[Here this is again, but with the correct date.] Karen,
I know Virginia - she's a clever woman and a good writer. Or, knew her - people I know are always going off to become nationally and internationally famous. On the other hand, some of my neighbors know me. For decades, I've been teaching that contracts are enforced in the mind. Paper is useful only to record the agreement should someone die. If I intend to keep the contract, the paper isn't needed for enforcement. If I don't intend to keep the contract, it doesn't matter what I sign. I remember a Glendale CA adult class that simply didn't believe such a contention. Then, David Stein spoke up. He was a grey haired Jew who was in every sense a gentleman. "I do business all over the world and I don't have written contracts." But what happens if someone doesn't keep the verbal contract, asked the class. Said David: "Then I don't trade with them again." Actually, serious trade goes through escrow. When it arrives, the goods won't be released from escrow until payment is deposited in escrow. However, all over the world, trade is done in the expectation that the other person will be honest. It bothers me that modern economists have to be reminded of the real world. Harry -------------------------------------------------------------------------------------------------- Karen wrote: >I believe we were discussing some of these issues recently.Even Without >Law, Contracts Can Be Enforced > >By VIRGINIA POSTREL @ ><http://www.nytimes.com/2002/10/10/business/10SCEN.html>http://www.nytimes.com/2002/10/10/business/10SCEN.html > > > >Would you lend a complete stranger $10,000? How would you get your money >back? > > > >Trusting people you don't know with large sums may sound like the height >of foolishness. But a modern economy depends on exactly such impersonal >exchange. > > > >Every day, people lend not thousands, but millions of dollars, to >strangers with every expectation that they'll be repaid. Vendors supply >goods and services, trusting that they'll be compensated within a >reasonable time. How does it all work? > > > >Traditional economics tends to assume away that basic question. On the >blackboard, supply and demand meet without a doubt that supplier will >really deliver or that demander will pay. > > > >A lively field of economics with an unfortunately clunky name looks behind >the blackboard assumptions. institutional economics studies how people >arrange their affairs; how they create institutions, including legal >sanctions, social norms and organizational structures, to govern their >relationships; how those institutions spur or hinder economic growth; and >how those institutions improve through trial and error. > > > >The International Society for the New Institutional Economics >(www.isnie.org) recently held its sixth annual meeting at the >Massachusetts Institute of Technology, attracting about 200 economists and >other social scientists from 40 countries. > > > >It asks deep theoretical questions and ties those questions to pressing >empirical realities, most notably how formerly Communist countries can >successfully make the transition to markets. > > > >Researchers look at economic activity through what Oliver E. Williamson, a >former president of the society, calls the "lens of contract." > > > >"The lens of contract focuses predominantly on gains from trade whereas >orthodoxy is focused on resource allocation (prices and output)," writes >Professor Williamson, an economist at the Haas School of Business at the >University of California at Berkeley. > > > >To the "science of choice" developed by traditional economics, the new >institutional economics adds a "science of contract." > > > >To understand how contracts work, it helps to examine problem cases where >contract law is underdeveloped or contracts are hard to enforce. > > > >In a paper for the conference, the economic historian Avner Greif of >Stanford looks at how merchants in the late Middle Ages developed >institutions that allowed a commercial revolution. > > > >"How," he asks, "could a creditor from one corner of Europe, for example, >trust a debtor from another corner, about whom he knew little and who >could avoid interacting with him in the future, to pay his debt?" > > > >The answer was the community responsibility system, in which every member >of a community was liable for every other member's debts. If someone in >Community A didn't pay what he owed, Community A had the choice to either >cease trading with Community B or compensate it for the damage and seek >retribution from the individual. > > > >Because communities wanted to maintain trading relations, they policed >their own. As trade flourished and communities grew, however, the system >began to break down. The costs to an individual who cheated shrank, while >larger merchants had to bear a high cost for other people's cheating. > > > >Communities abandoned the old system. In 1279, for instance, Florence, >Venice, Genoa and other cities agreed not to hold any person or his goods >because of someone else's debts. They also agreed to imprison debtors who >fled to their towns. > > > >Over time, new forms of enforcement developed, forcing creditors to >evaluate borrowers by using indicators of their individual merits. But >the community responsibility system provided the institutional scaffolding >that made the expansion of trade possible. Even without centralized law, >it was possible to make enforceable contracts. > > > >Turning to the present, Guido Friebel of the Stockholm School of Economics >and Sergei Guriev of the New Economic School in Moscow offer a provocative >argument about an extralegal contract: the payments illegal migrants >promise traffickers who arrange long-term, long-distance moves from, say, >China to the United States or Europe. > > > >It costs an illegal migrant as much as $35,000 to go from China to the >United States and $25,000 to go to Europe. (This research does not apply >to short-haul migration like that involving the United States and Mexico.) > > > >But these are mostly poor people who can't possibly pay that much in >advance. Instead, they make a down payment and agree to work a certain >term for Fujian Chinese, the average is 26 months to repay the rest. > > > >On arrival, they become temporary slaves or, as they were known when >America was settled, indentured servants. > > > >In theory, the immigrants could run away once they were in the >country. They don't escape, however, because they fear >deportation. Their illegal status acts to enforce their contracts. > > > >(Traffickers generally keep their deals because they face competition in >the home country. A bad reputation would cost them future business.) > > > >Tightening immigration enforcement paradoxically supports indentured >servitude and, hence, illegal migration. Traffickers would have less >leverage to collect debts and wouldn't be as likely to finance poor >migrants. But more affluent, higher-skilled people would be able to >immigrate legally. > > > >These are two small examples of a much larger phenomenon: When the rule >of law is absent or imperfect, people find other ways to make contracts >workable. But those alternatives may be unstable or inefficient. > > > >"Whatever the rules of the game," Professor Williamson writes, "the lens >of contract is also usefully brought to bear on the play of the game." ****************************** Harry Pollard Henry George School of LA Box 655 Tujunga CA 91042 [EMAIL PROTECTED] Tel: (818) 352-4141 Fax: (818) 353-2242 *******************************
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