Tear Down This Wall

At this twenty year anniversary of the fall of the Berlin Wall, let us reaffirm its key principle: we accept adult choice of law, at least if bundled with choice of nation.  North Korea still keeps locals from leaving, and until very recently the U.S. reserved the right to tax ex-citizens for up to ten years. But for the rest of the world, if someone picks up and leaves a nation and then solemnly swears allegiance to a new nation, we don’t see much need for regulatory oversight to determine if this new contract is “valid”.

I bring this up because teaching law & econ has reminded me of just how ossified and inefficient is our standard legal system, and Bryan Caplan recently guest lectured in my class on the vast potential of private law to improve efficiency.  The idea is to let people contract around standard law, privately choosing new legal rules and processes.  Local agreements between nations is what protects us now when we navigate the anarchy between nations, and the greater efficiency of private legal regimes of credit card firms, insurance companies, and social networks like Facebook greatly improve our lives. The idea is to extend such approaches to a wider range of legal issues.

The greatest barrier to wider use of private law today is the reluctance of government courts to enforce contracts specifying private law.  For example, a few years back a woman signed an employment contract with Halliburton saying disputes would be settled by a certain arbitration agency. When she claimed she was then raped in Iraq, we saw outrage:

Sen. Al Franken’s “anti-rape” amendment to the Senate defense appropriations bill … passed Oct. 6 by a 68 to 30 vote, was intended to prevent the Pentagon from contracting with companies that require employees to resolve disputes over sexual assault and discrimination through arbitration rather than through the courts.

A key argument against this arbitration is this:

Private arbitrators sided in Halliburton’s favor in 80 percent of cases.

Now in general it is good that courts do not automatically, literally, or strictly enforce all clauses of all contracts. We do not give equal attention to all clauses of all contracts, and do not explicitly say how to handle all possible unusual circumstances. But unfortunately this reasonable inclination to adjust typical contract enforcement toward what we probably would have meant to say gives ossified government law an excuse to block its displacement by better private law.

It seems to me that the main problem is trying to invoke private law via small clauses on page 20 of 30+ page contracts – most folks feel reasonably justified in not always literally enforcing such terms.  What private law needs instead is a clear deliberate solemnity like that of a new citizen moving to and then swearing allegiance to a new nation, an expensive signal showing they understand there are large consequences.

Imagine North Korea sent out agents to forcibly return escapees, arguing that escapee agreements to join other nations were void because escapees didn’t understand the full consequences of their actions. The world would loudly denounce such weak and transparently self-serving excuses. We want the act of agreeing to a private law to have such obvious and clear deliberateness, making government courts who overturn such agreements also seem self-serving.

Therefore I suggest: let individuals in a nation pay a large cost to with great solemnity declare their membership in a private law, a legal system covering disputes between its members and negotiating rules for disputes with members of other private laws.  If government courts refuse to enforce such agreements, then one could more reasonably ask a wider world of opinion to condemn such overreaching repression. Here one would have a stronger and clearer case pitting freedom against totalitarian control.

Note that I’m not (yet) proposing to eliminate government law; it may have a role in anti-trust for private laws, for example.  I’m just proposing to tear down the wall that prevents us moving to and between private laws.

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  • Larry D’Anna

    It seems obvious that arbitration agencies are going to be unfairly biased towards employers, because the employer is the side that’s selecting which arbitration agency to use. Isn’t this a big problem with the whole concept of arbitration? Actually, isn’t the whole practice of offering 30 page non-negotiation-possible indecipherable take-it-or-leave it contracts to the public a big problem as well?

    Perhaps we should adopt a rule that says all contracts have to be written in understandable language, and have to be solemnly read aloud in front of witnesses in order to take effect.

    • Larry D’Anna

      ooooh!, and a judge should quiz both parties on the meaning of the contract before it’s allowed to take effect. If they fail the quiz they have to try again on a different day and pay the judge-fee again to boot.

      • James K

        Yeah, and we shouldn’t let people leave their country unless they can pass a quiz on the laws of the country they are going to.

      • Nick Tarleton

        James: There’s a reasonable expectation that (a) national laws will be more uniform, and less likely to contain gotchas, than contracts, and (b) gotchas in national laws will be better publicized, and prospective immigrants will do more research than prospective employees, such that paternalistic protection may be more justifiable in one case. Also, the harmful precedent and possible abuse of making freedom of exit non-absolute seem more likely to be very bad than the analogous marginal costs of reducing already non-absolute freedom of contract.

