When George W Bush passed the Commodities Futures Modernization Act 12 years ago, there was an influx, led by Goldman Sachs, of purely financial players who had no interest in ever buying food, but who sought solely to profit from changes in food prices, says Olivier De Schutter, the UN special rapporteur on the right to food.Now, what I'd expect to see if there are more dollars chasing the same amount of food is a price spike, followed by a production spike. If there aren't actual needs for the food, though, that production spike should be followed by a price collapse. Thus, though people might starve to death in the short term, any who survived would eventually enjoy lower prices for food (at least until the market adjusted).
He added: "What we are seeing now is that these financial markets have developed massively with the arrival of these new financial investors, who are purely interested in the short-term monetary gain and are not really interested in the physical thing – they never actually buy the ton of wheat or maize; they only buy a promise to buy or to sell. The result of this financialisation of the commodities market is that the prices of the products respond increasingly to a purely speculative logic. This explains why in very short periods of time we see prices spiking or bubbles exploding, because prices are less and less determined by the real match between supply and demand."
That isn't happening, apparently. What's happening instead is that food prices went way up in 2008, and have remained up (with occasional further spikes-and-collapses).
Is this a case for government regulation of the market, e.g., to prevent speculation on certain necessities like basic foodstuffs? Or is there an upside that isn't evident from the article? Or is there no upside, but regulation should still be opposed -- and if that, why?
A futures contract is just a transferable promise to buy a set amount of a commodity (wheat, oil, electricity, or even cell phone minutes) on a set date in the future.
ReplyDeleteSpeculators cannot alone drive up the price of the underlying commodities through futures contracts alone. After all, when the delivery date for the underlying commodity approaches, the holder of the contract must find someone to agree to buy it from them or take delivery of the commodity at the futures price. But if that price is widely out of sync with the spot price, no one will take buy it. (Why sign a contract to buy wheat at 625 cents a bushel a few days in the future when I can get it for 550 cents on the spot market?)
Futures prices cannot move the price of the underlying (at least not for too long). There are two reasons for this. Anyone who tried to buy up commodities on the spot market to sell again at a future date would face ruinous storage and carrying fees. This might not be an issue with precious metals, but grain and frozen orange juice concentrate (the type of commodities in question) are more demanding. Furthermore, one doesn't need to hold the commodity in question to sell a contract on it: it is just as easy (and requires no more deposit) to sell a futures contract short as buy it long. Savvy traders who see a speculative bubble can just as easily take the other side of that trade.
But ultimately, a quick internet search will show this claim of speculation-drive food prices to be specious. Wheat is back down to its 2007 and 2009 prices (http://futures.tradingcharts.com/chart/CW/M). Same with corn (http://futures.tradingcharts.com/chart/CN/M). Moreover, while both grains moved in more or less the same direction at the same time, wheat did not move nearly as much as corn. (A speculative bubble should not necessarily favor one over the other: both markets are extremely liquid.) More importantly, neither oil nor gold followed a similar pattern. If fundamentals could dominate those two bellwether commodities, why not grains as well? Broader forces (rising Chinese incomes, weather, and U.S. ethanol mandates all come to mind) do more to explain this than speculation.
It's more obvious to your quoted source than it is to everyone else that speculation is pushing prices higher. Speculation can certainly introduce volatility, though usually only temporarily.
ReplyDeleteOther frequently cited explanations for rising food prices include the many factors mentioned in this article:
http://www.ibtimes.com/meat-produce-dairy-prices-rise-while-processed-foods-grain-prices-remain-stable-1591626
including the diversion of agricultural resources to biofuels; a worldwide increase in prosperity among the poorest people, which pushes up food demand; intrusive regulation of agricultural practices; and a move to cities, which lengthens the supply line, especially for perishable foods, where spikes are most apparent.
Leaving aside the valueness of anything economic emanating from the UN, these guys start out factually wrong, and they carefully elide several other factors.
ReplyDeleteFor instance: Before it was deregulated in the year 2000, the agricultural commodities futures market was used mainly by farmers and food buyers [to hedge]
This is factually wrong. I used to run in the ag commodities futures (and debt instrument futures) markets [sic] in the '80s and '90s. And a whole lot of participants were speculators like me, too many for the market to be primarily the hedgers. Indeed, this speculation created a market for the hedgers: the guy hedging against a price increase--a buyer--is not going to find many opposite side takers among the guys hedging against a price decrease--farmers.
