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Archive for March 14th, 2011


As I grudgingly get back into the swing of school after my break in Mexico, I have a hard time getting it off my mind. To begin, I feel lucky even to have the protection of contracts and the ability to discuss their effectiveness in American society. Although I love Mexico and feel perfectly safe there. The government and infrastructure is a far cry from what we enjoy or at times disdain here in the states.

Friedman states that “There is not enough fine print in the world to cover every contingency.” Essentially, he is saying that even the civil or statutory law is, and indeed cannot, ever be created to without some gaps or holes. In this imperfect world of contracts then, their will always be a need for some form of common law–the judiciary.

I am interested to learn more about the claimed “hole” in contracts Friedman talks about. It seems like an interesting concept to leave a part of a contract open on purpose with the intent to let the courts decide. While I agree with Friedman’s quote above I feel like their a a big difference between the level of coverage offered by contracts versus a constitutions or legal code. The first is created for a single specific circumstance while the second is designed to cover a much broader scope. I plan on rereading the chapter tomorrow, but I am still wondering how, or more importantly why, clear objectives in contracts are allowed to be broken.

Ultimately, even a slow and “inefficient” legal system as many critics would say, such as ours, is still paramount to that of nearly every other country on earth. I’m left with a question I often have in this class. How much better can our current system become? Has our country, government, and courts essentially reached the our “pareto optimality” to put it in economic terms.

Sociologists, Mormons, and Economists.

In writing about contracts, Friedman discusses what some label a “moral decline” of the last few decades in America.  I heard a story today about Jon Huntsman, the benefactor and namesake of the Utah State School of Business.  Apparently he once stood to gain 125 million dollars but refused to take advantage of the situation because of an earlier handshake agreement.  That’s a very surprising story for this day and age.  As Randy’s dad said, “people are just no damn good anymore.”

The institutions of marriage and the family are disintegrating.  Many people, or maybe just sociologists and Mormons, are working to understand the causes of this disintegration and/or remedy the situation.

Maybe people are just no damn good anymore, but just as the necessary good reputation in a small town influenced honesty in the case of Randy’s dad, similarly Friedman suggests economic reasons, rather than moral ones or conscience, as the cause of the breakdown of the traditional institution of the family.

Friedman suggests an “enormous drop in infant mortality” and a “shift of production out of the home” as two main reasons why divorce is so much more common now than in the past.  “There are still substantial costs to breaking up a marriage, but they are considerably lower than two hundred years ago, and as a result, more marriages break up” (173-74).

Recently I drove an elderly man to the clinic for dialysis.  He said he has been going three times a week for the last three years.  This man was very old.  He was feeble and we had to help him in and out of the car.  This sounds bad, but I thought to myself, why are we keeping him alive?  He’s likely on Medicare and tax dollars are going to support his dialysis three times a week.

So advances in technology, and specifically medical technology, may be to blame for the disintegration of the family and for America’s fiscal problems.  But it seems like we ought to be able to enjoy the former without the latter two.  Maybe the sociologists, Mormons, and economists should all get together and work on this.

Boat Owners

Have you ever had to deal with other people in boats? If you haven’t I suggest you go hang out at the docks at Bear Lakes Marinas of down at Lake Powell. It’s quite a show. I would imagine that on average there are 2-3 boats at Bear Lake per day that need rescuing; whether they need to be towed because the engine is blown, someone forgets to put the parking brake on in the truck and the truck trailer and boat are now sinking, or the infamous “plug” in the back bottom of the boat was not replaced and the boat is sinking. What I found interesting from the Friedman’s writings was that he talked about about reputation and stated that, “Reputation may be the most important method for enforcing agreements in OUR(emphasis added) society…” It’s true. When I go to Hyrum Resevoir I tend to reserve flipping jet skiers that follow the behind the boat that I’m in or boats that like to travel in the opposite direction than the park service has enforced for those that I have never seen before. The reason for notifying someone with such means that something they are doing is very wrong is that it can be annoying when we have to dodge them and dangerous for those that are in the water next to a boat on the lake.

What I’m getting at is that when we deal with members of our society. If someone is not a person that I commonly bump into or have business interactions it is at that point that I will rely on a contract to protect my interests even though transaction costs may be incurred due to a fee for the writing of the contract and possibly legal fees in the future. But with those that go to the lakes that I frequent I find it comforting to be a member of those societies. Even though I may never have actually talked to most of the people there I can still usually rely on them being sympathetic and helping me out when I’m in a jam.

