Freedom of Contract and Self Interest

Freedom of contract is the principle that two parties can voluntarily enter into an economic agreement that they both deem mutually beneficial. In other words, people are free to make agreements regarding working conditions that all parties find acceptable.

Freedom of contract hardly exists today. For example, OSHA currently mandates such specific requirements like mandatory minimum lighting requirements. One of the most wide reaching set of regulations is the Fair Labor Standards Act, which mandates the now commonplace overtime pay requirements, child labor laws, and more.

These regulations were ostensibly enacted to ensure "fair" labor conditions (according to the arbitrary standard set by the bureaucrats, of course), and protect workers. There's nothing inherently wrong with the standards themselves. The real harm comes with the one-size-fits-all mandate.

Suppose there's a seventeen year old looking for work. He happens to be an expert in meat processing, and interviews for a job in the meat department at a grocery store. He is shocked when he's told that it's illegal for him to operate any meat processing machines at work, because it's unsafe. He leaves dejected and unemployed.

In this scenario, the grocery store loses a skilled and willing worker, and the young man loses a job. Neither party used force against the other. The beauty of freedom of contract is that it requires voluntary action from everyone involved before anything actually happens.

Labor regulations impose an arbitrary standard of fairness on millions of people with different wants, needs, and standards. What's fair to one worker may not be to another, and with the freedom of contract, that's okay. Every worker can seek a job where the standards and conditions fit with what they personally are looking for.

There's a common fear that if these standards were removed, some companies would take advantage of their newfound freedom and abuse workers with deplorable conditions, hours, and pay. This fear ignores the crucial motivator; self-interest. Henry Ford famously payed his employees the (at the time) exorbitant wage of $5 a day, far more than anyone else was offering. His reasoning was simple. The more he pays, the more likely he is to both attract and maintain the highest skilled workers for his factories.

Nobody forced Ford to pay a higher wage. He benefitted, and so did his workers. Self interest motivates businesses to keep working conditions at a place their employees want. If they start to fall, the workers will seek employment elsewhere. Even if they would rather cut corners on safety and wages, their own desire to stay in business and make a profit forces them to keep things at an acceptable level.

Adam Smith wrote in The Wealth of Nations that "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self interest." He demonstrates with this example that self interest is an incredibly powerful guiding force that ultimately tends to yield socially beneficial outcomes. This is why freedom of contract works. Regulations simply get in the way.