1,2 John Ashton, The History of Gambling in England 275 (1898). He continues: “Yet a man would be considered culpable, or at the very least, negligent and indiscreet did he not insure.”
3 Karen Halttunen, Confidence Men and Painted Women: A Study of Middle-class Culture in America, 1830-1870, pp. 1-32 (1982).
4 Id. at 17-22. See generally Herman Melville, The Confidence-Man: His Masquerade (Harrison Hayford et al., eds., Northwestern Univ. Press 1984) (1857).
5 “By the second decade of the nineteenth century, the divorce between insurance and gambling was almost complete.” Lorraine J. Daston, The Domestication of Risk: Mathematical Probability and Insurance 1650-1830, in 1 The Probabilistic Revolution, (Lorenz Kruger et. al., eds., 1987) at 253; “By the third decade of the nineteenth century, the divorce between insurance and gambling seemed final. Gambling was, to a large extent, outlawed, whereas insurance became a pillar of social order…” Reuven Brenner & Gabrielle A. Brenner, Gambling, and Speculation: A Theory, a History, and a Future of Some Human Decisions 106 (1990).
6, 13 Viviana A. Rotman Zelizer, Morals and Markets: The Development of Life Insurance in the United States 68-71 (1979).
7 Lawrence F. Abbot, The Story of NYLIC: A History of the Origin and Development of the New York Life Insurance Company from 1845 to 1929 (1930).
8 Id. at 7-8.
9 Id. at 9-10.
10 Id. at 11.
11 Id. at 12.
12 This has been a common claim by insurance companies since the popularization of life insurance in the mid-nineteenth century, but the defense was not limited to life insurance, nor has it ceased to be a usable defense up to today. See, e.g., Connecticut Mut. Life Ins. Co. v. Schaefer, 94 U.S. 457 (1876) (insurance company claimed that divorced spouse had no insurable interest in the life of the insured, her former husband); New York Life Ins. Co. v. Baum, 700 F.2d 928 (5th Cir. 1983) (insurance company claimed that beneficiaries had no insurable interest in the life of the insured, and thus should not recover); Fidelity Union Fire Ins. Co. v. Hicks, 250 S.W. 1084 (Tex. App. 1923) (insurance company claimed hail insurance was void as wagering contract due to lack of insurable interest).
14 See 3 Samuel Williston, The Law of Contracts § 1667, § 1668 (1st ed. 1920) (footnotes omitted):
The mere fact that an agreement was a wager did not make it unenforceable or opposed to public policy according to the English common law.
Statutes, however, restricted various forms of betting, and apart from such statutes wagers were held against public policy as matter of common law if the subject-matter of the bet was deemed to be obnoxious to the public welfare.
15, 17 Alan I. Widiss, Insurance 123 (1989).
16 Franklin L. Best, Jr., “Defining Insurable Interests in Lives,” 22 Tort & Ins. L.J. 104 (1986).
18 This rationale relies on nineteenth century terminology; from a current economic perspective, moral hazard is described as the inefficient limiting of precautions against the occurrence of the insured event, which amounts to the same thing, the difference being one of degree. On the shifting meaning of “moral hazard” see Tom Baker, “On the Genealogy of Moral Hazard,” 75 Texas L. Rev. 237, 239-40 (1996).
19 Ashton, History of Gambling, 279-281; see also Zelizer, Morals and Market, 71 (“The concept of insurable interest developed to guarantee the legitimate contractual motivation of life insurance. It was first introduced in England in 1774 as a legal weapon against the widespread wagering in lives.”).
20 Edwin W. Patterson, “Insurable Interest in Life,” 18 Colum. L. Rev. 381, 392-393 (1918); Widiss, Insurance, 125 (“The preamble to this statute stated that the legislation addressed ‘a mischievous kind of gaming’ in relation to ‘the making of insurances on lives, or other events, wherein the assured shall have no interest.’ Nothing was said of the destruction of the subject matter of insurance…”).
21 Best, “Defining Insurable Interest in Lives” (at the time of the article’s publication, Best was an Associate General Counsel of Penn Mutual Life Insurance Company in Philadelphia, Pennsylvania).
22 Johnny C. Parker, “Does Lack of an Insurable Interest Preclude an Insurance Agent from Taking an Absolute Assignment of his Client’s Life Policy?,” 31 U. Rich. L. Rev. 71, 79 (1997).
23 See Zelizer, Morals and Market, 69-70. Zelizer adds: “Another form of gambling with life, known as ‘graveyard insurance,’ briefly flourished in the United States in the early 1880’s with speculators insuring the lives of old people, preferably paupers who were likely to die soon.”
24 104 U.S. 775 (1881).
25 In these examples, it is always the life of A that is insured; thus, A is the Cestui Que Vie, and B always lacks an insurable interest in the life of A. In addition, it was not always the insurance company that raised the issue of insurable interest; often, the representatives of the estate of the insured raised the claim. Insurers often admitted liability, deposited the proceeds with the court and filed bills of interpleader, so that the court would only have to decide between parties claiming rights to the policy.
26 I will for the most part disregard the other half of the purpose of insurable interest doctrine, i.e. the prevention of the temptation to murder the insured. For an interesting treatment of that issue, see Baker, “Genealogy of Moral Hazard.”
27 An apparent exception to this rule exists in Texas, where the courts have stated that “[i]n order to make a valid contract upon the life of one person for the benefit of another the beneficiary must have an interest in the life insured.” Goldbaum v. Blum, 15 S.W. 564, 565 (Tex. 1891). However, in that case, and others cited for the same proposition, the beneficiaries paid all the premiums, and were instrumental in initiating the policy, so the statement was actually not controlling. For a recent case, see Stillwagoner v. Travelers Ins. Co., 979 S.W.2d 354 (Tex. App. 1998) (unbeknownst to employee, employer purchased life insurance policy on employee's life, naming employer beneficiary).
28 “If the cestui also pays the premiums, the transaction is an investment-gift – that is, a gift to the beneficiary of the investment made by the cestui. While gifts do not perform any useful function in trade or commerce, the courts recognize the validity of such policies as incidental to freedom of gift.” Patterson, “Insurable Interest in Life,” 397 (citation omitted).
29 Parker, “Lack of Insurable Interest,” 76.
30 53 S.E. 1032 (Ga. 1906). Faced with conflicting interests in payment, the company deposited payment with the court, leaving the only conflict between the assignee of the policy and the estate.
31 The court deals with this problem simply, by relying on the rule that a beneficiary of a policy on which the insured pays the premiums is entitled to recover. Comparing the beneficiary who doesn’t pay the premiums to one who does, the court says that the temptation to hasten the demise of the insured is equal in both cases, and since it does not invalidate the policy in the first case, it should not do so in the second. Id. at 1034.
32 Id.
33 Id. at 1037 (quoting Clark v. Allen, 11 R.I. 439, 443-44 (1877)).
34 Id. at 1037 (emphasis added).
35 Id. at 1036.
36 Id. at 1037.
37 This is a narrative of “expansion” because at early common law, choses in action were not assignable. Assignability grew with the rise in importance of negotiable paper, and is in some ways a mirror image in this aspect of the rise of a commercial law of contract. See 1 Williston Law of Contracts, §§ 404-406, 410, 414. See also, Morton J. Horwitz, The Transformation of American Law, 1780-1860, pp. 212-226 (1977).
38 139 S.W. 51 (Tex. Civ. App. 1911).
39 Id. at 52.
40 Id. at 55; regarding which jurisdictions fall into which camp, the court continues: “The courts of Alabama, Kansas, Kentucky, Missouri, Pennsylvania, and Virginia hold with Texas that such assignments are invalid, on the ground that they are opposed to public policy.” Id. at 56.
41 In technical terms, the court overstates the case made by those jurisdictions that allow assignment, in that they all view the insurance policy as a chose in action, and not as a chattel. Although this is a minor and technical distinction (which the court in a later paragraph abandons), in this passage it serves to expand the opposing claim, making it an easier target to combat (for instance, if insurance policies were assignable as chattels, rather than choses in action, defenses by the insurance company against the party procuring the insurance, such as fraud, would not be available against the assignee – a clearly undesirable result). On the difference between assignment of chattels and choses in action, see 1 Williston, Law of Contracts, § 404.
42 Horwitz, Transformation of American Law, 212.
43 See id. at 212-226.
44 139 S.W. 51 (Tex. Ct. Civ. App. 1911).
45 Id. at 58.
46 Id. at 58 (emphasis added).
47 “And then will I profess unto them, I never knew you: depart from me, ye that work iniquity.” Matthew 7:23.
48 The court’s attention to the “gambling” relationship, which takes for granted that commodities futures trading is a form of wagering, allows it to circumvent what might be a deeper problem with assignments, which is the problem of the adequacy of consideration.
49 222 U.S. 149 (1911).
50 Id. at 154.
51 Id.
52 Id. at 155-156, citing Stat. 14 George III., chap. 48.
53 Id. at 155.
54 Id. at 156.
55 13 N.Y. 31, 39 (1855).
56 158 N.Y. 24 (1899).
57 Id. at 31.
58 Id. at 33.
59 Recall that this was precisely the maneuver courts employed in dealing with the problem of wagering in commodities. This is still the modern view:
The standard for determining whether the presumption of validity [of assignment] has been successfully rebutted is the ‘intentions of the parties’ test. Pursuant to this standard, courts examine a number of factors in the quest to determine whether the assignment was a subterfuge for a wagering contract. However, no single factor alone has been identified as controlling on the issue. Each factor must be considered in combination with the underlying facts and circumstances of the case.
