349THE POVERTY OF MARKET CONTRACTARIANISMThe Journal of Value Inquiry 34: 349–357, 2000.© 2000 Kluwer Academic Publishers. Printed in the Netherlands.

The Poverty of Market Contractarianism

BOB BRIGHTDepartment of Philosophy, University of Manitoba, Winnipeg, Manitoba, R3T 2NT,Canada

1.

Contractarian theories come in two basic varieties. On the one hand, politicalcontractarians attempt to explain, understand, and justify the authority of thestate and the existence of various political institutions in terms of what it wouldbe rational for agents to agree to in certain specified circumstances. Moralcontractarians, on the other hand, attempt to explain, understand, and justifymorality itself as the result of a bargain between rational agents in specifiedcircumstances.

We shall be concerned in what follows with contractarian moral theoriesof a particular sort, namely, market contractarian moral theories.1 Marketcontractarians understand morality not simply as a set of constraints onbehavior which arise out of a bargain struck between rational agents, butspecifically as a set of constraints which constitute a rational response to theproblems raised for utility-maximizing agents by the failure of the market toproduce optimal outcomes. David Gauthier’s Morals by Agreement is the best-known theory of this sort, and the one we will focus on.

2.

Gauthier’s overriding aim in Morals By Agreement is to demonstrate therationality of morality. He takes this to be a matter of demonstrating in purelyinstrumental terms the rationality of agents constraining their utility-maximizing behavior in ways which accord more or less with the dictates ofa considered morality. After presenting the basics of a fairly standard accountof strategic rationality, he argues that agents can have no instrumental reasonfor constraining their behavior, and hence that there is no room for morality,in situations where individual strategies which are in equilibrium are alsoPareto-optimal. As is well known, however, not all cases of strategic interactionare of this sort. Sometimes optimal strategies diverge from equilibriumstrategies. In the classic Prisoner’s Dilemma, for example, the only individual

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strategies which are in equilibrium lead to the only possible outcome whichis not Pareto-optimal.

Gauthier locates room for morality in this divergence between equilibriaand optimality. He is thus led to develop the concept of the ideal market as amorally free zone, leaving no room for morality because its unfetteredoperation is guaranteed to result in optimal outcomes, and to defend moralsby agreement, the rationality of the constrained maximizing disposition, as aresponse to market failure.

Constrained maximization is the centerpiece of Gauthier’s theory, inasmuchas those who possess the disposition are supposed not only to be rational, butalso to constrain their utility-maximizing behavior in ways that are rec-ognizably moral. A constrained maximizer satisfies two conditions. She isconditionally disposed to base her actions on a joint strategy should the utility,were everyone so to base their actions, be no less than what she would expect,were everyone to employ individual strategies, and approach what she wouldexpect from the cooperative outcome determined by minimax relativeconcession. She also actually acts on this conditional disposition should herexpected utility be greater than what she would expect, were everyone toemploy individual strategies.2 For a constrained maximizer to actually act onher disposition to cooperate, it is not necessary that she expect that everyoneinvolved in a practice will also cooperate. All that is necessary, according tothe so-called trigger clause in the definition, is that her expected utility begreater than what it would be for universal non-cooperation.

The main argument that Gauthier offers for the rationality of theconstrained maximizing disposition takes the form of a second-orderparametric choice problem, where the objects of choice are themselvesunderstood as dispositions to choose: “We consider what a rational individualwould choose, given the alternatives of adopting straightforward max-imization, and of adopting constrained maximization, as his disposition forstrategic behavior.”3 Gauthier argues that on the assumption that agents arefully transparent to each other, it is rational to choose the constrainedmaximizing disposition over the straightforward maximizing disposition.His argument turns on the fact that constrained maximizers have a con-ditional disposition to cooperate: although they are always in principle readyto pursue joint strategies which offer the prospect of mutual advantage, theydo not actually cooperate with others unless they expect the outcome to bebeneficial in comparison with universal non-cooperation. The conditionalnature of the disposition prevents constrained maximizers from beingexploited by straightforward maximizers in Prisoner’s Dilemma-likesituations. When interacting with recognizable straightforward maximizersin these situations, the constrained maximizer simply behaves as if she isherself a straightforward maximizer, pursuing her individual utility-maximizing strategy.

