Capacitas : Contract Law and the Institutional Foundations of a Market Economy

1. Capacitas: Contract Law and the Institutional Foundations of a Market Economy Simon Deakin Presentation at the Faculty of Law, University of Amsterdam, 14 December 2009

2. The Capacitas project • Examining the potential of Sen’s ‘capability approach’ for law • Exploration of the juridical idea of capacity as a way into debates concerning the law-economy relation • Methodological challenge to predominant approaches in the economics of law (in particular the Becker-Posner view) • Policy challenge to current trends in EU social policy: stress on employability as the aim of the employment strategy; social rights seen as distortions of competition (Laval case)

3. Sen on ‘capabilities’ • ‘the concept of ‘functionings’… reflects the various things a person may value doing or being. The valued functionings may vary from elementary ones, such as being adequately nourished and being free from avoidable disease, to very complex activities or personal states, such as being able to take part in the life of the community and having self-respect… A “capability” [is] a kind of freedom: the substantive freedom to achieve alternative functioning combinations’ (Sen, 1999: 75).

4. Conversion factors • Personal factors: an individual’s metabolism, biological sex • Environmental factors: climate, physical surroundings, technological infrastructure • Societal factors: social norms, legal rules

5. Becker’s three axioms • Stable preferences • Maximisation • Market equilibrium • Eric Schanze adds, ‘institutional choice matters’ but this (Coasean) perspective is absent from Becker’s own account • Posner’s ‘economic analysis of law’ (at least in its original form) gave Becker’s positive theory a normative dimension which has proved enormously influential in promoting deregulatory policies (legal origins theory being the latest manifestation)

6. Becker v. Sen

7. Grounds of incapacity in contract law • ‘If the promisor’s preferences are unstable or not well ordered, then he is unable to conclude a perfect contract. The law says that such people’s promises are unenforceable because they are legally incompetent… Consider a slightly more controversial case: if high pressure tactics are used to confuse a customer and induce him to sign a contract, a court may be unwilling to enforce it. The consumer’s failing is described by some lawyers as a “transactional incapacity”, that is, the incapacity to conduct the transaction rationally under these circumstances’ (Cooter and Ulen)

8. The approach to ‘capacity’ in the age of reason • ‘Every single human being – and only the single human being – enjoys capacity’ (Savigny) • Emergence of general assumption of capacity, replacing heterogeneous status relations of the ancien regime (Wijffels) • Narrowing of grounds on incapacity over time

9. ‘Public policy’ • Common law notion of ‘public policy’ acknowledged priority of certain values over those of freedom of contract • Development of market-protecting rules (restraint of trade) and rules protecting society against the market (illegal and immoral contracts) • But, heads of public policy frozen in time at the end of the nineteenth century

10. Capacity and social legislation in the Lochner case • ‘There is no reasonable ground for interfering with the liberty of person or the right of free contract, by determining the hours of labor, in the occupation of a baker. There is no contention that bakers as a class are not equal in intelligence and capacity to men in other trade or manual occupations, or that they are not able to assert their rights and care for themselves without the protecting arm of the state, interfering with their independence of action and of judgment’

11. The Lochner dissent (Harlan) • ‘There are many reasons of a weighty, substantial character, based upon the experience of mankind, in support of the theory that, all things considered, more than ten hours’ steady work each day, from week to week, in a bakery or confectionery establishment, may endanger the health and shorten the lives of the workmen, thereby diminishing their physical and mental capacity to serve the state and to provide for those dependent upon them’

12. Development of modern social legislation • Displacement of incapacity as a technique of protection by insertion of mandatory and/or default terms into contracts (Hauser) • The Capacitas book explores the logic of capacity-enhancing rules in the areas of consumer protection (Godelain), domestic labour law (Brose, Godelain, Vimercati), European single market (Hesselink), international labour law (Drouin), discrimination law (Deakin)

13. Capacitas and capability • The civil law distinction between capacity to bear rights and capacity to act is significant in understanding the role of the law in putting in place the conditions for effective market participation on the part of citizens (Supiot) • Capacitas is not the same as ‘capability’ and is not a straightforward legal analogue for it • Nevertheless, exploration of the idea of capacity in a legal context can complement the wider application of Sen’s ideas

14. Conclusion • The idea of the self-equilibrating market lies at the foundation of the modern law-and-economics critique of social legislation (as it has in various other guises in the past) • The alternative conception of contract law is one in which contractual regulation complements, rather than obstructs, the institutions of private law in providing a framework for exchange relations

15. Conclusion • A law of contracts based on the idea of the role of the law in enhancing capabilities is in the process of emerging at various points where private law and social legislation intersect • This is a contract law in which the market is not seen as an end in itself, but as a social institution for enhancing individuals’ substantive economic freedoms • In other words, a conception of contract in which the market is adapted to the condition of the individual, not the other way round