Parker, “Lack of Insurable Interest,” 87-88.
60 Steinback, 158 N.Y., at 31.
61 Id. at 32.
62 Id. at 30-31.
63 Connecticut Mut. Life Ins. Co. v. Schaefer, 94 U.S. 457, 460 (1876).
64 Chamberlain v. Butler, 86 N.W. 481, 482 (Neb. 1901).
65 For representative rhetoric regarding the adoption of the good faith test, see, Finnie v. Walker, 257 F. 698, 700 (2d Cir. 1919) (“A life insurance policy taken out in good faith by the insured, with no idea of assigning it, can afterwards, in good faith, and for a valuable consideration, be sold and assigned to one who has no insurable interest in the life…”). For additional cases adopting the good faith test, see, e.g., Grigsby v. Russell, 222 U.S. 149, 156 (1911); Bankers’ Reserve Life Co. v. Matthews, 39 F.2d 528, 529 (8th Cir. 1930); Mechanics’ Nat. Bank v. Comins, 55 A. 191, 193 (N.H. 1903); Brett v. Warnick, 75 P. 1061, 1064 (Or. 1904).
66 William Reynolds Vance, Handbook of the Law of Insurance 103 (1904); see also Patterson, “Insurable Interest in Life,” 403-06.
67 39 F.2d at 529.
68 Similarly, in another case, the Supreme Court of Arkansas validated an assignment, even though the policy was procured with the intention of assigning it to one who had no insurable interest. See Prudential Ins. Co. of America v. Williams, 168 S.W. 1114 (Ark. 1914). In that case, the insured procured the policy with the intention of assigning it to a party who died before the assignment could be executed, and then the insured assigned it to a third party, whose right to the proceeds of the policy was upheld.
69 See, e.g., Steinback v. Diepenbrock, 158 N.Y. 24, 31 (1899):
The insured, instead of taking out a policy payable to a person having no insurable interest in his life, can take it out to himself, and at once assign it to such person. But such an attempt would not prove successful, for a policy issued and assigned, under such circumstances, would be none the less a wagering policy because of the form of it.
For additional cases where courts raise the hypothetical case of assignment at the time of procuring the policy, see, e.g., Grigsby v. Russel, 222 U.S. 149, 156 (1911); Chamberlain v. Butler, 86 N.W. 481, 483 (Neb. 1901); Rylander v. Allen, 53 S.E. 1032, 1037 (Ga. 1906):
Of course, one cannot do indirectly what the law prohibits him from doing directly, and as it is unlawful for a person to effect insurance upon the life of another in the continuance of whose life he has no interest, an invasion of this rule by the issue of a policy to one who has an insurable interest, and its immediate assignment, pursuant to a preconceived intent, to one without such interest, who undertakes to pay the premiums for his chance of profit upon his investment, is ineffective, and such assignment is void.
70 Warnock v. Davis, 104 U.S. 775 (1881). The only real difference was that in Warnock, nine tenths of the insurance was assigned to a mutual agency of which the insured was a member, rather than, as in Matthews, to his cousin.
71 Finnie v. Walker, 257 F. 698, 701 (2d Cir. 1919).
72 Warnock v. Davis, 104 U.S. 775, 781 (1881); McRae v. Warmack, 135 S.W. 807, 811 (Ark. 1911).
73 Patterson, “Insurable Interest in Life,” 404-05.
41
8
ACQUISITIVE INDIVIDUALITY VERSUS COMMUNAL EFFICIENCY: CONFLICTING POLICIES AND THE LOVE/HATE RELATIONSHIP WITH RISK
The analytical emptiness of the good faith standard as a tool for distinguishing legitimate from illegitimate contracts exposes a gap in the law. As in the case of the intent of the parties to commodities futures contracts, the gap is filled, not with a technical legal test, but with a conflict among policies. On the one hand, there is the policy of limiting wagers. It bears emphasis that the law is not interested in eradicating wagers, since elements of risk exist in the most legitimate transactions and the law has no way of definitively distinguishing wagers from legitimate contracts. Rather, the policy in its most defensible form is the more modest one of limiting wagers in such a way that gambling as a vocation does not become attractive. Thus, the limitation of the capacity to wager is positioned within a wider goal of the law and of emerging capitalistic culture generally, which is to foster acquisitive individuality. The chief objection to the wagering contract is that it leads to unearned gain. And, while the law does not attempt to eliminate every unearned gain, it does attempt to limit the harmful social consequences of a mechanism that allows people to get something for nothing. Edwin Patterson, writing in 1918 and defending the limitation of wagers through insurance, explains why the law must combat a vocation of wagering, while wagers that do not amount to a vocation will not have the same harmful consequences:
Vaguely, a sense of antagonism is aroused in a community of workers against persons who obtain a means of livelihood without participating in the machinery of social or economic production and distribution – in short, against ‘social slackers’. More specifically, unearned gains lead to idleness, and the wagerer becomes a social parasite. Useful business and industry are thereby discouraged. On the moral side, idleness leads to vice; and the impoverishment of the loser entails misery, and, in consequence, crime.160
Similarly, modern commentators have noted that gambling, in its various forms and especially when it offered itself as a vocation, stood in defiance of an ethic of industry deemed necessary to support a productive labor force. By holding out the promise of instant wealth, gambling undermined individual motivation to accumulate money gradually through employment.161
On the other side of the gap exposed by the lack of a technical legal mechanism to distinguish gambling from legitimate contract stood an ideal of communal efficiency. In
160 Edwin W. Patterson, “Insurable Interest in Life,” 18 Colum. L. Rev. 381, 386 (1918) (footnotes omitted).
161 Viviana A. Rotman Zelizer, Morals and Markets: The Development of Life Insurance in the United States 88 (1979); See also, Karen Halttunen, Confidence Men and Painted Women: A Study of Middle-class Culture in America, 1830-1870, p. 17 (1982); Ann Fabian, Card Sharps, Dream Books, and Bucket Shops: Gambling in 19th Century America 61 (1990); Vicki Abt, et. al., The Business of Risk: Commercial Gambling in America 208 (1986).
42
the simplest terms, “Life insurance emerged as the most efficient secular risk-bearing institution to handle the economic hazards of death through cooperative self-help.”162 But the principle of efficient risk bearing was hardly limited to life insurance, and the policy of efficient risk management bears further elaboration, especially in its relation to both insurance and speculation in commodities futures. Commentators who tried to legitimize various forms of economic activity that resembled gambling repeatedly resorted to the vocabulary of professionalism and specialization. New York Life’s commissioned history, referred to earlier, is a prime example, where the author distinguishes modern life insurance from the older, wagering form, by claiming that insurance “has become an exact science in which predictions can be made with all the certainty of mathematical calculations.”163 Other expressions of the policy were less vulgar and more detailed.
Early in the century, economists elaborated the relationship between increasing efficiency and encouraging speculation, laying the basis for the market consciousness that to a great extent still governs modern conceptions of economic activity. In Risk, Uncertainty and Profit, Frank Knight explained that the principles behind insurance practice, namely consolidation and specialization, actually underlay even the basics of production for a market.164 Knight identified the problem of uncertainty as the central obstacle to rational economic behavior. Uncertainty is reduced by grouping like instances, i.e., consolidation, which can then be subjected to probabilistic calculation. Whereas for the individual, specific instances of uncertainty are unpredictable, when an institution can group instances, it can treat the results as known on the basis of probabilities, and thus plan rationally for the outcomes. Secondly, those institutions that can best group instances are selected to deal with uncertainties. This is known as specialization. Knight went on to explain that while this model of action is the conscious and overt principle in organizing the insurance industry (with insurance companies grouping together the instances of death, uncertain for the individual but highly certain for large groups on the basis of actuarial statistics), the same principle actually explains the relationship of consumers to producers: while individual consumers’ wants are unknown in advance even to the consumers themselves, producers are able to plan for the future by producing for an anonymous group, whose wants can be predicted.
The clue to the apparent paradox is, of course, in the ‘law of large numbers,’ the consolidation of risks (or uncertainties). The consumer is, to himself, only one; to the producer he is a mere multitude in which individuality is lost. It turns out that
162 Zelizer, Morals and Markets, 89.
163 Lawrence F. Abbot, The Story of NYLIC: A History of the Origin and Development of the New York Life Insurance Company from 1845 to 1929, p. 12 (1930).
164 Frank H. Knight, Risk, Uncertainty and Profit 233-263 (1921). See also Henry Crosby Emery, Speculation on the Stock and Produce Exchanges of the United States (Faculty of Political Science of Columbia Univ. ed., 1896).
