Regular readers know that few things (okay many things) get me angrier than when people talk about capitalism as though it is a fixed system that produces bad outcomes. Our current system produces very bad outcomes, but we can change it in all sorts of ways to produce better outcomes, and it is still capitalism.

Government-granted patent and copyright monopolies are my favorites, both because there is an enormous amount of money at stake (trillions of dollars annually), but also because it should be easy to understand. Capitalism without these monopolies is still capitalism, but it would be a system where centi-billionaires like Bill Gates and Larry Ellison are much poorer.  And we do have other mechanisms for financing innovation and creative work. 

Anyhow, allowing access to the courts is one of the ways in which we can make capitalism more or less egalitarian. Access to the courts has been a hotly contested issue over the years, with married women denied legal access in most states through much of the 19th century. The key point in the Dred Scott decision was that enslaved Black people were property, and therefore not entitled to sue. 

This history matters because companies have been increasingly writing contracts with their workers and customers that require them to give up the right to sue in almost all cases. This is the topic of the new book by Brendan Ballou, the founder and CEO of the Public Integrity Project, When Companies Run the Courts. (See also my recent podcast.) 

The point of the book is that purchase agreements and employment contracts increasingly include clauses that force customers and employees to give up the right to sue under most circumstances and instead rely on binding arbitration. The company gets to choose the arbitrator, and they generally are not looking to find people committed to impartiality. 

Imagine you are buying a home where your purchase agreement says that any dispute would be decided by the seller’s best friend. This is pretty much what we have with these mandatory arbitration clauses. Companies pick arbitrators who they expect to rule in their favor, and if they don’t, they find a new arbitrator. 

Ballou goes through tactics for combatting forced arbitration, which have been at least somewhat successful. One that appealed to me was mass arbitration, where a large number of people file complaints on the same issue. Since in many cases the company is obligated to pay the cost of the arbitrator, this can be a considerable expense. That can make some sort of settlement seem preferable.

While this and other tactics may be useful, the better longer-term approach would be to lessen the frequency of binding arbitration clauses, most likely through legal restriction. Unfortunately, this cannot be done at the state level, at least not based on recent court rulings. 

However, it is not impossible to envision some changes at the federal level. Montana, a very conservative state, passed a law requiring the terms of a binding arbitration clause be written in capital letters on the first page of any contract. The Supreme Court subsequently ruled the law unconstitutional because it usurped federal authority. 

But the fact that the legislature in a conservative Republican state could be persuaded to pass this sort of restriction suggests that it might be possible to get conservatives in Congress to pass similar legislation. After all, it doesn’t prevent anyone from putting a binding arbitration clause in a contract; it just requires they make sure people know what they are signing. It’s not clear how much impact this would have, but there could be a good ad campaign from a company without an arbitration clause: “we aren’t afraid of our customers suing us.”

On the employment side, the best route is likely to be carving out exceptions. This has already been done with complaints of sexual harassment. Perhaps the carve-out turf can be extended to include issues like unpaid wages or serious workplace injuries. It might be hard for politicians to say that the family of a truck driver who dies because of faulty brakes on the company truck shouldn’t have legal recourse.   

The issue of mandatory arbitration is important in its own right, but it is an example of how rules on contracts can have a large impact on economic outcomes. And to be clear, the government’s restrictions on enforceable contracts do not always go to benefit workers or consumers.

The ban on union shops, commonly described with the misnomer “right-to-work,” is a clear example of a government restriction designed to help employers. With this prohibition, a contract between workers and an employer that requires all workers to pay a representation fee to the union is not enforceable. 

This should be a straightforward case of freedom of contract for anyone who takes their libertarianism seriously. But in most states, unions cannot have a binding contract requiring workers to pay for their representation. In striking contrast, the law does require a union to represent all workers, including in disciplinary proceedings, even if they don’t pay a fee.

I don’t know how much downsizing the importance of binding arbitration will matter in the distribution of income, but the direction of change seems unambiguous. Companies don’t insist on these clauses to cost themselves money. 

We also do need legal changes going beyond rolling back binding arbitration clauses, like making class-action suits easier. If Dell sells me a defective computer (it has), I’m not going to hire a lawyer to sue the company for $1,200. [It skips the letter “M.”] But if 100,000 people have a computer with the same defect, we might find a lawyer willing to take a suit involving $120 million.  

The point here is that we can write rules on contracts and other legal issues in an infinite number of ways, which would lead to very different outcomes. Capitalism doesn’t tell us how to write the rules, even though we can be damn sure that the capitalists will be using their money to ensure they are written in their favor.

That is especially easy to do when it comes to an issue like binding arbitration clauses. That’s because it is down in the weeds, where no one other than corporate lobbyists is paying attention. That is also in part because of the media, since corporate-owned media outlets aren’t generally anxious to call attention to corrupt practices by corporations. But that is another story.