– March 15, 2020

Economists usually say, “SINCE exchange is voluntary….” but the rest of the world says, “IF exchange is voluntary….” It makes a difference. To explain why, I have developed a concept of “truly voluntary” exchange in a number of writings, including one overview here at AIER. 

If an exchange is truly voluntary, we know for certain that both parties are better off. I listed six assumptions sufficient to guarantee an agreement is euvoluntary, or “truly voluntary.” These include acceptance of the (1) convention of ownership, and (2) of exchange; (2) the absence of regret; (4) no externalities; (5) no coercion by human action; and (6) no large disparities in bargaining power. With Ricardo Guzman, I recently formalized much of the intuition behind these definitions.

The point is that any euvoluntary exchange should not be interfered with by other people or the authorities. The implications for exchange that is not euvoluntary—one that fails one or more of the six conditions—are less clear. In fact, many non-euvoluntary exchanges are still beneficial, even to the less well-off party. I entitled my first publication on the subject in a way that makes this impossible to misunderstand: “Euvoluntary or not, exchange is just.”

As an example, consider entering a “sweatshop” factory in a developing nation. It is likely true that the wages are worse, and the working and safety conditions are worse, than a factory in the U.S. In fact, this may be the only paid employment that these workers can find. Does it follow that, just because the employment is arguably not euvoluntary, the factory should be closed or boycotted? Not only is the answer “no,” but as Prof. Ben Powell of Texas Tech has shown sweatshops have generally been a positive good in developing nations. Best of all, sweatshops are most useful precisely in those nations where workers have the fewest choices. 

But, as I said above, I have made versions of these arguments before. A recurrent response, and in fact complaint, against my approach to analyzing the consequences of voluntary exchange has been raised in a form I did not anticipate. The argument addresses not the voluntariness of the exchange situation, but the capacity of ordinary people to know what is good for them in the first place. Since people cannot be trusted to choose for themselves, the argument goes, there is no reason to expect voluntary exchanges to make consumers better off. In fact, as my Duke colleague Dan Ariely has argued, the fact that people are “Predictably Irrational” means they can be exploited and duped into making choices that make them worse off.

My first response has always been that, if this were true, democracy and voting should be outlawed. After all, every flaw in consumers is much worse in voters. For some reason the people who get their knickers knotted over consumer stupidity insist that those same people, when gathered into enormous majorities at the voting booth, possess a seraphic and transcendent wisdom. I don’t understand how someone too uninformed and manipulable to choose a breakfast cereal can be entrusted to select the presidential candidate with the best foreign policy platform.

Second, a society of free and responsible equals simply must act as if each of is presumptively capable of making our own choices. The alternative is to impose a hierarchy of power and privilege, where a clerisy or secular priesthood—possessed of superior knowledge, judgement, and taste—chooses for all of us. Then “we” would somehow have to choose how members in this oligopoly of betters would be selected, and the likely result is something quite different from what my friend Prof. Ariely has in mind.

Instead, the presumption of equality is an “as if” claim that is a normative premise for policy, not an empirical premise about the world. We must act as if people are equal, and deserve autonomy and self-realization, by their own conceptions of what constitutes self-realization. There is no objective “good” and “bad,” imposed as a “fact of the matter” by elites; rather, society must defer to the subjective judgements of the individual about what is good or bad for that individual, constrained only by restricting harm to others.

As F.A. Hayek put it:

It is neither because it assumes that people are in fact equal nor because it attempts to make them equal that the argument for liberty demands that government treat them equally. This argument not only recognizes that individuals are very different but in a great measure rests on that assumption. It insists that these individual differences provide no justification for government to treat them differently…

[Nothing] is more damaging to the demand for equal treatment than to base it on so obviously untrue an assumption as that of the factual equality of all men. To rest the case for equal treatment of national or racial minorities on the assertion that they do not differ from other men is implicitly to admit that factual inequality would justify unequal treatment; and the proof that some differences do, in fact, exist would not be long in forthcom­ing. It is of the essence of the demand for equality before the law that people should be treated alike in spite of the fact that they are different.