Unequalnessicity

It is important that our communities and businesses have contracts and verbal agreements and I love how many factors come into play when considering contracts.  When I was growing up I used to hear people say things like, “so sue me.”  So as children we are always taught that if someone does something to us that we deem as unfair or a “breach of contract,” we get to sue them.  This seemed like a reasonable idea as a child and then when I grew up I remember my mom teaching me that we don’t sue each other.  She talked to me a lot about the importance of trusting people and hoping that they would do the right thing.  I grew up in south Sacramento in one of the crazier areas and if there is one thing I can tell you, people don’t always tell the truth and they aren’t as trusting as my mom.  Contracts are something that break moral barriers and protect people that normally could have potentially been vulnerable to a predator waiting and salivating over the feast of religious beliefs stopping me from taking legal action.  So naturally as a child I found myself torn.  I wanted to trust people but my experiences that I had with people that I knew taught me that I couldn’t.  So what do I do?  Verbal contracts are great in theory but are they something that can really be enforced as a child.  If a bigger kid says to me hey ill trade you this for that… and “that’ all of a sudden doesn’t work exactly as well as the “this” that I had traded him, then all of a sudden I have grounds for calling him out.  But then what happens?  Within minutes the kids on the street all know that i was talking “heat” on the kid and he beats me up.  Now where am I?  I am out a “this” and a “that” and i have a black eye and all the kids on the street think im a wimp.  In walks the COURTS.  Designed to protect us, the little guys, and make sure that we are doing what we say we are.  More on this in the next post.

Contract Laws and Extra-legal methods

Friedman, on page 147, gives an interesting statement by saying; “There is not enough fine print in the world to cover every possible contingency….. but (contract writers) leave gaps to be filled in by the court.”  I assume that contract writing is a difficult process, and there is no possible way to cover all the bases, but why is it the court’s duty to fill in those gaps?  I agree that severe disagreements about contract should be taken to court. Considering the different kinds of contracts, I think the most common and best way to resolve contract disputes are extra-legal.  Friedman mentions this a page earlier.  Extra-legal methods however, are not effective in family relationship disputes.

When speaking about the Jewish diamond merchants club that helped regulate business and keep everyone honest, he explained that the arbitrator’s word was law.  No one cared whose fault it was, it was only the arbitrator’s judgment.  Even if you lost an argument, you were still able to do business.  If you refused to follow the rules of the arbitrator, you could no longer sell diamonds (146).  This would be a great rule for all labor to follow.  Government would be hands off, and no one would receive an unfair advantage from them.  Arbitrators would most likely be democratically elected by workers.

As Friedman moves to the next chapter on family relationships, contract law becomes more complicated.  I do not believe extra legal methods could solve these disputes.  For example, in custody disputes, the inability to appeal the decision of an arbitrator could separate a parent and child for good because of one weak argument.  Laws allowing grievances to be taken are essential for family security and welfare, because situations change, and so do people.  These contract laws are protection from irresponsibility of single family members, and so are a right of security that the government promises.  This form of contract law is the basic right of US citizens.

Friedman ask the interesting question of when is it acceptable if ever to breach a contract.  Should the contract be enforced no matter what the cost to one of the parties?  If I delve into my recent life experiences I would have to answer no.  Although the contracts I enter could not be considered legally binding, this one is life changing nonetheless.

Recently I made certain promises to a girl that I really didn’t mean.  They were not real legit promises but they could be seen as slightly binding.  Well unforeseeable events took place where it was no longer in my best interest to keep those promises.  Now there would be consequence if I broke the contract.  Social scorn from her friends, a loss friendship that i really do wish to preserve just to name a few.

Yet should I be forced to stay the course?  It would only bring me more trouble and pain for both of us in the future.  A short term gain for her, and long term losses for both of us.  I could make an argument that I was under Duress.  When the promises were made I was pressured to get into them.  Can I be at fault for not wanting to follow through.

Although the example is rather crude and not very relevant, sometimes to bring out the logic in an argument you have to take it to the extreme.  There should be ways to get out of contracts because sometimes its just bad.  For both people.

Duress

Friedman really has an interesting way of approaching the use of contracts in business.  I was surprised at the complexity of incentives involved in the enforcement and creation of contracts.  I also didn’t realize the role of the courts in deciding the extent to which a contract could be enforced.

However, the part that I found to be the most interesting was the section on contracts made under duress.  I particularly found the example of the sinking ship to be relevant to the discussion.

For several years I worked for two separate contractors who had formed a partnership to build single family homes.  There styles of bidding and contracting for their business differed greatly.  One of my bosses was a much shrewder man than the other and took advantage of the bids or contracts.

For example, in the course of building a home, certain changes from the contract/bid become desired by the homeowners. It could be something as small as moving a window a couple of inches or making a window or door bigger.  Inevitably, hovering homeowners make several changes in the construction process.  These changes were not included in the original bid or contract and therefore there isn’t a predetermined amount set for these changes.  When a homeowner decides to make these changes to their dream home most contractors smile because they know that the homeowner can’t afford to break the contract with them and that it isn’t advantageous to hire a different contractor simply to make a small change.  Contractors consequently charge outrageous prices for fixes that take 10 minutes in most cases.

