Debt, Default and Two Liberal Theories of Justice

TL;DR: In this article, the authors argue that there is a fundamental disconnect between the public discourse about sovereign and external debt in comparison to private domestic debt, and that the latter is predominantly viewed through a Humean lens, which sees economic morality in terms of contingent social institutions, justified by the valuable goods they realize.

Abstract: There is a fundamental disconnect between the public discourse about sovereign and external debt in comparison to private domestic debt. The latter is predominantly viewed through a Humean lens, which sees economic morality in terms of contingent social institutions, justified by the valuable goods they realize; while sovereign and external debt is viewed through a Lockean lens, which sees property, contract, and debt as possessing an intrinsic moral quality, independent of social context or consequences. This chapter examines whether this Lockean perspective on sovereign and external debt is compatible with the dominance of Humean approaches to the domestic economy. It considers and rejects the most plausible argument for reconciling these views, which emphasizes the different qualities of cooperation in the international and domestic economies. It further argues that many standard objections to a Humean approach to sovereign debt suggest, not the Lockean approach, but rather a Hobbesian international moral skepticism. Concluding that the Lockean approach is unmotivated, this chapter instead advances a Humean account of sovereign debt and default. It shows how taking seriously the demand for institutional justification and the idea of persons and peoples as free and equal provides an account of the duties of states—whether creditors, debtors or third parties—in sovereign debt crises. It further examines the implications of each approach for democratic choice about sovereign default.

Summary

Introduction

• Special Issue Democracy and Financial Order—Legal Perspectives Debt, Default, and Two Liberal Theories of Justice By Oisin Suttle* Abstract.
• There is a fundamental disconnect between the public discourse about sovereign and external debt in comparison to private domestic debt.
• How the authors understand the morality of sovereign debt is thus fundamental to any judgment they might make, about either the democratic credentials or the substantive justice of their legal and political responses to this crisis.
• Finally, I consider the implications of these diverse approaches for questions of governance, and in particular how claims to democratic choice might be applied to cross-border debts.

B. Two Liberal Perspectives on Economic Morality

• The authors can identify two distinct liberal traditions of thinking about the morality of economic life.
• These traditions are distinguished not by the economic institutions they prescribe, but by the ways they understand those institutions as justified.
• Indeed, as Nozick’s argument suggests, Humeans must necessarily deny this; for if they concede the natural rights account of property, they will find little conceptual space left in which to realize their utilitarian or egalitarian commitments.
• Rather, it was the return of an overlapping consensus between Humean and Lockean liberals on the virtues of markets in both vindicating natural rights and delivering social goods.

C. Financial Markets, Default, and Cooperation

• My starting point, then, is the prominence of a Lockean morality of debt in the discourse of sovereign and quasi-sovereign restructuring, and how, if at all, this can be reconciled with Humean, and specifically left-liberal, approaches domestically.
• 20 Rawls goes further, characterizing rights and entitlements—including those to economic goods—as products of social cooperation.
• Samuel Freeman has argued against the extension of Rawls’s difference principle internationally on the basis that the international system is not cooperative in the second, normative, sense.
• Arise with respect to that oil and revenue, and that Extractia’s and Industria’s claims on that oil and revenue fall to be justified in distributive terms.
• Focusing on another component—the lender’s cost of capital—leads to a similar point.

D. Three Models of Justice Beyond the State

• It appears, then, that international investment and debt concern the distribution of benefits and burdens from cooperation, rather than simply the protection or abrogation of pre-existing rights.
• Third, the authors might conclude that, while the international economy is indeed subject to judgment in terms of justice, reasoning about justice beyond the state has a different structure to reasoning about justice domestically.
• Further, it makes little sense to adopt this third approach by default, as some seem to, because the authors disagree about the conclusions of the first approach.
• It might mandate applying the same principles to outsiders and insiders, albeit this might require broadening the outcomes over which those principles are justified.
• If the authors understand the claims of outsiders in Lockean terms, but those of insiders in Humean terms, then they are likely to struggle wherever insiders and outsiders participate in the same institutions.