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Given that constrained maximizers are only conditionally disposed tocooperate with their fellows, Gauthier proceeds to argue that constrainedmaximizers cannot do worse, and depending on the circumstances may dobetter, than straightforward maximizers. Suppose that I adopt straightforwardmaximization as my disposition for strategic behavior. Then I must expectthe others to employ maximizing individual strategies in interacting with me.So do I, and expect a utility U, equal to whatever utility I would derive fromuniversal non-cooperation. Suppose that I adopt constrained maximization.Then if the others are conditionally disposed to constrained maximization, Imay expect them to base their actions on a cooperative joint strategy ininteracting with me. But then, I shall base my actions on the same strategy,and expect a utility U’, greater than U. If they are not so disposed, I employa maximizing strategy and expect U as before.4 Thus, Gauthier concludes,constrained maximization weakly dominates straightforward maximizationand is therefore rational.

3.

So much for the essentials of Gauthier’s defense of the constrained maximizingdisposition. Near the end of his defense of constrained maximization, he writes:

[W]e should not suppose it is rational to dispose oneself to constrainedmaximization, if one does not also dispose oneself to exclude straightforwardmaximizers from the benefits realizable by co-operation . . . Failing toexclude straightforward maximizers from the benefits of co-operativearrangements does not, and cannot, enable them to share in the long-runbenefits of co-operation; instead, it insures that the arrangements will proveineffective, so that there are no benefits to share. Then there is nothing tobe gained by constrained maximization; one might as well join thestraightforward maximizers in their descent to the natural condition ofhumankind.5

Gauthier’s remarks here are puzzling in two respects. First, in the passageimmediately preceding the one just quoted he refers to the claim that constrainedmaximizers will be disposed to exclude straightforward maximizers from thebenefits of cooperation as an implication of his argument. However, the supposedimplication does not appear to follow either from his definition of constrainedmaximization or from the argument for its rationality. As well, the reason thatGauthier offers in support of his claim that constrained maximizers must attemptto exclude straightforward maximizers from cooperative benefits is that unlessthey do so, there will be no cooperative benefits for anyone to share in at all.This is patently false, at any rate if it is interpreted as an empirical thesis.

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Gauthier claims that it is rational to dispose ourselves to constrainedmaximization only if we also dispose ourselves to exclude straightforwardmaximizers from the benefits realizable by cooperation. What exactly are thepotential benefits from which straightforward maximizers are to be excluded?Evidently, they are not the benefits which accrue to straightforward maximizerswhen, due to their translucency, they manage to take advantage of constrainedmaximizers in Prisoner’s Dilemma-like situations. If a constrained maximizermistakenly cooperates with a straightforward maximizer in such a situation,there is nothing the constrained maximizer can do to exclude the straightforwardmaximizer from benefits. The poor constrained maximizer has simply beensuckered, and the straightforward maximizer walks away with her prize.

The benefits that Gauthier has in mind must be ones which accrue to so-called free-riders in typical multiple-person interactions where the presenceof some limited number of defectors is not sufficient to eradicate the benefitswhich others realize from cooperating in the practice. According to thedefinition of constrained maximization, it is not necessary in order for aconstrained maximizer to act on her disposition to cooperate that she expectthat everyone involved in a practice will cooperate; all that is required is thather expected utility be greater than what it would be for universal non-cooperation. Thus, depending on the circumstances, constrained maximizersmay constrain their pursuit of individual utility-maximization in fullknowledge that some others will not. Free-riders are possible, a fact whichGauthier appears to acknowledge.6