    • An easy fix to that is to require mutual agreement as to which arbitration agency to use. One would not be required to use an agency which too often favored either employers or employees.

      • James K

        But how often the agency favours each side doesn’t necessarily indicate bias. New Zealand has a specialist tribunal for tenancy disputes. It’s government run and it rules in favour of the landlord in a bit over 75% of cases. Almost all of those cases are a result of the tenant not paying rent, so naturally the tribunal favours the landlord.

      • There was mutual agreement at the time they signed the employment contract.

      • magfrump

        How many people do you know that have any knowledge of arbitration agencies?

        How many of them would sign on to whichever one their employer suggested without having any idea there was another option? Especially if they’re unemployed and can’t get work without a contract.

        This isn’t exactly what I’d call negotiating in good faith.

  • Psy-Kosh

    Hrm… It occurs to me there may be… issues in details there. For instance, do we want to allow it to be entirely arbitrary, or do we want to at least enforce that no matter what system you’re in, you’re allowed to “emigrate” to any that will take you?

    How do we deal with people being pressured/manipulated into participating in such a ritual/signal to join one they don’t really want to join, for instance?

    Interesting idea, and I’m not quite rejecting it, just… not entirely sure about it either.

  • david

    If it is true that the wider court of opinion would side with individuals who have clearly paid a large cost, then what is stopping individuals from doing so now? Or are we saying that the state is required to recognize and solemnize such procedures? There are many activities that are costly and public and don’t require state involvement.

    Also, it doesn’t seem clear that the problem is a lack of solemnity per se, but rather expectations of how the terms will be enforced, and especially the perception of how both parties approach the issue. I venture that the sense that someone was being unfairly conned plays a larger role than solemnity and consideration (it’s easy to imagine, say, outrage over an individual signing some given contract popular perceived to be unfair even if said individual has invested considerable effort into the decision). Likewise, planting huge stickers over your contracts emphasizing the parts which can be expected to violate conventional assumptions would not be serious, but would alleviate the problem of expectations. I’ve observed Google’s EULAs occasionally doing this.

    Complicating this further is the underlying notion that if something (that a reasonable person would regard as unexpected) happens, it’s appealing to expect both parties to be willing to renegotiate in good faith, not seize the opportunity to further their own gain/cover their ass.

    • Jay

      You’ve read a EULA? That is not normal behavior. Except for insomniacs.

      • Doug S.

        I’ve read EULAs. I usually accept them with the belief that, should I choose to violate them, it is unlikely that I will be caught and suffer any losses as a result.

  • Larry, while there is a place for made-to-order law, there are also huge gains from mass-market law, not adapted to each circumstance. So we very much need standardized take-it-or-leave-it contracts.

    Psy and david, how do we now deal with folks pressured into joining a nation they “don’t really want”? Should the U.N. limit movement between nations to prevent such errors?

    Psy, long-term contracts are now an important way to achieve long-term coordination, and we should be reluctant to give them up.

    david, to implement it, this proposal requires coordination among the fans of private law.

    • magfrump

      When people change nations in Europe, they likely have many choices, or else their choices are limited by friends and family, providing a basic familiarity with some laws.

      When people change companies, they regularly have only one option, because there aren’t enough people hiring.

      Some people do not have choices when changing nations–consider Mexican immigrants to the US. We certainly “regulate” them in ways that are harmful.

      And while my general objection is that (necessarily) business-chosen arbiters would be pro-business and possibly expose people to (to my mind) unacceptable hardship, that has been true of national governments since the modern age began. Possibly the state of reform in public government, and it’s mild level of theoretic accountability make some difference but it’s hard to say (for me).

      • So we should only let people change nations if they have family in the new nation?

    • david

      Psy and david, how do we now deal with folks pressured into joining a nation they “don’t really want”? Should the U.N. limit movement between nations to prevent such errors?

      Well, we don’t, do we? I don’t think we can suppose that wider society has a coherent theory of legitimate choice to begin with. Appropriately, North Korea really has been allegedly kidnapping South Koreans, and insists that they have actually defected of their own free will and refuses to allow them to return to South Korea. But the conventional wisdom here seems to be to assume that the South, not the North, is correct – and to complicate this further, it is evident that despite this neither the South nor the international community would consider this a priority in DPRK relations.