E. Justice and Institutions in a Global Economy

• There seem, then, to be various reasons to reject the Lockean turn in international morality.
• While it is thus clear that there are non-voluntary institutions of the relevant kind, how exactly the authors specify these, and how they understand the relations between them, may have important implications for thinking about the justice thereof.
• The relation in which peoples, and indeed persons, stand towards the international economy is thus analogous to that in which individual persons stand towards their own states; and the terms in which it falls to be justified are symmetrical as regards each people.
• These clearly play an important role, but that role does not eclipse the continued importance of states’ domestic institutions.
• The authors might accept that outcomes in the international economy, as presently organized, are not attributable to definite agents and so not directly criticizable in terms of justice.

F. One Humean Take on Eurozone Sovereign Debt

• The discussion up to this point has been quite schematic.
• 81 Communitarian critiques of liberal neutrality might offer inspiration here.
• The goal of these earlier sections was to clear away the conventional wisdom of crossborder debt in order to open space for an alternative analysis.
• This Section continues that constructive project, elaborating its implications under one specific account of international economic justice, which I label Equality in Global Commerce (EGC).
• While I do not find that Lockean perspective plausible, contrasting its prescriptions with EGC highlights the implications of taking seriously the international implications of their domestically entrenched Humean commitments.

I. From Equality in Global Commerce . . .

• EGC is broadly Rawlsian in its content and methods, drawing on elements from Rawls’s domestic and international theories.
• In the case of regional or other non-universal international institutions, the position is somewhat complicated.
• The self-determination of peoples, both insiders and outsiders, thus constitutes the first criterion for assessing the justice of such institutions.
• It will, however, highlight the ways these voluntary institutions are experienced by non-members as non-voluntary.
• Similarly, arguments might be made for the earlier democratic transitions in Spain, Portugal, and Greece.88 84.

II. . . . To the Justice of Sovereign Debt

• These, then, are the principles I label EGC, as they apply to national, international, and non-universal or regional institutions.
• Rather, it assumes that the more advantaged pursue their own goals through their own institutions, and that the effects these have on outsiders are justified provided they allow those outsiders to do the same.
• Third, the issue is not the borrower’s freedom to agree to strict terms, but rather whether non-voluntary institutions should 95 For a further discussion, see infra pp. 829-831. 96.
• Some might object to this allocation of responsibility, but a plausible reply highlighting states’ dependence on international markets, and others’ constitution of those markets through their domestic institutions, supports it.

G. From Relations of Justice to the Scope of Democratic Community

• My focus thus far has been questions of justice.
• I want, in this final section, to shift that focus somewhat, to highlight the implications of this approach for thinking about democracy in financial markets, and specifically in respect of sovereign debt restructuring.
• The lender has a right to repayment of the debt, and no democratic choice on the part of any other person can license depriving him of it.
• Recall, the Lockean sees no role for borrower democracy because he does not perceive any choice that falls to be made by the borrower.
• Perhaps the most plausible response is that decisions fall to be made by the individual polities concerned, but that they should make those decisions with due regard for the justice-claims of outsiders.

H. Conclusion

• The puzzle was that the discourse of sovereign debt seemed to express a fundamentally different view about the structure of moral obligation in economic affairs to that found in liberal domestic polities.
• The first question was whether there were good principled explanations for this divergence.
• Finally, in Part G, I examined the different implications that the various approaches to international economic justice canvassed in earlier sections have for questions of democratic choice, including in particular who should decide the terms of any restructuring of sovereign debt.
• I have said nothing about historic injustices or non-democratic borrowing governments as alternative grounds for denying the moral force of international debt.
• More relevant for my purposes are questions about the forms that institutions might take to vindicate the demands of the Humean perspective, both as to substantive outcome and democratic control.

