The Coercive Enforcement of Contracts

[Eckhart Aurelius Hughes]

In a discussion about trying to regulate bad lending, I proposed the following questions: Can capitalistic lending be taken out of existence? Could a well-functioning society be created in which formal lending does not take place?

I am saying 'capitalistic lending' or 'formal lending' simply to distinguish that type of enforced lending from the friendly lending that may take place in an informal way but is not enforced by a government or other coercive institution. For example, I might help a friend move his stuff with an expectation that he will help me move next week, but I would not use force against him or take him to court if he did not end up helping me in return.

I suppose I am asking, can a relatively well-functioning society be created in which contractual obligations are not coercively recognized? What do you all think? If so, I think it would help eliminate the boom/bust cycle and usury in general.

In the thought I have put into the matter, I do not see the necessity of enforcing contracts. The lending that results from contractual enforcement leads to credit-based economies and usury, which seem more damaging to the typical person than any benefits. Namely, I speculate that the existence of enforced contracts, credit-based economics, and usury is one of the main reasons so-called free-markets tend to lead to monopolization of wealth and power as well as the existence of what some people call wage-slavery, as the wages of the workers are cut by wealthy usurers who are empowered by the enforcement of contracts.

I like the idea of free-market economics. I believe that as offensive coercion is removed from an economy and the government's hand is taken out of voluntary exchanges between people, then all deals become more voluntary in that they are voluntarily entered by both parties. This gives each party personal responsibility for themselves (i.e. self-regulation), which they then exercise more in their own favor than a third-party government, and so the deals are more mutually beneficial. That develops into complex natural economies with people freely entering into a wide arrangement of mutually beneficial deals.

I think the same essential principles can be applied to the use of coercion to enforce contracts. To make an analogy, why can't people enter into economic relationships the same way they enter into sexual relationships? Surely, people enter into long-term, mutually beneficial sexual relationships, but we would not propose coercively enforcing a contractual obligation someone made to have sex with another person at a future date, right? Some societies have allowed husbands to force their wives to have sex, but we would call that rape because we see the benefits of not enforcing contracts in that regard. Though analogous, I think the same applies to economic deals. People making deals about the future will understand that they are resting on the other party's trustworthiness or self-interest to continue the deal, and I believe the people would take precautions to protect themselves without the reliance on the coercive enforcement of contracts. That self-protection and self-regulation combined with the absence of coercion is what makes free-markets and free societies superior to statism, in my opinion.

I lean towards believing that agreements would be fairer and freer if contracts were not enforced by coercive force. What do you all think? For those who support the enforcement of contracts, if you do not mind, I would like you to explain why you think the people in society benefit from the coercive enforcement of contracts or why it is supposedly helpful or required in free-market economies.

[Jedite21]

Definitely gives me something to think about... My initial reaction would be to say that for a long term larger society that formal lending would fall under the social contract of the idea of government. I need to refresh myself on Hobbes and Locke more to get into that argument though, but I have trouble seeing what you call informal lending as feasible as a large scale model. Again this is just my initial thoughts though and I am definitely going to read over again what you said and do a little research.

[Bloefeld2002]

Wow, do you ever have no idea how capitalism works.

Let me ask you a question; do you have a retirement plan? Do you have a savings account?

What the sub-prime mess has shown me is two things; the general public has exactly zero clue about business and profit; business no longer has an ethical anchor.

Perhaps you think profit is evil. You also probably wish that there were more good jobs around. The two are mutually exclusive.

Profit = jobs.

Jobs are 'caused' not by government fiat but by capital. Capital is caused by Profit.

An income statement looks a bit like this;

Sales or Revenues

minus cost of goods sold

minus wages to employees

minus salaries

minus oh say health care

minus rent

minus etc etc.

What is left is profit or earnings.

And of course the Government takes about half of those in taxes.

A balance sheet has the following

Current Assets like Cash
Current Assets like receivables from your clients

Long Term Assets like the machinery your workers work on

Current Liabilities like the line of credit at the bank (most business owners must personally guarantee this, meaning if the business goes broke, the bank comes and takes your kid's swing set and sells it, I have actually witnessed exactly this happen to a good friend.)

Accounts payable, the money you owe your suppliers so that your workers have something to put into the machine you have workers working.

Long term liabilities, like the loan you took out to buy the nice machine for your workers to work on.

Then you have equity in two forms

Stock equity (the money you invested or others invested in your company) If you are that investor, you don't much think it is usury to get a return on your investment

Retained earnings. The earnings you have left after you have taken in the cash and paid your taxes and given a bunch of that to your investors.