      States (and their electorates) are concerned about different things than the movement of a tiny minority of people, unless one of them somehow becomes the basis of a sympathetic campaign, in which case the state still concerns itself with sympathy rather than coherence. Likewise in this case of Jamie L Jones; there have undoubtedly been previous cases where some employee has been similarly prevented from going to government court, but there is controversy only now because Jones is exceptionally sympathetic.

      Recall that when the economy went sour in Qatar and hundreds of Western expatriates – who had obtained work visas in Qatar with all their associated conditions – suddenly got in debt trouble, coverage didn’t go “yeah well you agreed to be subject to those laws, suck on it”. Coverage went “universal human rights, outdated medieval bankruptcy laws, etc.” We do let people tie themselves to other nations, we don’t think this implies adult choice of law. At least for some laws.

  • Jay

    Actually, I’m surprised that only 80% of the arbitrations favor Halliburton. Generally they run closer to 95%.

    It’s an agency problem. Arbitrators need business. Big companies are valuable repeat customers, and middle-class individuals aren’t.

    The obvious solution would be to have arbitrators’ pay come from an outside source and not be contingent on any particular outcome. At that point, we’ve largely reinvented the judge.

  • Tuttle

    Are you certain that the US gov’t no longer taxes expats for 10 years? I was under the impression that this continues…

    • Patri Friedman

      This was changed as part of the HEROES stimulus bill in 2008. It is now a one-time exit tax. Just google [heroes exit tax] and you can learn all about it.

  • q

    this is a lovely theoretical discussion. please make it real for me. mr hanson, for how much would you sell your right to due process in the event of violent sexual assault? if you are serious about debating these issues, you should be debate price, not philosophy, and you should make your bid.

    • Psychohistorian

      It’s the clear declaration that’s the issue. If there were a page that said, “RAPE LIABILITY WAIVER” in 36-point font, the text of which was:

      “I understand there is an appreciable risk that I will be raped by one or several of my coworkers. I hereby agree, if this happens, to submit to binding arbitration in any legal action against Halliburton. I am aware that this arbitration may be unfavorable to me. I am aware that I will not have any recourse within the judicial system if I believe the arbitrator has been unfair to me. I acknowledge that if I am raped by my coworkers or on the job, I may be denied any compensation from Halliburton, with no means of recourse. I fully acknowledge, understand, and accept this condition of my employment.”

      Followed by signature and, say, a fingerprint, it would be awfully hard to argue that the woman was uninformed. I’d be somewhat surprised if the court found in her favor were this part of the contract so thoroughly spelled out and acknowledged.

      The main problem is that contract language is devilishly Orwellian. It probably said something like this, buried on page 25:

      “In the event that a person or persons under the employ of Halliburton, or individuals involved in non-employment business relations with Halliburton or its subsidiaries, take any action against the signatory that results in undue physical or psychological harm or discomfort not otherwise expected during the fulfillment of expected duties, I hereby agree to settle any litigation arising from such wrongdoing under arbitration as described in section 3.2(c)iii of the employment contract.”

      The real challenge of allowing private law is ensuring that entities with disparate power are incapable of binding employees without very powerful, informed consent. If someone put, “And you agree to give us your firstborn child” somewhere in the Windows EULA, Microsoft would have millions of children amongst its assets. When you consider that the vast majority of people do not have a college education, and many of them don’t even speak the native language the contract is in, this problem becomes insurmountable, at least for any method thus far tried.

      • Why doesn’t this same sort of argument imply we shouldn’t let people change nations?

      • Dan

        I don’t think you know how contract law works… sure MS can place a 100 point font button with me signing my children over to perpetual slavery (or myself). It means nothing its ILLEGAL. Same for the 32 point Halliburton rape clause. Indemnity from an intentional tort guffaw!!

        This how it works… contracts is subservient to all laws, even lowly ones like municipal ordinances…

        “Private” law (what an oxymoron) is meaningless… there is no such thing and there will never be…

      • “Private” law (what an oxymoron) is meaningless… there is no such thing and there will never be…
        You should read Bruce Benson.

