1 George Mason School of Law Contracts II Contract Law in the State of Nature F.H. Buckley

2 Hobbes on the State of Nature Hobbes, Leviathan (1651) If a covenant be made wherein neither of the parties perform presently, but trust one another, in the condition of mere nature (which is a condition of war of every man against every man) upon any reasonable suspicion, it is void… For he that performeth first hath no assurance the other will perform after, because the bonds of words are too weak to bridle men's ambition, avarice, anger, and other passions, without the fear of some coercive power; which in the condition of mere nature, where all men are equal, and judges of the justness of their own fears, cannot possibly be supposed. And therefore he which performeth first doth but betray himself to his enemy.

3 Contract Law as a solution Suppose that the defector is penalized through legal sanctions so that the incentive to defect disappears.

4 But what if were in a State of Nature? International Law Russia Marriage under no-fault Vague promises Social promises Fidelity

5 Credible Commitments in a State of Nature: Four Strategies Self-binding Union Reciprocal Altruism Social and Internalized Norms

6 Credible Commitments Self-binding I might persuade another party to trust me if I make it painful for me to breach Doing this without contract law: The use of hostages

7 Hostages: The Burghers of Calais Rodin 1885

8 Not hostages: The burgers of Calais McDonald's at Walmart, 8 South St., Calais, ME 04619

9 Modern examples of hostages to solve the problem of trust in bargaining Bankruptcy and secured lending

10 Modern examples of hostages to solve the problem of trust in bargaining Bankruptcy and secured lending Rings

11 Modern examples of hostages to solve the problem of trust in bargaining Bankruptcy and secured lending Rings Romantic love

12 Credible Commitments Union strategies Hume : Tho' this self-interested commerce of man begins to take place, and to predominate in society, it does not entirely abolish the more generous and noble intercourse of friendship and good offices.

13 Credible Commitments Union strategies Hume : Tho' this self-interested commerce of man begins to take place, and to predominate in society, it does not entirely abolish the more generous and noble intercourse of friendship and good offices.

14 Union strategies The Theory of the Farm Allen and Lueck, The Nature of the Farm

15 Union strategies Marriage amongst princely families Victoria and Albert, 1840

16 Credible Commitments Union strategies Vertical integration Klein, Crawford, Alchian, 21 J.L. & Econ. 297 (1978) Armen Alchian

17 But see R.H. Coase, The Acquisition of Fisher Body by General Motors, 43 J.L.E. 15 (2000)

18 Credible Commitments Reciprocal Altruism Robert Trivers: Cooperative behavior amongst animals Axelrod, The Evolution of Cooperation (1984)

19 Credible Commitments Reciprocal Altruism Round 1: Cooperate or Defect Round 2: Cooperate or Defect Round 3: Cooperate or Defect Round 4: Cooperate or Defect Round 5: Cooperate or Defect Round 6: Cooperate or Defect Round 7: Cooperate or Defect Round 8: Cooperate or Defect Round 9: Cooperate or Defect Round 10: Cooperate or Defect Round 11: Cooperate or Defect Round 12: Cooperate or Defect Round 13: Cooperate or Defect Round 14: Cooperate or Defect Round 15: Cooperate or Defect Round 16: Cooperate or Defect Round 17: Cooperate or Defect Round 18: Cooperate or Defect Round 19: Cooperate or Defect Round 20: Cooperate or Defect Round 21: Cooperate or Defect Round 22: Cooperate or Defect Round 23: Cooperate or Defect Round 24: Cooperate or Defect Round 25: Cooperate or Defect Round 26: Cooperate or Defect Round 27: Cooperate or Defect Round 28: Cooperate or Defect Round 29: Cooperate or Defect Round 30: Cooperate or Defect Axelrods Iterated Prisoners Dilemma

The winner and loser… Anatol Rapoport Gordon Tullock

21 TFT in action: The Christmas truce of 1914 Youre a good sort, Fritzie, for a Hun… Ver ist der turkey? Und der Belgians?