So if you have an IRA and savings you are the bank. You want that money to work for you. You want it to grow. You want it to provide you with security.

Have you ever lent money to a friend, have you ever had that friend not pay you back. Is that ethically ok?

As to Jedite21, go read Fredrick Hayek's The Road to Serfdom and anything my Jane Jacobs. Then read up on your Hobbes and Locke and Hume and Kant and the boys.

Everyone needs to remember that you are the government. It rules at your pleasure. It takes your money and gives it to all manner of dumb-ass things. Saving people who borrowed endless money on the proposition that house prices always go up only needed to look back a dozen years to see that house prices always go down.

Lenders who lent that money need to go bankrupt, the guys who sold the real junk to off-shore companies that they kept off the books so that smart investors were stolen from need to be launched in catapults across the East River.

Everyone needs to get an education about how money really works and to remember that any power you give up to the government should only be given up after you have pulled out your own fingernails and decided that it was worth it.

Yesh, this is a pretty good forum but my word the best regulator of anything economic is your own brain and how bad you think you would like to not have the money you have. The governments role is to make sure that companies who can take my money in investment must always operate in a clear and transparent fashion.

[Eckhart Aurelius Hughes]

Jedite21, thanks for your reply! I personally don't fully accept social contract theory, but that is not of much concern to me with this issue. Even if social contract theory allows the government to enforce contracts, do you think enforcing contracts is necessarily desirable? Do you think a society in which contracts where not enforced would be freer or fairer? Why or why not? You point out a reasonable worry that without formal lending large-scale society may not form. For one, I am not sure that many aspects of large-scale societies are beneficial to the typical person or to the furtherance of freedom. Nonetheless, lenders could still lend based on credit and other factors, but they just could not rely on using coercive power to force people to pay back the loans. That would mean the lenders would have to regulate themselves to make sure only to loan to people who they believe will pay them back without being forced. If the lenders screw up, then they lose money.

**

Bloefeld2002, thanks for your reply! I am confident that I have a good understanding of how capitalism works, but my understanding of capitalism is not the topic at hand. The question is: Can a relatively well-functioning society be created in which contractual obligations are not coercively enforced?

I appreciate your explanation of income statements and balance sheets--two things with which I am quite familiar. However, I am not sure what you think there relevance is. Please explain.

You are probably mostly right about the general public having little clue about business and profit. However, we do not need to let even stupid or ignorant people have their freedom limited. Why make rules that mean we coercively take their money away because they stupidly agreed to a contract? Why not choose to not enforce contracts so that lenders must be responsible for themselves?

You ask me what I think about profit. It depends what you mean by profit. I have no problem with a person receiving a payment or reward for providing a service. However, I am weary of usurers and other non-productive people making more money just because they already have a large amount of capital; That would allow them to leech off the labor of others. I believe not enforcing contracts would lead to an economy less based on credit, which would lead to less usury and more freedom and fairness.

You ask me if I think it is ethical when a friend does not pay me back. I do not want the government to coerce people to do what is supposedly ethical. I want to know what policies will lead to the most freedom, fairness and happiness in society.

I agree with you that everyone needs to get an education about how money really works. It's hard to have a free society when the people are uneducated and ignorant because freedom requires self-responsibility. That's also why I suggest not enforcing contracts: It would mean lenders and dealers would need to take self-responsibility and self-regulate themselves without relying on the use of coercion to take money from people who agreed to a deal in the past. I prefer self-regulation over governmental enforcement. As you say, the best regulator of anything economic is your own brain.

Thanks,
Scott

[sethm395]

In a legal contract there is offer and acceptance, an intention to create legal relations, a duty not to enter into an illegal contract (i.e. a contract for murder, theft and so on...) and consideration (exchange either of goods or services i.e money). When you help your friend move you are not entering into a contract at all ( lack of consideration, no intention to create legal relations) and therefore it doesn't need enforcement. But to try to answer your question I think all the definitions would have to be redefined.

You ask whether we could be in a society without enforcement of contracts. Well, what would be the basis of this society? I mean, we would have to agree to do things in a certain way wouldn't we? Would those agreements have to be enforced? If so by whom? If not, then would we even be in a society at all?

In response you might say that, no, those agreements wouldn't have to be enforced because culturally we would all respect them. However, culture is a very shakey foundation to lay that much weight upon. Culture is in constant flux and is never quite the same from generation to generation. So you can't depend on it in order to garauntee those non-enforceable agreements which lie at the very heart of that society (if indeed it is a society to start with).