In the main, speculators lend liquidity to free markets, both in this way and by reducing time risk.
Regarding why food prices went up, and eliding lags (which vary a lot from time to time and item to item), another reason included in why food prices went up was a different sort of regulation: mandated ethanol production, which diverted, and diverts, potsful of corn from food to fuel and, given the broad range of dirt in which it's possible to grow corn (and wheat, and beans, and...), potsful of arable land from growing food to growing fuel inputs. Jacking the price of corn jacks the price of a broad range of foods, both plant and animal, for reasons having nothing to do with the demand for food.
In the end, too, government regulation adds overall costs: that ethanol, for instance, not only jacks food costs, it jacks fuel costs, vehicle maintenance costs, etc, including each of these for the farmer, who can't simply absorb these costs and not include them in the price of his food. The mere existence of regulation adds compliance costs, which spill over into food, both indirectly and directly--regulations from FDA, FTC, EPA (water, don't you know, including its runoff, and power generation--food processing, storage, shipping, etc), regulations concerning how cows and chickens must be housed and fed, for instance.
The anecdotes, too, from Kenya, Armenia, et al., also are reflective of intrusive governments and unstable political environments, not related to speculation. But there's not been, for years, a government this UN doesn't like, except our own.
Want to see food prices fall? Lose the regulations, lose the price controls, let the free market reign. There are better, more direct ways to help those who still will be unable to afford their day's food.
Eric Hines
To endorse E Hines from a pop culture perspective, I recommend the Barbra Striesand movie "For Pete's Sake". The MacGuffin of that four-decades-old plot is that the eponymous "Pete" is speculating -- taking a wild bet -- on Pork Bellies, a commodity about which he knows nothing and the physical delivery of which, should it eventuate, would destroy him.
ReplyDeletePeople will invest, speculate, or bet on ANYTHING. In 1950 the play "Guys and Dolls" described a character who would bet on which of two raindrops would reach the bottom of a windowpane most quickly. That play was based on a Damon Runyon short story two-decades older still.
It's difficult to imagine the UN has discoverd a new feature of human nature; but in any case, this one isn't it.
A new feature of human nature, no: but the claim is limited to the wisdom of a particular reform, the Commodities Futures Modernization Act. Did it make things better, as it was intended to do, or did it make things worse?
ReplyDeleteNow, some of you are denying that it made things worse! And Mr. Hines raises a good point about why such speculation is necessary to desired end of providing a hedge for farmers. Good. I take that as a suitable answer to the question I first asked, whether speculation ought to be prevented -- this is an upside that justifies permitting it.
Can we evaluate this piece of legislation, though, to see if it should be reconsidered?
Why is speculation a problem, again, if we discount the unproven and improbable notion that it raises prices? Why should we care whether people are motivated to buy commodities in order to eat them, or in order to resell them at a hoped-for profit?
ReplyDeleteAnd why does anyone need to "justify permitting" speculation? Shouldn't the burden be on the person who wants to interfere between a buyer and a seller?
(You can definitely count me among the people denying that the Act made things worse. I don't even understand where that assumption comes from.)
You didn't ask about the Act; you asked Is this a case for government regulation of the market...?
ReplyDeleteEven the linked-to article only mentions the Act as a claimed cause of increased speculation; the article centered on the UN's claim of the evils of speculation.
As to the Act itself, I view it as a typical well-intentioned government interference in the market that fails. Full stop.
Eric Hines
And what T99 said: government doesn't get to "permit" anything; that's not its role in our social compact.
ReplyDeleteEric Hines
Why is speculation a problem, again, if we discount the unproven and improbable notion that it raises prices?
ReplyDeleteIt's not. It's only a problem if we don't discount the notion that it's raising prices on things people need to survive.
Speculation on diamonds (say) isn't a problem at all. But if people are dying because they can't afford to eat, speculation on food becomes a moral problem because it is causing people harm.
Since it is the proper role of government to consider laws that prohibit people from doing things that harm each other, I don't think there's anything wrong with asking if this practice should be permitted. I am convinced that it should be, in some form, because farmers need the ability to hedge and speculation provides the only means (short of direct government intervention, surely less desirable given its terrible record that not only never succeeds, but often leads to famines!).
Why is it that you conclude speculation has raised prices, rather than attributing the rise to other factors cited above?
