Gov’t Regs Compensate For Massive Imbalances In Buyers’ & Sellers’ Bargaining Power

DavidGrace
Aug 8, 2018 · 11 min read

By David Grace (www.DavidGraceAuthor.com)

The False Idea That All Every Transaction Is An Exercise Of Free Will

In response to one of my columns a reader commented that libertarianism’s goal in opposing consumer protection laws and other types of business legislation was to protect the freedom of two parties to voluntarily enter into mutually agreeable contracts.

The first problem with that idea is that contracts between two people can negatively affect third parties who deserve the right to protect their own interests. My contract to sell you pesticide may end up poisoning other people’s air, land and water and they deserve a say in that.

The fact that two people freely agree to do something doesn’t mean they necessarily have the right to do whatever they want when the result of that agreement may materially, negatively affect third parties.

But moving beyond the problem of the effects of contracts on third parties, we need to consider the libertarian’s false assumption that all transactions are always voluntary expressions of each party’s free will.

Anyone who thinks that your signing the papers for a car loan from Wells Fargo or your purchase of a plane ticket for a destination served by only two airlines is an entirely voluntarily decision to enter into a mutually agreeable contract with the bank or the airline is living in a fantasy land that has no relationship to the real world.

In excess of 90% of the transactions we humans make are take-it-or-do-without, one-sided, non-negotiable demands from a multi-billion-dollar corporation on one side to a single human on the other. To call them voluntary, mutual agreements that are an expression of the free will of each of the parties is a massive distortion of the English language and an abandonment of any common-sense view of the real world.

This misapplication of the words “contract” and “voluntary” to all business transactions stems from libertarians trying to apply the structure of simple, person-to-person agreements onto a complicated and completely different commercial reality.

[Please spare me your silly arguments that the profit motive will keep banks, insurance companies, airlines, etc. from using their massive bargaining power to impose abusive terms, fees and policies on their human customers who have no viable alternative but to accept their take-it-or-leave-it demands. The desire for profit causes abusive terms rather than eliminating them. Businesses in an industry adopt abusive terms because it is more profitable for each of the businesses to have them than for one of them not to. They are successful in imposing them because of their massive imbalance in bargaining power vis-a-vis their human customers. Businesses in an industry make more money by sticking together and imposing similar harsh terms and fees than by one of them breaking from their competitors and soliciting new customers with the promise of not having some of those terms. All businesses know that cartels are always, always, more profitable than competition.]

Simple Rules Break Complex Systems

One of the ways people make a horrible mess of things is by thinking that simple, primitive, black-and-white principles can be successfully applied to complicated, analog systems.

The truth is that trying to scale-up simple, black-and-white rules to control complex gray-scale systems will result in nothing but a train wreck.

The moron who learns how effective a hammer is in joining two things together with a nail does immense damage when he tries to use a hammer to join a water pump to an engine block with a bolt.

The person who learns that penicillin works like magic to cure pneumonia ends up killing the patient when he tries to use a double dose of it to cure lung cancer.

People who lack common sense don’t get it that simple tactics and simple black-and-white rules can seldom be successfully extrapolated to govern complex systems.

Libertarians’ Simplistic Model Of Contracts

One of the libertarians’ foundation moral principles is that people should be free to make any contracts they both want without there being any laws governing any of the terms of their contracts, that the government shouldn’t get between people and prevent them from making a deal that they both want to make.

Their idea is that the law shouldn’t interfere with the free will of the contracting parties to do whatever they both voluntarily want to do.

Since this moral principle is meant to preserve the freedom of the parties to voluntarily make whatever agreements they both desire, logically the rule can only be applied to contracts that are, in fact, voluntarily agreed to by both parties, deals that reflect the mutual desires of both parties.

This “laws are wrong” moral principle can only rationally apply to contracts where both parties are freely choosing to make those agreements. That’s the whole purpose of the rule, to preserve the freedom of the contracting parties to do whatever they both voluntarily want to do.

If one of the parties’ consent to the contract isn’t fully voluntary then such a rule meant to protect a person’s freedom to engage in voluntary agreements doesn’t and can’t apply.

