In the comments of Bitarch and Voluntarist’s post, a discussion flared up regarding contracts and their binding nature. Opinions ranged from the view that a contract is sacred to the view that a contract itself is not worth the paper it is written on, and that only the good will of the contracting parties matters. All this was accompanied by questions about how an ancap society is even supposed to be built if contracts are not observed there. I will try to outline my approach to the problem.
Ancap is a free market plus the decentralization of law. That is, on one hand, it presupposes developed exchange relations—gifting and coercion are not completely excluded, but they certainly do not dominate. On the other hand, there is no top-down guarantee that the exchange will prove to be fair. Especially in situations of deferred exchange, when one party to the deal provides real value right now, while the other promises some presumed value later.
Within the framework of this text, I will understand a contract as the accompaniment of an exchange transaction by certain non-obvious conditions. These are precisely what must be fixed in explicit form, because otherwise, it will inevitably turn out that the parties understood each other differently. There is no particular sense in composing a detailed text describing a transaction for buying vegetables at a market. Often, people don’t even ask for the price: a person simply scoops up the goods, shows them to the seller, the seller names some amount within reasonable limits, the person pays and leaves; everything works on defaults—so much so that one can even not know the language and simply show numbers on a calculator.
It is a different matter if it is assumed that the transaction should take place only if both parties agree to some deferred interaction. For example, there is an employment contract. One party promises productive labor, the other promises payment for that labor. But beyond this, a desire arises to ensure that the parties agree on which party provides the space, tools, and materials; what labor is considered productive and, accordingly, subject to payment, and what labor, conversely, is sabotage and subject to a fine; to what extent the employee is responsible for damage to the employer, and to what extent the employer for damage to the employee, and so on. Fixing this agreement in an explicit form allows, firstly, the parties themselves not to forget after some time what agreement was reached, and secondly, to appeal to this agreement in the event that any of the parties decides to involve third parties to secure their interests.
There is an obvious problem here. Long-term relationships are inevitably accompanied by changes, sometimes quite radical. These changes may be impossible to predict in advance, or their possibility may have seemed too irrelevant at the start to be described. You hire a worker—and after some time you find that they are now a business partner or even a spouse. Or, conversely, that they are a competitor who secured the start of their own business using your client base. Or less radically: you hire a person for cleaning, and it turns out they also cook well. Or they clean the premises so thoroughly that they simultaneously “clean up” some valuables stored therein.
But employment is only half the battle. After all, if the relationship has changed significantly but both parties are interested in continuing it, the new relationship can be formalized through changes in the contract. And if one of the parties is interested in breaking off the relationship, they can simply leave the job or, accordingly, show the worker the door. In this case, the parties may have unresolved claims, but if the breakup is not delayed, the volume of claims will be small, and it will then be easier to write them off than to insist on a final settlement.
It is worse if we are talking about investments. There, a unilateral breach of relationship is precisely what the investor wants to avoid from the very beginning, whereas the recipient of investments is initially interested in exactly this scenario: just give me your money and leave forever. In order for investments to exist as a noticeable phenomenon despite such a powerful asymmetry in incentives, a systemic factor of coercion of the investment recipients is needed, so that they strive to fulfill the original agreements rather than presenting the investor with a fait accompli: the money is spent, there is no return, maybe something will be returned someday, inshallah. At the same time, when this factor works too harshly, the entrepreneur bears additional risks: the success of a business is never guaranteed, even if the entrepreneur did everything in accordance with the original business plan for which the investments were obtained. He may indeed find himself in a situation where the investments are spent, success is not achieved, there is nothing to return, and then the notorious coercion factor begins its violent actions to collect the debt. The cheaper coercion is for the investor, the more readily he will invest in dubious projects, and the harsher the conditions under which he provides investments will be.
The investment climate is precisely formed by the perception of such subtleties: how likely is the sudden intervention of third parties and natural forces into the bilateral relations fixed by the contract; how conscientious are entrepreneurs in following agreed-upon plans, or are they more inclined to collect money for one thing and spend it on another; but also conversely, how likely is it that the goal of providing investments is not the creation and development of a business, but the enslavement of the entrepreneur and turning him into a serf.
In other words, both extremes harm the economic prosperity of society. The conditionally left extreme is bad, where it is impossible to motivate a worker, and any somewhat complex project is simply not implemented because everyone has scattered to their own affairs and steals every single nail from work. And if you are foolish enough to lend money, you had better say goodbye to your money immediately; it will be spent on all sorts of good things, but by the very design of society, you are entitled to no benefit from this. But the conditionally right extreme is also bad, where a worker has a choice between several types of indentured contracts and starving to death, and if someone wishes to work for themselves using borrowed funds, the payment schedule will put them in conditions as difficult as those of a hired worker, only with the hourly prospect of falling into debt slavery. If someone starts a business using their own honestly saved funds, the person who has the resources to coerce their workers and debtors into order feels an irresistible temptation to use those resources to put spokes in the wheels of an independent competitor, even if this would be considered an unlawful act.