ReplyDeleteNot that I agree with you that everything resulting in higher prices for things people need is a proper subject for price fixing--far from it--but in this case I can't see why you are blaming price increases on speculation, so I don't even get to the second issue of what we would then want to do about it (such as figuring out how to depress demand or increase supply).
You're misunderstanding me. Twice, actually: first, I don't think "price fixing" is a good solution to anything! But second, I am not concluding that speculation is causing the problem. I'm inquiring as to what the market is doing here, and whether it's a case of causing problems we have a moral duty to try to fix.
ReplyDeleteThat's why I laid out my understanding of how supply and demand would work. I'm not sure I understand why prices rose and stuck at a new floor, since more dollars chasing the same products -- but with a demand that is steady, i.e., increasing only as much as population is increasing -- should not usually have that result. What I'd expect to see is something else.
So what's going on here?
Was there something specific about the many explanations for rises in price (some having to do with demand, and others with supply) in the article I cited above that you found unconvincing? There are things we could do about each of those factors, but none of them have anything to do with speculation or the Act.
ReplyDeleteThe wonderful thing about a free market is that we don't even have to root about figuring out whether we have a moral duty to alter supply here and demand there. The pressure of the market will automatically cause billions of people to make those adjustments far more effectively than a few do-gooders can. For instance, if regulators butt out, people will quit diverting farmland to biofuels, because they make no earthly sense except as tax-farming. As another example, if crowding too much into cities makes perishable food too expensive, people will crowd less into cities and/or start using more non-perishable food, because it's cheaper. As another, we could get rid of a lot of agricultural regulations, starting with the ones that discourage planting. (There, you run up against the problem that lower prices for consumers mean less income for farmers, so you have to figure out which is more important.)
We probably can't do a whole lot about the fact that more people are climbing out of poverty, acquiring resources, and bidding up the price of food. We may just have to tolerate a higher price for people who've been rich a long time in order to accommodate people who were bitterly poor a short while ago.
So as I see it, our principal moral duty is to vote against crazy regulatory schemes that distort supply and demand to no good purpose. In the meantime, if there are people who are caught short, they are appropriate objects of our charity, not our economic meddling.
There, you run up against the problem that lower prices for consumers mean less income for farmers, so you have to figure out which is more important.
ReplyDeleteNo, I don't. That'll sort out in a free market on its own, as some farmers adjust their crop output and selection, others go out of business and do other things (the ones around Plano, for instance, are retiring to Phat City as they sell their land to developers; although most farmers who go out of business will have actually to do other things), other farmers will consolidate with each other and get bigger, etc.
A free market takes care here, too, and the now very few (ex-)farmers who will need help will represent a far smaller burden on the public weal for their smaller numbers.
Eric Hines
This was caused by Green backed companies selling food as fuel, not merely speculation by power players.
ReplyDeleteThat's what they want the slow thinkers of the world to think, by presenting it as a financial bubble. Except the original cause is what they are smoke screening.
Was there something specific about the many explanations for rises in price (some having to do with demand, and others with supply) in the article I cited above that you found unconvincing?
ReplyDeleteNo. Nothing specific. Maybe it's that it is many, and not an explanation. Am I wrong to understand the expected process as I do?
Maybe so! But just why? What exactly am I missing? Do we understand what is going on, or are we throwing stuff at the wall?
I'm not sure I understand why prices rose and stuck at a new floor, since more dollars chasing the same products -- but with a demand that is steady, i.e., increasing only as much as population is increasing -- should not usually have that result.
ReplyDeleteIf I understand your misunderstanding....
In general terms, it's always supply, and demand; it's never one or the other alone. It's also always money available, not people available. You've posited two separate things. First, why prices rose and stuck at a new floor, since more dollars chasing the same products: with more dollars chasing the same products--with increased demand and no increase in supply--prices will rise for as long as the number of dollars available to buy continues to rise. Once that number stabilizes (at a new level), i.e., once demand stabilizes (at its new level), so will prices--at their new level. Demand is more than just how many people want a thing, it's how much money they have and are willing to spend on the thing. This much I think you understand readily.
Second, with a demand that is steady, i.e., increasing only as much as population is increasing: if demand is increasing, even if only as population increases, it's not steady, it's only predictable. That's a small definitional thing in this context.