Given that he defines the constrained maximizing disposition in a waywhich is consistent with a certain amount of free-riding on the part ofstraightforward maximizers, why does Gauthier then go on to assert that it isrational to dispose ourselves to constrained maximization only if we adopt afurther disposition to exclude free-riders from the benefits of cooperativeactivities? His explicit reason is that unless constrained maximizers aredisposed to stamp out free-riders whenever possible, there will be nocooperative surplus for anyone to enjoy. But this claim is so clearly false asto be practically disingenuous. The fact that many people dodge their taxes,or do not bother to vote, or pick wildflowers by the side of the trail obviouslydoes not entail that there are no benefits at all to be had from systems oftaxation, democracy, or national parks. If failing to discourage free-ridingreally did ensure that there would be no long-run benefits of cooperation, asGauthier maintains, then there could hardly be the opportunities for free-ridingwhich abound in the actual world.

A more plausible explanation of why Gauthier ascribes to constrainedmaximizers a further disposition to prevent free-riding is that without it hisargument for the rationality of the constrained maximizing disposition isseriously flawed. He evidently supposes that the argument that constrainedmaximization weakly dominates straightforward maximization establishes

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generally the rationality of constrained maximization as a dispositiongoverning strategic behavior. Nevertheless, in fact it establishes no such thing.What the argument actually shows is that constrained maximizers will do noworse, and perhaps do better, than straightforward maximizers in someinteractions having a Prisoner’s Dilemma-like structure. More precisely, whatthe argument shows is that constrained maximization weakly dominatesstraightforward maximization in any n-person interaction in which the presenceof even a single defector is sufficient to ensure that the expected utility ofcooperation is less than or equal to that of universal non-cooperation. For onlythen are we entitled to assume that straightforward maximizers can expectnothing but individual utility-maximization from others, regardless of theirstrategic dispositions.

Situations of this sort are rare in the real world, however. They are mostlyartifices of the pens or keyboards of game theorists. Situations in which acertain amount of free-riding is possible, consonant with benefits forindividuals who cooperate in a practice, are more common. Constrainedmaximizers will cooperate in free-riding situations in full knowledge that somestraightforward maximizers are thereby going to get a free lunch. Given thisfact, however, Gauthier has no way of showing that constrained maximizerswill typically do better than straightforward maximizers. If enough free-ridingsituations present themselves, then depending on the relative frequencies ofstraightforward maximizers and constrained maximizers in the population, andthe relative benefits to be expected from free-riding, it may well be utility-maximizing to adopt a straightforward maximizing rather than a constrainedmaximizing disposition, even under conditions of perfect transparency.

One of the reasons why Gauthier ascribes to constrained maximizers afurther disposition to exclude straightforward maximizers from the benefitsof cooperative activities, then, may be that he desperately needs the suppositionin order to get where he wants to go. Without supposing that straightforwardmaximizers can expect few benefits from free-riding, he cannot demonstratethe rationality of disposing ourselves to constrained rather than straightforwardmaximization. It is obviously not a supposition that he is entitled to, however,given his starting place.

4.

There is another possible reason why Gauthier may have overstated his casefor constrained maximizers being ill-disposed towards straightforwardmaximizers. It seems fair to say that Gauthier is more than a little obsessedwith the problem of free-riders and parasites. To understand his obsession,we need to reflect a little more carefully on the relation between the marketand morality as it is conceived within his theory.

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Recall that Gauthier locates room for a rational morality in the divergencebetween equilibrium strategies and optimal outcomes. He develops the conceptof the ideal market as a morally free zone with no room for moral constraintbecause ideal markets left to run on their own are guaranteed to result inoptimal outcomes. Gauthier specifically conceives of morality as “a potentialsolution to the problem of market failure.”7

More precisely, morals by agreement are advanced as the proper antidoteto a particular sort of market failure, namely the presence of externalities.Although Gauthier briefly discusses all of the usual conditions on the idealmarket when he defends it as a morally free zone, externalities quickly cometo occupy center stage, and are almost as quickly identified with the presenceof free-riders, who take advantage of positive externalities, and parasites, whoimpose negative externalities on others. Free-riders and parasites upset thebalance of the ideal market, and constrained maximization, according toGauthier, is necessary to restore the balance.