43
an outsider can foresee the wants of a multitude with more ease and accuracy than an individual can attain with respect to his own.165
The two principles of reducing uncertainty to measurable risk are consolidation and specialization, and each is associated with specific economic institutions or practices. The best known device for dealing with uncertainty through consolidation is insurance, with life insurance being its most highly developed form.166 And significantly, “[t]he most important instrument in modern economic society for the specialization of uncertainty…is Speculation,” with its best illustration in business at large being the hedging contract:
By this simple device the industrial producer is enabled to eliminate the chance of loss or gain due to changes in the value of materials used in his operations during the interval between the time he purchases them as raw materials and the time he disposes of them as finished product, ‘shifting’ this risk to the professional speculator. It is manifest at once that even aside from any superior judgment or foresight or better information possessed by such a professional speculator, he gains an enormous advantage from the sheer magnitude or breadth of the scope of his operations.167
Thus, when Justice Holmes calls speculation through the commodities futures markets “the self-adjustment of society to the probable,”168 or when Professor Patterson devotes an article to legitimating hedging contracts in commodities,169 they are actually relying on an incipient form of the policy argument fleshed out by economists such as Knight. Speculation, according to this argument, is an important part of the forward motion of a capitalistic market, a sort of engine of the progress of economic rationality. Taken to its extreme, this policy would allow for the development of vocations in risk management, despite the fact that these can be characterized by some as getting something for nothing. But, while it is easy to accept this vision as if it offers a simple and sweeping solution to the tension generated by the law’s antipathy to gambling (by seemingly eradicating that antipathy entirely), it is important to note that the tension is not in fact resolved. And the lack of resolution is not dependent merely on an anachronistic attachment to a pre-modern deterministic or religious world-view. In fact, the policy of limiting gambling advances the goal of constructing acquisitive individuality, nourishing the work ethic which is also presented as a necessary engine of economic progress. In other words, the conflict among policies is not between a pre-market or anti-capitalist policy and a pro-market or capitalist policy; rather, both sides of the policy divide fit squarely into an emerging capitalist society. The policies simply represent conflicting positions within a market oriented
165 Knight, Risk, Uncertainty, and Profit, 241.
166 Id. at 245-248.
167 Id. at 255-256.
168 Chicago Board of Trade v. Christie Grain & Stock Co., 198 U.S. 236, 247 (1905).
169 Edwin W. Patterson, “Hedging and Wagering on Produce Exchanges,” 40 Yale L.J. 843 (1931).
44
society regarding the question of which cultural attributes of that society require the law’s support or censure.
If analyzed closely, there are many aspects of the judicial rhetoric just canvassed that would yield clues to the shift to a modern market sensibility, and even a theory of the individual that underlies that shift. While it is impossible to undergo a thorough examination of these issues here, a few brief comments may be suggestive. One example is the issue of time. The opinions examined herein have a special concern with time, and its changing meaning and value. “From the time he plants his seed…” the farmer has lost control of the value of time, and he is gambling.170 Theorists examining cultural formations have concentrated on the shifting conceptions of time as a central aspect of the shift to modernity.171 The Marxist cultural theorist Georg Lukacs lamented that industrial capitalism had alienated individuals through a process of reification, a central aspect of which was the reduction of time into an uncontrollable, external influence on people, who were transformed into cogs in a machine. “The contemplative stance adopted towards a process mechanically conforming to fixed laws and enacted independently of man’s consciousness and impervious to human intervention, i.e. a perfectly closed system, must likewise transform the basic categories of man’s immediate attitude to the world: it reduces space and time to a common denominator and degrades time to the dimension of space.”172 Lukacs’ fundamental concern seems to be that time, once an intangible and infinitely meaningful quality, is reduced under conditions of industrial capitalism to yet another one-dimensional and measurable function of money. While they did not use the philosophical articulations available to Lukacs, turn-of-the-century judges experienced some of the same impulses. Insurance and commodities trading, with their constant reminders of many “futures” on the one hand, and the promise of turning time into money without intervening production on the other, are contexts where the shifting nature of time heightens the uncertainty and even the fear surrounding a transition to modernity.
Cultural critic Walter Benjamin’s work is even more pointed in drawing the connections between time, modernity, and gambling. Writing on Baudelaire, Benjamin
170 Albers v. Lamson, 42 N.E.2d 627, 630 (Ill. 1942).
171 See, e.g., Stephen Kern, The Culture of Time and Space 1880-1918 (1983); Peter Galison, Einstein’s Clocks, Poicaré’s Maps: Empires of Time (2003)
172 Georg Lukacs, History and Class Consciousness 89 (Rodney Livingstone trans., MIT Press 1968) (1923). He continues:
Thus time sheds its qualitative, variable, flowing nature; it freezes into an exactly delimited, quantifiable continuum filled with quantifiable ‘things’ (the reified, mechanically objectified ‘performance’ of the worker, wholly separated from his total human personality): in short, it becomes space…On the other hand, the mechanical disintegration of the process of production into its components also destroys those bonds that had bound individuals to a community in the days when production was still ‘organic’. In this respect, too, mechanisation makes of them isolated abstract atoms whose work no longer brings them together directly and organically; it becomes mediate to an increasing extent exclusively by the abstract laws of the mechanism which imprisons them.
Id. at 90.
45
notes that the image of the gambler became the characteristically modern complement to the archaic image of the fencer; both being heroic figures.173 He then elaborates suggestively that time itself is different in modernity, a difference understood in part by reference to the gambler. Benjamin’s critique of modern subjectivity is more layered and complex than Lukacs’s. Rather than relying directly on economic form as a motivation of change, Benjamin analyzes the relationship between cultural forms such as architecture, literature and technological innovations, such as assembly line work, comparing the repetition involved in such work to the narcotic effect of gambling.174 Benjamin’s conception of consciousness in modernity links, in a series of complex correspondences, a change in the experience of time with changing cultural conditions from traffic signals to matches to automated factories, and all of these in turn with the experience of the gambler. The gambler becomes emblematic of modernity. The negotiations of the place of gambling in commodities and insurance contracts, then, take their place as part of a change in the notion of individuality, and a construction of a market consciousness that accompanies a shift to modernity. Benjamin quotes these lines of Baudelaire, which seem to draw out the insecurities that animate much of the conscious and unconscious policy discussion in the cases: “Keep in mind that Time’s a rabid gambler/Who wins always without cheating – it’s the law!”175
The policy divide identified in the case law should be read as a cultural conflict central to the capitalist market economy taking shape in the United States around the turn of the century. Both sides in this conflict accepted capitalism as the central mode of economic organization for the country. However, they divided on the question of how to conceptualize risk, and especially on the question of the relationship between uncertainty and the individual. When looked at as a whole, this conflict can be characterized as a love/hate relationship with risk, or an economy of appropriation and distance.176 The advantage to reading this conflict as such an economy is that it allows us to see expressions of both sides of the policy within the same work; thus, a commitment to an outcome on one side of the policy divide does not cancel the possibility of resorting to rhetoric that favors the other side. It also allows us to read, rather than one case for one judge’s view, a discourse and its effects, despite the fact that none of them were willed by any particular actor.
173 Walter Benjamin, Illuminations 178 (Harry Zohn trans., Schocken Books 1968) (1955).
174 See id. at 174-85; see also Walter Benjamin, “Paris, Capital of the Nineteenth Century,” in Reflections 146, 159-62 (Edmund Jephcott trans., 1978) (“To the phantasmagorias of space to which the flaneur abandons himself, correspond the phantasmagorias of time indulged in by the gambler. Gambling converts time into a narcotic.”).
175 Benjamin, Illuminations, 179.
176 By using the term economy, I mean to draw attention to a way of looking at rhetorical maneuvers, not merely as independent isolated arguments, but rather as part of a larger rhetorical structure. The rhetorical structure lends arguments intelligibility, but not every piece of rhetoric that seems to favor a given outcome requires that particular outcome.
46
Certain descriptions of the development of contract law early in the century point to the centrality of coming to terms with uncertainty.177 However, these descriptions not only miss the more complex negotiation of cultural models at work in the conflicts over uncertainty, they also fundamentally miscast the role of uncertainty itself as a phenomenon new to contract law as industrial concentrations grow larger.178 By assuming an objective uncertainty in economic affairs, these descriptions confuse economics with culture. Economic factors may or may not have become more uncertain, but the crisis of uncertainty was cultural.
The most visible feature in the discursive economy of appropriation and distance is the positioning of risk, chance, or hazard, in relationship to contract. On the one hand, all these types of uncertainty are marginalized as objects of contract. Thus, the rhetoric of contract law is at pains, even in its nonchalant repetitions, to show that commodities futures contracts or insurance contracts are in some way a special, marginal category of contracts. They are even given a special appellation, aleatory contracts, implying that all other contracts are free from risk and uncertainty. Thus the common refrain that a transaction, whatever its content, is valid, “provided it not be by way of cover for a wager.”179 This construction masquerades as a simple legal proposition, often presented as a bottom line, and often included in the headnotes of the reports. But we should pause over what it actually entails in the cases. From the sentence itself, we would be tempted to believe that the “wager” is a known quantity, visible to the discerning eye wherever it raises its ugly head. But in fact, in most of these cases, the court spends most of its opinion trying to divine whether the transaction in question is or is not obnoxious to public policy. And recall, this is precisely the question on which the different jurisdictions, and sometimes different courts in the same jurisdiction, simply cannot agree. The courts are
177 See, e.g., Melvin Aron Eisenberg, “Probability and Chance in Contract Law,” 45 U.C.L.A. L. Rev. 1005 (1998); Walter F. Pratt, Jr., “American Contract Law at the Turn of the Century,” 39 S.C. L. Rev. 415 (1988).
178 As Knight shows, the increase of industrial concentration and the rise of larger institutions that can group instances (whether of deaths or of consumer demand) actually decrease the objective manifestations of uncertainty. Legal scholarship often takes the rise in the importance of uncertainty in legal rhetoric at face value, simply assuming that an industrial economy generates more uncertainty than some idealized, simpler economy. From my perspective, it is more interesting to inquire into why uncertainty becomes such an important category for legal thought.
