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I made the point last week that freedom of contract includes the right not to be party to contracts without your consent, and that consent has to involve some sort of affirmative action. Shrink-wrap contracts that are presented only after a sale is complete don’t cut it in my view. If the contract wasn’t available for review at the point of sale, then I don’t care what might be in the box. You didn’t consent to the contract.

Now, some people might (and in the comments to previous posts, did) claim that this is just nitpicking, and that the really important thing is to promote economic efficiency by making contract formation easier. On this theory, contract negotiations are a transaction cost, and it’s economically beneficial to lower transaction costs as much as possible. So even if you haven’t technically agreed to the shrink-wrap EULA before you leave Best Buy, some people might argue that you “should have known” there would be a EULA in the box, and therefore it’s economically efficient to bind you to the contract unless you return the product to the store.

The problem with this argument is that it focuses myopically on the costs of contract negotiation to the exclusion of other costs that in many cases are much more important. It should be remembered that every contract signed is a prelude to possible state coercion if the contract is broken. Like all other kinds of coercion, the possibility of contract-related litigation creates uncertainty and other deadweight costs. In addition, the act of offering contracts imposes a deadweight cost. Every time I’m presented with a contract, I have to at least skim through it to make sure that the terms are acceptable. A society in which contract formation is extremely cheap for one party will be a society in which other people have to spend a lot of time scrutinizing the contracts they offer. Finally, contracts impose costs on the court system. A legal system that makes contracts to cheap to create will lead to too much taxpayer money being wasted on contract litigation.

All of which is to say that economic efficiency is not promoted by making contract formation as cheap as possible. Rather, the goal should be to align incentives so that a party only offers a contract if its benefits to all parties outweigh its expected costs. One thing that we should particularly try to avoid is a situation in which offering contracts is almost costless to one party, but reviewing them is expensive for the other party. Because then the offering party will offer inefficiently many contracts favorable to itself, and its counterparties will accept inefficiently many contracts because the costs of scrutinizing them individually is too high.

In contrast, if things are structured so that each party bears roughly half the costs of contract negotiation, then each party is only going to propose a formal, written contract if he believes that the benefits of doing so will outweigh the costs to both parties. This is one of the good things about paper contract negotiations between flesh-and-blood people: If you give me a long contract to sign, you’re going to have to stand there and wait while I read the contract and decide if I want to sign it. Since standing around is a waste of your time, you’re only going to do that if you believe the transaction can’t happen without it. And you’re going to try to make the contract as short as possible so you don’t have to stand around too long.

In the vast majority of business transactions, the default UCC terms work just fine. Grocery stores don’t try to attach contracts to the items they sell because it would slow down the checkout line too much if customers had to stand around reading their Banana Licensing Agreements before they were allowed to take their groceries home.

The reason shrinkwrap licenses on software are more popular than supermarket checkout contracts is not because software sales are some kind of exotic financial transaction that require special contractual terms. The UCC defaults can and do work just fine for software. Rather, the reason software firms make extensive use of EULAs is because they’ve found a clever gimmick that allows them to use copyright law as a way to bypass the ordinary rules of contract law and foist almost all the costs of contract negotiation onto the customer.

If a grocery store checkout clerk slipped a Banana Licensing Agreement into your grocery bag, no court of law would regard that as an enforceable contract. But software vendors have been pushing the legal fiction that software is licensed rather than sold. And if software is licensed rather than sold, then using software without accepting the license agreement is copyright infringement, which operates under an entirely different set of rules than ordinary contract law.

This claim is pretty clearly contrary to copyright’s First Sale Doctrine, and some courts have explicitly rejected it in some cases, but other courts have upheld it, and software vendors find the ability to skirt the ordinary rules of contract law so convenient that they keep trying.

But as a policy matter, there isn’t any good reason to let them get away with it. It would be bad policy to allow grocery stores to attach Banana License Agreements to their customers’ banana purchases by putting a BLA in each grocery bag, and it’s equally bad policy to allow software vendors to bind their customers to contracts they’re not able to review until after a sale is made. If software vendors want the software they sell to come with particular contractual restrictions, they should have the clerk at Best Buy provide the customer with a copy of the license agreement and require her to sign it before she can leave the store. If software vendors aren’t willing to put their customers through that hassle (and I’d bet money that they’re not) then it’s obviously not that important to them for their products to come with contractual restrictions attached, in which case the right outcome is for the software to be sold without special contractual restrictions, the same way that movies, music, books, and other creative works do.