The libertarians look at a simple transaction where I want to sell my car and various people consider buying it as the model for how all contracts work.

The libertarians assume that this sort of simple transaction where I voluntarily consent to sell and a buyer voluntarily consents to buy at a mutually negotiated price accurately describes all contracts between all parties.

Based on this simple model, they wrongly assume that all agreements between all buyers and all sellers are, by definition, a voluntary exercise of each party’s free will.

But they are not.

A Party’s Consent To A Contract Is Not Necessarily Voluntary

The flawed conclusion that all contracts are voluntarily agreed to by both parties is based on the libertarians’ mistaken belief that the word “consent” and the word “voluntary” both mean the same thing.

They do not.

While all completed transactions are consensual in the sense that both sides agreed that the deal would be done, the fact that both sides consented to close the transaction in no way means that both parties’ consent was voluntary.

Consent Is An Action

I either consent to a transaction or I don’t consent to it. Consent is digital. It happens or it doesn’t happen. But a party’s consent to any particular transaction may be completely voluntary, completely involuntary or anywhere in between.

In the Godfather, Don Corelone made the bandleader an offer he couldn’t refuse. The fact that the bandleader consented to enter into an agreement providing that in exchange for $10,000 he released Johnny Fontane from his employment contract did not make the bandleader’ consent to that contract voluntary. Quite the contrary. Consent, yes. Voluntary, no.

Voluntariness Is A Measure Of Free Will

Voluntariness is a measure of the nature of my consent. Voluntariness describes the level of the free-will of my consent. Voluntariness is an analog value that measures the amount of my free will in performing an act.

  • I may enthusiastically consent to a transaction. In that case my consent is totally voluntary.
  • I may reluctantly consent to a transaction. In that case my consent is somewhat voluntary.
  • I may consent to a transaction only because the alternative to consenting is a horrible loss. In that case my consent is totally involuntary.

Volintariness Is Analog

The voluntariness of a party’s consent to a transaction is a point on a continuum between totally voluntary consent and totally involuntary consent.

In a simple transaction where the seller has multiple alternatives to any one buyer and the buyer has multiple alternatives to any one seller and the seller is not under any substantial pressure to sell and the buyer is not under any substantial pressure to buy, the parties have relatively equal bargaining power and each party’s consent can be said to be voluntary.

— — — — — — — — — — Seller’s Bargaining Power — — — — — — — — — —

High Bargaining Power…………………………………Low Bargaining Power

— — — — — — — — — — — — — — — <|> — — — — — — — — — — — — —

— — — — — — — — — — Buyer’s Bargaining Power — — — — — — — — — —

High Bargaining Power…………………………………Low Bargaining Power

— — — — — — — — — — — — — — — <|> — — — — — — — — — — — — —

When, and only when, the parties’ bargaining power is essentially equal, can you categorize both their consents to a contract as voluntary.

— — — — — — — Level Of Voluntariness Of Seller’s Consent — — — — — —

Totally Voluntary Consent………………………..Totally Involuntary Consent

<|> — — — — — — — — — — — — — — — — — — — — — — — — — —

— — — — — — — Level Of Voluntariness Of Buyer’s Consent — — — — — —

Totally Voluntary Consent ……………………..Totally Involuntary Consent

<|> — – — — — — — — — — — — — — — — — — — — — — — — — — —

That is both a simple and a relatively rare situation that cannot be scaled up to automatically apply to all contracts between all parties.

The idea that all consented-to transactions are necessarily also voluntary transactions ignores the crucial element that dictates the level of voluntariness of each party’s consent, namely, the relative severity of the penalties that each party will suffer if it fails to close the deal.

The parties’ relative penalty levels if they don’t do the deal are a vital component of each of the parties’ bargaining power.

The point on the line between a party’s totally voluntary consent to a transaction and totally involuntary consent to a transaction is determined by the parties’ relative bargaining power.