179 Hawkes v. Mobley, 163 S.E. 494, 497 (Ga. 1932). For additional cases using substantially the same construction, i.e., calling the transaction valid provided it not be done by way of cover for a wager, see, e.g., Prudential Ins. Co. of Am. v. Williams, 168 S.W. 1114, 1115 (Ark. 1914); Page v. Metropolitan Life Ins. Co., 135 S.W. 911, 912 (Ark. 1911); Rylander v. Allen, 53 S.E. 1032, 1036 (Ga. 1906); Guaranty Life Ins. Co. v. Primo, 140 S.E. 780, 781 (Ga. App. 1927); Volunteer St. Life Ins. Co. v. Buchannan, 73 S.E. 602, 604 (Ga. App. 1912); Elkhart Mut. Aid Benevolent Relief Ass’n v. Houghton, 2 N.E. 763, 767 (Ind. 1885); Reilly v. Penn Mut. Life Ins. Co., 207 N.W. 583, 585 (Iowa 1926); Chamberlain v. Butler, 86 N.W. 481, 483 (Neb. 1901); Mechanics’ Nat. Bank v. Comins, 55 A. 191, 195 (N.H. 1903); Empire Development Co. v. Title Guarantee & Trust Co., 121 N.E. 468, 469 (N.Y. 1918); In re Phillips’ Estate, 86 A. 289, 290 (Pa. 1913); Cronin v. Vermont Life Ins. Co., 40 A. 497, 497 (R.I. 1898); Roberts v. National Benefit Life Ins. Co. 148 S.E. 179, 180 (S.C. 1929); Rogers v. Atlantic Life Ins. Co., 133 S.E. 215, 217 (S.C. 1926); Crosswell v. Connecticut Indem. Ass’n, 28 S.E. 200, 201 (S.C. 1897); Shoemaker v. Harrington, 30 S.W.2d 539, 543 (Tex. Civ. App. 1930); Manhattan Life Ins. Co. v. Cohen, 139 S.W. 51, 54 (Tex. Civ. App. 1911).
47
engaged in a constructive process of naming certain contracts “wagers,” or allowing those contracts to escape that label. But while this process goes on, the refrain allows the courts to repeat the mantra, implying that while there is a question as to the legitimacy of each and every transaction, the “mere wager”180 itself is always a marginal, exterior category, which has no home within contract.
The language of marginalization is the rhetoric of containment and mastery. On its face, it implies complete control. The very act of incessant, nearly compulsive repetition, found in almost every jurisdiction, implies that the law controls the wager, and thus, even chance itself. Rhetorically, wager is controlled, tamed, expelled from contract discourse. But this almost ritualistic repetition is only a substitute for the control of gambling that the law cannot achieve.181
On the other hand, an opposed rhetoric is also at work, dispersing or disseminating the wager rather than marginalizing it. Instead of claiming that the uncertainty inherent in gambling is somehow exterior to contract, this rhetoric claims it is the essence of contract, and even that contract can be defined as the assumption of risk. This view is at least as old as Holmes’ The Common Law,182 and is popular today in the contract opinions of Chief Judge Richard Posner.183 Indeed, it has become a commonplace of legal opinions to speculate on the ubiquity of something akin to gambling in contract specifically, and in economic life generally. A rich example, complete with literary allusion, comes from a case regarding a joint venture in stock investment:
Except for those endowed with the blessings of prescience or omnipotence, the agreements of all men as to the future depend on some degree upon chance and unknown and fortuitous events.
180 Courts also favor this construction when attacking wagering, in the abstract.
181 In this, the courts reenact the child’s game of disappearance and return, fort-da, described by Freud in Beyond the Pleasure Principle. There, the child enacts the controlled disappearance and return of his toys in order to compensate himself for his mother’s disappearance, which is beyond his control. See Sigmund Freud, Beyond the Pleasure Principle 12-17 (James Strachey ed. & trans., W.W. Norton & Co. 1961) (1920).
182 See Oliver Wendell Holmes, Jr., The Common Law 299-301 (1881) (“In the case of a binding promise that it shall rain to-morrow, the immediate legal effect of what the promisor does is, that he takes the risk of the event, within certain defined limits, as between himself and the promisee. He does no more when he promises to deliver a bale of cotton.”) Id. at 300.
183 See, e.g., Nicolet Instrument Corp. v. Lindquist & Vennum, 34 F.3d 453, 456 (7th Cir. 1994) (“It is not a novel idea that an essential function of contracts is to allocate particular risks to the parties best able to bear them....”); Market Street Assocs. v. Frey, 941 F.2d 588, 595 (7th Cir. 1991) (contrasting contractual functions of allocation of risk on the one hand and setting in motion of a cooperative enterprise on the other); Spartech Corp. v. Opper, 890 F.2d 949, 955 (7th Cir. 1989) (“A principle purpose of contracts... is to allocate the risk of the unexpected... not to place it always on the promisee.”); Northern Ind. Pub. Serv. Co. v. Carbon County Coal Co., 799 F.2d 265, 275-78 (7th Cir. 1986) (asking how the parties would have assigned the risk that the performance of the contract might become impossible); Fidelity and Deposit Co. v. City of Sheboygan Falls, 713 F.2d 1261, 1269 (7th Cir. 1983) (“An important function of contracts is to allocate risk; and the performing party to a contract usually guarantees performance against at least some contingencies that are beyond his control.”).
48
‘The best laid schemes o’ mice and men / Gang aft a-gley;
An lea’e us nought but grief and pain, / For promis’d joy.
One of our most substantial and respected businesses, insurance, is premised upon the most unknowable and unpredictable contingency of all – death. The stock market, as a barometer of business success, international and domestic outlook, sales, taxes, profits, competition, and a hundred variables, not the least of which is the irrationality of mass psychology, is a notoriously volatile indicator whose fluctuations, largely beyond individual control, bestow fortunes on some men while leaving others shattered and penniless. Chancy, yes. A gamble in the legal sense rather than the vernacular, no. ‘Business may involve speculation but unless the latter is illegal it does not get down to what in modern times is the lower classification known as gambling.’ Risk, then, is not the element which makes the transaction a gamble.184
Contract law, then, has learned to live with risk. It has set itself up as a higher order, to be contrasted with that “lower classification,” gambling. Contract discourse has taken the teeth out of gambling, devolving “chance and fortuitous events” in the first sentence quoted above into a mere colloquialism, “chancy,” later in the passage. Chance intrudes everywhere in life, but only in a moderate, controlled fashion, at least as far as the “legal sense rather than the vernacular” is concerned.
This quotation is only a hint of the fact that insecurity over the status of speculative transactions arises in almost the same form today, regarding two distinct contexts closely analogous to the turn of the century cases discussed here. The first context is activity in the market for complex derivatives; the second is the new industry of viatical settlement. A brief word regarding these two issues should suffice to show that while attitudes toward gambling have changed over the last hundred years, the basic problematic of distinguishing legitimate risk allocation from illegitimate speculation is still alive and unsettled, and perhaps unsettling.
The market for financial instruments known as derivatives has grown to staggering proportions since the early 1980’s.185 For the most part, this growth is perceived as part of an extension of the rationalization of pricing risk. However, periodically, scandals involving huge losses plague the industry and generate a different kind of discourse.186 Popular discourse surrounding the derivatives markets, particularly following scandals, is
184 Liss v. Manuel, 296 N.Y.S.2d 627, 630-631 (Civ. Ct. 1968) (citation omitted).
185 The derivatives market was estimated to have a notional value of $70 trillion in 1998, 100 trillion in 2000, and 340 trillion in 2005. See Bank for International Settlements Quarterly Review, Sept 2005, available at http://www.bis.org/publ/quarterly.htm.
186 Among the more publicized scandals in derivatives trading are the collapse of Barings Bank in 1995, the bankruptcy of Orange County, California, in 1994, the losses incurred by Procter and Gamble and Gibson Greetings Inc. in derivatives trades with Bankers Trust in 1994, and the collapse of the Long Term Capital “hedge fund” in 1998. For an account of the tendency of derivatives markets to resemble gambling, see Timothy L. O’Brien, Bad Bet: The Inside Story of the Glamour, Glitz, and Danger of America’s Gambling Industry (1998).
49
The moral aversion to gambling has dissipated, but the theoretical difficulty of determining the proper way to regulate the market in risk lives on.full of references to betting and gambling, and to the fact that investment and gambling are difficult to distinguish, “since all financial products straddle that very fine line separating temperate, calculated gambles from irrational, impassioned betting.”187 Each new scandal brings with it a call for tighter regulation, with its familiar dynamic of paternalism pitted against those who claim that flexible self-regulation will always be more efficient.188 Finally, defenders of the derivatives markets today make a claim for specialization and expertise, reminiscent of Justice Holmes’ crocodile tears over the fact that “the success of the strong induces imitation by the weak, and that incompetent persons bring themselves to ruin by undertaking to speculate in their turn.”189 190
The difficulty in regulating the assignment of life insurance replays itself even more starkly. Over the last decade, a “new” industry of viatical settlement has sprung up. Viatical settlements are agreements to buy insurance policies from terminally ill policy holders, usually people suffering from AIDS, for a percentage of the value of the policy, typically between fifty-five and seventy per cent of the face value of the policy.191 In essence, viatical settlements are identical to the assignments of life policies discussed above, except that the AIDS epidemic has created a population base in dire need of cash, primarily for medical expenses, before the policies mature (at death). Seeing the potential
187 Id. at 274. For journalistic accounts of investment in derivatives characterized as betting, see, e.g., Michael Lewis, “How the Eggheads Cracked,” N.Y. Times Mag., Jan. 24, 1999, at 24; Steven Lipin et al., “Fancy Footwork: Bankers Trust Thrives Pitching Derivatives, But Climate Is Shifting,” Wall St. J., Apr. 22, 1994, at A1; Steven Lipin et al., “Portfolio Poker: Just What Firms Do With Derivatives Is Suddenly a Hot Issue,” Wall St. J., Apr. 14, 1994, at A1; Robert Trigaux, “Firms’ Stretch for Profits Could Backfire,” St. Petersburg Times, Apr. 14, 1994, at 1E.
