Some brief observations about contract theory

### Some brief observations about contract theory

General Contract Theory.
Most contract theorists share five common presuppositions:
1. Relative equality of need. Each of us has basic things needed to survive which are common to everyone, such as food, shelter, and so on.
2. Relative scarcity of goods. Some or many of the goods that we want are not going to be in such supply that not everyone will be able to freely get as much as they want. Thus, there will be competing desires between people for certain things.
3. Relative equality of power. None of us is so much stronger or smarter than the others that we are invulnerable. Each of us could be harmed and even killed by others.
4. Limited altruism. Each of us is self-interested to some degree so that we are not completely altruistic. When one agent's interests conflict with the interests of another agent, it is often the case that the agent will not give up their interests without some sanction.
5. Minimal rationality of the agents involved.

Game Theory Example: The Prisoner's Dilemma
Using a branch of mathematics called game theory, it can be illustrative to show how social arrangements can naturally lead to suboptimal arrangements. This shows us that we cannot just assume that an unreflective social arrangement is best or even just sufficient.

Imagine that the police arrest you and charge you with being a spy. They also say that they have arrested a Mr. Smith, whom you do not know, and they claim he is your co-conspirator. You do never see or talk with Smith. They ask you to confess, and offer you the following deal:
1. If you confess and Smith does not, you get 1 year in prison.
2. If you and Smith both do not confess, you get 2 years.
3. If you both confess, you get 5 years
4. If you don't confess and Smith does, you get 10 years.
They also tell you that Smith is getting the same deal.

If you are trying to minimize your time in prison, you are best off to confess. (Why? Recall that there are two cases: Smith confesses, and Smith doesn't. What should you do in each case?) But Smith should then do the same. Hence, you both get 5 years. If you could have communicated and made a deal, you both could have refused to confess, and gotten 2 years.

Game theoretic examples like these show that sometimes acting in rational self interest (defined solely in terms of ones own individual goals), without combining effort with other people and forming agreements, can lead to less than optimal conditions for yourself. Think of what kinds of actual situations you might experience which are like this.

Hobbes's Contract Theory
• Thomas Hobbes was an English philosopher who lived 1588-1679.
• His relevant work for our discussion is Leviathan, 1651.
• In the state of Nature, there would be
no place for industry, because the fruit thereof is uncertain; and consequently no culture of the earth; no navigation, nor use of the commodities that may be imported by Sea; no commodious Building; no Instruments of moving and removing such things as require much force; no Knowledge of the face of the Earth; no account of Time; no Arts; no Letters; and which is worst of all, continuall feare, and danger of violent death; And the life of man, solitary, poore, nasty, brutish, and short [Leviathan].
• Our best solution is to give up some freedoms in exchange for other people giving up those freedoms. The freedoms we would then be inclined to give up are those that would harm us if exercised against us.
• Hobbes thought that we needed a strong government to enforce this implicit social contract.
• But Hobbesian contract theory is one source of the ideas that underlie classical liberalism: that our social arrangement should be the one that ensures each of us the maximum freedom consistent with all of us having those freedoms, and with minimal harm to each other.

Rawls's Contract Theory
• John Rawls was an American philosopher, 1921-2002.
• Rawls is most noteworthy in this context for having introduced a radical new way of thinking about contract theory, and a new normative use of it.
• Rawls introduces the concept of the "veil of ignorance": each person is to decide upon the society that they want if they do not know what job or sex or race or savings and etc. they would have when they return to that world.
• Rawls sees this as an application of the idea that justice is fairness. If justice is fairness, presumably we should treat everyone fairly. But how do we describe such a situation? We imagine what would be our social decisions from behind the veil of ignorance.
• Behind the veil, Rawls argues we would decide for:
• The minimax principle: shape the economy to maximize the minimum.
• (Classical) liberal freedoms: allow the maximum freedoms for all that are consistent with all of us having those freedoms (e.g., generally, if there is some general freedom you do not want exercised against you, then don't give that freedom to anyone).