to derive from the execution of the contract (the surplus good, the “gains from trade"). In the fully forward configuration, the contract (or in the case of performance-streams, the part of the contract left to run, i.e., that is still to be fulfilled) remains “wholly executory.” There is no first and second performer. Neither party gives up any consideration without simultaneously receiving its counterpart in discrete “lumps” or in a continuous flow, lump matching lump, flow matching counter-flow. One’s loss if the other defaults is limited to the expected “gains from trade” that he forgoes, or, if he had discounted them, that he must surrender.
The difference between the two kinds of default is fundamental, so much so that one wishes separate words existed to denote each. As the next-best thing, I will refer to default involving loss of the consideration by the first performer as “first-degree default,” while calling that involving solely the loss of contractually secured expectations of advantage “second-degree default.” The particularity of the half-spot, half-forward contract is that it carries risk of a greater order—for it is open to first-degree default—and a higher probability of the risk turning into actual loss—for the contract is intrinsically non-self-enforcing.
Hobbes calls half-spot, half-forward contracts “pacts” or “covenants,” referring to wholly forward contracts as “covenants of mutual trust.” His main interest is in the latter, where two continuing streams of mutually contingent performances are promised—"I promise to keep the peace as long as you keep your promise to do likewise"—the very contract configuration which, next only to the spot contract, has the best chance of enforcing itself. Strangely enough, Hobbes seems relatively unworried about the intrinsic risk of first-degree default in mere “pacts,” yet he is deeply concerned about the much more conjectural risk of second-degree default in “covenants of mutual trust”3 so much so that he deduces the rationale of the social contract from it. It is because he conceives of covenants of mutual trust, i.e., forward contracts, as intrinsically non-self-enforcing in the state of nature that he can represent the surrender of arms to the contract-enforcing sovereign, and willing obedience to him, as the sole rational and moral solution to human coexistence.
It would be fascinating to speculate about the shape Hobbes’s theory, and subsequent contractarian arguments, might have assumed had he not confounded the two types of default risk and the intrinsic tendencies of two distinct types of contract to be, or not to be, self-enforcing. We will revert to a somewhat different form of much the same question in Chapter 4.
Non-self-enforcing contracts “need enforcement” in two senses. In the first, the defaulter must be forced to fulfil his promise by specific performance, repair the harmful consequences of his nonperformance, or possibly both, depending on circumstances. In the second sense, there must be some general presumption in favor of keeping promises as a matter of prudential policy on the part of promisors. Enforcement of some random sample of contracts is a prudential argument against default in all others, for it lengthens the odds, if only subjectively, against being able to default with impunity. The mere probability of successful enforcement, and the ensuing liabilities, will act as a general deterrent to default and contribute to a climate of respect for contractual obligations. This deterrent is an “externality.” It is generated by one’s contribution (effort, trouble, cost) devoted to the enforcement of certain contracts, while the benefit accrues both to the contributor and to others, in that all default becomes a little less likely and reliance on contracts more acceptable to everyone. Reliance on the “practice” of contracting is a classic case of public good created for all by the contributions of some.
Enforcement is a blanket term, standing for a wide spectrum of alternative means, of varying efficiency and cost. At one end of the continuum, there is basic self-help ("If you break your word, I and my friends will make you regret it") and the help of bystanders who are not directly concerned with the contract in hand, but who have a general interest in discouraging default ("If you break your word, the people of goodwill who know of your promise will make you regret it"). Beyond this, there is enforcement by systematic, at least tacitly pre-arranged mutual aid; a perhaps quite small and informal coalition can advance its specific interest in the reliability of contracts in some field by acts of solidarity against promise-breakers. It can contribute to a precedent-based local climate of respect for promises, where a would-be defaulter must take some account of the probability of sanctions ("If you break your word, you will come to regret it, as did X"). Contract law and tort law are, of course, in this manner jointly enforced by the same powers, applied in response to the same incentives. “Enforced” in its second sense, as an externality, must be understood throughout as a matter of degree, as an increased probability of defaults being sanctioned, specific performances extracted from the defaulters, and torts repaired.
A special case of self-help is bought help, the purchase from specialized providers of protection against default and torts; debt-collectors, insurance adjusters, guard services fulfil some of these functions. More special still, protection rackets not only protect their clients’selected property and contracts (notably labor contracts and loans) in exchange for ransom, but they also try to suppress the “externality,” the free-rider benefit non-payers of ransom derive from the ransom-financed activity of the racketeer when he discourages interloper banditry, theft, arson, default on debts, and strikes. The protection racketeer will actually attack the non-client, burn him out, organize a strike by his employees, etc., to induce him to become his client by denying him the free-rider benefit.
Self-help, bought help, and mutual aid involve being judge and judgment-enforcer in one’s own cause, or, in the cause of a member of one’s coalition, vis-à-vis a non-member. This is generally condemned, though often it is a lesser evil or simply unavoidable. Manorial jurisdiction in matters between the lord and his serfs, and royal and republican jurisdiction in matters between the state and its subjects, have throughout history seldom produced quite the monstrously unjust results a priori reasoning would lead one to expect. The judge’s temptation to find merit in his own cause is generally tempered by the risks of abusive behavior. High-handedness always involves a danger, whether or not accurately gauged, of provoking tit-for-tat retaliation, hostile coalition-forming, and disproportionate reactions, from hayrick-burning and sabotage to “exit” (the flight of serfs, the emigration of taxable subjects) damaging to the abusive judge, and possibly even to revolt, though the latter raises special problems.
Further along the range of what one might call private, decentralized or micro-means of enforcement there is, at least conceptually, some room for institutions that are recognizedly not the instruments of one party, but are meant to stand between litigants. A neutral stance lends them some authority, hence they regain, or more than regain, in efficiency of enforcement what they lost in motivation, in incentive to enforce. History has in fact had a large place for such institutions, from councils of elders to parish priests, until they were gradually undercut and pushed aside by the agencies of the sovereign state. In many parts of pre-feudal Europe there were peasant guilds which impartially assumed their members’ duty of revenge against other members in cases of homicide, mutilation, or harm to livestock, awarded damages, and sanctioned tricky dealings. Where, as in the core area of post-Carolingian Europe, feudalism had a chance to develop properly and its justice superseded the co-operative justice of the peasantry, the lord was technically neutral when dealing with disputes among tenants, though of course he was judge and party in matters affecting manorial rights. In enforcing the basic medieval contract of service tenure, however, feudal justice was bound by the “custom of the manor” which the unjust lord could not transgress without some peril to his own interests. In commerce, fair courts and staple courts stood between the parties, settling disputes and enforcing bargains with a power and efficiency we moderns are surprised to find in non-sovereign, co-operative institutions.
Guild, town, and merchant jurisdictions spread the general benefit of an increased probability of contract enforcement and hence of observance; in this they acted as providers