— — — — — — — — — — Seller’s Bargaining Power — — — — — — — — — —

High Bargaining Power…………………………………Low Bargaining Power

<|> — — — — — — — — — — — — — — — — — — — — — — — — — — — —

— — — — — — — — — — Buyer’s Bargaining Power — — — — — — — — — —

High Bargaining Power…………………………………Low Bargaining Power

— — — — — — — — — — — — — — — — — — — — — — — — — — — — <|>

— — — — — — — Level Of Voluntariness Of Seller’s Consent — — — — — —

Totally Voluntary Consent………………………..Totally Involuntary Consent

<|> — — — — — — — — — — — — — — — — — — — — — — — — — —

— — — — — — — Level Of Voluntariness Of Buyer’s Consent — — — —— —

Totally Voluntary Consent ……………………..Totally Involuntary Consent

— — — — — — — — — — — — — — — — — — — — — — — — — — — <|>

The more the terms of a transaction are based on a massive imbalance in bargaining power, the more coerced and the less voluntary is the weaker party’s consent to the transaction.

That doesn’t mean that the particular deal with that particular buyer shouldn’t close. It does mean that the general category of deals of that sort where many buyers share the same bargaining power imbalance may require regulations to reduce the disparity in the relative bargaining power of the sellers and the buyers.

An Example Of Involuntary Consent

I am one of two companies that make a drug that you need in order to live. We have entered into an informal agreement to both charge the same price and over the term of a year we have increased the price of that drug by 500%. Think digoxin.

I have no pressing need to sell a dose of that drug to you, but you must purchase it or you may die.

When I have something that you desperately need and which I have no pressing incentive to sell, I have a huge advantage in bargaining power over you. The greater my bargaining-power advantage over you, the less voluntary is your consent to enter into the contract on the terms I demand.

Even though the above drug-sale transaction is couched in the form of a contract between two parties where one consents to sell and the other consents to buy, the contract has not been voluntarily entered into by the buyer because the vast imbalance between the seller’s bargaining power versus the buyer’s bargaining power results in the buyer’s consent being highly involuntary.

Your consent to purchase that drug at the monopoly price and terms is no more voluntary than your consent to hand over your wallet to a mugger at the point of a gun is voluntary.

The Libertarian No-Laws Rule Cannot Be Justified For Involuntary Contracts

The libertarian philosophy is founded on the idea that all consented-to transactions are, by definition, voluntary ones, and that’s factually false.

The libertarians’ no-laws rule designed to protect the freedom of both parties to mutually, voluntarily enter into transactions is inapplicable to contracts where one party’s consent to the contract is materially involuntary.

Put another way, the greater the imbalance in bargaining power between the parties, the less voluntary is the weaker party’s consent to the contract and the less applicable is the no-laws rule to that transaction.

The less voluntary the weaker party’s consent to the contract, the less the justification there is for libertarians’ rule that there should be no government regulations concerning that contract, because the purpose of that rule is to protect people’s power to voluntarily enter into agreements, and when one of the parties’ consent to the agreement is not voluntary there is no free will decision left for the rule to protect.

To the extent that agreements are not totally voluntary for both parties, the libertarians’ justification for including those agreements in the no-government-regulation rule collapses.

Regulations Increase The Voluntary Freedom To Contract

In point of fact, government regulations are nothing more than a tool that equalizes the vastly unequal bargaining powers of the parties to those take-it-or-do-without transactions.

In essence, regulations serve to increase the bargaining power of weaker party in order to make the weaker party’s consent to a contract more voluntary.

If the government enacts an anti-trust law to the drug pricing in the above drug-sale example that law will lower my bargaining power and raise the buyer’s bargaining power.

That increase in price competition will make the buyer’s consent to buy the drug from me a more voluntary one and it will increase the level of the buyer’s freedom to freely enter into or not enter into that drug-purchase contract with me.

The existence of regulations increases the freedom of the vastly weaker party to enter or not enter into a contract with another party who otherwise would have such massively higher bargaining power as to negate the voluntariness of the weaker party’s consent to the agreement.

Government regulations actually make contracts between parties with vastly unequal bargaining power more voluntary on the part of the weaker party and give the weaker party more freedom, not less, to accept or reject proposed contracts.

— David Grace (www.DavidGraceAuthor.com)

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DavidGrace

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Graduate of Stanford University & U.C. Berkeley Law School. Author of 17 novels and over 200 Medium columns on Economics, Politics, Law, Humor & Satire.

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