I think your thinking has your heart in the right place but it is going on the wrong path. Instead of doing away with the law of contract you need to modify it into something else. That is why I think the definitions need to be redefined

[Eckhart Aurelius Hughes]

sethm395, thanks for your reply. It's not that I think agreements would be culturally enforced. It's that I do not think that people need to make contractual agreements about the future--at least not one's that would be enforced with coercion. Any deals would be made at present, and would be continued at-will. Each party in any given deal or agreement would be responsible to ensure the deal will benefit them.

Of course, many people would still be inclined to keep their commitments as to have good credit. But it would up to the lender, knowing the deal could not be coercively enforced, to decide whether he believes the benefits to him compensate for the risks.

In a free market, people choose to work together and make exchanges because they each believe that the transactions are mutually beneficial. I believe it would happen even more effectively when contracts are not enforced coercively. It would be up to each person to ensure that making a deal would work out in his or her own favor without coercive enforcement of a contract. It would lead to self-regulation and more mutually beneficial transactions because the deals and exchanged would be based on people's continued voluntary agreement rather than on one party being able to coercively force a second party based on a contract that the second party made previously.

Please excuse me making another example... If a random Nigerian emails me asking for $50 and I have no way of ensuring that I get it back, naturally I do not sent him the money. That's fine and dandy. If I go to some random bank and ask for them to give me $1,000, they will likely say "Sure, here you go!" That seems very problematic to me. It seems like legalized loan sharking to me. Let's live in freedom without loan sharking. Let the bank be as responsible with giving me their money as I am with giving a random Nigerian my money.

If they are desired, there are many ways for investments, loans, and long-term business deals to happen without the coercive enforcement of contracts.. In business, the deals will work without coercion so long as it remains in each party's interest to keep the deal going. As such, I believe it will work out better for all overall because nobody will be coercively forced to participate in a deal because they signed a contract in the past.

Thanks,
Scott

[Bloefeld2002]

Hi Scott,

Ok, I completely reject your premise and your use of the term usury.

I do so on the basis that we all trade for services or material is based on the exchange for money.

Money is easier to drag around than the machinery I might build and trying to convince the guy at 7/11 that three bolts in my machine are worth a Slurpy. Even tougher for him to take the tail of my cow for the same deal.

If two parties enter into a trading arrangement with full enough knowledge of the terms, conditions and obligations of the arrangement and one party does not perform then the contract must be enforced my some means. The other result is chaos, death, destruction, and slavery.

If you are the mafia your recourse is to hurt the guy who owes you money. If you are Citibank your recourse is to ruin the credit of the guy who owes you. It has the same net effect.

I know you are looking for good reply fodder and to get a good discussion going. I applaud you. However your premise is so outrageously flawed that it really doesn't bear discussion. The answer is obvious in practical terms.

As a discussion point it is boring. The only reason I replied was I was even more bored and I seriously doubted that you could on the one hand hold a retirement fund and on the other think that getting a return on that fund was usury.

However it is clear to me that you believe it is only usury if someone actually has more money than you do and expects a good return on it.

That line you can see behind you if you squint is hypocrisy.

It is the same theory that created the Democratic Party's idea of the super-delegate which in my opinion is best stated by quoting Animal Farm, "Four legs good, two legs better." Of course the 'super' people should get to decide elections in the mis-named Democratic party. Super people should also not have to take any risk to get their super return on their retirement fund.

Let me pose this one for you. If I waved a wand today and tomorrow everyone in the US had exactly the same amount of assets and cash, how long would it take for the guys that are rich now to have all of their riches back and the guys who are poor now to have given their money to Sony and Budweiser on its way into the hands of todays richest guys?

I think at best 6 months.

[Eckhart Aurelius Hughes]

Bloefield2002,

You say you reject my premise but I am not sure what you mean by my premise. What is it you are rejecting?

You also say you reject my use of the term usury, but I'm not sure how you can do that. The term is a simple term that refers to a someone making money by lending and charging interest. That clearly happens, and it is called usury. Perhaps you thought I meant something else by the term?

You say that we all trade services or materials based on the exchange of money. That may be true, but it is not necessarily usury. For example, if a barber cuts a masseuse's hair in exchange for the masseuse giving the barber a massage, that would presumably be a mutually beneficial exchange of services without any necessary usury. Of course, that does not mean that usury doesn't exist.

