A Rethink in Governance Is Necessary

Contractual governance could revolutionize the existing legal systems by transforming the relation from a ruler-subject to a service provider-costumer one.

Ever since Rousseau, social contract theory has come a long way. According to the Genevan Philosopher, the people legitimate governments by giving their mutual consent to the governance structure in a social contract. Many philosophers and political theorists over time analyzed and discussed this theory. Libertarians such as Lysander Spooner, for instance, argued that although a nice theory, the reality is that current constitutions do not have explicit individual consent from those they govern.

But what if that wasn’t the case? What if Constitutions were real contracts and thus part of private law? In this article, we are going to analyze some of the implications of this proposal. But before we do that, let’s go through the precursors of the idea.

The first of them comes from constitutional theory, which deals with how one should interpret a constitution. Some theories say that we should always rule based on the original meaning of the words in the documents, others affirm that the current meaning of words should be used. Contractarianism, as explained by Tom W. Bell, differs from both these views, as it treats the constitution as if it were a contract, ruling in a way that maximizes consent. However, there is still no real individual contract.

The other root of this idea can be found in the Free Private Cities model. A Free Private City, as defined by Titus Gebel, is a sovereign or semi-autonomous local authority with its own legal and regulatory framework that offers governance services on a contractual basis. Here, there is a real social contract between the customer-citizen and government-operator. However, a Free Private City is more akin to Special Economic Zones and Charter Cities, as it gets a “blank slate” for legislation and can create a new legal system from scratch. Although the idea can easily be applied on unpopulated areas, “resetting” law on existing cities can prove politically impossible or too big a source of conflict to be viable.

Drawing from these two principles, we come to a third alternative: Offering already existing city and government services on a contractual basis. What are the consequences of this change to the operation and delivery of governance services? First of all, for the contract to be valid, there must be a guarantee of initial consent, otherwise, it is no contract, but coercion. All citizens must be offered the contract and must explicitly consent to it. This could be done at once or through a transitional process, in which citizens that reach adulthood are offered the contract. If they agree, they continue their life as usual, if they do not, they are requested to find somewhere else to live. If one has nowhere to emigrate, then he must at least consent to live by the local rules until he is able to find another place.  One of the most notable consequences of this initial consent would be the increased justifiability of public action and a higher rule of law, as in this case, all citizens have signed an agreement with the city. The common objection “I never agreed to this” no longer applies to law enforcement.

We must also discuss changes regarding exit. Contracts have exit clauses, as consent from the part of the clients may be withdrawn. If governance is a service based on a voluntary agreement, then there must be freedom to exit. This can be guaranteed in different ways. One could allow the subdivision of the territory by secession, as Liechtenstein does, which would allow communities to collectively withdraw themselves from the current arrangement. However, this may prove a source of conflict in case the original government has land-based assets in the region. The other – much easier – way is to guarantee complete freedom of emigration, allowing citizens to leave and “vote with their feet” for a jurisdiction they prefer. The service provider, on the other hand, cannot rescind the contract except for a contract breach from the side of the client. However, one must keep in mind that the contract need not be permanent; time-limited contracts with the citizens are also a possibility, similar to what visas with a duration of a certain number of years currently represent.

Speaking of contract breaches, there is also the issue of disputes. Different from many public services, in a contractual relation there is a direct correlation between the payment provided by the customer and the benefit he ought to receive. So, for example, if on the contract the operator guarantees your security, but you end up being robbed, this is a clear non-fulfillment by the part of the operator. Unless he is able to recover the stolen good, he can be taken to court and sued for reparations. This alters the incentive structure of the operator in a big way. First of all, governments have to be more careful when distributing rights and making promises to their citizens, as everything that oversteps their reach will cost them greatly. Also, there is an increased incentive to be as effective at service delivery as possible, because fulfillment will spare the operator of legal costs.