The big thing is demand increasing as much as population is increasing. Even if demand is only increasing with population, if production is not keeping up, we're back to First above: rising demand outstripping supply, and so price levels increase.
In the case of food in particular, there are all of those extraneous factors identified above, having nothing to do with speculation and really only a few having to do with food demand, that are limiting supply that are in play. They don't keep supply from increasing in absolute terms, necessarily, but they do, sometimes individually (ethanol mandates and the like, for instance) and most definitely in their aggregate, inhibit the increase in supply. Population growth globally, but especially among the poorer countries, increases basic demand for food; increasing wealth generally--that growing middle class, among other wealth factors--work to increase demand, and the two sets (supply growth inhibitors and demand growth potentiators) work to increase demand relative to supply. First above obtains, and prices rise.
A word about those poor folks and demand being amount of money and not numbers of people is in order. Food production costs money. If the food can't be sold for at least that cost, the farmer won't produce at all; he'll go do something else. Those poor folks are simply priced out of the food market if their meager dollars aren't enough to pay at least the farmer's cost. They're the ones who are burned the most badly by regulations and mandates and political instability and corruption. The food riots in response to ethanol-related corn price increases didn't occur on the Strip in Vegas or along Lake Shore Drive in Chicago.
Eric Hines
Yeah, OK, fair enough.
ReplyDeleteIt's only the poor that concern me. We're talking about food cost increases of 35 cents here, 25 cents there. The average American, even in these hard times, can sustain that. The poorest Americans may have some trouble. The folks in the southern Philippines may starve.
I've been down there, and to China, and Iraq, and elsewhere. We owe them some thought. So the argument you are forwarding strikes me as at least somewhat sensible: every regulation raises costs, and these are the people for whom costs are the greatest problem.
Are there any counterexamples, where regulation is worth the cost even to the poor, do you think? Or would we really be better off with no regulation at all of the food supply?
"Maybe it's that it is many, and not an explanation."
ReplyDeleteI don't understand that. Why are many factors not an explanation? Wouldn't we expect a lot of factors to enter into the supply and demand of such an important commodity as food? Are the factors I cited not obviously the sort that would affect supply or demand? I'm not getting what your difficulty is here.
I'm not sure anyone's suggesting that there are no sensible regulations of the food supply. There is a broad consensus for a variety of regulations affecting safety, for instance, and most people can swallow an increase in price, even if it hurts the poor, on the theory that they'd be hurt worse by food poisoning. But the regulations I was suggesting we might usefully dispense with are the ones that prop up prices (by paying farmers not to plant crops) or that increase the production of biofuels at the expense of the production of food (because both crops compete for the same arable land). There are also water use regulations that can crash agriculture, as in California's Central Valley, and anti-GMO fads and so on. The more worried we are about rising food prices, the more strictly we might want to review regulations that hinder food production in aid of some non-food-related policy or another.
I don't want to discount the seriousness of famine. I will say, though, that there is less famine now that at any point in mankind's recorded history. The decrease in famine just over the last 50 years is absolutely astounding. It takes concentrated effort on the part of a really bad government to produce famine now. We got to this point by letting prices float over larger and larger areas of the globe, and letting people change their behavior so that supply and demand could push us to consuming different resources and developing better types of production.
I think you may have gotten the impression that I (or others) were merely saying that the solution is to abolish regulation. That's not really the point. Yes, some regulations are ill-conceived and counterproductive, and should be scrapped. But the real question is, what do you think should be done when we find that there are people who find it difficult to afford the most basic necessities of life? When you say "we owe them some thought," what do you really mean? Do you think there's a way to "regulate" the market to solve the problem?
I would say that, short of decreasing demand or increasing supply, there is no answer other than charity. I also think that a free market operates automatically and efficiently to produce changes in both supply and demand as necessary. What's your view? Do you of a more effective approach?
Well, the best sort of demonstration is the kind that shows, from principles, results. That's the sort I offered at first -- but it's plainly not the right best sort of explanation, because it doesn't match the facts.
ReplyDeleteSo what is the right demonstration? Saying, "It could be this or that" is the same as saying "We don't really understand." And sometimes we don't! But I'd like to understand, because this is a serious problem.
That's the answer to your question about what I mean by 'we should give it some thought.' I don't have a solution. I don't think we properly understand the problem. But I think we owe it to them to try to understand it, so we can think about what solutions might be possible. Right now, I don't think we've got the ability to do that.
