contract forms that can be written. This is a categorically different question. But still one worth considering.

Down to the brass tacks of the EE, then. Once again, I don't know if I have a good answer for you. It strikes me that (at least in the language we use here) that what we observe is a violation of conventional capacity to trade. But this is exactly the point we're trying to address, so that objection just plain begs the question. Again here, I think it ultimately boils down to a question of aesthetics. Plural marriage is weird, so people (the median voter) opposes it. Polygamists are low status, so they're less likely (at least, for now) to garner much popular support.

So I close with these simple questions: is plural marriage non-euvoluntary? If so, what condition is violated? If not, why the continued ban? If you do end up grilling your friends, family or students about this, hold their feet to the fire. I expect you'll find their arguments end up teetering on a precipice of visceral revulsion and not much else. If I'm wrong about that, do please let me know.

Voluntary Coercion: Fear the Mechanical Mother

There are several me's. There's the me today who eats six jelly donuts, and the me tomorrow who looks at the scale and say, "I HATE yesterday me!"

Some people have trouble getting out of bed when their alarm goes off. I've never had that trouble, but I know people who do. (We have talked about the problem before, here at EE).

For them, the current "me" is the rational one, who wants to constrain the future "me" who is going to act badly.

So, while in the case of the jelly donuts, future me cannot travel back in time and berate the past me who ate the high calorie snack. But in the case of the alarm clock, all rational me has to do is figure out a way to force future me to act in the way that current me wants. In effect, current rational me gets to write a contract, knowing that future me will be trying really hard to cheat on that contract.

And future me is just as smart as current me. So you need a commitment device. And here it is! As the designer, Paul Sammut, puts it:

"I wanted to make something that would essentially force me to get out of bed when I wanted to get out of bed the night before," said Sammut. "And I was thinking about ways of doing it and I thought about how in high school I had the perfect solution to this, which was my mother, and how she would, if it was time for me to wake up, she would force me out of bed."

He built the prototype in his spare time and uses it every day.

"Now I wake up before it goes off," said Sammut. "I subconsciously fear it and know I have to get up."

Now, I guess I need a mechanical mother to keep me away from those jelly donuts....

Obscene Contracts

Armin Meiwes, Der Metzgermeister, wrote a very simple contract in March of 2001 (links omitted for the sake of civility {and I encourage you to refrain from seeking out any details on your own}). The offer was simple: he was "looking for a well-built 18- to 30-year-old to be slaughtered and then consumed." Now, since this contract was offered in Germany, I can't comment on the specifics of Teutonic Law as it relates to how the local court might have upheld the terms, but the main components of a valid contract seem to (arguably, of course) be present: offer and acceptance (by Herr Bernd Jürgen Brandes), consideration (this may be the crux of the argumentablity) and sufficiency. There appeared to be no coercion, and for the purposes of a thought experiment, we might assume that the contract included a cool-down period featured in many other life-or-death contracts, such as a euthanasia agreement. Naturally, we might ask if the respondent was indeed mentally impaired or otherwise incapable of forming a contract, but again, let's assume for the moment that this is not the case. In Anglo-American common law, this contract violates what is known as "unconscionability", a term of art that is as it sounds: the contract is so hideous that no court would consider enforcing it.

It is on these shifting shoals that we pilot the SS Euvoluntary Exchange. It seems reasonable that even if we grant all the other conditions on EE that we might still legitimately seek to bar parties from writing contracts over voluntary murder and cannibalism. We can assume that parties have rights over ownership and exchange, no appreciable probability of ex post regret, there exist no uncompensated externalities and no coercion by agency or circumstance exists and we still would find this kind of contract unacceptable. The curious question I have is what role money? Suppose that instead of Brandes offering his participation for non-pecuniary consideration that the offer included a cash transfer. I propose that if the ad had included the line 200,000DM embedded somewhere, the moral revulsion would increase exponentially.

Now, clearly the case of Meiwes and Brandes is a rather extreme example, but I suspect that similar moral sentiments linger as we relax the monstrosity of the contract. A contract to indulge a street fight between homeless people might be objectionable, but once you offer them $20 to bloody each others' noses, it seems downright criminal. An exchange of explicit cash consideration amplifies extant revulsion. Volunteering to protect a physically weaker friend from attack by bullies is gracious and noble; selling such services as a hired bodyguard is mercenary and ignoble.

At any rate, I think it's quite interesting that this whole "conscionability" concept exists. It seems to imply that even if every other legitimate condition for trade can be met, there remain some things that are just (to misquote Andreoni) some things that are just so icky that it's not in the interests of society to permit enforcement. Perhaps a seventh condition for EE would be something like: (7) trade is not unconscionable under the common law definition.

But seriously, don't look up the details of the Meiwes case. It's pretty gross, people.

Mawwiage Is What Bwings Us Togevver Today

The always-excellent Bryan Caplan makes some interesting points today on the liberalization of military labor contracts and the implications for other long-term contracture (specifically, marriage contracts, though one might imagine taking the notion further).

Part of my day job research interests deal with the intersection of military labor contracts and biased beliefs. If we look at arrangements like marriage or military service as a Bayesian process with quasi-predictable posterior nodes (that would be a good name for a band), contracts like the ones described by Caplan anticipate systematic regret. In the military, this could be the post-training blues; in married life, it could be the seven-year itch.

Interesting then the disparity. The lack of at-will employment in the Armed Services suggests acknowledgement of the non-euvoluntary nature of military service. Here however, simply voluntary is plenty to mollify the compassionem publica. Not so for marriage, it seems. The same arguments that would permit the DoD to enforce an enlistment contract would be thrown out of court on their ear were they presented before a family courts judge. I suspect the legal reasoning would pivot on the "good of the National Defense", and it's harder to make the case that marriage is a pure public good so there probably is at least some plausible logic behind the status quo ante, but it sure would be interesting to ceteris parebus see how intuitions over ex post regret vary from institution to institution. We bar Soldiers and Sailors from indulging regret, but not married couples. We bar students from indulging regret over borrowing to finance education (for the most part anyway--it's very difficult to dispose of student loan debt) though the US Treasury will underwrite large lending houses after the fact when they've made regrettable decisions.

How stable or unstable are intuitions about the role of regret when it comes to honoring contracts? Are people consistent in their reasoning? What is more important, protecting the rules of the game or bailing out losers? What is the role of ergodicity in bounding rationality? I will take this opportunity to reserve some thoughts on Armin Meiwes for a future post related to this topic.