[C]o-operation is intended to afford an optimal outcome in situations inwhich the presence of externalities would make the outcome of natural orof market interaction sub-optimal. The moral significance of externalitiesis found in the possibility that one person may take advantage of another,either as a free-rider, obtaining some benefit cost free as a spin-off fromthe other’s activities, or as a parasite, transferring the cost of some benefitto the other.8

We may discern within the general lines of this argument another reason forGauthier’s insistence that constrained maximizers must attempt to excludestraightforward maximizers from the benefits of cooperation. Constrainedmaximization is introduced specifically and explicitly as a response to theproblem of externalities in the form of free-riders and parasites. In Gauthier’swords: “Our moral inquiry has been motivated by the problems created forutility-maximizers by externalities.”9 We noted, however, that in appropriateand fairly realistic circumstances, constrained maximizers will act on theirdisposition to cooperate even when they think it likely that some people willfree-ride. Constrained maximization thus fails in the task that Gauthier setsfor it: it is not in itself able to eradicate free-riders. Since constrainedmaximization cannot itself solve the problem of free-riders, Gauthier mustfinally solve it essentially by ad hoc stipulation. He must insist, on speciousgrounds, that constrained maximizers will adopt a further disposition toexclude straightforward maximizers from the benefits of cooperative activities.

This is obviously an unhappy result for Gauthier’s theory. There is a deeperproblem, however, which vitiates his entire market contractarian approach toethics. The fundamental problem, on Gauthier’s view, is the potentialdivergence in strategic choice between optima and equilibria. In an ideal

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market, the problem does not arise, but the presence of externalities in a less-than-ideal market generates sub-optimal outcomes, thus giving rise to theproblem that the theory of morals by agreement is designed to solve

The main difficulty here is that nothing in the foregoing provides anywarrant for conceiving of free-riders and parasites per se as a problem requiringany sort of solution, moral or otherwise. That Gauthier thinks otherwise reflectsa basic misunderstanding of market theory. Two points are relevant in thisregard. The first is that he seems to have overlooked the fact that the existenceof free-riders and parasites is perfectly consistent with Pareto-optimaloutcomes, since getting rid of free-riding and parasitism would typically makethe beneficiaries thereof worse off. Secondly, and crucially, when a marketoutcome is suboptimal, it is never the existence of free-riders and parasitesper se which is responsible for the suboptimality.

An example may help to illustrate the point. Imagine that you aredeliberating over whether to put new siding on your house. If you do, the valueof my property next door will increase. This is a classic case of a positiveexternality. Suppose that you decide that all things considered you would preferthe new siding, and contract with your local handyman to have the jobcompleted straightaway. The value of my property increases and I become afree-rider, in Gauthier’s terms, securing a benefit for which I have providedno reciprocal consideration. Even so, the result in this case is not suboptimal.By hypothesis we are both better off as a result of your decision to install thenew siding, and ceteris paribus there is no way of improving the position ofeither of us without harming the position of the other. Thus free-riding isperfectly consistent with the existence of an optimal outcome.

Suppose, alternatively, that you decide not to have the new siding installed.In this case, the result may be suboptimal. Whether it is depends on whetherthe benefit that I would receive were you to install the new siding would besufficiently large that, if I were to transfer some portion of that benefit to you,the gain would be sufficient for you to decide that all things considered youwould prefer to have the new siding after all. If this condition is met, the resultis not suboptimal because there is a certain amount of free-riding going on.On the contrary, the problem is evidently that free-riding is not going on, inthe sense that if we can somehow agree on how much of my supposedly ill-gotten gains I should transfer back to you, you can go ahead and install yoursiding, I can free-ride to some extent, and we will both be better off.Economists standardly assume that market goods are continuous rather thandiscrete, so that instead of being faced with the binary choice of installingnew siding or not, you must choose between an infinite number of levels orgrades of siding, ranging from no siding at all to the very best siding that currenttechnology can produce. This assumption requires that our example bemodified slightly, but not the moral to be drawn from it. Given that your choiceis between an infinite number of grades of siding, you will choose so that the