Full text

Special Issue
Democracy and Financial Order—Legal Perspectives
Debt, Default, and Two Liberal Theories of Justice
By Oisin Suttle
*
Abstract
There is a fundamental disconnect between the public discourse about sovereign and
external debt in comparison to private domestic debt. The latter is predominantly viewed
through a Humean lens, which sees economic morality in terms of contingent social
institutions, justified by the valuable goods they realize; while sovereign and external debt
is viewed through a Lockean lens, which sees property, contract, and debt as possessing an
intrinsic moral quality, independent of social context or consequences. This Article
examines whether this Lockean perspective on sovereign and external debt is compatible
with the dominance of Humean approaches to the domestic economy. It considers and
rejects the most plausible argument for reconciling these views, which emphasizes the
different qualities of cooperation in the international and domestic economies. It further
argues that many standard objections to a Humean approach to sovereign debt suggest,
not the Lockean approach, but rather a Hobbesian international moral skepticism.
Concluding that the Lockean approach is unmotivated, this Article instead advances a
Humean account of sovereign debt and default. It shows how taking seriously the demand
for institutional justification and the idea of persons and peoples as free and equal
provides an account of the duties of states—whether creditors, debtors or third parties—in
sovereign debt crises. It further examines the implications of each approach for democratic
choice about sovereign default.
*
Lecturer in Law, University of Sheffield, o.suttle@sheffield.ac.uk. I am grateful for valuable comments from the
editors of this special issue, from participants in the workshop from which this issue derives, including, in
particular, Jen Hendry, and from Robert Burrell, and Sagar Deva, who kindly read and commented on earlier
drafts.

800 G e r m a n L a w J o u r n a l Vol. 17 No. 05
A. Introduction
This Article is about the ways that we do, and should, think and talk about the moral status
of cross-border debt relations, and, in particular, sovereign and quasi-sovereign debts. It is
motivated by a puzzle. There is a fundamental disconnect between recent public discourse
about the Eurozone sovereign debt crisis, and the ways we commonly analyze economic
affairs within domestic polities. Whereas domestically, we typically think about economic
affairs in terms of institutions, outcomes, efficiency, and distributive fairness, Eurozone
sovereign debts have been discussed through a dominant lens of responsibility, obligation,
and the intrinsic moral duties of debtors, tempered only by duties of charity and humanity
on the part of creditors.
This disconnect, and the moralizing of cross-border debt, has substantially limited the
options for resolving the debt crisis, including in particular by limiting the scope for
restructuring. It has shaped the legal responses to the debt crisis, and to sovereign and
external debt generally. It has informed debates within and between democratic polities
about the choices that fall to them to make, and about who should make those choices,
given competing claims and cross-border relations. How we understand the morality of
sovereign debt is thus fundamental to any judgment we might make, about either the
democratic credentials or the substantive justice of our legal and political responses to this
crisis. Insofar as those responses claim to track underlying moral rights and duties, and
particularly given the absence of comprehensive democratic processes and institutions
through which they can be legitimized, it is doubly important that we clarify our thinking
on the underlying moral issues.
I argue the disconnect expresses a deeper tension between two fundamentally different
traditions of liberal thinking about economic affairs, which I label Lockean and Humean.
The Lockean understands economic relations as having an intrinsically moral quality, while
the Humean sees the economy in institutional and instrumental terms. Notwithstanding
the domestic dominance of Humean approaches, discussions of sovereign debt seem
clearly to express the Lockean perspective.
The first question that I ask is whether and to what extent it makes sense to adopt these
different approaches in analyzing domestic and international debt. In particular, I ask
whether differences in the nature of cooperation in international financial markets might
explain these different approaches. Notwithstanding the initial plausibility of this position, I
conclude that it cannot do so. Nor, I argue, can the differences be explained by any of the
other challenges typically posed to theories of global economic justice. In so far as these
challenges constitute objections to Humean approaches, they are equally fatal to the
Lockean perspective, motivating instead a Hobbesian skepticism.

