Contracts, relationships, and our society at large

Yesterday I had a very nice chat with a friend and colleague, and as part of this chat, a theme that I had thought about before came back to my mind: whenever people interact with one another, this usually implies some sort of contract. And I want to start by giving my own, personal definition of what I understand when I use the term contract…

Naturally, there are written contracts, many of them being pre-printed forms where people simply fill in some blanks and, by signing it, indicate they are willing and accept to be bound by the terms stated therein. But I would argue that most contracts that people enter into are unwritten contracts. In that sense, for me a contract is indeed just that, the willingness and acceptance to display a certain type of behavior in the future, sometimes based on conditional contingencies, sometimes regardless of other future events. And quite a few contracts also contain some sort of provision of what will happen if the contract is not fulfilled. In some contracts this part is left out, which then means that the person misbehaving might be dragged in front of a judge, given that there was a contract to begin with, objectively speaking.

Put differently, whenever I have a (hopefully reasonable) expectation about someone else’s behavior–or more precisely for that behavior to be within certain limits–and this person implicitly or explicitly agrees to my expectation–and of course at the same time has expectations about my behavior in the very same situation–there is some kind of contract at work. And whenever such a contract is violated by straying from the agreed-upon path, there is a conflict that needs resolution.

Now, what are unwritten contracts? For one, as far as I can tell, being in any kind of relationship, including an intimate relationship, can be seen as agreeing to a contract, most of which are never written down but actually only inferred by habitual and customary behavior. To give a practical example: whenever I go shopping for groceries and I put my items on the conveyor belt at the register, I enter into a (sort of business) relationship with the person on the other side of the register, and I have a certain expectation of what is going to happen next. Unless there are circumstances at play that I didn’t notice or I have made some kind of error–for instance, I might have put too many items out for the express check-out line–I would assume that the associate of the store will start scanning or manually processing my grocery items and, once done with this task, ask me to pay for my shopping. In turn, the expectation is then that I will pay and take the items with me when I leave. Obviously, nothing of that is written down or agreed upon on an individual basis, but rather the idea of entering a groceries (or other) store, collecting, and finally presenting the merchandise at the register is seen as my entering into this unwritten contract.

When it comes to personal, intimate, relationships, the contract between the two partners might be much, much more complicated: it contains clauses covering behavior in many, many more domains and regarding many, many more possible situations. But, apart from its complexity, the contract is probably equally unwritten, and entered into–at least in the beginning–implicitly. In fact, even a first date, when two people have little to no knowledge about one another, still comes with a contract: for one, you expect the other person to behave with at least a minimal amount of dignity and respect towards you, and if that part is broken, the date usually ends prematurely.

One of the big differences, comparing such a contract to the one at the groceries store, is that people don’t always agree on what exactly that contract says, which leaves (a lot of) room for conflict. In fact, my take on relationship conflicts in general is that, other than bad intentions, ignorance, and negligence, disagreements in relationships are almost exclusively caused by two people applying different versions of the same contract to one and the same relationship.

Imagine going to the bank and signing two copies of a loan agreement, and the two versions differ in, say, the interest rate and the payment terms. I think, unless your copy has the higher rate and more frequent payments, the bank will be quite dissatisfied and upset if you don’t make your interest payments on time, in the expected amount…

The same is true in an intimate relationship, with the difference being that there is no written contract. In that sense, a relationship without a written contract requires that, whenever a conflict occurs, the people in the relationship must be willing to “spell it out” and renegotiate: what are my expectations? Why were they not met? Are my expectations unreasonable or even unrealistic? Can we find a middle ground?

For that to be successful, however, it is important that both parties in the relationship understand that the terms must be negotiable to begin with. As soon or as long as one party insists that their terms are “right” or that their views on things are “the only way to see it”, negotiation becomes impossible–something that reminds me strongly of the current political situation, both here in the U.S., but also abroad. And it is somewhat unfortunate that in quite a few situations, one of the parties in a relationship either subjectively or, even worse, objectively is in a position of power to almost dictate the terms of the contract, which, if abused, in the long run can lead to an undermining of trust, the basis for any future success of the relationship…

And speaking of relationships, here’s another idea (I know, coming back to the economy…): naturally, people who work their entire life have the expectation that their retirement will be a reasonably comfortable one, although they no longer put their work force into the generation of wealth and produce. To a certain extent–wherever financial assets and investments exist–this expectation might even be backed up by a written contract. But this obviously doesn’t change the premise of what is supposed to happen: those people have worked for most of their adult life and simply expect that they don’t have to keep working until they are on their deathbed. Society, on the other hand, makes the promise that the elderly as well as those unable to provide for their livelihood by means of work will be taken care of reasonably well.