Regarding disputes, another relevant change must take place for the relation to be congruent with private law principles. Currently, when one faces the government in a dispute, the case is ruled by state judges. This must be extinguished completely if we want a fair relation between both parties. The contract should instead go to independent arbitration, which can be done in a similar way to how international law operates. A simple solution would be that each party chooses a judge and these judges choose a third, which would then rule the case. Again, a simple change, but which greatly hinders abuse from the operator’s side, since the jury isn’t composed solely of its employees.

Another issue is the modification of the contract. On the market, along with the bulk of the contract, the parties also agree on how alterations to it will be made. Currently, when it comes to governance, all decisions are exclusively unilateral, as the state alone can make changes in the legal system, regardless of what the citizen thinks about them (some would argue that a democratic system gets rid of this problem, though it can do so only imperfectly at best). In a contractual arrangement, when it comes to functions of the city and duties of the citizen, at least one section of the agreement must have its alterations done exclusively on a bilateral basis. So, for example, while zoning or public space policy could be altered by the city, tax rates or services offered would be subject to a contract revision, which the citizen would have to agree to for them to be valid. A violation of this principle would then be considered a contract breach, which the citizen could sue the city for. This hampers arbitrary action by the service provider and allows for much longer-term planning by the citizen, lowering their time preference and increasing prosperity.

The formulation of new and existing legislation must also be reviewed. In the governmental sphere, there are several legislations on highly subjective terms and constitutions generally have interpretations that vary greatly from one another. If we were to compare, contract law is much better resolved than constitutional law, reducing uncertainty for both sides and allowing for greater security and therefore prosperity. The Common Law, for example, has evolved a set of rules regarding the interpretation of contracts that encourages peace and prosperity. If governance services were to incorporate world-class approaches to contract interpretation into their documents, we could be relieved of this interpretative chaos that spans the public sector. A simple clause containing “this document is to be interpreted according to the following principles” could suffice.

Lastly, there could be changes regarding punishment. We should really consider if the traditional jail system is appropriate for a contractual society. Two mechanisms that can prove very useful for punishment in a contractual paradigm are exile and compensation. History shows that microstates and quasi-sovereign entities often impose exile instead of imprisonment or capital punishment. It is certainly a more efficient system because the cost of the wrong actions does not go to the citizen not involved in the case, who traditionally is the one paying for prisons. Of course, nations nowadays can hardly impose exile to their own citizens, since all land is claimed, which means some other country would have to be willing to accept criminals. However, exile does not have to be an “8 or 80” matter. In modern and connected societies, it can come in various degrees, such as loss of credit, access to services and even complete ostracism, creating a precise, cheap, and more humane system than imprisonment. Nevertheless, the focus when it comes to crime must always be to compensate the victim. Often, in the current system, the one benefiting from the punishment is not the victim, but the state itself. The possibility of allowing bails in a wider array of cases as compensation can be a good solution, but in the end, it is the victim who must be compensated, and it is the victim who must decide if he or she even accepts the reparations. Of course, requiring lawbreakers to compensate victims will mean nothing if they are unable to pay. Therefore, it may be required that people have some insurance, support group or guarantee that valid claims against them can be paid for. So, while punishment methods like incarceration could certainly still exist, if a community based on voluntary cooperation to the largest extent possible is the goal, their use should be kept to a minimum, being substituted by exile or compensation in its many forms.

To draw this to a close, the advantages that contractual governance could bring to existing legal systems are enormous, but the main one is the transition from a ruler-subject to a service provider-costumer relation, essentially turning governance into a market. With market competition and cooperation in place, more experimentation and adaptation will lead to a discovery process, which ultimately will result in better models of living together.



  • Francisco Litvay is the co-founder of Settee (settee.io), a website covering SEZs and private cities in Portuguese. He was involved in the creation of Adrianople Group's (adrianoplegroup.com) Open Zone Map and Startup Cities Map, two open-source tools on Special Zones and Charter Cities. He is the Free Cities Foundation (free-cities.org) Ambassador to Brasil.

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The views expressed on austriancenter.com are not necessarily those of the Austrian Economics Center.

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