Maybe Odysseus Was a Capitalist?

Daniel Barnhizer

In this article, Marietta Auer, Director of the Max Planck Institute for Legal History and Legal Theory, takes a sophisticated and nuanced look at the role of unequal bargaining power as it relates to both economics and legal theory. From my own perspective as an unrepentant libertarian and capitalist, there is much in the article with which I disagree. However, Auer’s observations on the importance of bargaining power inequality, the relationship between law and markets in a [quasi-]capitalist economic and political system, and the futility of attempts to use law to redistribute bargaining power among market actors are insightful, creative, and require engagement by those working on the problem of bargaining power.

Auer’s analysis begins with a survey of both classical and neoclassical economic arguments regarding the neutrality of markets. According to Auer, under the classical conception of private law in relation to markets, “the ground rules of private law, in particular property and contract law, provide a politically neutral framework that enables market transactions among equals.” (P. 6.) While it is questionable whether and to what extent legal scholars and courts of the so-called formalist period in American law and jurisprudence actually adhered to the classical conception as described by the later American Legal Realists,¹ the advent of American Legal Realism addressed the apparent disconnect between classical contract and property law versus practical economic realities in which facially neutral legal rules promoted exploitation and coercion in transactions affected by bargaining power disparities. As noted (with a big helping of judicial hubris) in what appears to be the first U.S. case to recognize explicitly the legal concept of inequality of bargaining power:

Our enlightened modern thought realizes that an equality of bargaining power between two such unequal parties [employees and employers] is impossible, and has attempted to equalize the balance through the labor unions and state regulation of industry; but old ideas die hard, and the pathways of progress are strewn with the fragments of legislation designed for this purpose but wrecked on the insistence of court after court that the state must not interfere with the ‘free right of contract.’²

As a result of Legal Realist influences, significant areas of contract law were subject to legislative efforts to redistribute bargaining power where transactions in those fields were perceived to suffer from significant inequalities, such as consumer transactions, labor law, and housing. (Pp. 7-8.) Auer notes, however, that in these fields:

[T]here are cases where the strategy of redistributing bargaining power through mandatory terms in private law transactions systematically fails to reach its goal and is actually ‘hurting the people one is trying to help,’ as Duncan Kennedy likes to put it. … The additional cost imposed by the mandatory contract term on the seller, landlord, or employer will likely not lead to the intended redistribution of wealth to the weaker market side, but will in fact be passed on to the buyer, tenant, or employee through higher prices or fewer opportunities of contracting. (P. 7.)

Following this introduction and historical review of classical, Legal Realist, and neoclassical jurisprudence relating to bargaining power disparities, Auer reviews current trends in critical jurisprudence, particularly in Law & Political Economy. Of particular importance, Auer observes critical arguments suggesting that if markets are created and shaped by law, then law should be used to reshape markets to accomplish redistributionary goals. (Pp. 10-12.) After observing that such arguments have failed to account for the actual “formally egalitarian structure of private law,” Auer moves to the primary argument of the article – namely that “there is a way to decode the myth of private power: understanding bargaining power.”

I argue that this [legal] understanding of unequal bargaining power is undertheorized because it misses the economic function of the mechanism of bargaining power in capitalist bargaining situations. This is a serious theoretical shortcoming because lawyers, as a consequence of the sociological fallacy of intuiting the power differential between the parties from an ad hoc mélange of criteria oscillating between the actual power to negotiate and the social status of the negotiators, systematically overestimate the regulatory potential of the law with respect to offsetting the effects of unequal bargaining power. As it turns out, the law cannot do much about unequal bargaining power in capitalist market transactions. (P. 13.) (emphasis added)

This paragraph is an extraordinarily important insight for contract doctrines dependent upon the concept of inequality of bargaining power. Bargaining power, as I’ve argued in past articles,³ is irreducibly complex and dynamic, often changing radically based upon new information, deceit, bluffing, availability of alternatives, access to legislative or regulatory bodies, and other factors. In cases applying contract law to individual disputes, courts are incompetent in determining which of the parties possessed superior bargaining power and which walked away with a greater share of the transactional surplus. Instead, both courts and legislatures conceal this incompetence behind a façade of poorly constructed status-based criteria that generally ignore reality in favor of presenting analysis that can be perceived as coherent and credible to users of the legal system.

Auer’s acknowledgment of the poorly-theorized nature of bargaining power disparities in the legal context proceeds further to suggesting that bargaining power should be analyzed economically and that legal tools that attempt to redistribute bargaining power within a capitalist system “will at most effectuate ‘palliative redistribution,’ meaning that it will not change the overall distribution of capitalist wealth in more than marginal cases, where it comes at an additional cost to the rule of law.” (P. 23.) Admittedly, I have my own concerns regarding the effectiveness of economic modeling of bargaining power, but Auer’s treatment of the concept and the futility of legal attempts to redistribute bargaining power is an extraordinary insight that makes this article well-worth reading.

1. See, e.g., Mark L. Movsesian, Rediscovering Williston, 62 Wash. & Lee L. Rev. 207, 209-217 (2005) (arguing that later Legal Realists’ characterization of Samuel Williston’s formalism as abstract and disconnected from real world impacts is inaccurate and ignores the pragmatism, rejection of essentialism, and moderate approach to freedom of contract).
2. Ocean Accident & Guarantee. Corp. v. Industrial Comm’n of Az., 257 P. 644, 645 (Az. 1927).
3. See, e.g., Daniel D. Barnhizer, Inequality of Bargaining Power, 76 Colo. L. Rev. 139 (2005); Daniel D. Barnhizer, Bargaining Power in Contract Theory, in Larry A. DiMatteo, Robert A. Prentice, Blake D. Morant & Daniel D. Barnhizer, Visions of Contract Theory: Rationality, Bargaining and Interpretation (2006); Daniel D. Barnhizer, Propertization Metaphors for Bargaining Power and Control of the Self in the Information Age, 54 Cleve. St. L. Rev. 69 (2006); Daniel D. Barnhizer, Bargaining Power in the Shadow of the Law: Commentary on the Contributions of Professors Wright & Engen, Professor Birke, and Joshua Bowers, 91 Marquette L. Rev. 123 (2007); Daniel D. Barnhizer, Context as Power: Defining the Field of Battle for Advantage in Contractual Interactions, 45 Wake Forest L. Rev. 607 (2010); Daniel D. Barnhizer, Escaping Toxic Contracts: How We Have Lost The War on Assent in Wrap Contracts, 44 Southwestern L. Rev. 215 (2015).