Applying this to the topic of contracts, it means that, on one hand, contracts, being evidence of the existence of complex and structured declarations of the parties, are absolutely necessary in a society with a developed market and, generally speaking, should be respected. But, on the other hand, the desire to observe any contract to the last letter at any cost, as well as the desire to describe all conceivable conditions of interaction between the parties in contracts with incomprehensible precision, is counterproductive and leads to the loss of that very respect for contracts, since they begin to be perceived more as a tool of violence by the party who drafted the contract over the party who was given a ready-made text to sign.
The most important thing in contractual relations is the presumption of good faith of the participants. Both the parties to the contract and public opinion must be confident that a contract is, firstly, a privilege of equals (a document describing unequal relations is called a “statute”), secondly, stems from the parties’ desire for their own benefit, and thirdly, a good contract is beneficial to both parties. It is this presumption of good faith that makes one party seriously and benevolently consider the other party’s statement that the previous terms of the contract are no longer beneficial to them and therefore it is desirable to revise them, or if this is impossible, to carefully terminate the contract.
But good faith is not inherent in everyone and not under all conditions. In order for the presumption of good faith to justify itself, rather than prompting one to enter into contracts with fraudsters over and over again, one must understand that powerful incentives work toward this very good faith. It remains to understand what these incentives could be in a world with a developed market and an absence of centralized coercion.
Historically, such incentives were provided almost exclusively by the counterparty’s membership in a particular community that bore a share of responsibility for its member and was therefore forced to independently ensure their good faith in relations with the outside world. If merchants from a certain polis cheated while trading, subsequent merchants from that polis might be robbed or denied entry to the harbor. And if merchants from a certain polis were robbed without reason, a punitive expedition might sail in their stead. Or no one might sail at all, because your polis had acquired a bad reputation among traders. If you hire a stonemason from the guild of free masons, he will work so as not to bring shame upon his corporation. If Swiss mercenaries flee the battlefield, who will be interested in hiring Swiss mercenaries?
However, relying only on such insurance groups also entails costs. At some point, for example, it may turn out that you have the right to hire only a union member, otherwise both you and your worker are guaranteed problems. And now membership in a professional community becomes not a sign of quality, but simply an imposed inevitability. Tying a person to a corporation deprives the market of flexibility, forces the loss of profitable opportunities, slows down progress and, ultimately, harms general prosperity, not to mention that it provokes conflicts out of nowhere—that is, when outsiders poke into things that are seemingly not their business, claiming that they have an interest in this matter.
But if a person does not belong to a group that bears responsibility for them, how can their good faith be guaranteed through purely market incentives? In many cases, insurance can help. A third party is brought into the transaction, who receives an insurance premium and in exchange undertakes to guarantee compensation for damages from unforeseen circumstances that arose despite the good faith execution of contractual obligations by the parties. This party is interested in paying nothing for the insurance event and will therefore try to prove the bad faith of one party or another. This means that the parties become interested in drafting the contract and conducting business as transparently as possible so as not to be left holding the bag when it comes to the prospect of insurance payments.
Will such a scheme help us? Alas, only partially. It does not protect against conscious fraud if the profit from it exceeds the amount of the insurance premium. The fraudster has left with the money, and the insurance company shrugs and says that there is clear bad faith of the counterparty, which they did not insure against and do not intend to insure, because today you pay for the loss from a fraudster’s actions, and tomorrow half of all deals will become fraudulent.
To provide guarantees in trade and employment, escrow account mechanisms and various collateral schemes help quite well. In the case of escrow, the participants of the deal lose the ability to receive payment until they prove the fact of execution of contractual obligations to a third party. In the case of collateral, the loss of one participant of the deal from the actions of another is compensated by the value of the collateral. But this does not help protect the investor at all, because in investments for creating a business from scratch, it is specifically the investor who puts in the money, and the entrepreneur only gives a promise to direct this money toward creating a business that should bring profit.
Is this vulnerability so critical? One must look at the context. The market develops a habit of typical actions because they save transaction costs. In a developed market, competition leads to a decrease in insurance commissions, so insuring risks becomes not particularly expensive, and this is done almost everywhere. The world of typical market interactions turns into a cozy park with paved paths, detailed infographics, and fences in all dangerous places. Sweet, cozy, beautiful, and zero drive. In other words, the profitability of business decreases. A good haul can only be made by opening a new market. And only here do we enter the space of unprotected investments.
Venture investing, based on a bare business idea, is a conscious risk for the chance of a big win. Yes, this sphere will attract strange people: project-pushers, “info-gypsies,” simple fraudsters. But from the investors’ side, those who are ready to deal with such a crowd will enter this sphere—those who can sift through insane projects to find those whose insanity looks noble, reinforce inventor-maniacs with clever managers and technical specialists—in short, the market will reward those who set sail not in a washbasin, but at least in a caravel. And then legends will be composed about them, and someone will also earn money on the reproduction of these legends.