A Socratic point! I know that I don't know enough.
We'll look forward to your reporting back, then.
ReplyDeleteIt may wait a while! I'm a little busy with another small project.
ReplyDeleteWell, the poor aren't going anywhere.
ReplyDeleteExcept into the grave, of course. But we are granted leeway, in a way: Mk. 14:7.
ReplyDeleteI see a lot of good commentary here. I have a few things to add.
ReplyDeleteI latched on to the first thing Eric Hines did...speculation in foodstuffs is not a recent invention from the Bush era. Per this, people have been trading in foodstuff futures (a major way of speculating...especially in perishable goods like food) since the mid-19th century. As you comment in the original post, the result has not been gluts and shortages with starvation in between. (As the "climate change" Greens have taught us, to make a commonplace thing seem evil and scary, you must try to imagine it is "unprecedented.") But I knew this already. Hillary Clinton's speculation in cattle...leaving aside the fact that it was totally bogus...happened way before the Bush era; and I read a little about wheat speculation in Milton Friedman's Free to Choose...from 1978.
I do know of a place where gluts and shortages of food were common...Communist-era Eastern Europe, where those dirty evil speculators weren't operating, and the State was trying hard to keep food costs down (Sven Rydenfelt's A Pattern For Failure, don't know where my copy is, talks about it country by country...queues for food are one of the enduring images of the Communist era.)
Searching to see if anyone had examined this question, I found an interesting paper from April 2013..."The Simple Economics of Commodity Price Speculation" by Christopher Knittel and Robert Pindyck (what a name to go through life with!). The authors were examining the very question of whether price spikes in commodities (in this case, oil) were driven by arbitrary speculation that needs to be punished, as populist ass-hats like to claim (the paper quotes Joseph Kennedy II on the subject), or by real changes in demand. I haven't time to understand their mathematical model...I had married-man duties most of the evening...but they applied it to oil-price data from 2000's and concluded the latter. Might be worth a look.
I noticed that oil prices were spiking around the same time as food, so I did some checking. Yep. Looks as if food got more expensive right around the time fuel did...in fact the two curves track each other pretty closely...suggesting a link between the one and the other, and a far likelier explanation than the mysterious machinations of Those Arbitrary Speculators.
It's difficult to imagine the UN has discoverd a new feature of human nature; but in any case, this one isn't it.
ReplyDeleteIn fact, the U.N. activist is displaying a very old feature of human nature...resentment. The physical fallacy. The idea that only people who produce physical things are creating real value; and that merchants, moneylenders, and speculators are somehow cheating because they create a different kind of value. It underlies the ugliest pieces of Martin Luther's anti-Semitism, the Islamic ban on interest, and the political and criminal views of Frank and Jesse James. It leads to a simple and satisfying Obamaesque view of things -- "Food's more expensive? Okay, whose ass do I have to kick?"
I do know of a place where gluts and shortages of food were common...Communist-era Eastern Europe, where those dirty evil speculators weren't operating, and the State was trying hard to keep food costs down....
ReplyDeleteThere's another place where food shortages occurred--here in the US, during the Great Depression. Mandated wage price floors combined with mandated farm price floors combined to price food out of reach of America's poor (and to keep the unemployed poorest unemployed by design, but that's another story), albeit not to the level of national famine, as other nations were experiencing.
Closer to the subject, what T99 said: no one is arguing for no regulation. But there are only a couple of kinds of laws that are necessary to a free market IMNSHO: you can't lie in contract negotiation (and in advertising, a subset of contract negotiation), and having signed a contract, you must see it through absent a) being able to show you were lied to, b) actual bankruptcy, and/or c) mutual consent to renegotiate or cancel by all signing parties.
That, then, generates a need for only a very few regulations. Regarding food, for instance: you can't flesh out milk with melamine, you can't spike gypsum board with formaldehyde, and so on. But all prices and production must be allowed to float, unfettered, with supply and demand. And the market must be allowed to innovate as the market participants see fit, not as government "sees fit." Every regulation, even those claimed to be for safety, or "for our own good," must be looked at with a jaundiced eye and a default position of rescinding/not enacting it. Government, for the most part, should not pass up these wonderful opportunities to shut up.
