“It passed away, as most social systems do, in its sleep, leaving its citizens unaware that it was gone. No society more fully reflects Hegel’s dictum that the Owl of Minerva flies only at dusk; few people in eighteenth-century France understood that the Old Regime was no more.” —James Collins, The State in Early Modern France.
If the above was true in pre-revolutionary France, it is just as true today of our old regime of property and contract. Philosophers, economists, lawyers, and the public continue to use the terms ‘property’ and ‘contract’ to describe our shared economic system, even though this system has long since transformed into something different. We are no longer clearing land for small farms over which we have ‘sole and despotic dominion’; rather we are working alongside others for compensation that includes various public and private insurance programs as well as retirement savings that ultimately reside in sophisticated financial instruments. A recent Pennsylvania Supreme Court case addressed the issue of an employee who claimed that a third party had interfered with their contractual relationship with their employer; while disagreeing about whether the employee had a protectable interest, both the trial court and the Supreme Court agreed that the at-will employment relationship (which is the most common and default employment relationship in the US) is not truly contractual. There were rumblings of this seismic change beginning with Grant Gilmore’s Death of Contract half a century ago, but philosophers are hard of hearing. So let us shout a bit and declaim: the terms ‘property’ and ‘contract’ have neither explanatory nor descriptive grip on twenty-first-century economies and must be replaced. In this brief post, we focus on the negative claim that these terms have lost their utility; but in the final paragraph, we suggest some more serviceable replacements.
To paint with a broad brush, since at least the seventeenth century, property and contract have served as the central philosophical descriptions of the forms of free agency that we exercise in our economic interactions. We rightfully possess things in the world—perhaps including our bodies but primarily physical objects and paradigmatically arable land. Then, we exchange property with others through voluntary agreements, allowing us to rightfully possess physical objects different from those we have produced ourselves. However, these concepts capture neither the nature of our ownership interests nor our economic interactions in our current world for the following reasons.
To begin with contracts, their economic value was to enable new and specific forms of exchange by clearly limiting the liability of the contracting parties. But since the middle of the twentieth century, we have seen what Gilmore called “an explosion of liability.” Contract law “functions today less as a tool that enables a rich vein of private ordering than as a series of arbitrary traps that lie in wait for the unwary.” Whereas contract law used to be prized for its generality, we now move areas of law outside of the purview of contract law when those areas become socially significant. The best example of this is employment contracts. Though an explicit agreement still exists in some cases, the terms of the agreement and the principles to be used in any adjudication of disputes over it are primarily derived from labor law, not contract doctrines such as acceptance or consideration (the benefit each party must derive to have a valid contract).
It is also worth noting that the notion of a contract has essentially no role in structuring the most critical form of economic cooperation, namely the business corporation. Of course, a corporation can enter into contracts as a single legal entity, which is important for all sorts of reasons. However, the very form of internal organization that makes this contractual status possible is decidedly non-contractual. A share is neither a contract with other shareholders nor with the corporation itself. Shareholders are generally unknown to each other and free to transfer their shares, but this is contrary to the basic framing of contracts, in which one specific party has an explicit agreement with another particular party. If a share were a contract with the corporation, there would be consideration and performances on each side that could be compelled. However, neither is the case, and shareholder lawsuits are based on corporate law rather than contract law. This lack of enforceable performance is essential to the modern corporation since the separation of ownership from control prevents shareholders from meddling in the corporation’s business. This encourages investment because no shareholder has to worry about the business acumen of another. Finally, the economic function of these firms within which the vast majority of employment takes place is precisely to remove that economic interaction from the domain of contracts in order to avoid the transaction costs attendant to contractual activity.
A similar but less well-recognized misalignment with economic reality afflicts the notion of property. In legal practice, different rights—to use, exclusion, transfer, revenue, etc.—can be combined at will to create specific ownership relations. This is quite in contrast to the early modern philosophical theories of property, which generally attempt to ground all those different ownership interests as protections for a single kind of economic agency. Those early modern theories were developed in agrarian societies, where almost the only thing worth owning was arable land. So, it is unsurprising that the right to property generally ends up as a protection for the exclusive productive use of a spatio-temporal region. However, in the twenty-first century, corporate stock, money, and income flows are the most valuable ownership interests. Nothing in the modern philosophical accounts of private property is helpful in describing, justifying, or even criticizing such rights.
A long line of literature argues persuasively that property ownership is simply the wrong category for understanding shareholding. The share itself is not property, nor does it represent an ownership interest in the corporation’s property. To take up the former first, that in which you have an interest as a shareholder is not a piece of property. Instead, you have rights to dividends (if distributed) and voting rights on questions such as those of the boards of directors. The former is a right to an income flow (not an object) and is increasingly unimportant (if you want an income flow, buy bonds). There is nothing here to use or from which to exclude others—the only meaningful rights are to profit from and to transfer. However, these latter rights are derivative in most philosophical property rights theories. The latter (voting) is an essentially political right not included in standard property theories. Furthermore, the share itself does not represent an ownership interest in the corporation. As a Single Legal Entity, the corporation owns itself (or the corporation owns the business enterprise within it). Shareholders lend equity capital (as opposed to debt capital) to the corporation but do not own any part. As David Cieply nicely puts it, “all of the rights over the firm’s assets that we normally think of as bundled into the right of ownership—such as rights to exclude, use, lend out, collateralize, sell, or profit from the use or sale of an asset—are held by the legal entity and exercised on its behalf by the board and its hirelings. The stockholders possess none of them, which makes them very odd ‘owners.’”
None of this should seem particularly surprising. The greater surprise would be if two concepts developed in agrarian economies in opposition to late feudalism still had a grip on one of the most dynamic spheres of modern life four centuries on. These terms should be replaced by explanatory categories and associated normative terms that more directly track what we do. Briefly, we suggest that the primary insight required for this replacement is to see that three fundamentally different economic activities are essential to our economic agency and must be protected: producing (in firms), exchanging (in markets), and accounting (in banks). These are very different kinds of activity, and their associated institutions are very different: banks are not firms, and firms are not markets. Only by capturing the normative importance of these sorts of activities for free agency and then the role played by the associated institutions in fostering such agency will we arrive at the replacements for ‘property’ and ‘contract.’
Christopher Yeomans
Christopher Yeomans is Professor of Philosophy at Purdue University. He is the author of The Politics of German Idealism: Law and Social Change at the Turn of the 19th Century and, together with Justin Litaker, is working on a monograph tentatively entitled A Social Ontology of Economic Institutions.
Justin Litaker
Justin Litaker is Instructor in Philosophy at the University of South Alabama. Together with Christopher Yeomans, he is writing a monograph tentatively entitled A Social Ontology of Economic Institutions.
