The Contract-Based Society

To paraphrase T. S. Eliot, Between the real and the absurd falls the contract.

This was my thought as I pondered cause and effect in our recent plumbing fiasco. The builder, so called, did not build the house: they subcontracted to others. Some of the subcontractors did not build the house: they subcontracted. The builder was actually in the business of selling mortgages. This I discovered twelve years ago when we bought the house.

How much has the artifact called the contract pervaded our society and what are its consequences? I have yet to get anything close to a clear answer to that question, but it seems to me that the further a contract gets from the product or service it references, the more deleterious it becomes for society.

In terms of human history, contracts as we know them, are a rather recent innovation. The ancient Chinese people had no written contracts. When disputes arose over obligations they were adjudicated on the basis of fairness: a strange legal notion that. We long ago abandoned fairness as a contract criterion. Now it is caveat emptor - let the buyer beware.

One of the consequences of the increasing remoteness of the contract from the product or service it represents is that it becomes a commodity itself and is thus subject to speculation. For example the commodities market consists of nothing but contracts to buy real goods at a specified time for a specified price. These contracts become gambling entities as speculators buy and sell contracts based on variables such as weather forecasts, market timing, etc. Thus prices are driven higher than actual demand for the goods themselves. How much this increase is on average I have been unable to ascertain, but the massive amounts of money made on this market indicate it is not trivial.

A sense of the magnitude of this increased cost can be gained from Holly Jean's blog conjuring grace: field notes from the 21st century. (Her complete name is Holly Jean Buck.) She quotes Charles Derber in her blog, "Most of the financial activity going on in the world is in this kind of betting; nothing of value is created with these derivatives. For every $1 floating around the productive wold economy of real goods and services, there is an estimated $20 to $50 circulating in the world of pure finance, producing or creating nothing." Jean's bolg is well worth reading. It may be found at
http://www.createdestroyenjoy.net/grace/2008/06/adventures-in-global-finance-part-iii.html.

A study done by the University of Ohio for the state legislature found that although law professionals argued the value of the contract that in many rural communities contracts were much less formal, usually expressions of common law or simply verbal agreements. To quote,

Economists and business oriented social scientists and legal scholars generally believe that contracts that include all relevant verifiable terms to a transaction are preferable to "incomplete" contracts that omit many relevant terms thereby reducing the ability of a court or arbitrator to enforce the contract. However, canonical economic models that have supported this theory are largely based on one-shot transactions where two parties come together to execute a single transaction. The economic models and experiments developed in this project suggest that incomplete contracts may lead to higher productivity in repeat trading environments where people develop relationships by trading repeatedly over time with a small group of known trading partners. In these environments, complete contracts are not necessary because these relationships become self enforcing in the sense that the threat of relationship unraveling is sufficient to discipline the trading partners so that they honor their obligations. Moreover, their obligations are often implicitly understood rather than legally understood so that they need not be included in a contract. Finally, incomplete contracts provide trading partners with greater flexibility to respond and adapt to the actions of trading partners thereby reducing transactions costs increasing productivity.

In this connection David Korten, in his new book, Agenda for a New Economy: From Phantom Wealth to Real Wealth, makes a distinction between the highly speculative economy of Wall Street and the more responsible economy of Main Street. The main difference is the proximity of the economic activity to the goods, services, and people involved. This is another way of saying that the chicaneries of Wall Street and, I would add the corruption of our society and politics is substantially a matter of our size.

At the far end of the distance between the product or service and its contract we have our recent mortgage debacle. Here contracts were not only commodities, they were sliced, diced and packaged into other commodities called securities. When contracts get this far removed from their source the contract has absolutely lost its anchor in reality and becomes a free-floating object for the fun and games of financial speculators. Greed rules. There is no social benefit. Disaster awaits.

A sign that the various costs of contracting are coming home to roost may be found in General Motors' decision to forgo its extensive contractual outsourcing of manufacture and make most of its new Volt electric car in house. Among the reasons given are; Achieving performance, quality and reliability by doing all design, manufacturing, materials selection and production procedures in house. Achieving exceptional power density, NVH, and high reliability and affordability only achievable by understanding and engaging the entire electric motor vaue chain.

It appears that globalization and the financial instruments it uses are not, because of the vast increases in cost and social disruption, the panacea its promoters have proclaimed. However, it is, to my mind, still an open question whether, given our overpopulated planet, any other kind of economy, especially one enjoying the benefits of localism, can persist.

Further there is a fundamental issue for human beings here. When humans first formed societies it was for security. Why, after so many millennia, do we put our basic necessities, e.g. food, at the mercy of a gambling den? Ought not humans and their welfare be the animating endeavor in basic needs distribution? Why should such a system be put at any greater peril than absolutely necessary? The results of the present system are mass starvation among the poor of this earth. Global Research in its 2008 report titled Global Famine declares, "Spiraling food prices are in large part the result of market manipulation. They are largely attributable to speculative trade on the commodity markets." When we let financial speculation, i.e. gambling, come between humanity and its food we are looking moral corruption straight in the eye.

Bob Newhard