An inquiry into fraud (or indeed into direct physical coercion) must begin with an inquiry into rights. For neither fraud nor coercion can be distinguished perceptually from legitimate activities. An assault and an old-fashioned, bare-knuckled boxing match look much the same. But the former is coercion and the latter not because, in the latter case, there exist prior agreements between the parties. Likewise, the pattern of deceit that goes into a con and the pattern of deceit that goes into a surprise party look much the same.
But the former is fraud and the latter not because, in the latter case, the deceit is not intended to work to the deceived person's harm.INDIVIDUAL RIGHTS
Two facts serve as the basis for individual rights. Unlike the members of some species (termites, apparently), man is metaphysically capable of living as an individual. Specifically, he is capable of using the individual attribute of reason to guide his production of values. Ethologically, however, man lives in stable social units, unlike species such as the orangutan. For millennia, it was believed that these two facts conflicted and that as one was emphasized the other must give way. The discovery that the very opposite is true, that society flourishes to the extent its members survive metaphysically as individuals, was the discovery that motivated the recognition of individual rights. For rights are the principles that define what a man must be free to do—what he must not be stopped from doing—if he is to live metaphysically as an individual in a social context.
What must a man be free to do? The argument that justifies rights shows that the one all-encompassing right is the right to live—as an individual within one's society. Since the essence of individual human living is action based on reason, man possesses the right to liberty: he must be free to take actions based on his judgment. Since the purpose of rights is specifically to preserve man's right to live as an individual within society, it is useful to stress that men have a right to pursue their happiness, an inherently individualistic purpose. Lastly, since all human action involves material objects, if only a place to stand, men must be free to create goods for themselves, to employ those goods, to trade them, or to destroy them. They must have property rights.
The paragraphs above speak, loosely, of what a person "must be free to do," "what he must not be stopped from doing." The obvious question is: In what ways might a person's freedom to do these things be curtailed? When shall we declare that he has been stopped from doing the things he has a right to do?
Ayn Rand wrote that "To violate man's rights means to compel him to act against his own judgment, or to expropriate his values. Basically, there is only one way to do it: by the use of physical force." ("Man's Rights," The Virtue of Selfishness [paperback], p. 111.) Insofar as this dictum rules out such "economic crimes" as "the restraint of trade" and "the attempt to monopolize," it is a valuable identification. But in Rand's mind, the scope of force was not limited to the blatantly physical: shooting a man, tying him up, burning his house. She (like most people) considered force to include threats of force: pointing a gun at a person and declaring, "Your money or your life." And she termed "indirect force" such actions as unilateral breaches of contract, fraud, and extortion (She also endorsed the libel and slander laws, in a Ford Hall Forum "question and answer" session.)
Here are two of Rand's statements on "indirect force":
A unilateral breach of contract involves an indirect use of physical force: it consists, in essence, of one man receiving the material values, goods or services of another, then refusing to pay for them and thus keeping them by force (by mere physical possession), not by right—i.e., keeping them without the consent of the owner. (Ayn Rand, "The Nature of Government, Ibid., p. 130.)
Let me concretize this. A cannery ships a hundred cartons of canned goods to a wholesaler, along with an invoice. But the wholesaler arbitrarily declares he will not pay the invoice. According to Rand, the canned goods are then being held without the consent of the owner, that is, the person who runs the cannery.
Here is Rand's second statement: "Fraud involves a similarly indirect use of force: it consists of obtaining material values without their owner's consent, under false pretenses or false promises." (Ayn Rand, Ibid.) Again: A cannery ships a hundred cartons of goods to a wholesaler, along with an invoice. But the wholesaler's depot is a front. The goods are quickly reloaded onto trucks and the wholesaler skips town, never having intended to pay invoice. According to Rand, the canned goods have been obtained "without the owners consent."
In order to determine whether Rand's analysis is correct, let us begin by defining "fraud." Its genus, I suggest, is simply "The act of obtaining goods or services from another." Fraud is thus in the same broad category as trade; as the forcible seizure of another's goods; and as the obtaining of goods and services by threats of force.
What are the facts of reality that give rise to the differentiae of "fraud"? The first, I believe, is that fraud proceeds by inducement rather than by direct physical coercion. Secondly, it proceeds by inducements based on the promise of gain rather than on the threat of harm. Thirdly, its inducements of gain involve a conscious and harmful deception of the person who conveys the goods or performs the services. Thus, fraud may be distinguished in turn from malicious deceit that harms but does attempt to obtain goods or services (e.g., giving a motorist false directions); from the seizure of goods by direct force; from the acquisition of goods through threat; and from the acquisition of goods through trade. Its definition is: "The act of obtaining goods or services from another through an inducement of gain that involves a conscious and harmful deception of the person who conveys the goods or performs the services."
Several questions may now be asked. (1) Is fraud indirect force, and, if so, does it violate rights? (2) Is fraud not indirect force, and therefore not a violation of rights? (3) Is fraud indirect force but not a violation of rights? (4) Is fraud not indirect force but a (non-forcible) violation of rights?
Ayn Rand endorsed the first proposition, as we saw, and the case for her position seems strong. After all, traded items are not usually exchanged simultaneously. Even when a merchant hands me a quart of milk and I go to hand over a dollar, I may suddenly pull back the dollar and run out of the store without paying. If so, I have clearly violated the merchant's property right—his ability to control his goods—by using force of the most direct sort: the physical seizure of his goods. How different is that, in essence, from walking out of the store with a quart of milk, because I have established an account with him, under a false name and address?