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Coercion, Contract and the Limits of the Market

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  • Basu, Kaushik

    (Cornell U)

Abstract

It is a widely accepted principle of economics that if two or more adults voluntarily agree to a contract or an exchange that has no negative fall-out on others, then the government should not stop such a contract. This is often called the 'principle of free contract' (PFC). There is a body of writing in economics which upholds the PFC. Yet, this ubiquitous principle is ill-defined and full of ambiguities. For instance, since it refers to voluntary choice, its proper use presumes an understanding of what is 'voluntary' and, therefore, also, of what is coercive. What is ironic is that, while philosophers and legal scholars have debated and analyzed these concepts and the validity of the principle of free contract, there is very little discussion of these in economics, even though so much of economics is founded on this principle. This has caused a lot of policy confusion. The aim of this paper is to construct general rules for when we may violate the PFC. The argument is constructed within the Paretian framework. Hence, the violation of the PFC is not justified by appeal to deontological ethics or non-welfarist criteria. This is not an easy task since the principle of free contract is often viewed as a rule that is a derivative of the Pareto principle.

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Paper provided by Cornell University, Center for Analytic Economics in its series Working Papers with number 06-01.

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Date of creation: Jan 2006
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Handle: RePEc:ecl:corcae:06-01

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  1. Sen, Amartya Kumar, 1970. "The Impossibility of a Paretian Liberal," Scholarly Articles 3612779, Harvard University Department of Economics.
  2. Sen, Amartya & Pattanaik, Prasanta K., 1969. "Necessary and sufficient conditions for rational choice under majority decision," Journal of Economic Theory, Elsevier, Elsevier, vol. 1(2), pages 178-202, August.
  3. Sen, Amartya, 1970. "The Impossibility of a Paretian Liberal," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 78(1), pages 152-57, Jan.-Feb..
  4. Wulf Gaerther & Prasanta K. Pattanaik & Kotaro Suzumura, 1991. "Individual Rights Revisited," Discussion Paper Series, Institute of Economic Research, Hitotsubashi University a238, Institute of Economic Research, Hitotsubashi University.
  5. Neeman, Zvika, 1999. "The Freedom to Contract and the Free-Rider Problem," Journal of Law, Economics and Organization, Oxford University Press, Oxford University Press, vol. 15(3), pages 685-703, October.
  6. Basu, Kaushik, 2003. "Prelude to Political Economy: A Study of the Social and Political Foundations of Economics," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780199261857, October.
  7. Akerlof, George A, 1976. "The Economics of Caste and of the Rat Race and Other Woeful Tales," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 90(4), pages 599-617, November.
  8. Arrow, Kenneth J, 1994. "Methodological Individualism and Social Knowledge," American Economic Review, American Economic Association, American Economic Association, vol. 84(2), pages 1-9, May.
  9. Basu, Kaushik & Van, Pham Hoang, 1998. "The Economics of Child Labor," American Economic Review, American Economic Association, American Economic Association, vol. 88(3), pages 412-27, June.
  10. Ashwini Deshpande, 1999. "Loan Pushing and Triadic Relations," Southern Economic Journal, Southern Economic Association, vol. 65(4), pages 914-926, April.
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Cited by:
  1. Raul Caruso, 2008. "Reciprocity in the shadow of threat," International Review of Economics, Springer, Springer, vol. 55(1), pages 91-111, April.
  2. Barrett, Christopher B. & Bachke, Maren E. & Bellemare, Marc F. & Michelson, Hope C. & Narayanan, Sudha & Walker, Thomas F., 2012. "Smallholder Participation in Contract Farming: Comparative Evidence from Five Countries," World Development, Elsevier, Elsevier, vol. 40(4), pages 715-730.
  3. Arvanitidis Paschalis A. & Kyriazis Nicholas C., 2013. "Democracy and Public Choice in Classical Athens," Peace Economics, Peace Science, and Public Policy, De Gruyter, De Gruyter, vol. 19(2), pages 213-248, August.
  4. Barrett, Christopher B. & Bachke, Maren E. & Bellemare, Marc F. & Michelson, Hope C. & Narayanan, Sudha & Walker, Thomas F., 2010. "Smallholder Participation in Agricultural Value Chains: Comparative Evidence from Three Continents," MPRA Paper 27829, University Library of Munich, Germany.
  5. Kaushik Basu, 2007. "Identity and altruism: The Moral basis of prosperity and oppression," Indian Statistical Institute, Planning Unit, New Delhi Discussion Papers, Indian Statistical Institute, New Delhi, India 08-08, Indian Statistical Institute, New Delhi, India.
  6. Raul Caruso, 2009. "Relational Good at Work! Crime and Sport Participation in Italy. Evidence from Panel Data Regional Analysis over the Period 1997-2003," NCER Working Paper Series, National Centre for Econometric Research 47, National Centre for Econometric Research.

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