2016 Debt, Default, and Two Liberal Theories of Justice 801
I therefore dispense with the Lockean approach and turn to a second question, namely
how we might develop a Humean approach to international financial markets, and
specifically to sovereign debt restructuring. There are many Humean approaches
domestically, each suggesting a different approach internationally. I focus on one,
developing what I see as the best expression in the international debt context of Rawls’
Justice as Fairness. I show how understanding economic justice as concerned with the
justification of social institutions can generate specific principles for the governance of
debt relations and the resolution of debt crises, and how those principles in turn support
conclusions about the duties of debtors and creditors that are quite different to those
suggested by the dominant Lockean approaches. Finally, I consider the implications of
these diverse approaches for questions of governance, and in particular how claims to
democratic choice might be applied to cross-border debts.
B. Two Liberal Perspectives on Economic Morality
We can identify two distinct liberal traditions of thinking about the morality of economic
life. The first, deriving from John Locke, finds its most prominent contemporary expression
in the right libertarianism of Robert Nozick. The second runs from Thomas Hobbes through
David Hume, Jeremy Bentham, and John Stuart Mill to—in modern Anglo-American
thought—John Rawls and his successors.
These traditions are distinguished not by the economic institutions they prescribe, but by
the ways they understand those institutions as justified. For Lockean liberals, economic
relations have an intrinsically moral character. Real and personal property derive from our
inherent self-ownership.
1
Contracts bind as promises, the breach of which violates the
natural rights of the individuals to whom we make commitments.
2
The move from natural
rights to economic morality does not run through consequences, except perhaps at a low
threshold level.
3
Humean liberals, by contrast, understand the economy as institutional,
instrumental, and ultimately contingent.
4
Property and contract are institutional
expressions of the scheme of cooperation that we label society, and it is together with the
1
JOHN LOCKE, TWO TREATISES OF GOVERNMENT 285 (P. Laslett ed., Cambridge Univ. Press 1988) (1689); ROBERT NOZICK,
ANARCHY, STATE AND UTOPIA 150 (1974).
2
LOCKE, supra note 1, at 277. Lockeans can most plausibly invoke Kant for this claim, although Nozick understands
the self-ownership argument as similarly expressing a Kantian injunction against instrumentalizing persons.
NOZICK, supra note 1, at 30.
3
Thus, in Locke, our natural right to appropriate depends inter alia on a claim about what is necessary for persons
to make use of the world. LOCKE, supra note 1, at 286. Further, the proviso to leave “as much and as good”
introduces a potential, if quite limited, consequentialist constraint. Id, at 291; NOZICK, supra note 1, at 178.
4
We might equally label this second tradition Hobbesian. Given both Hobbes’s moral egoism, and his
appropriation by international relations realists, however, Hume seems a more suitable namesake.