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As Adam Thierer has previously commented on this very blog, Mythbusters is “the best science show on TV in years.” Since the show tackles ridiculous beliefs that have entered the popular culture, it would make sense that at some point, they’d expose some dumb government policy. But, generally, the Mythbusters stay away from terribly controversial topics. So, unlike Bill Maher, they don’t debunk religious beliefs. And, unlike Adam, they haven’t shown that concerns over airplane terrorism are overblown.

But maybe Adam and Jamie’s policy is changing. I just watched an episode (which originally premiered in 2006) where they test whether cell phone signals can interfere with airplane avionics. Shockingly, even when they hauled into a real plane a radio transmitter broadcasting all kinds of cell phone signals at hundreds of times their normal power, there was no interference at all! This makes sense; after all, there are lots of radio signals travelling through the air everywhere anyway. Airplanes are built to ensure that these signals don’t affect their navigation equipment. And the EU has allowed cell phone use on planes for years, without incident. Plus, we all know that people have used their phones on planes in the US, just more covertly.

I reported on the US’s absurd ban before over at OpenMarket. And it looks like, in spite of liberalizing moves on the part of the FAA and FCC, the ban isn’t going anywhere, thanks to Congress. I guess you can bust myths with science, but the government won’t listen. If only we could recruit Mythbusters to show that the FDA does more harm than good or that Social Security creates fiscal insecurity.

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Forbes has produced a scintillating special report on the market crash and what comes next. Steve Forbes tells “How Capitalism Will Save Us.” In “Curbing Washington’s Growing Power” economist David Malpass explains the policy mistakes that led here and describes the key threats that could make it worse. Rich Karlgaard compares today’s market to the malaise of the 1970s, but offers hints of optimism bubbling up. And George Gilder, summoning Peter Drucker’s mantra — “Don’t solve problems; pursue opportunities” — previews the technologies that portend a “Coming Creativity Boom” and offers, characteristically, the deepest insights on the nature of capitalism:

Knowledge is about the past; entrepreneurship is about the future. In a crisis the world of expertise pulls the global economy ever deeper into the past, where accountant-economists ruminate on the labyrinthine statistics of leviathan trade gaps, tides of debt and deficits, political bailouts and rebates, regulatory clamps and controls, all propping up the past in the name of progress.

The crucial conflict in every economy, however, goes on. It is not between rich and poor, Main Street and Wall Street, or even government and the private sector. It is between the established system and the new forms of wealth rising up to displace it–all the entrenched knowledge of the past and the insurrections of futuristic enterprise and invention.

The real source of all growth is human creativity and entrepreneurship, which always comes as a surprise to us, especially in the worst of times, as Rich Karlgaard notes. No amount of knowledge about the present can predict the specific profile and provenance of innovation. From the pits of the crash of 2000, when the Internet and the dot.com siege were famously dismissed as a barren “bubble,” came Google (nasdaq: GOOG – news – people ) and MySpace to rise up and take all the chips and establish a new Internet economy. If creativity was not unexpected, governments could plan it and socialism would work. But creativity is intrinsically surprising and the source of all real profit and growth.

You’ll find lots more economic and investing advice, including a report on “What Ben Graham would do.”

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A swarm of acronyms descended on other acronyms on Monday.  The ACLU, EFF, and AU’s Center for Social Media (CSM) wrote an open letter (PDF) to CBS, NBC, ABC, CNN, and other acronymed networks asking that each of them think twice before sending takedown notices to YouTube for what they see to be fair use content concerning the election.  The letter notes that:

Not only are such notices contrary to the law, but they also threaten to silence an exciting new source of political expression.

TechDirt seemed to miss the point by reacting to the letter with this statement in a recent story:

If the law is the problem, fix the law — don’t ask everyone else to play by different rules. That just sweeps the problems of the law under the rug, where they’ll get a lot less attention.

But the trifecta of concerned acronyms aren’t asking for TV networks to play by a different set of rules, or even to restrain themselves from excercising their legal right to file a takedown for infringement, they’re asking for the networks to follow the letter of the law and recognize blatant cases of fair use.  This seems fair and totally reasonable.

What I take issue with and what seems to be asking a lot in terms of legality, is the coalition’s second letter sent on Monday (PDF), this one addressed to YouTube.  It asks YouTube for two things:

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I thought that Thierer was frank when it came to pointing out the self interest of net neutrality proponents, check out Valleywag on the same topic today:

What’s “net neutrality”? As far as we can tell, it’s a bunch of rhetoric that amounts to regulations that affirm Google’s God-given right to avoid giving Internet service providers a cut of advertising revenues.

This comment was inspired by Google VP Vint Cerf’s recent endorsement of Barack Obama for president.  Obama has stated that he favors net neutrality regulation and would enshrine into law the likely illegal action of the FCC to stretch their net neutrality “principles” into hard and fast rules.

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