188 See, e.g. Jaye Scholl, “The Big Fizzle: Beware of Leveraged Rocket Scientists with an Attitude,” Barron’s, Sept. 28, 1998, at 23; Randall Smith and Steven Lipin, “Beleaguered Giant: As Derivatives Losses Rise, Industry Fights to Avert Regulation,” Wall Street Journal A1, August 25, 1994, at A1; Steven Lipin and Anita Raghavan, “GAO to Join Hot Debate on Derivatives, ” Wall St. J., May 19, 1994, at C1.
189 Board of Trade v. Christie, 198 U.S. 236 (1905).
190 One recent article on the issue claims, using economic analysis, that pre-1930’s antipathy toward gambling may have had its basis in efficiency, and that the current support for lax regulation of speculative transactions in derivatives may be economically unsound. See Lynn Stout, “Why the Law Hates Speculators: Regulation and Private Ordering in the Market for OTC Derivatives,” 48 Duke L.J. 701 (1999). Legal scholarship surrounding derivatives sometimes touches on the gambling issue, but it is more often focused on the question of whether derivatives can be regulated by federal authorities as securities. See Procter & Gamble Co. v. Bankers Trust Co., 925 F. Supp. 1270 (S.D. Ohio, 1996); see also William K. Maready, Jr., “Comment, Regulating for Disaster: Federal Attempts to Control the Derivatives Market,” 31 Wake Forest L. Rev. 885 (1996).
191 See Timothy P. Davis, “Should Viatical Settlements Be Considered ‘Securities’ Under the 1933 Securities Act?” 6 Kans. J.L. & Pub. Pol’y, 75 (1997). See also Dave Luxenberg, “Comment, Why Viatical Settlements Constitute Investment Contracts Within the Meaning of the 1933 & 1934 Securities Acts,” 34 Willamette L. Rev. 357 (1998).
50
and another notes that, “Critics claim that it is ‘ghoulish’ to allow companies to financially succeed by gambling on the life expectancies of others.”The focus of the discussion has shifted, gambling has been displaced as the center of regulatory discourse, but the core conflict over what kinds of speculation will be deemed legitimate retains its resonance. for profits, the industry has grown at a very rapid pace,192 and is expanding its client base from AIDS patients to numerous terminally and chronically ill patients.193 While most of the legal discourse, again, revolves around the question of how to regulate the viatical industry,194 one commentator opened her discussion with the claim that “Viatical companies gamble on people’s lives,”195 196
I have focused on a transformative moment in the development of contract law where the question of gambling was eventually swallowed and internalized as if the problem were solved. What has come to light, instead, is that the conflict over what was gambling and what was allocation of risk was handled, and settled, not according to an analytical formula that successfully distinguished between them, but rather through a more complex and less decisive cultural negotiation and displacement of the question. The close reading of judicial rhetoric I have engaged in serves to show that legal discourse is a productive endeavor. More than straightforward prohibitions on certain types of conduct, judicial grappling with risk and uncertainty offers its audiences an image with which to identify; rhetoric does not stop at telling us what to do, it tells us what to be.
Today, the gambling label is less of a stigma, not only for dubious financial transactions, but even for plain, straightforward gambling, which has been legalized in almost all the states in some form, from numbers (the state lotteries) to poker (casino gambling). All of these legalized forms are seen as productive economic endeavors, at least as much as any of the rest of the entertainment industry. In the modern setting then, the normative question of the legitimacy of specific types of transactions is not played out by arguing over whether they are gambling (everyone is willing to admit they are), but rather, is displaced into the question of how they should be regulated, and particularly,
192 Viatical settlements were estimated at $5 million in 1989, $500 million in 1996, and were projected to grow to $4 billion by the year 2000. Miriam R. Albert, “Selling Death Short: The Regulatory and Policy Implications of Viatical Settlements (Symposium on Health Care Policy: What Lessons Have We Learned from the AIDS Pandemic?),” 61 Alb. L. Rev. 1013, 1018 (1998); Joy D. Kosiewicz, “Comment, Death for Sale: A Call to Regulate the Viatical Settlement Industry,” 48 Case W. Res. L. Rev. 701 (1998).
193 Kosiewicz, “Death for Sale,” 725.
194 See SEC v. Life Partners, Inc., 87 F.3d 536 (D.C. Cir. 1996); Davis, “Should Viatical Settlements Be Considered Securities;” Luxenberg, “Why Viatical Settlements Constitute Investment Contracts;” Michael R. Davis, “Note, Unregulated Investment in Certain Death: SEC v. Life Partners, Inc.,” 42 Vill. L. Rev. 925 (1997); Katherine DePeri, “Recent Decisions: Brokered Viatical Settlement Contracts Are Not Securities,” 70 Temp. L. Rev. 857 (1997); Elizabeth L. Deeley, “Note, Viatical Settlements Are Not Securities: Is It Law or Sympathy?” 66 Geo. Wash. L. Rev. 382 (1998); Shanah D. Glick, “Comment, Are Viatical Settlements Securities Within the Regulatory Control of the Securities Act of 1933? ” 60 U. Chi. L. Rev. 957 (1993).
195 Kosiewicz, “Death for Sale,” 701.
196 Denise M. Schultz, “Comment, Angels of Mercy or Greedy Capitalists? Buying Life Insurance Policies from the Terminally Ill,” 24 Pepp. L. Rev. 99, 103 (1996).
51
whether they should be regulated by the ultimate father figure, i.e., the federal government in the shape of the Securities and Exchange Commission or the Commodities Futures Trading Commission. This displacement represents a shift of the same normative debate, over how and how heavily transactions of this sort should be regulated and (the other side of the coin) enforced.
Commenting on the workings of legal discourse as an ideological function, Robert Gordon has argued that lawyers’ main importance derives from their contribution to the forms and categories of public discourse.197 Judicial discourse surrounding the problem of gambling in contract law around the turn of the century was involved in such an ideological function. By spinning out an economy of appropriation and distance with regard to risk, chance and hazard in the economic processes of contracting, contract discourse helped its audiences come to terms with the deep fears and uncertainties that accompanied the transition into modernity. By retaining its condemnatory critique of gambling, or “banishing its gambling doubles,”198 it played the protector of souls. And by recognizing that efficient economies required speculative activity, and that an element, albeit a controlled element of gambling existed in all economic activity, contract discourse made way for the emergence of an individual who could claim mastery even while acknowledging uncertainty. Throwing itself between the devil and the deep sea, contract helped Americans stop worrying and learn to love risk.
197 Robert W. Gordon, “Legal Thought and Legal Practice in the Age of American Enterprise, 1870-1920,” in Professions and Professional Ideologies in America 81-82 (Gerald L. Geison, ed., 1983).
198 Fabian, Card Sharps, 5.
CONCLUSION: UNDERMINING THE METAPHYSICS OF CONTRACT
In Shakespeare: The Invention of the Human, Harold Bloom recently argued that our fundamental sense of the meaning of humanity, of the multiplicity and conflict within personality, are shaped and forever changed by Shakespeare’s plays. Of course, there were human beings before the bard’s birth; but Shakespeare’s portrayals of character changed our conception of humanity so fundamentally that it is difficult to imagine what came before, or how it could have been otherwise.1 A similar dynamic is at stake in the relationship between contract and the individual.
Students of economic and political thought have long mused over the processes through which the west learned to imagine individuals as rational, autonomous, calculating, and finally, calculable. These processes have their roots as far back as the sixteenth century, and go hand in hand with an ever expanding vision of a market peculiarly hospitable to these abstract, calculating creatures.2 Late nineteenth century contract law took shape in the conflicts that were the culmination of this process of imagining the individual subject. That vision of contract, and that imagination of the subject, in turn govern the way Americans think about contract up to today.
This formulation raises two different kinds of questions: first, what is the content of this imagined subject? Second, how does the process of imagining the individual subject take place in the contractual arena?
The calculating subject is the individual with market consciousness, for whom most things can be reduced to market goods and their ultimate and ultimately abstracted measure, money. Writing at the turn of the twentieth century, Georg Simmel remarked that one could “characterize the intellectual functions that are used at present in coping with the world and in regulating both individual and social relations as calculative functions.”3 For Simmel, money is both the key to the process of becoming calculable, and the ultimate example of the kind of abstraction that cleanses objects of character. Importantly, the abstract form that represents the value of objects eventually “reflects upon the objects themselves.”:
If it is true that the art of a period gradually determines the way we look at nature, and if the artist’s spontaneous and subjective abstraction from reality forms the apparently immediate sensuous picture of nature in our consciousness, then so too
1 Harold Bloom, Shakespeare: The Invention of the Human 4-7; 12-17 (1998).
2 Two of the most provocative and enlightening accounts of these processes are Max Weber, The Protestant Ethic and the Spirit of Capitalism (Talcott Parsons trans., 3d ed. 1985) and Albert O. Hirschman, The Passions and the Interests (1977).
