On the Meaningless of Contracts and the New Optionality

An old saying is that contracts are only as good as the parties that enter into them. And the evidence is growing that when there is a meaningful power disparity between two parties to an agreement, the odds are high that the bigger player will elect to behave badly. This blog is rife with examples: pervasive contractual and regulatory violations in securitizations and foreclosures, banks exploiting not just ordinary consumers with “tricks and traps” but even billionaire clients; debt collection abuses; routine raiding of employee pensions while CEO pay and perquisites remain sacrosanct; and, of course, the pilfering of customer accounts at MF Global.

And conditions on the ground are even worse. Hoisted from comments:

LAS says:
March 23, 2012 at 10:41 am
I think you are on to something, Yves.
There’s no indication of improvement either.

For an example, our firm completed work for a major corporation last month (successfully) and they will not accept the invoice for our work. While we have had to lay out cash to perform the work, they have not. Although they came to us to do the work for them, they have shut down their procurement/accounts payable dept and they have kept it shut for about 2 months now. This is a major international corporation and I believe they are treating other suppliers like this, trying to make their Q1 performance look better than it is.

I consider this to be theft of service. Until they re-open their procurement/accounts payable system, they are in effect refusing to acknowledge that they owe anything.

Mel says:
March 23, 2012 at 1:38 pm
(Robert Reich wrote another post mentioning the “destruction of meaning”. Why can’t I find these things when I want references?)

Wait till you see their next move. They’re going to run Accounts Payable as a Profit Center. Because they can.

Lidia says:
March 23, 2012 at 7:43 pm
Is (isn’t) that how banks work?

As a small business person, I was shocked at the practices OF MY DEBTORS that pretended to keep me on the skids.

I was expected to be THEIR BANK, me! Someone who pulled in $50k, was fronting money to Siemans, Bard Medical and even larger, more obscure, companies whose names I now forget.


Planck says:
March 24, 2012 at 8:58 am
We saw this recently too…major corporations who don’t think they have to pay suppliers. Also, procurement officers who want 5% off the top of everything to justify their measily paper pushing jobs for profits that roll up to some Family Office somewhere.

Now LAS might have some creative routes for recourse (say drafting a press release from Concerned Big Multinational Suppliers expressing concern that the mysterious shuttering of the purchase department might be a sign that Big Multinational is in very bad financial shape because it is taking such desperate measures, faxing it to the corporate communications office from a Kinkos so as to disguise the source, with a list of financial websites and websites to whom it will be sent if checks are not forthcoming in a week. That might get their attention). But it is grotesque that we are even having to discuss taking extreme measures to get paid. LAS’s company is a victim of theft, period.

Guest blogger and author of On Value and Values Doug Smith took note of the LAS story and e-mailed:

It all reminded me of two things: specifically, the Morgan Stanley guy who is charged with stabbing the cab driver – and more generally a profoundly important shift that is already happening in society/capitalism/markets.

Business used to be based on cultivating critical relationships: with customers, employees, suppliers. Capitalism has not simply abandoned a relationship orientation, but has rapidly moved through “transactions” to “options.”

Today, everything is just an option. As deleterious as transaction orientation is to relationships, at least transactions have the constraints of obligations to follow through. But in our current raging and out of control homo economicus-as-options situation, not even that exists. There are no contractual obligations whatsoever.. there are only new negotiating positions tied to option values.

When the corporation in LAS’s initial comment above refuses to accept the invoice for services, it is merely exercising its option choice — likely under the belief that any cost (whether legal or otherwise) will be less than paying the invoice.

This is the world in which William Bryan Jennings operates. The driver’s account is credible, because it reflects this new business reality. When the cab pulled into the driveway, Jennings — just out of habit, routine and practice — treated the ‘agreed upon transaction amount’ as a mere option to be exercised through a new transaction/renegotiation. What the cabbie recalled as a contract for $204 became, if I remember, an option to pay $50.

In a world of relationships, those relationships had value beyond ‘just one damn transaction after another’…. and this goes missing in a world of transactions… but, in a world where every moment is just that moment’s options … not even previous promises have any stable value, let alone relationships …. and this is the dog now, not the tail.

Now there are settings in which not having a contract can work, but those are where relationships matter. When I worked with in Japan in the 1980s, the entire society was non-contractual. You’d have a vague understanding (Japanese is a vague language, being explicit is seen as tiresome and rude) and the two parties would keep arguing about what the deal was as they worked together. But there was a well understood, well shared set of norms, and it was a shame based culture, so word getting out that one party had been abusive would have led it to be hectored and shunned by others.

With a rise in an options-based view of business, it isn’t hard to see how a pernicious dynamic sets in. It used to be that only occasional scumbags would behave this way, and you’d write it off as bad luck and a reminder to do a decent amount of due diligence on new customers. But when this sort of behavior becomes common, the cost of doing business escalates since no one can trust anyone’s commitments. You can see this now in the way many types of contracts have changed. It used to be possible to do business with a short agreement. In many fields, they’ve now become excruciatingly long, since the odds of them being litigated is correctly seen as higher, so nailing down all sorts of possible outcomes is more important. And longer agreements means more protracted negotiations. It amounts to a tax on commerce.

