God Doesn't Play Dice, Spooky Action at a Distance, If You Have a Hammer, Everything Looks Like a Nail, Ships Passing in the Night, and Other Metaphors For Belief and Debate

This is a reflection about disciplines and theory, in particular, law and economics.  I preface it by saying that I think economics is a fascinating subject, I took a lot of econ classes in college (mostly macro), and I was an antitrust lawyer for a long time, which meant that I had to have some handle on micro as well.  What provokes this particular reaction is a new piece by Bob Scott (Columbia), a far more distinguished contract theorist than I, on the same subject, contract interpretation, on which I've been writing and blogging this summer.  Bob and I aren't just ships passing in the night. (If we were, he'd be the aircraft carrier in the photo at left.) We are sailing in different oceans. I have been thinking the last few days about why. (I should say that Bob and his frequent co-author, Alan Schwartz, have acknowledged my previous critiques in print. The sailing metaphor is about our concepts, not the fact of the dialogue!)

I'll come back to the specifics later. What I want to consider first is those circumstances in which reasoned discussion is or is not even possible. A couple years back I read a fascinating article by a philosopher named Brian Ribeiro, in which he assessed truly hard cases of conflicting belief, i.e., those instances in which the interlocutors disagree but are not ignorant of critical facts, are sufficiently educated, and are under no cognitive disabilities. A perfectly good example is religious belief. If you are a Mormon or a Catholic, you are going to believe things about which no amount of reasoned argument will change my belief. Rather, a change has to be the result of a conversion.  To quote Ribeiro, "If reconciliation is to occur, then one of us must forsake reason-giving (non-rationally) reject our old rule, and (non-rationally) accept a new rule, thereby ending the dispute."

It's pretty easy to see that issue in the case of religion, but my contention here is that it happens all the time in academia, i.e., we are ships passing in the night because we begin with an affective set of foundational beliefs upon which we base our sense-making of experience, and the affect is simply not amenable to anything but a conversion experience if there is to be a change.  The first part of the title is a reference to Einstein's famous quip about quantum mechanics, and has to do with something very fundamental about how you believe one event causes another (like particles influencing each other simultaneously at distances greater than light could travel in that instant - the issue of "entanglement" that Einstein called "spooky action at a distance").

I'm not saying that one can't be converted. I suspect there would be some experiment that could have brought Einstein around, just like Arthur Eddington's experiment brought Newtonians around to Einstein's general relativity. The issue arises at a meta level, when you don't believe that there can be evidence that would change your belief. Sorry, but I don't think even my believing Christian friends whose intellects I  respect beyond question are going to get me to believe in the divinity of Jesus Christ.

I'm pretty sure that there's no bright line that cabins off the meta issue of belief solely to matters of religion, however. My friend and next door neighbor, David Haig, is an esteemed evolutionary biologist at Harvard. He and I occasionally partake of a bottle of wine on a Saturday or Sunday afternoon, and come around at some point to the "hard question of consciousness." This is the unresolved scientific and philosophical question of the phenomenon of consciousness. At this point, the debate is not so much about whether there is a reductive explanation, but whether there can ever be one (that's why it's still as much a philosophical as scientific debate). David and I pretty much agree to disagree on this, but my point is that reasoned discussion morphs into belief and conversion at some point.  That is, if presented with a theory of consciousness that comports with the evidence, I'd be pretty stupid not to be converted (just as if Jesus showed up with Elijah at our next Passover Seder and took over reading the Haggadah). But for now, he believes what he believes and I believe what I believe. (There's a philosophical problem of induction buried in there, because usually the basis of the belief that we'll solve the problem is our past experience of solving heretofore unresolvable problems.)

How this ties back to something as mundane as contract law after the break.

First, I owe it to Bob to plug his forthcoming Marquette Law Review article, Contract Design and the Shading Problem, the abstract of which is as follows:

Despite recent advances in our understanding of contracting behavior, economic contract theory has yet to identify the principal causes and effects of contract breach. In this Essay, I argue that opportunism is a primary explanation for why commercial parties deliberately breach their contracts. I develop a novel variation on opportunism that I identify as “shading;” a behavior that more accurately describes the vexing problems courts face in rooting out strategic behavior in contract litigation. I provide some empirical support for the claim that shading behavior is both pervasive in litigation over contract breach and extremely difficult for generalist courts to detect, and I offer an explanation for why this is so. In contrast to courts of equity in pre-industrial England, generalist courts today are tasked with the challenge of interpreting contracts in a heterogeneous global economy. This has left generalist courts incapable of identifying with any degree of accuracy which of the litigants is behaving strategically. I advance the claim that ex ante design by commercial parties is more effective in deterring opportunism in litigation than ex post evaluation of the contractual context by generalist courts. I illustrate this claim by focusing on the critical roles of uncertainty and scale in determining how legally sophisticated parties, both individually and collectively, design their contracts. By deploying sophisticated design strategies tailored to particular environments, parties are able both to reduce the risk of shading and to cabin the role of the decision maker tasked with policing this difficult to verify behavior. I conclude that judges and contract theorists must attend to the unique characteristics of the contracts currently being designed by sophisticated parties because it is the parties, and not the courts, that reduce the risks of opportunistic shading in contract adjudication. 

What Bob is wrestling with is how to fit the problem of contract language into the law and economics of contracts.  "Theory" would predict that contracts are a check on opportunism, and therefore we ought to see a reduction in opportunistic behavior, particularly as between sophisticated parties who write complex agreements. But we see LOTS of opportunistic behavior and so how do we explain it? Well, it must be because somebody is acting opportunistically, and pushing an ex post interpretation of the language that couldn't realistically have been what it meant when the parties agreed to it ex ante.

 

Economic theory of contract law - i.e., the relationship of contracting behavior to the reduction of opportunism - demands a causal relationship between the act of making a contract and the application of that contract to resolve a dispute that occurs later in time.  Moreover, if the contracting parties are rational, they ought to trying to make their contracts as "complete" as possible, that is, to anticipate as many "state contingencies" as they can. To quote Bob Scott: "Faced with this wide gap between theory and reality, the answers to a critical empirical question remain elusive: how do sophisticated parties adjust ex ante to the prospect of breach ex post?"

 

Bob and I don't disagree that the world is rife with opportunistic behavior, and it occurs as much in the case of sophisticated market actors as with anybody else.  Why we are ships passing in the night has to do with our respective orientation to theory and causation. I'm being presumptuous here, but I think for an economist to delink the ex ante contracting behavior from the ex post opportunism is, like Einstein, to accept spooky action at a distance. The theory is the hammer and, if you have it, the problem looks like a nail.

 

As I've written (ad nauseam, but at least here and here), I have a completely different view of the causal connection (or, to put it more bluntly, the lack of one) between the creation of ex ante contract text and ex post contract opportunism.  All law and economics scholars would (I think) agree that "complete contracts" - i.e. contracts that can in theory anticipate every state contingency - don't and will never exist in the real world. I think the concept, as a matter of fundamental belief, is so ephemeral and fantastical that I can't accept it even as the basis from which to begin an argument. Similarly, I believe the phrase "mutual intention of the parties" is right up there with "the present King of France" in terms of nominally coherent descriptions of non-existent things.  On the other hand, I can understand if an economist would look at my view as saying, in essence, God plays dice with the world, or as contending that I've reduced the behavior to something like spooky action at a distance.

 

What's interesting about all of this is my suspicion (confirmed by my exchanges with Bob offline) that we'd probably face practical problems as pragmatic lawyers in very similar ways. The dialogue is really about fundamental orientations to making sense of the world.