3 Georg Simmel, The Philosophy of Money 444 (Tom Bottomore & David Frisby trans., David Frisby ed., 2d ed. 1990) (1900).
53
will the superstructure of money relations erected above qualitative reality determine much more radically the inner image of reality according to its forms.4
The system of exchange prevalent in a developed money economy encourages recurring descriptions of objects in terms of their money value, and that in turn leads to their appreciation or understanding primarily as holders of such value, fungible in all senses. Money describes value, and objects increasingly correspond to its rationalization, precision, and calculation.
Contract at the turn of the century takes part in this same economy of generating calculability. The imagined individual of theoretical contract discourse begins as an abstraction describing the real world persons, natural and corporate, who engage in contractual activity. But this image does not stop at description. Instead, it transforms the objects it purports to describe. The “inner image of reality” is transformed as it sheds the characteristics of communal connection, passion, anxiety, beneficence, trust, in favor of precision and cold calculation.
Perhaps the leading contemporary ideologue of free contract summed up this vision: “[I]n the United States more than anywhere else, the social structure is based on contract, and status is of the least importance. Contract, however, is rational – even rationalistic. It is also realistic, cold, and matter-of-fact…In a state based on contract sentiment is out of place in any public or common affairs.” The individual in such a state is an “isolated man,” independent and sovereign; he has sloughed off ties to family, leaving himself relations that are “open and free, but…also loose.” His personal independence has led him to the point where he has only a minimal need for government, no need of labor unions, and indeed he has reached “the point where personal liberty supplants the associative principle.”5
Classical contract theory took its cues from such a vision of the individual, first by positing this idealization as a working assumption and then reinforcing the image by relying on it as a justification for particular rules. But the idealized image was never an accurate description; indeed, acknowledged as an abstraction, it never needed aspire to accuracy. The image constructed by contract discourse at once denied interdependence and highlighted autonomy.
One source of interdependence denied by contract discourse was the world of relational pairs, whose incidences were determined by law. Relational pairs – master-servant; landlord-tenant; bailor-bailee; principal-agent; even husband-wife – appeared to contract theorists as tainted by the concept of status, and indeed by a world where interdependence was dangerously close to dependence and subservience. With the institutions of slavery and coverture still fresh in their collective legal consciousness, the
4 Id. at 445.
5 William Graham Sumner, What Social Classes Owe to Each Other 25; 39; 96 (photo. reprint 1972) (New York, Harper & Brothers 1883). See also Amy Dru Stanley, From Bondage to Contract 1-4 (1998).
54
associations of classical theorists between relational pairs and dependence was understandable.
And so, classical theorists developed a general theory of contract that in fact limited the scope of the contract idea. Labor and employment and bailment and marriage and a host of other relationships would be pushed out of what antebellum legal scholars had imagined as the realm of contract. More importantly for our purposes here, the image of the contracting individual changed the taken-for-granted background of contract discourse. For Parsons, writing at mid-century, contract ranged so broadly as to encompass even the duties of care between parent and infant. Such contractual obligation
is implied by the cares of the past, which have perpetuated society from generation to generation; by that absolute necessity which makes the performance of these duties the condition of the preservation of human life; and by the implied obligation on the part of the unconscious object of this care, that when, by its means, they shall have grown into strength, and age has brought weakness upon those to whom they are thus indebted, they will acknowledge and repay the debt.6
Contract was “coordinate and commensurate with duty;” it was animated by “common principles which all are supposed to understand and acknowledge;” it connected all members of society in “the web and woof of actual life.”7 The distance between this antebellum individual subject and classical theory’s “isolated man” is great indeed, not only at the level of imagery, but also at the level of legal rules. Could we even imagine a greater divide than that between Parsons’s discussion of the obligation implied by the cares of the past and the steadfast statement of classical theorists that past consideration is no consideration?
But the image of interdependence rooted in the past was only half the problem for classical theory. Just as threatening was a new type of interdependence looming in the not so distant future in the shape of corporate capitalism and most pointedly in its managerial organization of work. The turn of the twentieth century saw a rise in economic concentration, and with it a limitation of “ruinous competition” and an accelerated shift in employment patterns: more and more Americans worked for a small number of (giant) corporations. And the workplace was increasingly managed not by skilled workers themselves serving as shop foremen with wide discretion over work practices, but rather by an army of management engineers, equipped with a scientific technique explicitly designed to rationalize the workplace.8
6 1 Theophilus Parsons, The Law of Contracts 3–4 (1st ed., Boston, Little, Brown & Co. 1853).
7 Id. at 4.
8 See David Montgomery, The Fall of the House of Labor: The Workplace, the State, and American Labor Activism, 1865-1925, pp. 214-56 (1987); Naomi R. Lamoreaux, The Great Merger Movement in American Business, 1895-1904, pp. 1-13 (1985); Alfred D. Chandler, Jr., The Visible Hand: The Managerial Revolution in American Business 411-14; 484-93 (1977); John Fabian Witt, The Accidental Republic: Crippled Workingmen, Destitute Widows, and the Remaking of American Law 103-09 (2004); James
55
Livingston, Origins of the Federal Reserve System: Money, Class, and Corporate Capitalism, 1890-1913, pp. 55-57 (1986).
Two aspects of this transformation bear emphasis. First, economic concentration under the corporate form had wide ranging cultural effects. It changed not only business practices, but also people’s perceptions of the shape of the market, the social body and its elements. Critics of economic concentration as well as its most ardent proponents were joined in understanding the rise of the corporation as entailing the decline of entrepreneurial capitalism and with it, the decline of the freeholder or small producer as the model of the modern subject. Journalist and cultural critic Walter Lippmann, for example, claimed that corporate concentration was “sucking the life out of private property,” and that theories of autonomous personality based on older notions of property would have to be reexamined if not discarded altogether. John D. Rockefeller understood the significance of the new corporate order in even simpler terms: “The day of combination is here to stay. Individualism is gone, never to return.”9
Second, just as the number of people working in large industrial concerns was mushrooming, scientific management was cutting away at the individuality and the autonomy of the worker. Frederick Winslow Taylor, one of the founders of scientific workplace management, claimed that scientific management involved “a great mental revolution,” a revolution geared perhaps more towards managers than workers. With actual production processes broken down to the minutest details of physical movement, workers often felt like they were being reduced to parts in a machine, and new managers were encouraged to view laborers instrumentally. While some would rail against the mechanization of the worker’s body as others would hail the advent of new levels of cooperation, one thing was clear: the decline of the individual. As Taylor testified before Congress in 1912, the new scientific management would be “entirely impossible with the independent individualism which characterizes the old type of management.”10
Against this background, the legal arena was one more locus of cultural engagement over the shape of the individual. As John Witt has recently shown, one of the key inroads that scientific management would make in transforming traditional individualism was through workmen’s compensation programs. These programs enhanced managerial responsibility and with it managerial control, and their working principle was that workplace accidents and consequently employees had to be managed in the aggregate, rather than as individuals. Lawyers were quick to understand that sanctioning workmen’s compensation programs would erode at least the legal image of individualism and personal responsibility embedded in tort law. By the mid 1910’s, however, the battle over
9 Walter Lippmann, Drift and Mastery: An Attempt to Diagnose the Current Unrest 45 (William E. Leuchtenburg ed., 1961) (1914); Rockefeller quoted in Alan Trachtenberg, The Incorporation of America: Culture and Society in the Gilded Age 86 (1982). See also James Livingston, Pragmatism and the Political Economy of Cultural Revolution, 1850-1940, pp. 66-77 (1994).
10 Frederick Winslow Taylor, “Taylor’s Testimony Before the Special House Committee,” in Scientific Management 30-31; 76 (1947). See also Livingston, Pragmatism and Cultural Revolution, 89-95.
56
workmen’s compensation had been fought, and the legitimacy of workmen’s compensation statutes had been established.11
Classical contract theory was wary of interdependence in both these forms, but it reached out both to the past and the future in order to build an image of the contracting individual. The imagined individual subject of classical theory was in part an allusion to the republican tradition. This was the individual imagined as self-possessed property holder, sole entrepreneur, responsible and independent. Indeed, this aspect of the contracting subject is figured quite precisely in what historians refer to as free labor ideology.12 The actual existence or prominence of such a contracting subject is secondary; the figure of such a subject was clearly salient, its image forming a clear point of identification in building a theory of contract.
The other aspect of classical theory’s imagined individual was forward looking, embodying a spirit of calculative rationality difficult to imagine prior to the classical period. Interestingly, the spirit of calculation is closely analogous to that evinced in scientific management itself. The cardinal feature of the calculative ideal is the ability to make decisions on the basis of functional equivalents, which requires that the decision-making agent be able make accurate and precise comparisons among the elements of exchange. The structurally necessary condition for such calculation, as the founders of modern sociology have famously shown, is a developed money economy. But while money is a necessary condition, by itself it is not sufficient. In order for calculation to take hold, market actors must be able to view exchanges abstractly, paring away extraneous features that threaten to cloud the essence of exchanging values. In its purest form, calculation entails a leveling of all goods, services, assets, or utilities potentially available to an individual. For the calculating attitude to be complete, all qualitative differences are erased, and all things may be compared as values, endlessly interchangeable for one another.13
Classical contract assumed contractors who could calculate in this abstract manner, not as a matter of description, but as a matter of theory. The assumption of calculation is encapsulated in the theory of consideration, which at once strips the past of meaning (past consideration is no consideration) and at the same time assumes equivalence while denying the law’s capacity for examining consideration’s adequacy. The refusal to examine the adequacy of consideration is a statement of contract law’s confidence that contracting parties always calculate and trade on the basis of constitutively equivalent values. What
11 See Witt, Accidental Republic, 109-22; 171-86.
12 See, e.g., Christopher L. Tomlins, Law, Labor, and Ideology in the Early American Republic 259-92 (1993); Robert J. Steinfeld, The Invention of Free Labor 147-56 (1991); Stanley, From Bondage to Contract, 1-10.