You are right that money can be easier to facilitate the exchange of goods and services, as shown by your 7/11 example. In this thread, I am merely asking about the enforcement of contracts, not about the use of money. A society could still use money without enforcing contracts. For example, I personally do a lot of business with people internationally using money via private, non-governmental payment processors such as PayPal and e-gold--and contracts are not enforceable by the coercive power of government in those international transactions. This works fine because I take proper precautions to protect myself. For example, if a Nigerian promises to wire me $1,000 tomorrow for $10 today, I refuse. That's how a truly free-market works: through self-responsibility and self-regulation. The alternative to the enforcement of contracts is not "chaos, death, destruction, and slavery," as you have said, but is self-responsibility and self-regulation.

In your examples, you even say that Citibank reporting someone for bad credit has essentially the same effect as a mafia (or government) enforcing a contract with violence and coercion. Using a private credit agency is not governmental and is not coercive; it's an example of free people interacting without one party relying on the use of coercive force to enforce contracts.

You say that the answer to my question is obvious in practical terms. It is not obvious to me. If you don't mind, please explain why you apparently believe that a society would not be able to develop without the coercive enforcement of contracts.

You say that you doubt that I could on the one hand hold a retirement fund and on the other think that getting a return on that fund was usury. However, by definition, loaning out (or "investing") money clearly is usury--and I think most people realize that whether they do it or not. Of course, some may argue that usury is a good thing for the people in a society.

You also claim that I believe it is only usury if someone actually has more money than I do and expects a good return on it. That is not true, and I never said anything of the sort. Loaning out money for interest is usury, regardless of who does it. Additionally, I am asking a hypothetical question about a potential society in which contracts are not enforced, so it really has nothing to do with whether or not a single person in our own current society (where contracts are enforced) invests or not. For that reason, you are wrong when you say that I am a hypocrite, but calling me that would have at best been a ad hominem tu quoque fallacy anyway.

I am not sure how you can say my "theory" is the same that created the Democratic Party's super-delegate system. I doubt it, but it is irrelevant. I am not suggesting that we make some people "super."

Let me pose this one for you. If I waved a wand today and tomorrow everyone in the US had exactly the same amount of assets and cash, how long would it take for the guys that are rich now to have all of their riches back and the guys who are poor now to have given their money to Sony and Budweiser on its way into the hands of todays richest guys?

I think at best 6 months.

I'm not sure what the relevance is to the topic of this thread. Regardless, I do not think that the rich people would regain their wealth at all. Morons like Paris Hilton would be screwed. Additionally, most poor people would not go back to being poor, since they could, for example, finally afford to get their kids in good schools and away from violent ghettos and all. Remember, most poor people are born underprivileged, and most rich people are born that way. Poverty traps most poor youth, and wealth protects most rich kids. Exceptional kids can be exceptions, of course. What you seem to be suggesting is what I call The Myth of Meritocracy. If you want to discuss the issue of poverty and wealth distribution in our current society, I have created a thread for it: Is the United States Meritocratic? I don't think it is relevant to this this discussion of the enforcement of contracts in hypothetical societies.

Thanks,
Scott

[sethm395]

Scott, the coercion only comes into play when one side renegs on the deal. Say you went to the bank and they gave you a business loan and you started your business and it became succussful. Great for you! Then you say, "I'm making all this money now but since I don't believe in the coercive power of contracts I'm not going to pay the bank back." So now the bank isn't getting anyone to pay them back and they go out of business. Where is the money going to come from when the next person like you is looking to start a business? They are now left out in the cold because of your plan.

Or take it this way. You put money in a bank and the bank then says "You don't believe in the coercive power of contracts so we are keeping your money" Now you are broke and out in the cold.

The point is that while some mutally beneficial agreements would continue on an ongoing basis not a lot of them would. There would always be a side that would unilateraly pull out of the agreement because it benefits them. When that occurs the party not in breach of the agreement loses out, and sometimes loses everything. By making contracts not enforceable at law you would be walking right into bankers hands since they would devise even more devious ways to divest you of your deposits.

[Eckhart Aurelius Hughes]

sethm395,

Regarding your example with the bank, that's why it would up to me and the bank to each take self-responsibility. If someone gets screwed, it's their own fault--they were not coerced into the deal at any point. If I give my money to an untrustworthy bank in a society without enforced contracts, I would be screwed. The same would happen if I put my money in a pot and set it on fire, or if I sent it to a Nigerian scammer knowing that there was no way to internationally enforced the deal.