This is an important distinction. The efforts by white supremacists to “demonstrate” the empirical inferiority of African-Americans, or the efforts by Nazis to do the same for Jews, reveals the danger of basing the requirement for equal treatment on the claim of factual equality. (Note: I’m not claiming African-Americans, or Jews, are in some way inferior. I’m saying that even if doctored statistics “proved” difference it would still not justify segregation).

The state must treat people as equals because they are citizens, and are therefore equals before the law. If “rule of law” admits differences in treatment if differences in empirical merit can be admitted as evidence, then the rule of law has no meaning.

And that is why people, and the state, must defer to the subjective judgments of individuals about their own welfare. A reader recently sent me an interesting example, asking about the famous example in Genesis (25:29-34 English Standard Version):

29 Once when Jacob was cooking stew, Esau came in from the field, and he was exhausted.

30 And Esau said to Jacob, “Let me eat some of that red stew, for I am exhausted!” (Therefore his name was called Edom.)

31 Jacob said, “Sell me your birthright now.”
32 Esau said, “I am about to die; of what use is a birthright to me?”
33 Jacob said, “Swear to me now.” So he swore to him and sold his birthright to Jacob.
34 Then Jacob gave Esau bread and lentil stew, and he ate and drank and rose and went his way. Thus Esau despised his birthright.

My friend asked, in an email, whether this “exchange” of stew for birth-right was euvoluntary? And, if it was not euvoluntary—Esau was exhausted, and might have died if he didn’t eat—is the contract enforceable?

Let’s suppose the exchange was not euvoluntary. It’s not clear from the passage that Esau was dying of hunger—he may just have been tired and grouchy after a day in the fields under the hot sun—but let’s suppose. The interesting thing is that Jacob was the one who suggested the birthright in exchange for the stew. It was clear (and became clearer, later!) that Jacob coveted Esau’s birthright. Esau did not say, “Tell you what, that stew smells good. I’ll sell my birthright for a bowl!” Instead, Esau asked Jacob to share a meal, of which Jacob had plenty, the sort of thing one does in a family all the time, and Jacob tried to convert sharing into a transaction. And it is a transaction where bargaining strengths are highly unequal. If Esau later changes his mind, can he demand that Jacob void the “exchange”?

A key is the obiter dictum at the end of the passage: “Thus Esau despised his birthright.” As some interpreters have argued, this may mean that Esau lived only in the moment—economists would say he had “a very short time horizon.” The question for public policy is a simple one: Is Esau allowed to despise his birthright? Does Esau have the personal dignity to be presumptively afforded the assumption of autonomy, of being the best judge of his own subjective welfare?

Note there are two aspects of this question:

1. Did Esau make a bad decision? Given the subjective preferences of most observers, yes. The exchange of the birthright to be the leader of the people, as Isaac’s eldest son would be, for a bowl of stew and some bread, is a bad bargain, and would be made only by someone desperate with hunger or confused by having worked in the fields.

2. Is Esau allowed to make a bad decision? That is, do Esau’s rights as a citizen include the right to value resources he owns as he sees fit, or is he enslaved to the judgments of others?

The argument in favor of denying people the right to make their own subjective judgements and act on them requires three things: #1 above is true—the decision is clearly bad, and no sensible person would make it. #2 above is false—Esau does not have the right to control even those things he owns. And then #3 is implicit, but crucial:

3. There are some individuals or groups that have both the knowledge and the correct impulse to choose instead of Esau, and will do what Esau should want to do instead of what Esau believes he wants to do.

Those of us who believe in rights as a protection against tyranny will argue that #2 must be defended, for the reasons that Hayek argued. But even if you don’t believe that as a matter of right, the empirical claim that something you call the state will have the information and incentive to make our choices for us is absurd. The right of personal autonomy and self-determination is an inviolable foundation of a liberal society.

(With thanks to L.D’A. for suggesting the Genesis example)

Michael Munger

Michael Munger

Michael Munger is a Professor of Political Science, Economics, and Public Policy at Duke University and Senior Fellow of the American Institute for Economic Research. His degrees are from Davidson College, Washingon University in St. Louis, and Washington University. Munger’s research interests include regulation, political institutions, and political economy.

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