13 See Simmel, Philosophy of Money, 443-46; 1 Max Weber, Economy and Society 80-94; 107-09 (Guenther Roth & Claus Wittich eds., 1978).
57
Ian Macneil has called “presentiation” or the bringing of future value to a present exchange, is an additional aspect of contract’s commitment to the calculating attitude.14
Clearly, few human beings actually approach this calculative ideal. However, there is a contracting individual who more closely aspires to it: the corporation. The corporation, as disembodied individual subject, comes close to assuming the powers of abstraction and calculation that contract theory lays at its own foundations. The corporation ignores affective ties with impunity (and without pangs of conscience), indeed advancing as its virtue the seeking of profit for its shareholders. It can plausibly be characterized as single-minded. To adapt Karl Polanyi’s phrase, it subordinates society to the market.15 And thus, it is the corporation that becomes the model of contractual man. But if the corporation is the imagined individual of modern contract, and if, to turn a phrase on its head, contract would become the nexus of corporations, what place would autonomy hold in in the vision of contract? Would justifications of contract that rely on autonomy have a place in a world of contract based on the corporation as the contracting subject?
To sum up: The abstracted ideal subject of classical contract teetered on a precarious perch between two different forms of interdependence, one based in the past; the other, in the future. The past was the interdependence of standardized relationships, of local communities, of a well regulated society; the future would be the interdependence of large scale industrialized society, of man in the organization. At the same time, the idealized subject reached out to two different images of independence and autonomy, one culled from the past and one in the process of becoming. From the past came the republican image of the self-possessed individual, the product of free labor ideology; from the future, the ultra-rational calculator. The work of creating the individual subject in contract discourse may then be seen as double: on the one hand, a distancing from past and future (in short, from history); on the other, an appropriation of idealized elements of that same history. The case-law is not the advancement of a position in these debates, but rather a locus of cultural conflict. It exhibits a working through, a negotiation, an endless series of reformulations of possibilities of the position of the subject, together working toward a mediation of conflicting visions.
I have concentrated on three realms in which the calculating subject was conjured and reinforced by the classical revolution in the conception of contract. By banishing gift promises from the kingdom of the enforceable, contract theory helped purge the complex entanglements of the past. Rationalizing consideration doctrine meant limiting the ways in which obligations based on family and friendship, rather than calculable economic
14 “Presentiation is a way of looking at things in which a person perceives the effect of the future on the present… [T]he presentiation of a transaction involves restricting its expected future effects to those defined in the present, i.e., at the inception of the transaction.” Ian R. Macneil, “Contracts: Adjustment of Long-Term Economic Relations Under Classical, Neoclassical, and Relational Contract Law,” 72 Nw. U. L. Rev. 854, 863 (1978). See generally Ian R. Macneil, The New Social Contract (1980).
15 See Karl Polanyi, The Great Transformation 68-76 (1944).
58
interaction, could be recognized and integrated into legal duties. By internalizing the logic of speculation and insurance, contract provided for the taming of an uncertain present. Statistical calculation, based on the law of large numbers, of the chances of rise and fall in value or of life and death, fed the illusion of a world susceptible to scientific management. Finally, by positing the contracting parties as the sole source of obligations, a formal vision of contract put the individual in control of a future he may never have considered.
So how does this calculating subject become the individual of contract? As should be clear, it is not a question of a particular doctrinal rule being adopted or rejected. No rule of contract law could establish the image of the autonomous individual as the subject of contract. In that sense, there is no position within the discourse upon which the shape of the individual turns. This is because subjects are created by discourse itself, and not by a position within that discourse. It is not the articulation of any particular argument in the debates over contract rules that creates the individual, but rather the framework of the debate itself. And the framework, by its very ubiquity, becomes almost unseen, nearly invisible. In this sense, imagining the individual is an ideological project: the “individual” is a role in the drama of private ordering. That role is created by the balance of positions in a discourse, a discourse whose persuasive force hinges on its ability to veil its own constitutive power.
The work of the classical revolution in contract was to establish a new framework for the debate of contractual questions. This framework in turn, at once relied on and established a new contractual subject: autonomous, calculating, and calculable. The success of the framework lay in establishing the parameters for argumentation. The framework was formal, then, in just the sense that formality is considered in art, as Bloom and Simmel both tell us. It establishes the rules of relevance, the criteria of visibility. Validity of the contractual relation turns, within the new framework, on bargains that make up economic exchange. Personal loyalties, moral obligations, and familial connections are expunged. The fear of damnation is submerged into the mechanics of a rational coping with risk. The indeterminacy of the future is reduced to an all-encompassing exchange of entitlement at the moment of contract formation. We become interested only in the question of the presence of a formal bargain. Finally, we translate the idea of the formal bargain into an undertaking that can only be adopted by a willing free agent, and we label the undertaking a promise.
Thus, with contractual obligation having been engulfed by the classical framework, it is widely accepted, within legal academia and outside it, that contract law is about enforcing promises.16 That acceptance is the first measure of the success of the classical revolution in contract thinking. More than positing a new definition of contract, the
16 One clear indication stems from definitions: Pollock’s definition discussed at length in chapter one became the basis for the most traditional and widely accepted American definitions of contract. See Restatement of Contracts § 1 (1932) (“A contract is a promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty.”); Restatement (Second) of Contracts § 1 (1981) (same); 1 Samuel Williston, The Law of Contracts § 1 (1st ed. 1920) (“A contract is a promise, or set of promises, to which the law attaches legal obligation.”).
59
classical revolution was so sweeping as to generate a reinterpretation of the history of contract.17 Based on an understanding instilled in every student of contract since the late nineteenth century, we have all been trained to read the history of contract backwards, as the often misunderstood but finally perfected art of enforcing promises. It has become nearly impossible to read the history of contract without initially conceiving of contract as an issue of enforcing promises, whence the necessity of dividing promises into the enforceable and unenforceable kinds. In this sense, the classical thinkers established a metaphysics of contract, reasoning that earlier conceptions of contract were primitive, unperfected, incomplete, but that the real basis of contract was eternal.
My claim in this book has not been that all such views are based on a misunderstanding. Indeed, as much as it is a mode of economic regulation, contract is a conception, an intellectual construct: it is primarily what people believe it to be. The popular belief is not wrong. But there may be better beliefs available, if someone has the impulse to look. This book does not seek to establish an alternative metaphysics of contract. It does, however, suggest that it would be more useful to think about contract as a framework for cooperation, the central element of which is the set of relationships whose terms are potentially regulated by the state.18 This conception is both a better account of judicial practice, and a way to improve on that practice by ridding it of those commitments that have the effect of limiting contract’s fairness-promoting, or redistributive potential.19 Contract is a conception, and thus, it may be reconceived, or reimagined. A prod to our imagination, and a reminder that the current conception is neither timeless nor transcendent, is the fact that only a hundred and fifty years ago, contract was conceived of quite differently. The transformation of contract is tied to complex economic and social changes, but its technical doctrinal manifestation is visible in the work of classical theorists. My claim here has been that what classical contract theory undertook piecemeal, it achieved wholesale. The rhetorical framework that made enforcing promises into the centerpiece of contract retains its power today, and perhaps is the major factor limiting contract’s transformative potential.
17 Grant Gilmore famously commented that classical scholars, primary among them Holmes, Langdell, and Williston, had to perform “major surgery” on the cases in order to arrive at their general theory of contract, and he offered competing readings of several leading cases to justify his viewpoint. See Grant Gilmore, The Death of Contract 24 (2d ed. 1995). Gilmore’s history and theory have become objects of routine disparagement, but Gilmore’s first calling was literary criticism, and his insights into the Nietzschean mode by which the classical interpretation of contract became dominant, and its violence in ousting previously popular interpretations of contract, remain salient. By subjecting the cases to a rereading, and by emphasizing how controversial the classical interpretations and classifications of the cases were when they appeared, Gilmore reminds us of the creative power of classical theorizing.
18 One of the important parts of such a view of contract would be some account of how potential regulation works, not only when the potential is exercised, but also when it remains in the shadows, since the refusal of the state to exercise power over a given relationship allows whoever wields power within the relationship to violate the relationship’s norms with impunity.
19 At least one scholar has made the case that the best reading of the history of contract should place the fairness of distribution at its center, while retaining the focus on promise enforcement. See James Gordley, “Enforcing Promises,” 83 Cal. L. Rev. 547, 548 (1995).
Unlike many forms of casino gambling, in parimutuel betting the gambler bets against other gamblers, not the house. The science of determining the outcome of a race is called handicapping
It is possible for a skilled player to win money in the long run at this type of gambling, but overcoming the deficit produced by taxes, the facility's take, and the breakage is difficult to accomplish and few people are successful at it.