22 TFT in action: Posner and Goldsmith on Ambassadors in International Law Carpaccio, The Legend of St. Ursula: The Arrival of the English Ambassadors

23 TFT: An Application? America is at war with France and Al- Quaeda. American POWs in France are housed in a five star hotel where they are feted with wonderful meals and fine wines. American POWs held by Al-Quaeda are beheaded, every one of them.

24 TFT: An Application? The Geneva Convention prescribes that POWs shall be provided with exercise facilities. Is America in breach of this if it offers French but not Al-Quaeda POWs exercise facilities?

25 Example of TFT communities Old-boy networks Bullington Club members, David Cameron 8. Boris Johnson

26 Example of TFT communities Americans like to form clubs. Tocqueville Americans like to form clubs

27 Racial Communities Diamond district, West 47 th Street, NYC L. Bernstein, 21 J. Legal Stud. 115 (1992)

28 A genetic basis to reciprocal altruism? Robert Trivers, 46 Quart. Rev. Biol. 35 (1971) If TFT is individually rational, no group selection fallacy problem

29 A genetic basis to reciprocal altruism?

30 Credible Commitments Social and Internalized Norms Ruth Benedict on shame cultures The Chrysanthemum and the Sword (1989)

31 Credible Commitments Social and Internalized Norms David, Andromache Mourning Hector

East-enders handing out the white feather 32

But just how long did that last? 33 Lytton Strachey

34 But still… Consider the following examples of cooperative behavior: Not littering Gas Guzzlers Helping out in an emergency: the Good Samaritan

Are Social Norms Always Benign? 35 Gericault, Portrait

Are Social Norms Always Benign? If so, whats wrong with blackmail? 36

Are Social Norms Always Benign? Suppose that theyre always benign Is blackmail still a problem? What costs does it impose? 37

Are Social Norms Always Benign? Suppose that theyre always benign Is blackmail still a problem? What are the costs of blackmail? Embarrassment Blackmailers information production costs Victims efforts to hide his vice 38

Credible Commitments What happens when shame is internalized? 39 Georges de la Tour, Repentant Magdalene

Credible Commitments What happens when shame is internalized? 40 Holman Hunt, The Awakening Conscience Tate Collection

41 Credible Commitments Internalized Norms There is a man inside me who is angry with me Robert Frank, Passion within Reason (1988)

42 Visible Guilt Solves the Lemons Problem If Homo Economicus Had a Choice, would he want a conscience? Robert Frank, 77 AER 593 (1987) Speech is the gift God gave us to hide our thoughts. Talleyrand Which explains why we have faces…

43 Whom would you vote for? Alexander Todorov et al., Inferences of competence from faces predict election outcomes. Science (in press)

44 Deception detection: Guilt and facial signals Zygomatic smiles Zygomatic smiles Paul Ekman, Darwin and Facial Expressions (1973); What the Face Reveals (1997)

45 Microexpressions We are able to detect visual cues that can be seen for only a fraction of a moment Two stable equlibria

46 Microexpressions De la Tour, The Fortune Teller

47 Microexpressions

Spot the liar Two mothers. Which one killed her children? 48

Kim Philby 49

Some Cold War History… 50 In September 1945 Soviet cipher clerk Igor Gouzenko defected and told the RCMP of an espionage apparatus at the Anglo-Canadian nuclear research center in Montreal

Some Cold War History… 51 Gouzenko told the RCMP that Dr. Alan Nunn May, a British scientist in Montreal, had revealed nuclear secrets to the Soviets and provided them with samples of U-233 and U-235

Some Cold War History… 52 The RCMP passed on the information to MI-5

Some Cold War History… 53 Which assigned it to their head of Soviet Counter-Intelligence… Kim Philby

0oops… I forgot a fifth enforcement strategy in the state of nature Can you think what it might be? 54

Meet Nick the Chin 55 Im tinkin youse should pay what youse owe

56 The advantages of contract law Privatized and decentralized Democratic and open to outsiders Sir Henry Maine: The movement of the progressive societies has hitherto been a movement from Status to Contract.