Of course, there will remain some 14, or so, in the US, and maybe 300 globally, who still can't afford their daily food, but those few are far cheaper to help for their smaller number, and they're more effectively helped directly, rather than trying to manipulate the market in which they have to operate. That's what family, friends, charity, church are for. And after those--not before, but not never, either--government aid, directly to those.
Eric Hines
You can't lie in contract negotiation (and in advertising, a subset of contract negotiation), and having signed a contract, you must see it through absent a) being able to show you were lied to, b) actual bankruptcy, and/or c) mutual consent to renegotiate or cancel by all signing parties.
ReplyDeleteIn the U.S., these things are handled by civil law rather than direct regulation. What's interesting in this:
If you lie during a contract negotiation (commit fraud), the other party can get punitive damages out of you. The law does want you punished for lying, if the other party relied on your lies and suffered from it.
But if you simply breach a contract, then the other side can only get actual damages (a loose term, I know, but I'm trying to keep it short). So the Anglo-American tradition is...you can breach your contracts, as long as you are willing to compensate the other party. (This is one reason contract cases almost always settle.)
The idea is that, in a matter of business, if you've got some resources, and find a more profitable use for them, the courts will let you put them to that more profitable use...just as long as you compensate the people you shafted.
(There are exceptions. Land, for example, is considered a "unique good"...at least sometimes...so if you agree to sell a house to one person, then change your mind because another person offers you more money, the first person can get "specific performance" and force you to sell to him instead.)
What Eric said. It's one thing to feel an empathetic qualm for the poor, and another to wreck a good system in order to scratch that itch--because the "system" let them down. It's just one of the many ways we try to avoid the clear duty of offering charity to the truly needy out of our own pockets. We imagine we can tinker with the system, make it more "just," and the poor will magically be taken care of without our having to share from our own plenty. There's always someone else to help them! Someone who unfairly did well in the "system"--by offering things that other people really wanted and needed.
ReplyDeleteNo economic system is going to ensure that every single person, no matter how lacking in skills that anyone else needs or lacking in immediate friends or family who care enough to feed him, will eat his fill, or have a big enough house, nice enough job, heart transplant, etc. We can have a system that distributes all goods equally to everyone, but then prosperity will crash and, instead of having a few who are hungry, we'll have a multitude--and we can say goodbye to heart transplants for anyone but the odd kleptocrat or two. Or we can let a free market work, maximize prosperity overall, raise the prosperity even for the ones on the bottom, accept that some will prosper more than others, and help the ones who appear to need and/or deserve our help, according to the lights of those who are offering the help from their own pockets.
Sounds like, with JW's addition, we've narrowed it to just one necessary regulatory law: you can't lie in contract negotiations, but you can break your arrangements as long as you pay set compensations.
ReplyDeletePresumably that can be enforced only after the fact in court, in cases where people have violated it. No need for regulatory agencies at all, then.
I know one large exception...which I support...in insurance cases there's a tort called "bad faith failure to pay"....if the contract is an insurance contract, and the company has no good-faith basis for rejecting a claim, they can be soaked with punitive damages, the same as if they committed fraud during negotiations.
ReplyDelete(A common pattern in litigation is this: the plaintiff claims both breach of contract and fraud or bad-faith failure to pay. The tort claims go away on summary judgment, because the plaintiff can't come up with evidence of fraud. The contract claim then settles.)
So the Anglo-American tradition is...you can breach your contracts, as long as you are willing to compensate the other party.
ReplyDeleteBut that's the case with any transgression: you can transgress, so long as either you get away with it or you pay a price for it.
I also stand by my claim (as a desirable thing, not as a thing as it stands) that one who agrees to a contract should be required to honor it in full, absent my three criteria. Want an out? Get the other party to agree to renegotiate, or get him to agree to a suitable clause in the contract being agreed in the first place.
Reneging on a contract, so long as I compensate my victim? How, exactly? Money doesn't make a man whole for all that's irretrievably lost from the reneging, most especially for the time or opportunity lost. It's only a fee, of limited value. As I understand it, that...fee...doesn't even represent the present value of the opportunity foregone. This isn't illegitimate, present values of hypotheticals are not easy to calculate.
There's a third area for legitimate law that I should have mentioned above: abusing monopoly power (note: not monopoly power itself) should be enjoined. I'm hard-pressed, though to envision any regulations needed to flesh this out; although, this is "informed" by my view that Congress ought do its own job, and not wish it off onto unaccountable agencies in another branch of government.