Parimutuel betting (from the French language: pari mutuel, mutual betting) is a betting system in which all bets of a particular type are placed together in a pool; taxes and a house take are removed, and payoff odds are calculated by sharing the pool among all placed bets.
The parimutuel system is used in gambling on horse racing, greyhound racing, jai alai, and all sporting events of relatively short duration in which participants finish in a ranked order. A modified parimutuel system is also used in some lottery games.
Parimutuel betting differs from fixed odds betting in that the final payout is not determined until the pool is closed – in fixed odds betting, the payout is agreed at the time the bet is sold.
different types of bets, in which case each type of bet has its own pool.
box – a box can be placed around exotic betting types such as exacta, trifecta or superfecta bets. This places a bet for all combinations of the numbers in the box. A trifecta box with 3 numbers has 6 possible combinations and costs 6 times the betting base amount. A trifecta box with 5 numbers has 120 possible combinations and costs 120 times the betting base amount. In France, a box gives only the ordered permutations going along an ordered list of numbers such that a trifecta box with 6 numbers would cost 20 times the base amount
http://en.wikipedia.org/wiki/Spread_betting
Spread betting is a term used to describe various types of wagering on the outcome of an event, where the pay-off is based on the precision of the wager, rather than a simple binary outcome (win or loss). A bet is made against a 'spread' (or index), on whether the outcome will be above or below the spread.
The general purpose of the spread is to create an active market for both sides of a wager, even if, a priori, the expected outcome of the event may be tilted in favour of one side or the other
Spread betting was invented by Charles K. McNeil, a math teacher from Connecticut who became a bookmaker in Chicago in the 1940s His students included John F. Kennedy. He was also a securities analyst in Chicago.
In 2004 Cantor Fitzgerald launched the spread betting exchange Cantor Spreadfair which matches up spread bettors opposing views and allows them to bet with each other. This removal of the faceless bookmaker allows clients to bet at the spread size and monetary level that they request, and in turn this creates tighter spread magin which in turn allows users to lose less and win more than with the non exchange spread betting firms.
Spreads in the financial industry
By far the largest part of the official market in the UK concerns financial instruments; the leading spread betting companies (IG Index/IGMarkets, City Index, Cantor Index, Financial Spreads, CMC being amongst them) either make all their revenues from financial markets or have sports operations dwarfed by the financial side. For example, in the figures for the second half of 2006, the income derived from financial spread betting at IG Group, the largest of the companies, was £29.3m, compared to £3.8m in sports. Financial spread betting in the United Kingdom closely resembles the futures and options markets, with the major differences consisting in (a) the fact that the 'charge' occurs through a wider bid-offer spread and (b) the different tax status of spread-betting compared to exchange instruments (c) the flexibility of spread betting, which, not limited to exchange hours or definitions, can create new instruments relatively easily (e.g. individual stock futures), trade 24-hours, guaranteed stop losses and (d) the trading being off-exchange, with the contract existing directly between the market-making company and the client, rather than exchange-cleared.
Unlike fixed odds betting the amount won or lost can be very large, as there is no single stake to limit the maximum losses. However, it is usually possible to place a "stop loss" with the bookmaker, automatically closing the bet if the value of the spread moves against the better by a specified amount.
A betting exchange is a peer-to-peer gambling website acting as a broker between parties for the placement of bets. The concept is similar to that of a stock exchange or a futures exchange, where in this case the commodity being traded is a bet, rather than a stock or futures contract
The concept was first brought to the public by the UK website Flutter.com in May 2000 in person-to-person betting form, followed closely by UK-based Betfair in June 2000. Betfair embraced a pure exchange model - one Flutter later adopted and even improved upon in places - but first-mover advantage proved decisive for Betfair. Though Flutter managed to climb to a reported 30% market share, Flutter's backers were content to broker a merger which left Betfair the dominant partner by a reported ratio of 84:16. Post merger, Flutter's customers were transferred to Betfair's system, which was later upgraded to embrace some of Flutter's functionality. Betfair went from strength to strength and controls a reported 90% of global exchange activity today
Gamblers whose betting activities have traditionally been restricted by bookmakers (normally for winning too much money) have found these sites a boon since they are now able to place bets of a size unrestricted by the exchange.
Exchanges are not suited to unrestricted multiple parlay betting
Exchanges also offer the opportunity to lay, which is to bet that a selection will lose. This is the position bookmakers have traditionally taken when offering a bet to somebody to back that the outcome will win.
As every bet transacted requires a backer and a layer, and the betting exchange is not a party to the bets transacted on it,
Laying one horse in a race is just the same as backing all of the other horses to win.
The fact gamblers can now lay outcomes on the exchanges has resulted in criticism from traditional bookmakers
In the summer of 2004, Betfair provided data to investigators, including the City of London Police which on September 1 lead to 16 arrests on charges related to race fixing. Among those arrested was champion jockey Kieren Fallon, whose case remains before the courts.
The advent of the betting exchange has given rise to a new type of gambler - the trader. Traders are generally not concerned with the final outcome of an event, but instead bet on both sides of a proposition prior to the start of the event. If he can back the proposition at longer odds than he lays he will make a profit. Almost all betting exchanges charge commission on net winnings only, which suits the trader's high turnover, low profit strategy.
The profit or loss for a trader will typically be no more than 10% of the total amount of his combined back and lay stakes - so to make meaningful amounts of money a trader needs to commit a relatively large amount of capital.
The parimutuel system was invented by Parisian perfume maker Joseph Oller in 1865 when asked by a bookmaker friend to devise a fair system for bettors which guarantees a fixed profit for the bookmaker.
The large amount of calculation involved in this system led to the invention of a specialized mechanical calculating machine known as a totalisator, "automatic totalisator" or "tote board".
The first was installed at Ellerslie Racecourse, Auckland, New Zealand in 1913; U.S. introduction was 1933 at Arlington Park near Chicago IL.
Parimutuel gambling is frequently state-regulated, and offered in many places where gambling is otherwise illegal.
Parimutuel gambling is often also offered at "off track" facilities, where players may bet on the events without actually being present to observe them in person.
With introduction of Internet gambling has come "rebate shops".
These off-shore betting shops in fact return some percentage of every bet made to the bettor. They are in effect reducing their take from 15-18% to as little as 1 or 2%, still ensuring a profit as they operate with minimal overhead.
Rebate shops allow skilled horse players to make a steady income.
The recent WTO decision against the United States of America by the small island nation of Antigua opens the possibility for offshore horse betting groups to compete legally with parimutuel betting groups.
Weighing up the options at Lloyd's
http://www.elbornes.com/index.php?section=articles¶m=8
The Moral Hazard Myth
August 29, 2005
Dept. of Public Policy
http://www.gladwell.com/2005/2005_08_29_a_hazard.html
New Yorker
In the late nineteen-seventies, the Rand Corporation did an extensive study on the question, randomly assigning families to health plans with co-payment levels at zero per cent, twenty-five per cent, fifty per cent, or ninety-five per cent, up to six thousand dollars. As you might expect, the more that people were asked to chip in for their health care the less care they used. The problem was that they cut back equally on both frivolous care and useful care.
- "Because the costs are hidden, there is an illusion that the benefits cost nothing"
… In a moral point of view, the superiority of frugality over luxury is indisputable. It is consoling to think that it is so in political economy. ¶
- Bastiat, 1850
"Ce qu'on voit et ce qu'on ne voit pas"
(That which is seen and that which is unseen)
In the movie The Fifth Element, the parable of the broken window is retold (without recognizing the fallacy) by Zorg (Gary Oldman) as a way to justify that his self-centered actions as an economic superpower benefit society as a whole.
Some would say that this interprets the proverbial "Broken Window" as a positive, and that some form of Genuine Progress Indicator would be a more realistic indicator of economic health.
The credit default swaps market is growing at a rapid pace. Credit default swaps are derivative instruments based on underlying fixed income securities such as corporate and government bonds. Swaps are privately negotiated contracts traded on over-the-counter markets.
The buyer of a credit default swap pays a premium to the seller to assume the risk of the issuer of the underlying security defaulting on the coupon or interest payment. Credit default swaps are used for hedging as they enable investors to insure their bond holdings against the risk of default. They are also traded for investment purposes.
Credit default swaps traders look for sophisticated information and analysis tools to help them perform effectively. They need fast and reliable credit default swap pricing data and easy-to-use search functionality. They also require tools that enable them to perform a variety of analyses from calculating swap values to comparing swap prices and spreads against those of other instruments.
Credit default swap traders have to monitor the fixed income markets and the factors that could cause debt issuers to default because credit default swap prices are linked to those of their underlying instruments and are affected by the market’s view of default probability.
And if traders are dealing in default swaps based on corporate bonds, they need to track the equity markets as well. So they need access to a wide range of information, in addition to derivatives data, to analyse credit.
This range of information includes bond pricing; bond terms and conditions; information on issuers with details of their credit ratings, capital structure and issued debt; stock performance; company fundamental data; and brokers’ estimates.
Comprehensive news coverage of the markets and the events that drive them is also essential.
Reuters premium cross-asset information products include a credit default swaps service tailored to meet the needs of financial professionals trading in the fast-growing credit derivatives market. Reuters offers integrated access to news, market data, analysis and instant messaging tools.
Reuters provides extensive credit default swap pricing data, information on more than 1.9 million debt instruments, and coverage of more than 12,000 companies. Reuters global network of journalists includes 500 specialists who report on the issues affecting the credit derivatives, fixed income and equity markets.
|
