Sunday, October 5, 2008

contracts

A contract is essentially a set of reciprocal promises. There are at least four reasons why one might want to adhere to a contact, to keep one's promise: Purely out of a sense of personal honor, because the other parties will retaliate in the event of a breech, because of the damage to one's reputation, or because there is some authority which is entrusted to interpret to contract and empowered to enforce it. These are all related in that some entity is deliberately punishing one in breech of a contract, the difference being the entity doing the punishing.

The importance of the first is not to be underestimated. Given the existence of individuals who will rip you off given the chance, it is imprudent as an individual to rely on the personal honor of other unknown individuals. However, I suspect a any sort of decent society requires most people most of the time to behave honorably purely out of a sense of personal obligation. A society in which most individuals would cheat if they were confident they could get away with it must lead to widespread cheating, both because cheaters could in fact get away with it many cases, and because the sort of moral outrage necessary for enforcement in the second and third cases would be impossible to summon up in such a society.

A sense of personal honor is as important in the scond case as in the first for that same reason: Effective retaliation means means not merely severing future relations, but taking steps to injure the breecher when a "rational agent" in the game theory sense would simply walk away. All the benefits of retaliation come from convincing others that one will retaliate; the act of retaliation itself is all costs. But one could hardly convince others that one would massively retaliate against caught cheaters while simultaneously acknowledging that one expects others to cheat when they could get away with it and is in fact personally doing the same.

The third category is very important for small groups whose members only infrequently change. But in modern societies the number of individuals one may come into contact with is vast. One will frequently have some sort of commerce with someone one has never encountered before, will probably never encounter again, and doesn't really have any good information about. Conflicting reports from third parties of unknown reliability are of limited value.

It is thus unsurprising that in so many cases individuals explicitly or implicitly rely on a third party for arbitration and enforcement. And because it is inevitable that even individuals who have explicitly agreed to abide by the decisions of some third party will not necessarily willingly accept the decisions of the arbiter, in practice dispute resolution must involve an element of force. This in turn implies that modern states by their nature must declare themselves to be the final arbiter of all contracts, since if a decision must be forcefully imposed the state must sanction the use of force, and in many cases must itself be the enforcer.

1 comment:

Aaron Davies said...

breech
breach
(analogies to burros and burrows omitted for brevity)