Eric Hines
The English common law system decided centuries ago that commerce will work much better if people can pay cash damages to breach commercial contracts rather than be forced to perform them. The two original parties to the contract come out the same financially, and the two parties to the replacement contract come out ahead, too. Exceptions are made for the rare contractual undertaking for which there is no reasonable cash substitute, and specific performance can be ordered for those.
ReplyDeleteEveryone in commerce understands from the beginning that he may receive either the literal performance of his contract or its cash equivalent, and plans accordingly. The system allows people to pull their resources out of dead-end deals and invest them in more promising ones, which benefits everyone in the long wrong while harming no one in the short run. It works like a charm.
If someone's interest in a contract is not primarily commercial, he needs to write special provisions for damages and other consequences of breach. But the whole contract-enforcement-in-court approach generally turns out to be a terrible approach to non-commercial relations. Much better to rely on the strength of someone's word and his reputation: the right institution for the right problem.
...and, as Texan well knows, there's even a duty to mitigate damages (i.e., if someone breaches, you can't just let things get worse in order to pump up the damages; or your recovery will be reduced).
ReplyDeleteEric - Your view isn't bad although I don't agree with it...there's another cost to this system as well: as Texan points out, everyone enters a deal knowing that the other fellow may breach; so the value of contracts overall is reduced. (On the other hand, they're less scary to get into in the first place, so maybe the effect is a wash. And as she points out...a reputation for keeping your word is not only the immediate jewel of your soul, but a precious asset that pays off even if the courts don't require it.)
By the way, compensation can include extra money for the "opportunity lost"...I used "actual damages" to cover several different theories of damages. Under an "expectation" theory, if you breach, you have to put the other person in as good a position as if you hadn't breached...so if you offered to buy Grim's timber, then reneged, so that he had to sell it to someone else at a lower cost...you have to pay him the difference, and he still gets the benefit of the bargain.
Likewise a breacher has to pay "consequential" damages...that is, secondary damages that resulted from the breach. So, if Grim had to keep his timber insured an extra 2 months while finding his new buyer...you're paying that insurance. Also, money judgments typically come with interest to compensate the plaintiff for having to wait. I won't call it perfect but it's a pretty strong system overall.
And do reflect on this. A contract may be for services as well as goods...and if a court starts forcing a person to perform services (even services he agreed to), you've got a Thirteenth Amendment issue.
JW, I think T99 makes the better argument, from the reputational aspect.
ReplyDeleteI appreciate the clarification of lost opportunities and present value...estimates...in our jurisprudence. I was subsuming consequential into actual, as that seemed self-evident. The legal distinction seems to me artificial. If Grim had to pay additional storage and insurance fees--and perhaps a shipping addendum because he had to change carriers or keep one on some sort of retainer longer--because I welched on a purchase agreement, those extra costs seem like an "of course" in the damages I'd owe.
As for "gotta honor the contract," I have considered 13th Amendment ramifications. I keep coming back to two things. One is that I see no material difference between a man's labor in this context and the goods or services he accumulates from the fruits of that labor. If he can't have the one, he's been denied the other. If he's agreed to provide the one, he's agreed to provide the other. The other thing is that he agreed to provide the service, in your argument, of his own free will. I confess to being of two minds regarding even voluntary servitude, but it's hard for me to work up much sympathy for his welching when the agreement became inconvenient to him. And since he agreed to the service, there's nothing involuntary about it; the only thing now being coerced is that he keep his word. Of course, if thing reaches this state, the other party to the contract may find it better to settle rather than to hold out for, now less than best effort, performance. Besides, it's too easy to write an early out provision into a contract; these cases really should be rarities.
And, there are others who are harmed by such desertion besides the other party to the contract. The son of a friend of mine, for instance, agreed to take a job in Wisconsin (a really cush job for a really neat employer, but that's beside the point, except to compound the harm done) and worked it for a week. Then he got what he considered to be a better offer locally so he walked out the door in favor of that second job. His first employer isn't the only one harmed by this. So were the other viable candidates for the job, some of whom are no longer able to accept an offer there. In though, this is a moral failure, not a legal one; most non-union employer/employee relationships (including, now, those in Wisconsin) are at will, for all that government has done to damage the concept.
Going back to 13th Amendment concerns, it seems to me the larger danger here are all the closed shop states.
Eric Hines