  • komponisto

    Someone is obliged to sound the “be careful what you wish for” warning about Islamic communities privately enforcing Sharia on “consenting” members — something which has already become an issue in certain European countries, if I recall correctly.

  • John Maxwell IV

    Realistically, lots of people don’t read the contracts they sign. Lots of people don’t read the laws of the government either, but there’s some pressure for those laws to be at least somewhat decent, since politicians can score points with voters by fixing up more obvious atrocities. So public laws win on balance.

    • A major difference here is that people CAN’T read the laws – there are simply too many and too long. And the pressure isn’t for the laws to be decent, they simply need not actively offend too many people. Of course, given your means for politicians to score points – they first have to create the legal atrocities, before they can fix them, so there is pressure to pass anything at all – they can score points for passing it, then again for “fixing” it.

      Most laws benefit special interests while costing any single person too little to make it worth fighting in particular – see for examples all agricultural price supports.

  • John, customers surely also impose pressures on producers to offer quality products at low prices. This includes the terms of legal contracts.

    q, private law can also include “due process”

    • Jess Riedel

      Then why do I get my cell phone rebate on a difficult-to-fully-use prepaid visa card? Why are there difficult-to-redeem rebates at all?

  • “Note that I’m not (yet) proposing to eliminate government law; it may have a role in anti-trust for private laws, for example. I’m just proposing to tear down the wall that prevents us moving to and between private laws.”

    Sure tear down the walls; give everyone guns; teach them about the sanctity of life and let them go at it. May the best…. win.

  • George

    Not reading contracts carefully imposes massive but unlikely risks – same with the laws of nations. But we only submit ourselves to one or two nations’ laws, whereas we we submit ourselves to thousands of unread contracts. The probability that at least one contract over an individual’s life contains a catastrophic condition is quite high. Luckily they’re not all enforced. The lifetime risk for an individual of a catastrophic law of nation is smaller.
    This is the fundamental problem. Can an insurance market solve this?

    • My point was exactly that private law would get more respect if we only chose it rarely – having every contract try to specify some more private law details isn’t getting it the respect it needs.

      • Granite26

        Do you mean something like a generic EULA club, to where you sign up for it and then any supporting software, instead of a long complicated eula, will simply list which eula it’s giving you?

        I.E. “CompuSoft uses a EULACLUB Restrictive license. Please enter your current EULACLUB membership ID to sign”

        That makes a lot of sense. Companies buy rights to use the agreement, which pays for lawyers to enforce. Users only need to read a few contracts once before they can revert to a shortform.

      • Yes, that would be a good change, if not be the easiest first step.

  • There are limitations to how much we will respect laws in other countries regardless of our other agreements with them. Sexual assault is a case where this is consistent. You can be penalized for having sex with someone who is considered underage in your country even if they are not underage in the country where the act is done.

    I don’t know why anyone would argue in favor of special justice for criminal acts committed by certain people. It seems to undermine the concept of equality before the law and democracy. We have many cases of it as it is. When I was in college, many fraternities engaged in the sale of drugs, physical assault, property damage and sexual assault, and the members were disciplined by campus rules usually just resulted in their expulsion and the loss of fraternity charter. Meanwhile uneducated youths in bad neighborhoods go to jail for distilling extasy in the bathroom. One fraternity “prank” included frat brothers from one house driving a truck into the wall of another fraternity house. No one went to trial for this. A similar concept seems to apply to diplomatic immunity. One law for the elite and another for those with less recourse. This isn’t what justice is supposed to be.

    • I see that you have preferences over sex-related laws, but I’m not clear if you think that favors government over private law. Both kinds of law can either have the sex laws you favor or not. Do you think you would like the sex laws that would result if we had a single world law? If not, you are glad we have legal anarchy at the international level.

      • “I see that you have preferences over sex-related laws, but I’m not clear if you think that favors government over private law.”

        That isn’t a comprehensive paraphrasing of what I posted. I said that I thought that allowing private contracts to be binding in the event of criminal behavior would be to undermine fundamental principles of democracy and the spirit of the constituion. The article you linked to concludes that the outrage over the Haliburton case is misplaced because as it stands contracts are already not binding when it comes to criminal charges, thus a special clause that singles out sexual assault as a case where private contracts must not be endorsed by the government was unecessary and used as a political ruse.