If the job belonged to the shrewder of my two bosses he would charge these outrageous prices and earn quite a profit from it.  He is still doing very well because he learned how to take advantage of the system.  However, my other boss was a much kinder forgiving man when it came to these changes.  He would simply make the changes from the original plans without charging the homeowners extra.  He was set in his idea that the happiness of the customer was more important in the long run because of future referrals.

They both operated at different ends of the spectrum and both ended up reaping benefits for their actions.  I don’t believe however, that they were acting as efficiently as they could have.  The one that charged more probably lost future business because of his practices and the one who didn’t charge anything was left out on profits that he could have earned without sacrificing his reputation.  If it wasn’t for the extent of the transition costs, a third party probably could mediate between the two groups to allow for maximum profits without customer dissatisfaction either in the quality of the finished product or the cost of it.

Marriage as a Reduction of Risk

Let’s say my best friend and I decide to start a small custom jewelry making company. We flip through the bead catalogs and decide on what materials we would like to buy to start out with. The total comes to about $20,000 for the entire order. (What can I say? Beads are expensive. But I digress.) We verbally agree that I will pay for the order and she will reimburse me for her half of the materials. The company charges my account, we get the beads, and my friend decides she wants out. Now I am left with $20,000 worth of beads I don’t have time to work with and $20,000 worth of debt, instead of the $10,000 I was planning on paying off. If we had both signed a written contract, I would have been protected from the risk of my friend leaving in a lurch. But since we didn’t, I’m stuck with the fuzzy end of the lollipop. If you replace “beads” with “a car” and say my best friend was my boyfriend, this sounds a lot like a marriage without a contract.

Coincidentally, my mom and I had a nice conversation on our way through Sardine Canyon on Sunday about economics and marriage. It started out with me explaining how the class had discussed the topic of engagement rings as a form of a contract. From there we got into some of the economic benefits of getting married, but then my mom hit on, arguably, one of the biggest reasons to tie the knot. Friedman doesn’t explicitly discuss this, but marriage is a way to reduce my risk within a relationship through a contract. My mom had explained that you really don’t need a piece of paper to make a commitment to be with someone for the rest of your life. However, if that relationship were to fail, that piece of paper means that we get to discuss the split one more time. I can make a verbal commitment to be with someone and only risk having my heart broken. But when he and I start looking at buying things like cars, a house, and furniture together, I’m taking a great risk with that verbal commitment. If he were to leave, I’d be in some serious economic trouble. That little piece of paper that says we’re married on it could be the one thing that saves me. At that point we could stand in front of a judge and have him decide how to best split up our possessions and our debt.

We know how hard it is to evenly divide possessions through a legal divorce. But how do we do so when the legal system isn’t there? No matter how, it gets much harder to do at that point.

Re:bridar Business is Business

I have to agree with bridar on their post about business and family. It also goes the same way when dealing with close friends. In the business I work in, the only way I make money is by selling something for more than the business pays for it. This overage is how I make my living and pay my bills. Yet for some reason, people that I know personally seem to think that they have a right to take away my wages and get bottom dollar prices. When this occurs, one of two things happen, either I get no money, or my friends get offended. For this reason, certain parts of our contracts need to be kept secret i.e. the bottom dollar price. It is a real life example of rational self interest. I must do what is best for me, even if means letting my friends pay a few extra dollars.

That being said, I also found it interesting when he spoke about peace agreements. Why do countries make and honor peace agreements? In the Revolutionary War for example, Britain was defeated, but they could have surely dragged the war out a little longer. This would have weakened the Colonies, and left them in a dire economic situation. Yet instead, they chose to sign an agreement ending the war. The externalities Britain faced were too heavy. While they could have continued, it not only would have weakened their economy, but made them susceptible to other enemies. They had to protect all their interest, not just one. There are multiple factors that can enter into a contract agreement, not just the ones that the contract addresses. @_@

Business Is Business.

Reading about contracts and how they fit into relationships has really got me thinking. I have always heard the phrase “you can’t do business with family”. I am a firm believer in this policy. I have a large family and we are always in each other’s business. We do sell a lot of things to each other and make business deals all the time. However mostly we do not profit from these deals. Because we are doing business with family we are more inclined to give them a better deal.

I think that when making a business deal with somebody it is best for both to have their own lawyers drawing up contracts. Obviously when people are doing business together they are going to have rational incentives, meaning they will be trying to get the best deal for themselves. But when you throw in the family dynamic it really shakes things up. Suddenly the business deal becomes about how you know exactly what your sister can afford and so although it may not be in your best interest you go ahead and make the deal anyway. And inevitably somehow your sister will feel like you still ripped her off. I do not think that it is possible to do business family. Business is business and it’s not about family relationships.