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marginal cost of the last increment of siding you purchase is equal to themarginal benefit you receive from it. However, whatever grade of siding youopt for, short of the maximal grade, there will be some higher grade such that,if you were to install it, I would receive more benefit from free-riding andcould in principle transfer some of that benefit to you so that we would bothbe better off. Thus, on standard economic assumptions, the presence of positiveexternalities does guarantee a suboptimal result. Again, however, that thesuboptimal result here cannot be attributed to the presence of free-riding. Theproblem, in this case as in the original, is not that there is free-riding goingon, but that there is not enough free-riding going on! If I am allowed more ofa free ride, we will both be better off.

What applies to positive externalities and free-riding also applies, mutatismutandis, to negative externalities and so-called parasites, except that in thecase of negative externalities, an outcome will be suboptimal just in case theamount of harm that parasites inflict on others is sufficiently large that theothers can bribe the parasites to scale back their harmful activity to an extentwhich will make all parties better off; crucially, the outcome for the otherswill typically be significantly worse than if the negative externality had notbeen present.

If free-riders and parasites are a problem, then, it is not because theirpresence guarantees or is even likely to result in suboptimal outcomes.Gauthier has very firm intuitions about the undesirability of some people takingadvantage of others in the form of free-riding and parasitism – too firm,perhaps, given that some cases of free-riding are clearly unobjectionable, andperhaps even morally desirable. His attempt to link the undesirability of free-riders and parasites to what he views as the fundamental problem of strategicinteraction fails utterly, however, for the simple reason that free-riders andparasites, in responding rationally to the availability of positive and negativeexternalities, are doing their part in bringing about outcomes which aretypically optimal, notwithstanding the fact that they are taking advantage ofothers in doing so.

If there is room for morality only in situations where outcomes are less thanoptimal, then there is no room for morality in typical cases of free-riding andparasitism. Morals By Agreement does not solve the problem of free-ridingand parasitism, and even if it did, there is, by Gauthier’s own admission, noproblem which requires resolution to begin with.10

More generally, the foregoing demonstrates the essential poverty of a marketcontractarian approach to ethics. Whatever plausibility market con-tractarianism has derives from the supposition that the failure of markets toproduce optimal outcomes is a kind of moral failure, and hence that a systemof norms, or institutions, or dispositions-to-choose which restores optimalitycounts as a recognizably moral solution to the problem. It should be clear thatthere could be no instrumental reason for constrained maximizers or anyone

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else to give up free-riding and parasitism. Indeed, constrained maximizers, ifthey are rational, must take whatever advantage of their fellows the presenceof positive and negative externalities affords. Their so-called morality consistsmerely in keeping to agreements concerning how to split the cooperativesurplus beyond whatever they can gain by taking advantage of others. That,however, is not a recognizable morality at all.

Notes

1. See Jules Coleman, “Market Contractarianism” in Morals, Markets, and the Law(Cambridge, England: Cambridge University Press, 1988), ch. 10.

2. David Gauthier, Morals by Agreement (New York: Oxford University Press, 1986), p.167.

3. Ibid., p. 170.4. Ibid., p. 172.5. Ibid., p. 180.6. Ibid., p. 167.7. I am indebted to Howard Sobel for bringing this passage to my attention.8. Gauthier, op. cit., p. 152.9. Ibid., p. 163.

10. See Jody S. Kraus and Jules L. Coleman, “Morality and the theory of rational choice”,in Peter Vallentyne, ed., Contractarianism and Rational Choice: Essays on DavidGauthier’s Morals by Agreement (Cambridge, England: Cambridge University Press,1991), p. 256. and Gauthier “Why Contractarianism?”, in Vallentyne, op. cit., p. 22.

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