Cato Versus Caesar

Almost forty years ago, Charles Koch co-founded what is now known as the Cato Institute, the nation’s preeminent libertarian think tank. It had an unusual management structure for a non-profit: the five founders were made equal shareholders. Over time, Cato’s and Koch’s views drifted apart; Cato is relatively more committed to libertarian policies, while Koch is relatively more committed to Republican electoral victory. (In David Auerbach’s terms, Cato is nearly pure Type L, while Koch has a substantial undercurrent of Type C.) Although Charles Koch and his brother David are both now shareholders in Cato, Koch money is only a small portion of its annual operating budget.

Last week, the Koch brothers sued to take control of Cato. Their theory is that under the shareholder agreement, they hold an option to purchase the shares of the recently deceased William Niskansen, giving them an absolute majority of the extant shares. Cato’s current president, Ed Crane, has called the move a “hostile takeover” and argued that it’s an attempt to “transform Cato from an independent, nonpartisan research organization into a political entity that might better support [the Kochs’] partisan agenda.” Numerous prominent libertarian commentators—see, e.g., Jonathan Adler and Julian Sanchez—have weighed in against the move, on the grounds that it would at the least undermine Cato’s perceived independence, and at the worst pull the organization away from libertarian principles.

The irony is thick. And I don’t mean this in a tone of Go it, husband! Go it, bear! schadenfreude. As neither a libertarian nor a Koch brother, I have no direct stake in the fight, nor do I think public debate in this country will gain much if that fight is painful and protracted. I don’t know who is right as a matter of non-profit law; I can say only that whoever is right on the law ought to win. I think Adler is correct that it’s not in the Kochs’ own interest to take over Cato this way—but even as a liberal, I can say that this is their own mistake to make.

No. The irony here is that the nation’s preeminent libertarians—who ought to be exquisitely attentive to freedom of contract, institutional design, and observing the letter of the law—couldn’t get their rights right. They built this Streeling of libertarian thought, with its $20+ million annual budget and world-wide reputation, on a shareholding structure that is either actually or nearly under the control of people who do not share many of their values and have not for decades. The entire enterprise may well have been for years only one death away from Koch domination. If so many libertarians are now so worried about a Koch takeover, one has to ask, why have they spent so many years building a brand with an unshielded thermal exhaust port?

The answers are obvious, and completely understandable. Because few people knew about Cato’s unusual share-based ownership structure. Because those few who knew didn’t think the Kochs’ power play was a serious possibility. Because Cato was there, and so it made sense as a coordination point, whatever its weaknesses. Because each individual project made sense, regardless of the long term. Because they never even thought to ask. All completely human, all quite arguably reasonable, and all things any of us would likely have done in the same position. And yet the end result could well be to deliver one of the world’s most recognizably libertarian institutions into the hands of men who would use it for other purposes.

I could not tell you how many times I’ve encountered libertarian arguments about law that assume that individuals can and ought to use contracts to protect themselves against just this sort of contingency. Don’t worry about users clicking “I agree” to overreaching terms of service; if they truly cared about the terms, they’d negotiate for better ones. Don’t worry about people who refuse to buy health insurance; they’re making a rational choice for themselves. Don’t worry about minority shareholders, don’t worry about franchisees, don’t worry about all the other groups that find themselves on the wrong end of a bargain that always seems to tip against them in the long run—if they wanted better protections, they could and should have negotiated for them up front.

Except they don’t. They never do. And really. If the uber-libertarians of the Cato institute can’t watch out for themselves, what hope is there for the rest of us?

James… You know how much I value your thinking and approach to the issues, so I regret to say I am terribly disappointed with your reasoning here.

The operational assumptions here seems to be that, because libertarians value freedom of contract, (a) they must believe that contracts can solve all societal problems; and (b) they should always be able perfectly structure contracts in their own organizations that can plan for every contingency. Both assumptions are incorrect.

Libertarians understand that many societal problems are complex, involve trade-offs, and demand multi-sided solutions. We are less comfortable using coercive remedies that others prefer and instead look first to a combination of social pressures, evolving norms, voluntary collective action, personal responsibility, property rights, ongoing marketplace experimentation, and, yes, contracts and other voluntary agreements, as the superior approach. Even then, things can go wrong and most libertarians endorse the use of torts and targeted, selective law enforcement efforts when they do. But the multi-sided approach we start with often proves fruitful and less restrictive or costly than anticipatory planning and administrative regulation.