Deals could still exist, but neither party could make the deal by counting on enforcing it later on. This requires prior self-protection and the counting of risk instead of just counting on coercively enforcing the deal later on.

Most deals could still easily exist. But loan sharking and things of that nature would not exist. People just could not make coercively enforceable deals about the future. Voluntary deals have always been the method of most business persons, but just not predatory ones such as loan sharks.

I just don't see why we need to force someone to do something today because they promised to do it yesterday. I think economics could work even more fluently and mutually beneficially if people made deals knowing promises and pledges about the future would not be enforced.

For example, if some guy signed over his house to you today, then it is yours. But if he only promised to sign it over to you tomorrow or pay you its value tomorrow, you would not be able to use coercive force to make him sign it over. You would know this when he made the promise, so it would be up to you not to do anything counting on being able to enforce the promise.

What do you think?

[MarcT]

I stumbled onto this topic, and, while it's an old thread, I can't help but chime in. I believe that court enforcement of contracts is a remnant from the era when slavery and debtor's prisons were deemed essential for society and the economy to run properly. Those two institutions are no longer with us and our economy is thriving compared to two hundred years ago. Today, in practical terms, one has to be careful how one conducts a transaction since the cost to litigate a small claim, including the indirect costs of wasted time and opportunities, and the inherent difficulties in actually collecting after winning a judgment, often means tossing good money after bad.

Unless a party is actually pursuing deterrence or punishment, it makes no sense to go after a debtor that has no substantial assets to collect. Differing state laws provide shelter for debtors, such as Texas which prohibits wage garnishment and has a generous homestead exemption. So even when there is legal recourse, a debtor could flee to Texas or they could even flee the country altogether. For this reason, individuals experienced with one on one transactions, such as those that take place every day in the home improvement industry, will utilize approaches that protect them from parties that have intentions to breach their contracts. These tools can include background checks, personal references, reputation among industry insiders, ratings and review websites, BBB reports, credit reports, deposits, third party escrow accounts, surety bonds, insurance, personal history with the party, etc. Even knowing where the party lives and who they associate with provides more information that makes it easier to do business with someone.

The consumer credit reporting agencies would probably step up to the plate to provide all sorts of information regarding how much risk one should take trusting another with a business proposition. Insurance companies might step in to keep capital flowing by insuring against total or massive losses due to willful breach of contract. Individuals and companies would be weary of doing business with a corporation "too big to fail", which might help to naturally limit how powerful a small set of companies could ever become. The punishment for breach of contract would be having one's credit trashed for the world to see. People and companies might join guilds, trade organizations, and advocacy groups with mutual agreements to leverage pressure on those who don't fulfill their bargains. So, refusing to pay your water bill may end up getting your electric and cable TV service cut off as well if those utilities were cooperating to pressure compliance with contracts. If banks had such agreements with influential creditors then debtors might discover that their funds are frozen. Both actions would be taking place privately without any protection from courts. In such case ordinary citizens could easily be abused by the powerful and well connected. Of course, one could argue that the lower castes could band together in similar clans of mutual support.

It wouldn't necessarily end usury. People in a bind might agree to pay usurious fees to borrow short term cash, especially if they haven't had chance to establish good credit. The fear of making their credit worse for a longer period of time, or admonishments from family or religious/cultural leaders, might lead vulnerable people to continue paying debts that they should rather walk away from (which could be the only option in the absence of government enforced bankruptcy). It wouldn't necessarily lead to meritocracy, since the wealthy would prefer to do business with long established wealthy individuals such as themselves. A close-knit aristocracy of mutually supportive oligarchs could hold the gate keys to the resources of the world, excluding those who do not have the extensive family history of sticking to their word or the insider social connections and reciprocity that grant access to exclusive opportunities, especially in the management of large organizations (which, incidentally, is where most new wealth is "earned"). Though, one could argue that's how it has always been.

It wouldn't necessarily end loan sharking either. My understanding of the term is that when you illegally and secretly borrow money from the mafia, if you don't pay they feed you to the sharks. Those with little or no credit may have no choice but to borrow from such dangerous loan sharks.

I'm not sure if the renting of an apartment or the financing of a vehicle could be facilitated without some sort of coercion in the form of eviction or repossession. If you don't pay your rent and you come home to a locked door with all of your possessions on the curb, would it be legal? Could the bank "steal" back your car in repossession? Technically, neither case would be a direct act of physical coercion against you. But if you hunker down and refuse to leave an apartment you aren't paying for, would the sheriff have authority to physically evict you in a world where contracts are not enforced?