        I think most people would say that private arbitration should not even be suggested in the case of rape even if there is a contract that specified that sexual misconduct is to be handled this way. Companies should be required to send those cases to the regular criminal justice system both so that the accused can get a fair trial and so that the accused can be sentenced a proper jail term if found guilty.

        “Do you think you would like the sex laws that would result if we had a single world law? ”

        This world law would be impossible to enforce. However, yes, it would be morally preferable for all sex laws to resemble those of any western first world nation, and it would be preferable if local populations wanted to enforce those laws.

      • I’m not that interested in the “spirit of the constitution” or what “most people would say.” You seem to be just assuming that governments choose better laws and make better legal decisions.

      • Give’em guns and I will bet donuts to dollars that law will get real simple.

      • “You seem to be just assuming that governments choose better laws and make better legal decisions.”

        Our government is not an arbitrary set of oligarchs. They are the people elected to support a system where all people have an equal chance at justice (amongst other things they are elected to do). I would bet that the court system does make better legal decisions than private arbitration where criminal behavior is concerned. It is not sensible to place some one size fits all “big government is bad” shoe on every event that potentially concerns a tax funded service, in this case the courts. Even in a libertarian world, the freely elected government is charged with protecting the freedoms of the individuals within that country. It is the government’s job to protect people from rapists and it is the government’s job to prevent those falsely accused of rape from suffering undeserved punishment.

  • lxm

    Perhaps you’ve just picked a bad example. The woman who worked for Halliburton was raped and imprisoned and her case was buried. I think outrage is an appropriate reaction. In fact if she had killed the Halliburton CEO in retribution it would have been appropriate. Likewise it would be appropriate for individuals who lose health insurance when faced with expensive life threatening illnesses through contract rescission to kill the insurance company CEO.

    If the courts and the law of the land cannot protect you from overreaching by the powerful, well then, there is always recourse to a more primitive private law.

    Who proposes private laws? Large corporations. Who receives the greatest benefit from these private laws? Large corporations.

    Should Halliburton and the Federal Government be able to enter into a private law agreement that will immunize Halliburton against all acts of rape and murder committed by their agents?

    I think the answer is no. You, apparently, believe the answer is yes. The cost for greater efficiency is too high.

  • Stuart Armstrong

    Legal history is littered with examples of brilliant sounding theories that turned out to be incredibly dire in practice.

    When it comes to touching the underlying framework of law, policing and judgement that underpins practically everything else in the modern world… This is one area where I’d say: change little, change slowly, and unless the benefits are huge by more than one standard, don’t change at all.

  • Jim Babcock

    I think it’s important to draw a distinction between criminal law and civil law here. Civil law is mainly for the benefits of the parties, but criminal law exists mainly for positive externalities. I wouldn’t want anyone else to sign contracts that lead to rapists going unpunished, because that would mean more rapists left for me and everyone else to worry about.

    • Jayson Virissimo

      “criminal law exists mainly for positive externalities”

      When you say it “exists mainly”, do you mean what people say it is for or its actual consequences? So much of the violent crime (in the US) would cease if the prohibition on drugs were ended. It seems to me that criminal law creates just as many negative externalities as positive externalities.

    • Granite26

      I may be guilty of an RTFM failure here, but wasn’t the arbitration against Haliburton as a corporate entity rather than against the person who commited the actual crime?

  • jonathan

    Under the laws of some countries, it is illegal for a Muslim to convert. It is also illegal under Islamic law for a Muslim to convert. The former would in your terms be “ossified government law” but the latter would seem to be a private contract between the religion and the person – and both require death. So we support the latter and condemn the former?

    With regard to the rape clause, I agree with the comments that your argument fails. First, society at large has a social interest in protecting its citizens and court cases are public while arbitration is private. Are you arguing the threat of public litigation has less or the same effect on reforming behavior? If so, you skipped that part.

    Second, if a clause that allows arbitration for rape is okay, then what about a clause that says, “We may choose to cripple you, to render you so that the rest of your life is dominated by excruciating pain, and that you can take us to arbitration if we do”? The word “choose” implies conscious act but that need not be; a company may be saying they choose to maintain an unsafe work environment and thus a certain number of employees will suffer. If your philosophy says that should be privately contracted – because that provides better outcomes – then you run into a huge line drawing problem. Why not allow a company to torture employees or even to kill them and then let an arbitrator deal with the fallout? Is there a behavioral line which society says is wrong or is everything affixed with a price tag that you believe can be determined “best” by an arbitrator or some other private choice?