Regardless, please do not play this game of trying to reduce all libertarian thinking to a simplistic “contracts solves everything” indictment you have issued against us here. It is flat out wrong.

Second, while libertarian-minded people and organizations value freedom of contract, they are not omniscient planners who can anticipate every possible use or misuse of contractual language. We’re all human. Sometimes contracts can contain some pretty bone-headed clauses. (They’re usually written by lawyers, after all!) Even libertarians who value contractual relationships can make silly errors in how they originally structure or later interpret or enforce those contracts. That doesn’t mean you can indict all contractual arrangements in the sweeping way you do here by saying something as silly as “If the uber-libertarians of the Cato institute can’t watch out for themselves, what hope is there for the rest of us?” Really, James? So your indictment of freedom of contract rests on a single bad contract that a couple of young libertarians brokered back in the 1970s to get a fledging organization off the ground?

Certainly you can do better than that, my friend!

Adam, I think you’re misreading my post. My point is simple. People make bad bargains all the time, even on important matters, and even when they’re highly attentive to what could go wrong. (And it’s not just the Cato founders who locked themselves into a structure vulnerable to the Koch brothers; its all the thinkers who’ve tied their own and their movement’s fortunes to the Cato brand, who’ve invested over decades in an institution that could be snatched away.) The law reviews are full of economic libertarian arguments to the contrary—that those bargains are actually efficient for society, that people must have preferences justifying the risks they take, etc.

Those arguments are my target, not “all libertarian thinking.” What we do about private plans gone awry is a fair subject for debate: when should government intervene to revise them or clean up the mess? On those questions, you know that I’m often a sympathetic audience. But I lose patience when people on your side of the fence try to define the problem away.

Maybe we read different libertarian thinkers, but the argument for the superiority of contractual arrangements is typically based on a consideration of the aggregate effects of contractual arrangements and a comparison with the available alternatives. Of course contracts are riddled with provisions that we recognize as errors in hindsight. That’s part of the discovery process. The question is whether, as a general rule, relying on private ordering is preferable to available alternatives. The Cato experience does nothing to undermine the presumptive libertarian view that for many problems, contractual arrangements are preferable to the alternative.

Jonathan, I think you too are missing the point. (you’re obviously so close to the situation that you could benefit from accepting smart outsider views as at least valid). There is no alternative to setting up a non-profit corporation and its hiring of employees than contracts. The issue is not contracts or something else (assumed government regulation). The issue is the inherent problems with all contracts - they are usually far from completely voluntary and mutually beneficial. Deal with reality.

Jonathan Adler’s point is a frequent libertarian fallback position when the lack of realism in contract-based libertarian theories is pointed out — sure, people aren’t that rational, but a social ordering that assumes they are is better than the alternatives. This often segues directly into a straw-man comparison between libertarian contracting and some kind of Stalinist Gosplan system.

The problem is that there is an almost infinite spectrum of alternatives between pure libertarian contracting (if this is even possible) and direct bureaucratic allocations by the state. These include ex post refusal to enforce particular contract terms when it is clear one party did not fully understand or intend them, refusal to enforce particular classes of contract terms that are likely to be exploitative, requirements that one party to a contract have some fiduciary duty or duty of care toward other parties (perhaps less sophisticated ones), etc. Not to mention that a contracting regime can generally be made more egalitarian by ensuring that each party to e.g. a labor contract has a good exit option, something that is directly affected by state social supports. It seems highly unlikely that Adler, or indeed the entire community of libertarian scholars, has genuinely assessed each and every one of these alternatives to find that libertarianism is practically superior. The argument that ‘oh, it’s better than the alternatives’ is handwaving.

“The argument that ‘oh, it’s better than the alternatives’ is handwaving.” No it’s not, it’s the essence of the argument, otherwise one is committing the Nirvana Fallacy. The essential question to ask in ANY debate over public policy is “compared to what?” What is the alternative to having a legal system in which contracts are enforced absent evidence of force or fraud? Would that alternative be better or worse? Why? What’s the evidence? Pointing out that contracts are often entered into with imperfect information and/or don’t work out the way the parties intended tells you nothing about the desirability of contractual enforcement unless you know what you’re comparing it to.

“What is the alternative to having a legal system in which contracts are enforced absent evidence of force or fraud?”

