Bitarch’s Column
The question of permissible methods of contract enforcement was touched upon during Mikhail Svetov’s lecture in Novosibirsk. Svetov once again unequivocally expressed his position—physical violence (coercion) must not be used. The maximum that can be done against a violator is ostracism.
Unfortunately, not everyone accepts this moral position, so I will try to explain it, relying on utilitarianism and game theory. The example described below is an original illustration for the summary of the RAND Corporation study On the Doctrine of Deterrence, chapter “Local Balance of Power: An Important, but Not Always Decisive Factor.”
“Suppose I entered into a contract with you and decided to break it on my own. You dug in your heels and began to threaten me with ‘special forces’ who would forcibly seize my property. Assume you can send ten fighters, but I can guaranteedly destroy one of them. I make it clear that I am prepared to go to the end. For the fighters to agree to such a risk, you would have to offer each of them $10M. Suppose the contract amount is $100K, and I possess assets that can be liquidated for only $1000. You evaluate the ratio of benefits to costs—and tell me something like: ‘Get out, I don’t want to have anything to do with you anymore; people are right, it’s better not to touch shit!’. After that, we part ways, and you no longer enter into any deals with me. Under certain circumstances, you can retaliate by placing information about my behavior in the public domain, thereby prompting other people to join the ostracism.”
As seen from the example above, contract enforcement through physical coercion becomes impossible in a society where there is at least some balance of violence potential (different from the conditional ‘zero’ for citizens and ‘infinity’ for the state, as is usually the case in etatist societies).
In his book “For a New Liberty,” Murray Rothbard provides historical examples confirming the described theory and shows his affinity for it.
“The fact is that in the Middle Ages and up until 1920, merchants relied exclusively on the power of ostracism and boycotts by other local merchants. In other words, if someone refused to obey the decision of an arbitrator or ignored his decision, other merchants brought this fact to everyone’s attention and everyone refused to deal with the rebel, which quickly brought them to their knees. Woolridge provides a characteristic example of this:
‘Merchant courts were effective because merchants agreed that their decisions would be enforced. One who refused to obey was not sent to prison, but he did not remain a merchant for long after that. The influence of his colleagues and partners proved more effective than physical coercion. Take John of Homing, who made his living in the wholesale fish trade. John sold a batch of herring, all of which was supposed to be the same as in the three barrels presented to the buyer, but it soon turned out that it was actually rotten, and even mixed with sprat. He had to quickly reimburse the buyer in full under threat of ostracism from other merchants.’
Over time, ostracism became an even more effective means, since a situation arose where one who had once disobeyed an arbitrator’s decision could no longer expect any other intermediary to deal with them. Industrialist Owen D. Young, head of General Electric, concluded that moral censorship carried out by other businessmen operates far more effectively than the official judicial system. Modern technologies, computers, and credit ratings make the threat of nationwide ostracism more effective than ever before in the past.”
