Plate i in print

The Sword

Hobbes; the enforcement that turns a promise into a binding one, and lets exchange reach across time.

Promises unbacked by any power to compel them are mere breath — too weak to bind a man, or to make his word worth another's trust.

— the founding problem of this plate, after Thomas Hobbes, 1651

The second of the institutions is the one that makes the market possible, though we rarely notice it doing so. A contract is a promise made binding; and the work it does is to let us exchange across time — to trade not goods for goods, hand to hand, but present performance for future performance, my labor now for your payment later, your loan now for my repayment hence. Almost everything that distinguishes a modern economy from a village market is an exchange across time, and so a contract. The question of this plate is what makes such a promise binding — for a promise, on its face, is only words.

Consider why exchange across time is hard, when exchange on the spot is easy. If I trade you an apple for a coin, hand to hand, neither of us need trust the other: we exchange at once, and if you withhold the coin I withhold the apple. But most valuable exchange cannot be simultaneous. The builder raises the house over months before the owner has paid in full; the lender parts with his money now against a promise of repayment years hence; the worker labors all week before the wage arrives on Friday. In every such exchange, one party must perform first, and in performing puts himself at the other's mercy: the house built, the owner might refuse to pay; the money lent, the borrower might abscond; the week worked, the employer might withhold the wage. The first performer's exposure is the fundamental obstacle to exchange across time — and if it cannot be overcome, all such exchange fails, and the economy shrinks to the simultaneous swap. The promise to perform later is meant to overcome it; but a promise is only words, and words, the first performer fears, are cheap.1

1. The fundamental problem of exchange across time: most valuable exchanges are non-simultaneous (construction, lending, employment), requiring one party to perform first and so risk the other's non-performance. This first-mover exposure is the obstacle the promise — the contract — must overcome; unsolved, exchange collapses to simultaneous (spot) barter. The contract is the institution for binding future performance. Cf. the hold-up problem (The Holdup).

Thomas Hobbes saw the heart of the matter, though he wrote of covenants among men in a state of nature rather than of commerce. A promise, he argued, is binding only if there is some power that will compel its keeping — for where the promisor may break his word with impunity, and stands to gain by breaking it, the rational man both expects the breach and, expecting it, will not perform first; and so the promise, unbacked by any power to enforce it, is mere breath, too weak to secure anyone. What makes a promise binding, then, is not the saying of it but the existence of a force that will punish its breaking — a sword, in Hobbes's image, held over the promisor, that makes keeping the promise cheaper than breaking it. The contract is exactly this: a promise plus a power to enforce it. Strip away the power, and the contract is no contract, only a hope; supply the power, and the bare promise becomes a binding obligation, and the first performer, secure that the second will be made to perform, dares at last to act.2

2. Hobbes (Leviathan, 1651) argued a covenant binds only if backed by a power to compel performance: where breach is profitable and unpunished, the rational party expects breach and will not perform first, so the unenforced promise is empty. Enforcement — a power making the keeping cheaper than the breaking — converts a bare promise into a binding obligation. The contract is a promise plus an enforcement mechanism. Hobbes located the power in the sovereign; the plate generalizes it.
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But the sword need not be the state's, and this is the enlargement the plate makes on Hobbes. Enforcement — the power that makes a promise binding — comes in several forms, and the law is only one. The first is indeed the law: the state's courts, which on a broken promise will order the breacher to pay damages or to perform, backed ultimately by the state's monopoly of force. This is the enforcer of last resort, and the foundation of the most formal contracting. But there is also reputation: the promisor who breaks his word loses his good name and the future dealings it would have brought, so that the value of his reputation, held hostage to his conduct, enforces the promise without any court — the merchant keeps faith because faithlessness would ruin his trade. There is the hostage, or bond: the promisor posts something of value — a deposit, a collateral, a pledge — that he forfeits if he breaks, binding himself by putting his own stake at risk. And there is the norm: the internalized sense of obligation, the shame of the cheat, the sanction of the community, which enforces promises by conscience and custom where no law or reputation reaches. The contract rests on whichever of these enforcers is available and adequate — and most contracts rest on several at once.3

3. Enforcement takes several forms beyond the state: law (courts ordering damages or performance, backed by the state's force — the last resort); reputation (the good name held hostage to conduct, enforcing through future dealings); the hostage or bond (collateral forfeited on breach — see The Hostage); and the norm (internalized obligation, social sanction). Real contracts rely on layered enforcement; the law is the backstop, not usually the front line. This anticipates the relational-contract plate, The Handshake.

Of these enforcers, the law is the one a society deliberately builds, and its provision is among the state's most fundamental economic functions. For reputation and norm, powerful as they are, have limits: they work among people who deal repeatedly, who share a community, who can observe each other's conduct — but they fail among strangers, across distances, in one-off dealings, exactly where the modern economy most needs to reach. There the law must serve: an impartial third party, the court, that will enforce a promise between strangers who will never meet again and have no shared community to sanction them. The law of contracts is, at bottom, the public provision of this enforcement — the state lending its sword to private promises, so that strangers may bind themselves to one another with the same confidence that kin and neighbors bind themselves by reputation and custom. And because the law's enforcement is what lets strangers contract, the quality of a society's contract law — the impartiality of its courts, the speed and certainty of its judgments — sets how far its market can reach beyond the circle of the personally trusted.4

4. The law is the enforcement a society deliberately constructs, and providing it is a core state function. Reputation and norm work only among the repeatedly-dealing, the communal, the observable — failing among strangers, across distance, in one-shot dealings, where the modern economy must operate. The law (impartial third-party enforcement) fills this gap, letting strangers contract. The quality of enforcement bounds how far the market reaches beyond personal trust — North's theme, developed in the flagship.

The sword makes a promise binding — but only the promise that was actually made, the terms actually written. And here the volume's central difficulty enters, the one the flagship will reach: no promise can name everything. However powerful the enforcement, it can only enforce what the contract specified, and the contract, being the work of finite minds facing an infinite future, specifies only a fraction of what may come to pass. The sword enforces the letter; but the letter is always incomplete, falling silent on the countless contingencies the parties did not foresee. So enforcement, necessary as it is, is not sufficient: a contract perfectly enforced may still fail to say what should be done when the unforeseen arrives, and then the sword has nothing to swing at. What fills the silence the contract leaves — what governs the parties when the world springs a surprise no clause addressed — is the question the rest of the volume must answer, and the question on which, the flagship will argue, the whole nature of the contract turns.5

5. Enforcement binds only the terms actually specified — but contracts, made by finite minds facing an uncertain future, are inevitably incomplete, silent on most contingencies. So enforcement is necessary but not sufficient: a perfectly enforced contract may still fail to say what to do when the unforeseen arrives. What fills that silence — the volume's central question (the author's openq) — is taken up in the plates that follow and resolved in the flagship, The Promise.

The sword, then, is what makes a promise more than words: the power — of the law, of reputation, of the hostage, of the norm — that makes the keeping of a promise cheaper than its breaking, and so lets the first performer dare to act, and exchange to reach across time. Hobbes saw that a covenant without such a power is empty, and the insight founds the economics of contract: a contract is a promise plus its enforcement, and is only as binding as the enforcement behind it. The law is the enforcement a society builds for the dealings that reputation and norm cannot reach — the strangers, the distances, the one-off bargains — and its reach sets the reach of the impersonal market. But the sword can enforce only what the contract said, and no contract says everything; and so the volume turns next to the contract's inevitable incompleteness, and to the gaps that no enforcement can fill, only fill in. The next plate asks what governs the parties when the world springs a surprise the contract never named.