802 G e r m a n L a w J o u r n a l Vol. 17 No. 05
rest of that scheme and—at least in modern iterations—in terms of the volume and
distribution of valuable goods that it realizes, that they fall to be justified.
5
Humean liberals
need not be consequentialists, but they will likely deny there is any intrinsic moral quality
to economic rules, of the kind imagined by Lockean liberals.
6
Indeed, as Nozick’s argument
suggests, Humeans must necessarily deny this; for if they concede the natural rights
account of property, they will find little conceptual space left in which to realize their
utilitarian or egalitarian commitments.
The Lockean reasons directly from political morality to just institutions governing economic
activity. The Humean, by contrast, must appeal to the human sciences, most prominently
economics, but also sociology, psychology, and political science, to identify optimal
institutions, as defined by her underlying social welfare function.
7
These might be the same
institutions that the Lockean approach favors—security of property, freedom of contract—
but how these are justified is quite different. Indeed, despite their popularity among soi-
disant libertarians, such prominent free-market liberals as Hayek and Friedman fall clearly
on the Humean side of this line: They defend market freedoms not for their intrinsic worth,
but for their social consequences.
8
These traditions represent fundamentally different understandings of the relationship
between the individual and society. For Lockeans, individuals and their rights are prior to,
5
See generally DAVID HUME, TREATISE ON HUMAN NATURE §3.2 (David F. Norton & Mary J. Norton eds., Oxford Univ.
Press 2000) (1738); THOMAS HOBBES, LEVIATHAN 90, 125, 170–75 (Richard Tuck ed., Cambridge Univ. Press 1996)
(1651); JEREMY BENTHAM, PRINCIPLES OF THE CIVIL CODE §1.8 (Étienne Dumont ed., 1843); JOHN RAWLS, JUSTICE AS
FAIRNESS: A RESTATEMENT 114 (Erin Kelly ed., 2001) (1971) [hereinafter RAWLS, RESTATEMENT]. Kant’s recognition of
property as relational, and in consequence deriving from social contract, most clearly places him in this category.
Immanuel Kant, Doctrine of Right, in PRACTICAL PHILOSOPHY 421–32 (Mary J. Gregor ed., 1999) [hereinafter Kant,
Doctrine of Right].
6
They do not deny, of course, that economic rules serve important moral functions, making human society
possible, but deny only that they have force or content apart from their function in particular societies. See, e.g.,
HUME, supra note 5, at §§ 3.2.2.12, 3.2.3, 3.2.5, 3.2.6.6. Admittedly, some Humean liberals’ accounts of liberty
lead them towards a middle-ground. See generally, e.g., RONALD DWORKIN, SOVEREIGN VIRTUE: THE THEORY AND
PRACTICE OF EQUALITY (2000).
7
This comes out clearly from Rawls’s discussion of the basic structure and the need to continuously adjust basic
institutions to ensure that they realize social justice over time. JOHN RAWLS, POLITICAL LIBERALISM 265 (1996).
8
See generally FRIEDRICH VON HAYEK, THE ROAD TO SERFDOM (2001); MILTON FRIEDMAN, CAPITALISM AND FREEDOM 12–20
(2002). By contrast, while I focus on right-leaning Lockeans, who identify the intrinsic morality of the economy
with property and contract, there are also leftist Lockeans, who ground egalitarian prescriptions in the intrinsic
moral quality of particular relations. Consider, most prominently, Marx’s concerns with exploitation and
alienation. See WILL KYMLICKA, CONTEMPORARY POLITICAL PHILOSOPHY: AN INTRODUCTION 180, 190–92 (2d ed. 2002).

2016 Debt, Default, and Two Liberal Theories of Justice 803
and impose limits on, society.
9
For Humeans, rights derive from society and are defined
and justified by the function they play within the social scheme.
10
The tension between these approaches is a recurring feature of political debate in liberal
states. J.M. Keynes, writing in 1926, tells the story of their temporary reconciliation at the
hands of nineteenth-century laissez faire economists.
11
The efficiency of markets generates
a happy coincidence between protecting natural rights and advancing social welfare. Early
utilitarians and libertarians thus found an overlapping consensus in support of secure
property, free contracting, and the minimal state.
Two World Wars, the Great Depression, and Keynes’s own theoretical innovations
undermined that consensus, forcing states to choose between natural rights and social
welfare. In Roosevelt’s New Deal, the United States chose the latter. In the UK, the same
choice was made in stages, from the free trade debates of the 1900s through the industrial
unrest of the 1920s to post-war nationalizations and the welfare state. As John Ruggie
observes, the post-war Atlantic social model was that of embedded liberalism, in which
markets are understood as tools, contingently valuable for the realization of social goals.
12
The Atlantic consensus around the interventionist state lasted, to varying degrees, into the
1970s, when faltering growth and persistent inflation stimulated renewed interest in the
free-market models of neo-classical economics. The Reagan/Thatcher revolution was not,
on this account, a simple reassertion of the Lockean morality of property. Rather, it was
the return of an overlapping consensus between Humean and Lockean liberals on the
virtues of markets in both vindicating natural rights and delivering social goods.
Admittedly, the language of market freedom and individual responsibility has achieved a
new salience in recent decades.
In the domestic context, however, any plausible defense of
9
Recall that Locke understands government as instituted for the protection of property, and hence denies it can
have general authority to interfere with property. See LOCKE, supra note 1, at 360; cf. NOZICK, supra note 1, at ix.
10
This holds as much for deontological left-liberals, such as Rawls, as it does for utilitarian liberals, such as Mill.
Recall, Rawls’s basic liberties are themselves products of social cooperation, rather than a remainder of pre-social
natural rights. For Hume, there are natural virtues, which we can understand apart from social cooperation; but
the virtues of economic justice, including property and contract, are firmly social and conventional. HUME, supra
note 5, at §§ 3.2.1.17-19, 3.2.2.9-11, 3.2.6.4. Natural rights play a role in Hobbes’s theory, but these are limited to
liberty rights in the state of nature. A small residue remain under the commonwealth, but impose no duties on
others, whether individuals or the state. Any claim rights, which we can assert against others, are purely
institutional.
11
See generally, John Maynard Keynes, The End of Laissez Faire, in THE ESSENTIAL KEYNES (R. Skidelsky ed. 2015)
(1926).
12
See generally, John Gerard Ruggie, International Regimes, Transactions, and Change: Embedded Liberalism in
the Postwar Economic Order, 36 INT'L ORG. 379 (1982).