    Third, some contracts are unconscionable. Unconscionability is not new; contracts with clauses that shock the conscience are illegal. You can’t obtain flesh if the loan is not paid. Society has the same right to determine that rape deserves public remedy – or can’t be bargained away – as it does to say you can’t agree to have your arm cut off or maybe to sell your child.

    Fourth, as noted, some contracts are a product of highly unequal bargaining power. They may even be adhesion contracts and this employment contract fits that bill. Again, there is a long history of unequal contracting cases that don’t involve ossified government. I believe in this case – the rape arbitration case – that is exactly what happened, that after 2 years a judge ruled the clause was illegal based on bargaining power and similar issues. In that light, one can see the Congressional action in more sensible terms, as necessary to prevent long litigation over a clause that courts may well find illegal, and thus it would be sensible to outlaw a clause that would generate court cases while adding significant costs.

  • I think Haliburton gang rape case is a brilliant example of why libertarian-style private laws wouldn’t work in the real world.

    I had one related experience. I was once presented with an employment contract that had some shockingly awful clauses. When I pointed them out, they just said the contract is a product of a lot of lawyer time, and they cannot really change anything in it, and what are the chances any of that would happen anyway. I’m sure most people would sign. I didn’t, more due to outrage than any rational calculations.

    Any consequentialists can see that allowing private laws would mean that the strongest party would push as much risk as they can to the most vulnerable party, and is therefore wrong without some very strong constraints.

    • Jayson Virissimo

      At least you were presented with a contract you could turn down. Isn’t that more than you can say for government law?

  • Most critics here are pointing out things that can go wrong in private choice of contract, even though similar things can go wrong in choosing a new nation. The key question is: Why allow choice of nation but not otherwise allow choice of law?

  • Cyan

    Why allow choice of nation but not otherwise allow choice of law?

    Have you directed your attention to the ways in which permitting total private law and permitting choice of nation differ? Here’s a couple that seem relevant to me:

    * for most people, there is a huge up-front cost to changing nations; not so with entering a private contract;
    * the outcomes for large numbers of people already live under the fairly stable laws of various nations are more-or-less easy to investigate; private laws based on contract is far more variable, and the information about outcomes is more difficult to obtain.

    These two factors place the two above juxtaposed choices at different positions on the scale of permissible paternalism. By and large, we believe people who are changing nations are not thereby directly and unknowingly placing themselves in a position of vulnerability to entities that might try to exploit them; not so for people entering contracts.

    • This post is arguing that private law fans should focus on having private law choices be larger more stable choices, exactly to get the respect you say such factors merit.

  • “Why allow choice of nation but not otherwise allow choice of law?”

    I am not sure we fully allow ex patriots to be subject to the laws of other nations. It’s customary for countries with a lot of international clout to stick their necks out to retrieve expats who are at risk of major human rights volations in other countries becuse of the laws in those countries. For example, Britain tried to extradite a teacher in Sudan who was sentenced for blasphemy after she let her students call a teddy bear Mohammad. It seems we also don’t respect their ideas of child custody. If an American wants to bring their child back with them to America after marrying a foreigner, I don’t think we recognize the divorce and child custory laws of other countries when deciding whether or not the child and parent can return.

    Western countries even recognize the basic human rights of people who have never been citizens. If a government decides to legalize genocidal policies, we sometimes arrange to accept those in danger as refugees. Since rape is considered a human rights violation, it makes sense that the legal system should never let private organizations be judge, jury and executioner when rape might have occured.

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  • Amasa Amos

    I’ve never understood how Al Franken’s “anti-rape” amendment is supposed to interfere with “private law”. The amendment does not outlaw any form of private contract, it merely “prevent[s] the Pentagon from contracting with” companies that have entered into certain classes of contract with third parties. Obviously, this is intended to discourage such contracts, but companies are still free to engage in them so long as they’re prepared to give up government business. It seems like an admirably free market solution to me.

  • Goatmania

    Neither contracts nor laws supersede human rights. I suppose though exist in economics, though.

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