Friday, February 25, 2005

daddy, why are there contracts?

Contract law seems to be all about maximizing wealth: we want to enforce those contracts that increase overall social wealth, and not enforce the ones that don't. For example, we usually enforce an agreement to sell a car because the person buying the car wants the car more than the money, and the person selling it wants the money more than the car. As a result, society overall is better off: both people have increased what they value. On the other hand, if the person selling the car knows it has some serious mechanical problems and lies about them, we might not enforce the contract because the person buying the car can't accurately decide how much she values it, because she doesn't know about the mechanical problems. In that case, we can't be sure overall social wealth has increased.

The question I've been mulling over is this: why is our standard maximizing overall social wealth?

Back in the middle ages, status was a big deal. People wanted to maintain their status and that of their families. And status was tied to land. As a result, we developed a whole branch of law, property law, that brought with it different kinds of estates (to manage inheritance of land), leases, easements, etc. All stuff to regulate the movement and use of land, and therefore status. Land was so central that most people probably never even stopped to wonder why it was so central.

Then we decided we should be moving money rather than land, and we developed contract law. But if you compare today's standard of maximizing overall social wealth to yesterday's of maintaining status, how much better is the modern one?

Certainly it seems to be a good thing that people are more socially mobile than they were in the middle ages: without rigid social classes maintained by land inheritance, people have the opportunity to better their lives.

On the other hand, the contrast in wealth between Bill Gates and a someone selling burgers at McDonald's is pretty stark: the standard of maximizing overall social wealth doesn't really care how much that wealth accumulates in any particular person, which is probably one of the reasons we have social mobility.

What have we gained and lost? Is this the best of all possible standards, or is there a better standard out there somewhere?

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