This social contract between the older and younger generation as well as between working and non-working members of society is now threatened. Why? Over the past 40 or so years, the percentage of generated wealth, as measured by the gross domestic, attributed to the production factor of labor paid in wages has declined slowly but irresistibly–put differently, prices for every good and service used by an actual end consumer are no longer, in the main, determined by the cost of labor, but by the cost of capital and corporate profit margins. On the other hand, more and more–though still select and elite–people are able to afford living without working at all, throughout their entire life, not just retirement, simply by paying for their consumption out of some capital gains. If this trend continues, those who actually have to generate the wealth through labor will no longer be able to provide for everyone… And as much as I believe in free markets and capitalism, I think it’s high time to start re-distributing wealth to those who actually provide for it: the working class!

The relationship between money and entitlement

Personal friends of mine may very well groan… (this topic? again?) — yes, I feel I have to… In fact, I woke up a couple minutes ago and somehow feel that without getting a few words out now, going back to sleep will be difficult…

To begin with, I have a very strong feeling (and could probably find some scientific evidence, although I am happy to leave that for a later discussion) that most people (maybe even all people) have a strong desire (need) for safety and assurance that “things will be alright” in the future. Naturally, no-one can ever truly guarantee that the future will be “good”, but having someone say so (and trusting that it will), gives a sense of safety (assurance).

As a consequence, people are often willing to give up on other needs and desires (including but not limited to the need of acting morally, the desire to be happy in the moment, the overall need of satisfaction and fulfillment) in exchange for that assurance. For instance, if someone were to offer me the assurance that, for the rest of my life, I would not go hungry, that I would not go without medical assistance (should I require it), and that at least all physical requirements my body might have would be taken care of, I think there is a strong “temptation” to accept a relatively high price-tag in the moment for that guarantee. I might even compromise on some very important values that I hold…

And in a society where all of these things (food, health care as well as general provision for bodily needs) can be bought with money, one way of guaranteeing that those needs will be met is by offering me (a lot of!) money

That is, in short, I believe the reason why even relatively wealthy people still have a strong desire to increase their wealth; although it would, in the here and now, seem to be relatively unimportant: all their current needs are already taken care of, and any additional wealth is unlikely to have an impact on their current situation other than adding a number to their sense of virtual safety.

I’ve used the term virtual on purpose. Why? Well, here is where the relationship between money and entitlement comes into play. Money, in large quantities, represents the idea that, in some future economy, I will be able (allowed) to participate (consume) goods and services (which in my mind truly equated to the sense of entitlement). Don’t get me wrong: for many examples (such as my ability to save money for a while to then buy something I couldn’t afford with a single pay check, such as a car or even a house) this actually seems like (and probably is) a wonderful concept. However, when money is used (or abused?) to generate this “all-purpose” feeling of owning a card blanche (entitlement!) that, in the future, I will be able to simply “use up” goods and services (which still need to be produced for me or be made available to me by someone!), I think that this no longer represents an aspect that was originally meant to be linked to currency (an all-purpose means of exchanging goods and services in the present). And a strong inequality in the distribution of wealth might even be considered a form of slavery (those with little to no money would be forced to produce goods and services for those with more of it, simply to partake in the economy at all, even if they cannot even meet their basic needs with the outcome!).

The major reason for this discrepancy is that, through the market (where goods are priced based on supply and demand as well as the overall amount of wealth and debt in existence, which truly are two sides of one and the same coin), the amount of money required to buy any given good changes over time, and thus the amount of goods and services I am able to obtain with whatever wealth I have accumulated is not fixed (which, if that were true, would then indeed represent some entitlement!) but variable. So, as much as having (a lot of) money might seem like giving a wealthy person a sense of safety, this sense will only be experienced for as long as money doesn’t lose (much of) its value.