Frequently asked questions

Q1. What are the contributions in "Special issue democracy and financial order—legal perspectives debt, default, and two liberal theories of justice" ?

This Article examines whether this Lockean perspective on sovereign and external debt is compatible with the dominance of Humean approaches to the domestic economy. Concluding that the Lockean approach is unmotivated, this Article instead advances a Humean account of sovereign debt and default. It shows how taking seriously the demand for institutional justification and the idea of persons and peoples as free and equal provides an account of the duties of states—whether creditors, debtors or third parties—in sovereign debt crises. I am grateful for valuable comments from the editors of this special issue, from participants in the workshop from which this issue derives, including, in particular, Jen Hendry, and from Robert Burrell, and Sagar Deva, who kindly read and commented on earlier drafts. It further argues that many standard objections to a Humean approach to sovereign debt suggest, not the Lockean approach, but rather a Hobbesian international moral skepticism. It further examines the implications of each approach for democratic choice about sovereign default. 

Q2. What have the authors stated for future works in "Special issue democracy and financial order—legal perspectives debt, default, and two liberal theories of justice" ?

It may be that these concrete questions of institutional design and political possibility are where the real challenge lies. 

Q3. What are the main questions that are relevant for my purposes?

More relevant for my purposes are questions about the forms that institutions might take to vindicate the demands of the Humean perspective, both as to substantive outcome and democratic control. 

Q4. What are the non-voluntary institutions that are characterized by the international economy?

These include formal international institutions, such as the IMF and WTO, to which states formally consent, but which, in practice, they have little choice but to accept;58 they include informal international institutions, such as the globalized economy and the relations of trade, investment, and debt comprised therein;59 and they include the political56 

Q5. What is the first criterion for assessing the justice of such institutions?

The self-determination of peoples, both insiders and outsiders, thus constitutes the first criterion for assessing the justice of such institutions. 

Q6. How does the Lockean avoid this worry?

The Lockean might avoid this worry by suggesting that outsiders implicitly accept limits on economic rights, in line with those applied to insiders, as a condition of participation. 

Q7. What is the only justification for opposing a restructuring?

The only justification for opposing such restructuring would be that this would lead to worse outcomes in terms of the value—self-determination—that is at issue. 

Q8. What are the consequences of allowing some borrowers to borrow?

97 Second, allowing some borrowers this choice may impose significant negative externalities on others; where there is an option to borrow on strict terms, lenders may be less willing to lend on terms that allow restructuring, as compared to a situation where all lending must allow restructuring. 

Q9. Does it mean that the borrower can be restructured?

It does not mean that restructuring cannot be made conditional on policies to ensure it, in fact, leads to the borrower’s effective self-determination.