Chapter Content
Okay, so, I was just reading this really interesting stuff, and it got me thinking. It starts with this quote, right? "Lawyers who'll spend ages, like sixty pages, on contracts for their clients because they just, you know, don't trust other businesspeople, will literally organize their own office with like, a scrap of paper, maybe not even signed, 'cause they trust their partners." I mean, isn’t that wild?
And it brings up this guy, MacNeil of Barra, the forty-sixth chief of the Scottish Clan MacNeil. What a title, right? Anyway, turns out he was also a big shot American law professor at Northwestern, like, for twenty years! And back in the sixties, he came up with this idea of the "relational contract." Basically, the idea is that almost all contracts, like, pretty much *all* of them, happen within the bigger context of ongoing relationships, both social and, like, you know, commercial. And that those relationships *are* the real agreement. It’s not just the fine print, you know?
You see, some people, especially those super into law and economics, they kind of see life as one big contract after another. Like, every single day. They, I don’t know, fulfill their job, then enter an agreement just to take the train home, spend hours reading the terms of service on, like, freakin’ Microsoft Teams, and then review Deliveroo's stuff before ordering food. But, like, come on!
Real people, me and you, we don't, and actually couldn't, operate like that. We rely on experience, reputation, the relationships we've got with the folks we deal with, and, you know, a shared desire to just keep doing business. Everything is rooted in context. It’s not just about the cold, hard contract. I mean, you're probably listening to this podcast, reading a book, or whatever, and you've got some legal agreement with some provider. But you probably don't care about the nitty-gritty. The legal stuff only matters if things go south. If you don’t like this, you move on. You might send an email, but otherwise, you’re done. But if you *do* like it, if you buy more books or podcasts, that’s a relational thing. Hopefully based on trust, respect, and, you know, some benefit to both of us.
It reminds me of this story about MacNeil again. Northwestern University is on Lake Michigan, right? Barra, on the other hand, is a small Scottish island with awesome beaches. Anyway, MacNeil's dad, the forty-fifth chief, he actually bought back most of the island and its castle. Then, MacNeil himself, after he retired, he gave the land to the Scottish government for the locals and leased the castle for, get this, one bottle of whisky a year! Talk about understanding ownership and obligation.
And that brings me to trust. Cooperation, whether it’s a team at work or, you know, savers giving money to a business, it all needs trust. You gotta believe what people tell you and that they’ll do what they say. Trust starts with family and friends, of course, but generalized trust, which is the assumption you can trust strangers, it's crucial for complicated economies.
And here's something interesting. Polls show that trust is higher in richer countries. But there's China. It's still middle-income, but people there report trusting others *more* than in the US or the UK. It's weird, right? Maybe the questions just mean different things in different cultures.
And you know, just on a general note. Selfishness is, like, destructive to things like raising kids, teaching, or research. We're naturally turned off by people who are just in it for themselves. You can usually see through it, like the slick car salesman or a politician just angling for votes. People can tell if a company cares about its workers or is just trying to avoid turnover costs.
It all boils down to honesty, right? "Honesty may be the best policy, but he who adopts that policy is not an honest man." I think that rings very true.
Religion also plays a role, actually. Trust tends to be higher in places with, like, Judaeo-Christian traditions. Weber, years ago, talked about the Protestant ethic and the rise of capitalism, and it still holds true to some extent. Although religion is becoming less central to our lives, that ethic continues. But there’s a big difference between that ethic, where a good name is valued more than riches, and what some evangelists preach today – the prosperity gospel.
In short, "the Protestant ethic" has become a norm, not a religious dogma.
Historically successful minorities, like the Pilgrim Fathers, Huguenots, and others, have also played a big role in the economies of their adopted countries. Often, these groups end up being disproportionately represented in business and finance. These folks are often outsiders to the established class, who, despite those odds, achieve success.
You see, competition and cooperation can exist together, but only if there's mutual respect. Like in sports. A good athlete plays to win but doesn't cheat. It's all about relationships and the connections we have with others.
Basically, if there's a chance for everyone to benefit, businesspeople usually figure it out.
Now, large projects, those are often dispute magnets because, you know, it's hard to build real relationships. It’s common for contractors to bid low, expecting to make money on changes later. And public contracts, they try to be super transparent, but that can also cause problems. Like, Birmingham City Council had a five-thousand-page contract for road maintenance. Crazy!
Back in the day, Marks & Spencer was a classic example of relational contracts. They had exclusive relationships with suppliers, they talked about every detail. It was all about long-term partnerships. Then the company wanted more profit, things changed, and those relationships fell apart.
And when that happens, the law gets involved. But in the Marks & Spencer case, the court said they couldn't just force a relationship to be a formal contract. It was up to businesspeople to work things out, and not rely on the law. Similarly, when there was some disagreement with Birmingham City Council, the courts told both sides to find a reasonable solution, not just exploit loopholes in the contract.
Hart, who won a Nobel Prize for his work on contract design, used an example of an electricity plant next to a coal mine. Should the power company own the mine? It's complicated. He suggested a formal process for resolving disputes, but, as far as I know, nobody actually uses it! He says it's because businesspeople aren't rational. I think it's just that they have a different idea of rationality, one that's based on the context of what’s going on.
There's a power plant in Australia, Loy Yang, where one station, Loy Yang A, is owned by the same company as the coal mine. The other station, Loy Yang B, has had different owners over the years. But, you know what? It hasn't really mattered. They figured out a way to make it work.
In the end, there are lots of ways to be efficient. The best businesspeople are the ones who can find arrangements that actually work in practice. Those arrangements are shaped by history, politics, and culture. You see similar mixes of cooperation and competition everywhere, from Silicon Valley to Italy, Japan, and Australia. But the details are always different, and you have to understand the specific cultural context to really get it.