Straw man. The debate is not over whether we should enforce contracts absent force or fraud; the debate is over whether we recognize such things as inequality of bargaining power coupled with overreaching as a species of “force or fraud.”

Editor’s note: this comment was mistakenly flagged as spam and was held in limbo until November 2012. My apologies to Jonathan and to my other readers. -JG

Mark and marc —

Your posts aren’t particularly responsive. I accept that contracts aren’t perfect. The question is what the alternative is. Pointing to a contract that seems deficient ex post proves nothing about the desirability of using contracts to address certain sorts of problems more generally. In marc’s case, many of the “alternatives” aren’t alternatives at all, but ways of implementing a contractarian regime. Asserting a preference for private contracting does not necessarily entail any particular view about the optimal default rules to cover ambiguous or missing terms or even how consent should be manifested. Like the original post, you’re attacking an opponent made of straw.


David Bernstein, you are citing a broad principle that no one could disagree with (that you need a point of comparison when discussing public policy) but is irrelevant to my point. My point was that there are numerous highly specific alternatives to a blanket ‘sanctity of contracts’ principle, so simply saying that you need an alternative is no argument at all. To take just one example, the bankruptcy process allows people to renege on contracts. Derivatives contracts used to be unenforceable as speculative wagers or gambling contracts. In cases where one party owes a fiduciary duty to another a contract may be unenforceable as a violation of the fiduciary duty. And on and on. I am not a lawyer, but I’m sure in pretty much any area of contract law a lawmaker could define some limited subset of cases where the contract would be unenforceable in specified circumstances. This is not radical and has been done many times in many legal systems.

I think rea is making a similar point above.

Having read about the Koch/Cato situation a bit, I just don’t see the supposed irony here. I say this as a long time liberal, though I’m lately coming to think I may harbor some latent libertarian sympathies. ;)

First, both Adler and Sanchez have pointed out that the Kochs may have the legally binding right to take over Cato, but that it might not be the best idea to do that. Just like a hog farmer may have the right (via contract or otherwise) to place his farm next to the church he attends, but he may choose not to so as not to be a nuisance to his fellow churchgoers. Adler and Sanchez suggest the Kochs should voluntarily refrain from building the proverbial hog farm next to the church. I don’t see how this is violative of any libertarian view that I know of. In fact, acknowledging the persons legal right to do so and suggesting they voluntarily choose not to seems to me to be eminently libertarian.

Second, the original post points to the specific irony that arises from the “libertarian” stance regarding unbalanced bargaining power in contract formation. There is only irony in this situation with respect to that issue if (a) the legal arguments being used by the individuals at Cato who oppose the Kochs implicate unbalanced bargaining power (I am not familiar with their legal arguments) AND (b) the specific individuals opposing the Kochs have actually espoused such views themselves. The second point is key because libertarianism, like liberalism and conservatism, is not monolithic. That particular principle relates to an extremely specific subject matter (i.e., the law of contracts, and more specifically the law of invalidating contracts) upon which libertarians may have wide-ranging views. While a number of professed libertarian lawyers may have written on the subject in various journals, it’s not clear to me that the lawyers commenting on such legal minutiae can be said to speak for all libertarians on the point (or even all libertarain lawyers). So unless the legal scholars who you’ve encountered ARE the individuals at Cato opposing the Kochs, then where’s the irony, really?

Previous comments make this too complicated.

Isn’t the irony that Libertarians assume people make informed choices, at least about important issues?

Liberal-Conservatism is pretty much the center position in Australian politics. The assumption that you have a Either/Or choice about regulation and free individual contracts is strange.

The Success or failure of Cato is not a public issue - no reason to regulate. The failure/mismanagement of major virtually compulsory financial institutions is a public issue and cost ; needs be regulated.

“both Adler and Sanchez have pointed out that the Kochs may have the legally binding right to take over Cato, but that it might not be the best idea to do that.”

Uh, no. That’s not what they say. What they say is that it’s bad for a greater good (libertarian thought) and their freedom of expression for the Koches to excercise their property rights. And that’s not an argument a libertarian can make without be called a hypocrite. They’re hypocrites, pure and simple, no iffs ands or buts. They want everyone else to live by the owner’s whims, but want their freedom of expression without while someone else pays their salaries. You don’t get that if you’re a libertarian and don’t own the company.

So….libertarians must be protected against their own stupidity? Hmmmmmm….