The Agenda

Michael Munger on Euvoluntary Exchange

Michael Munger, a libertarian economist at Duke and one of our most consistently entertaining public intellectuals, has been advancing the concept of a “euvoluntary exchange,” i.e., a truly voluntary exchange, in a number of papers and at a new blog:

The novel portion of this paper is to highlight an implication of this second view, one that has received too little attention. I will state the claim as starkly as possible here, though I will admit to some qualifications later. The claim is this: All objections to the morality and justice of the uses of voluntary market exchange are mistaken. In fact, they are really objections to imbalances in the distribution of power and wealth. Euvoluntary exchanges always justified, and are always just. Further, even exchanges that are not euvoluntary are generally welfare improving, and they improve most of all the welfare of those least well off. Restrictions on exchange harm the poor and the weak.

So what are the conditions that must obtain for an exchange to be euvoluntary?

Euvoluntary exchange requires (1) conventional ownership of items, services, or currency by both parties, (2) conventional capacity to transfer and assign this ownership to the other party, (3) the absence of regret, for both parties, after the exchange, in the sense that both receive value at least as great as was anticipated at the time of the agreement to exchange, (4) neither party is coerced, in the sense of being forced to exchange by threat, and (5) neither party is coerced in the alternative sense of being harmed by failing to exchange. 

Munger’s discussion of euvoluntary exchange brought to mind two articles. The first was an article by Paul Boutin on reforming Rule 501, which we discussed in this space shortly after it was first published by Wired:


Pre-IPO sales are limited to “accredited investors,” people with a demonstrated net worth of $1 million or a yearly income of $200,000. It’s been that way since 1982, when Rule 501 of Regulation D of the Securities Act went into effect. The measure was intended to protect less-informed investors—widows and orphans, in Wall Street parlance—from gambling away their savings. So who has bought pre-IPO Facebook stock? A reported 10 percent of the company went to the Russian investment group Digital Sky Technologies, whose backers include one of that country’s richest oligarchs. In other words, the extremely wealthy.

Today, Rule 501 does less to protect widows and orphans than it does to prevent risk-savvy investors from playing the secondary market. 

The anxiety behind Rule 501 might flow from the concern that it doesn’t meet condition (3). Unsophisticated investors who are sure that making a pre-IPO investment in, say, Groupon is a sure thing might later regret having done so if their investment tanks. In this scenario, the investor in question might later resent the fact that she didn’t have the work of expensive equity analysts at her disposal, and so she was unable to make a truly well-informed decision. 

The more interesting set of issues, however, is raised by (5). The case for minimum wage laws flows from (5): yes, there might be people willing to “voluntarily” accept a low wage — but that is only because the alternative to accepting a low wage is bleak. This constitutes a kind of coercion, and we want to create laws that reflect our aspiration towards a society in which no one faces such bleak alternatives. Naturally, I don’t think that this is a very sound way of thinking, but I think it captures the views of many people who want to ban voluntary exchanges of this kind reasonably well. 

This brings me to the other article that come to mind as I listened to Munger discuss euvoluntary exchange with Russ Roberts: Anthony Kronman’s 1980 critique of libertarianism, “Contract Law and Distributive Justice“:

My aim here is to show that the idea of voluntary  agreement — an idea  central  to the  libertarian  theory of justice in  exchange — cannot be understood  except as a distributional concept, and to demonstrate that the notion of individual liberty, taken by itself, offers no guidance in determining which of the many forms of advantage-taking  possible in exchange relations render an agreement involuntary and therefore unenforceable on libertarian  grounds. Having established this general point, I propose a simple test, similar in form to Rawls’s difference principle, for deciding which kinds  of  advantage-taking should bepermitted and which should not, and argue that this test is the one libertarians ought to accept as being most compatible  with  the moral premises of libertarianism itself.

The following is drawn from Munger’s “Euvoluntary or Not, Exchange is Just“:

First, euvolunatry exchanges are always justified, and if consummated are always just. Second, and more important, even exchanges that are not euvoluntary are generally welfare improving, and they improve the welfare of the least well off most of all. The confusion that arises in judging exchanges that are not euvoluntary is understandable, but unfortunate. The observer, seeing the degree of inequality, or desperation of one of the parties to a potential exchange, is actually perceiving a disparity in levels of welfare of the respective BATNAs, or “Best Alternatives to a Negotiated Exchange.” This disparity is a consequence of differences that come before exchange is contemplated, and are not caused by the exchange. 

But the confused observer seeks to help the less well off party by outlawing the exchange. The observer, believing that the party should not have to exchange on such terms, blunders in and dictates that the party should not be allowed to exchange on such terms. The problem is that this ensures that party is marooned at his grossly inferior BATNA, an outcome that access to exchange could have avoided.  In short, interference with “capitalist acts among consenting adults” has effectsexactly the opposite of its supposed intent. [Emphasis added]

This raises another question: what are the sources of the disparities we care, or rather that we should care, about? 


The Latest