Two major problems now combine into a mix which, unless either problem is at least lessened in its impact, I would argue make it almost inevitable that any economy based on a free market and a monetary system where making money available (central bank lending) comes at a cost (interest), will eventually experience a near-fatal episode:

First, those people who “collect” money as a means of safety will never feel they have enough (and rightly so! once the money starts losing its value, all the entitlement they have collected thus far begins to melt for not to say evaporate). And while, deep down, most people probably sense that to be true, they will still deny that truth and attempt to increase their wealth (perceived safety) through collecting more (and more, and more).

The second problem is that once enough wealth has been accumulated (in few enough hands), the “real economy” (that is to say the part of the economy where money is used to actually buy means of production, such as labor and resources) is satisfied when it comes to liquidity, and the surplus of money (in the hands of the wealthy) requires (and irresistibly generates) new forms of “investment opportunities” (to increase the numeric value via interest rates).

From the outside (such as from the perspective of an alien, maybe — told you this is a crazy blog), it might possibly be even quite amusing to see what kind of “products” the engineers (economists) of the financial markets come up with to allow people who “own” large amounts of money (who have earned or received this entitlement in the past) to increase its (numeric, not actual, future-related) value by “investing” it in various way: my favorite so far is still the ability to buy credit default swaps (that is a bit like an insurance, in case some other, actually tangible good loses part or all of its value) without either having to own the actual good (compare it to being able to insure a house that you don’t own, but still having to option to cash in on should it get damaged or destroyed) or some system of transparency (such as a register to at least have a sense of how many of these insurances have been sold, by whom, and to whom).

The real problem is that for every unit of currency that is owned by someone (and considered wealth, let’s say a thousand dollars I have in my bank account), someone else must be owing the same amount of debt (each and every monetary system controlled by a central bank works that way, or otherwise: what good is wealth and entitlement if no-one owes me anything). And given that the amount of overall money seems to be increasing faster and faster (usually leading to price inflation), because the only true gain in wealth is of course growth above the nominal inflation rate, any such system must, in the end, collapse. I would almost go as far as to say that any currency system that does not “reign in” excessive interest rates as well as the ability to accumulate wealth without a specific purpose is to some degree, by virtue of how money works, destined to be unsustainable; unfortunately, in the end, no-one “wins” (not even the rich folks!)…

Do solutions exist? I think so! But the one crucial component to each and every solution I can think of is that people (which means everyone!) must be willing to give up on their sense of safety and entitlement (assurance). This can be done by accepting (much) higher taxation (but also giving up on the idea of a guaranteed retirement payment!) followed by truly reducing wealth and debt, or by hyper-inflation, or by some other means of neutralizing both wealth and debt (haircut on debts by disowning creditors). Why? It’s simply unrealistic to believe that by whatever means in the present anyone could ever guarantee that the wealth I own (effort that was put into the economy by me or in my name in the past without taking it out again immediately or shortly thereafter) will be able to buy me anything in the future (in essence: just as fiscally conservatives are talking about cutting back the social welfare state to end entitlement on the side of the relatively poor, they should also accept that “storing” wealth for a rainy day by the relatively rich is nothing but the same idea, only in form of currency instead of a provision in some law). This is, I think, exactly why an economic contraction (recession) is such a potentially disastrous event: people all over suddenly realize that their future is, inevitably, unsafe, and instead of keeping up the expenditure, they stop using currency in the market place. The reality simply is that no-one knows the exact state of the economy in the future. So it is simply a (partially false) promise if someone says: your needs will be met! (and that is, of course, also true for any other form of entitlement, including social security or Medicare/Medicaid…)

Only if people are willing to ease up on their (need for a) sense of entitlement can an economy run smoothly. What do I think is the best way to achieve this? By having faith in the future, by believing that, as long as humans with a sense of morality and fairness are “in charge”, I will not be “forgotten”. Then I am willing to accept that as good and useful money is for the purpose of exchanging goods and services in the here and now (and near future), I am much better off putting my faith and trust in the people of the future than the money (numeric wealth) I may or may not own by then.