The Principles of Political Economy

Henry Sidgwick

Book 3

The Art of Political Economy

Chapter 3

The Relations of Government to Industry

§5. In close analogy to the regulations above noticed that indirectly protect the person, stands another class of governmental interferences which have for their object the indirect prevention of theft. Of this kind are the regulations that hamper the easy disposition of stolen goods; such as the English law that a dealer in old metal may not at one time buy less than certain minimum quantities of lead, copper, tin, &c.; and some of the restrictions imposed on pawnbrokers. With these, again, we may class regulations that aim at the indirect prevention of fraud in exchanges; such as the prescription of standard weights and measures, and the more recent prohibition of `truck' (that is, of the payment of wages otherwise than in money),---so far as this is designed to secure to labourers the amount of real wages that is by contract fairly due to them. If we could extend the notion of `fraud' to include all cases in which one of the parties to an agreement `imposes' upon the ignorance of the other, several other important interferences with industry might be brought under this head; such as the chief regulations enforced on joint-stock companies---whether framed to protect the interests of the individual members of such companies against their directors, or to protect other persons who may deal with them---the taxing of solicitors' bills, and some of the regulations of the business of carrying emigrants.

It is to be observed, however, that the element of active misrepresentation is not necessarily present in all cases of what is commonly called `imposition'. In fact, the notion of `imposition' affords us a transition, by which we gradually pass from exchanges in which positive deception is practised to exchanges which are merely held to be inequitable through the ignorance on one side of the quality of the article exchanged, even though there may be no active misrepresentation on the other side, and no general understanding that the other party will furnish the knowledge that is wanting. Now, in ordinary buying and selling, a purchaser is expected to protect himself against loss incurred under these latter conditions; and though experience may show that the intervention of Government to protect him is in certain cases urgently required, it must be allowed that such intervention is hardly consistent with the fundamental assumption of the system of natural liberty, that the sane adult individual is likely to be a better judge of his own interests than his government is. At any rate we may say that at this point we approach the rather delicate theoretical line that separates governmental action for the maintenance of real freedom of contract---which is held to be impaired by successful fraud from action that invades this freedom. Various regulations tending to prevent contracts from being made under misapprehension as to material circumstances may be regarded as lying on this debatable margin: such as the rules of law obliging vendors with special opportunities of knowledge---e.g. vendors of land and promoters of joint-stock companies---to disclose any material circumstances affecting the value of what they offer for sale: or again, the compulsory registration of contracts like mortgages or bills of sale, which are liable to render the real financial position of one of the parties to the contract so materially different from his apparent position that third persons dealing with him are in danger of being seriously misled.

A somewhat similar margin presents itself when we try to define the other main condition required for the validity of contracts according to the principles of natural liberty: viz. that they should not have been procured by coercion---provided we extend the notion of coercion to include not merely physical injury or constraint, but also the moral pressure which is sometimes called `undue influence'. It is, of course, in accordance with the strictest limitation of the sphere of Government that it should prohibit and invalidate agreements procured by the infliction or threat of any illegal harm; and further, if in any case one party to a contract is able to cause pain or alarm of a kind which the law does not generally attempt to prevent, but which is not likely to be inflicted or threatened except as an inducement to make the contract, a special interference to prevent such undue pressure may fairly be regarded as a mere defence of freedom. Thus the special protection given by our law to merchant seamen, by the invalidation of contracts alienating part of their claims to wages, may be justified by the special opportunities of undue influence which the needful discipline of a ship gives to its master. So, again, the restrictions placed on the labour of women generally, in the English factory legislation, are commonly and plausibly defended on the ground that women, owing to their normal domestic dependence, require to be protected against the undue influence of the men with whom they live. When, however, the law interferes to prevent a contract in which A merely `takes advantage of the distress' of B, without being in any way responsible for it---or, otherwise, when the pressure which A puts on B is merely the threat of not rendering some service which he is in no way bound to render independently of the contract---it seems plain that such interference must be viewed not as a protection of freedom of contract, but as a limitation of it in the interests of disadvantageously placed members of the community.

I have spoken of the enforcement of contracts as a kind of protection to freedom: and there can be no doubt that a refusal to enforce such contracts is an interference with the spontaneous organization of industry which the system of natural liberty contemplates; in which enforcement of contract is the one elementary process by the repetition and complication of which the whole fabric is bound together. At the same time there is certainly something paradoxical in calling the refusal of Government to enforce certain contracts, an `interference' with the freedom of the individuals left alone: and it is probably for this reason that the very important restrictions, by which the enforcement of contract has actually been limited, have not commonly been treated as violations of laisser faire. Thus in England hardly any engagement to render personal services gives the promisee a legal claim to more than pecuniary damages;---to put it otherwise, almost all such contracts, if unfulfilled, turn into mere debts of money so far as their legal force goes. And it should be added that even the payment of debts is to a very large extent not exacted, even from persons who are now perfectly able to pay them; provided that at some previous time such persons have proved their inability to pay, given up their property for division among their creditors, and thus obtained as bankrupts protection against any future exaction of past debts. This very important limitation of the effects of contract is, I conceive, mainly to be justified as tending to promote the interests of production; being designed to restore to the bankrupt the stimulus to useful industry which an indefinite prolongation of his pecuniary liabilities would take away from all but the most energetic minds. It is thought that this can be done without any material sacrifice of the interests of creditors; since the latter, even if their claims were kept legally valid, would still have no effective means of compelling the defaulting debtor to earn the money required to satisfy them. It may be observed, however, that the same line of reasoning that thus justifies the general principle of a bankruptcy law also shows us that this kind of interference may easily be carried too far for the real interests of industry. For---even assuming that the details of such a law can be contrived and administered so as to prevent waste of the bankrupt's estate, secure its equal division among the creditors, and adequately punish not only common dishonesty on the bankrupt's part, but also such reckless and improper dealing with his borrowed resources as substantially amounts to dishonesty,---the danger still remains that the prospect of relief through bankruptcy may tempt men to run risks with borrowed property which they would not think it expedient to run with their own; and which, therefore, it is the interest of the community to prevent, although such dealing may not admit of being proved to be criminally reckless. And further, granting that a bankrupt should be exempt from legal obligation to pay his creditors in full, it still seems right that society should emphatically recognise the superior morality of the bankrupt who does exert himself to repair the losses he has caused. To attain this end, and at the same time reduce the danger before mentioned, it seems desirable to impose on the bankrupt certain disabilities which would not seriously interfere with his earning an honest livelihood, while yet they would express the coldness that society should feel towards a man who has failed to satisfy just claims---coldness rising to disapproval if he makes no effort to satisfy them. Thus a bankrupt---so long as his debts remain unpaid---should, I think, be placed on a level with a pauper in respect of all political rights; and the protection from his creditors afforded him by bankruptcy should be made conditional on his name being kept in a register open to the inspection of all persons in the place in which he trades. This latter provision, indeed, seems expedient on a different ground, of which we have before taken note: viz. for the due information of all persons who may hereafter have dealings with the bankrupt.

I have distinguished as a special mode of governmental interference that which operates by giving a definite interpretation to customary engagements. Here again a line requires to be carefully drawn between an impartial effort to ascertain and define the probable meaning of the contracting parties,---which is obviously an indispensable function of the judicature in case of disputes---and an attempt to modify what is held to be a bad custom; especially since in the development of our own ``judge-made'' law, the latter attempt has often been made in the guise of the former. Such interference by mere interpretation, which will only be operative if the persons affected do not bar it by express contract, is obviously of the very lowest degree of intensity, politically speaking, and hardly amounts to a sensible restriction on liberty; and it cannot be effective if the persons concerned are decidedly averse to the change sought to be introduced; but where there is no such aversion it may sometimes have important economic effects by overcoming the ``friction'' of mere carelessness and ignorance, or by forcing the tacit combination of persons who gain by the old bad custom to become open and aggressive, and so pointing it out for successful resistance.

This interpretative or quasi-interpretative intervention of law has been largely extended to the implied contracts or understandings involved in different economic relations. Thus the Law of Partnership and the Law of Agency largely consist of definitions or interpretations of this kind, designed to prevent the disappointment of normal expectations. So far as such legal definition of rights and obligations merely imposes on the persons concerned the necessity of making express contracts and announcements, if they wish to avoid the obligations that the law defines as normal, it does not materially restrict natural liberty; it is only where this avoidance is not allowed, that the restriction becomes palpable and serious. For instance, the legal obligation on common carriers to receive the goods of all applicants on similar terms is merely an interpretation of common understanding, if it can be evaded by giving full public notice; but if it cannot be so evaded, it becomes a material interference with laisser faire.

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