And this pattern is particularly devastating to small businesses. It’s comical to see the Administration talk up the need to help entrepreneurs yet gut the rule of law to help banks. The last time I had to think about suing someone (more than 10 years ago), the rule of thumb was that it didn’t make sense to litigate unless the matter at hand was at least $300,000, between the hard dollar costs (you can get to $50,000 in legal and not be very far along) as well as the management distraction and emotional toll. Adjusting for inflation alone, the number has to be even higher now.

And the power imbalance does not have to be of the big company versus small one sort. It can be informational. As we wrote in ECONNED:

When the seller knows more than the buyer (or vice versa), commerce in the neoclassical framework becomes costly. One option is dealing only with vendors a buyer has used before successfully. Even then, he runs the risk that the seller pulls a fast one now and again, taking advantage of him in ways he cannot readily detect.

If sellers cannot be presumed to be trustworthy (and the dictates of maximizing self-interest say they in fact won’t be), consumers have to either spend money and effort to validate the quality of their purchase or accept the risk of being cheated.

Consider purchasing a computer in the neoclassical paradigm. The buyer has no way of being certain that the computer lives up to the vendor’s promises. So the consumer will have to bring an expert to test the computer’s functionality at the time of purchase (does it really have the memory and chip speed promised, for instance?). The seller will need to be paid in cash, otherwise the buyer could revoke payment.

And what happens if the computer fails in a few weeks? Assuming the vendor has not fled the jurisdiction, the only remedy is litigation, or an enforcer with brass knuckles.

But even that scenario is too simplistic. It assumes the buyer can evaluate the expert. But in fact, if you aren’t a computer professional, you can’t readily assess the competence of someone who has expertise you lack. And even if the person you hired is competent, he might arrange to get a kickback from the seller for endorsing shoddy goods. The same problem holds true in any area of specialized skills, such as accounting, the law, or finance. Many people judge service quality by bedside manner, which is not necessarily a good proxy for the quality of the substantive advice. And as we will see later, one of the factors that helped create the crisis was the willingness of investors to buy complicated financial products based on the recommendation of a salesman who did not have the buyers’ best interests at heart.

We can see the damage of the breakdown of the norms of commerce. The private label securitization market, which functioned fairly well when originators and servicers acted in accordance with their agreements with investors, is now dead. The securitization market, which was 60% private label prior to the crisis, is now effectively 100% government guaranteed (there was all of one private label deal last year). Various reform proposals have been suggested; some have been well thought out enough that past investors reacted positively. But of course, the sell side nixed anything far-reaching enough to make a real difference. The investors I know say there won’t be a private label securitization market ex root and branch changes for at least ten years.

So it looks like Marx is being proven correct, that capitalism sows the seeds of its own destruction, although not by the route he envisaged, that of a worker revolt. Instead, it comes about via the capitalists turning on each other to try to secure an even better deal.

Print Friendly, PDF & Email


  1. Advocatus Diaboli

    I am not surprised at this turn of events because that is exactly how things work in third world countries.

    Commercial activity requires the governing system to maintain a fairly honest marketplace. The west was able to do that for a hundred or so years (late 1800s-late 1990s) and that was why commercial activity and wealth creation took off and created the world we live in. Today the basic social contract has broken down in many areas of life to such an extent that people in most western countries are a few unexpected events away from eating each other.

    1. Steve

      Why the historical romantiscism? It’s never worked just fine or perfectly, or much better at any point. That’s just bad history.

      1. Middle Seaman

        My personal experience shows clear deterioration in the last 10 years. When I would submit my detailed bills, companies would pay fully in the 90s. Later on, some companies started to claim that the bills are inflated. Some others just stated that they will pay only part of the bill. They basically exploited the fact that wouldn’t sue them over $100K due to the legal cost; they were right.

        1. LGS

          Is there no incentive from these customers of yours to treat you right just to keep you interested in doing business with them? I have to assume that after being forced to give a steep discount in one transaction you were very wary of doing business with them again.

          Sure, there are other options for them in the marketplace, but you can’t burn everybody. There has to be a limit beyond which they have problems securing reliable vendors.

          1. WiseAss

            Depends whether you can afford loosing a customer, or if this account is big enough to take the blow…

        2. Zlati Petroff

          An honest query: why did you not anticipate this and react to it?

          I am not trying to accuse you of bad management. But if you sensed that these firms are starting to exploit you, why didn’t you try to concoct means to protect yourself?

          I ask because I think your situation is extremely interesting. I’d like to know what barriers may exist within markets and relationships such as this that keep small firms from protecting themselves.

          Did you not have access to legal resources to write better contracts? Or perhaps the leverage to request partial up-front payments?

          What others ways are there to retaliate against a bad customer outside of expensive legal action? Have you thought about forming a “suppliers’ union” to resist the encroachments of the big firm that cheated you?

          Let me know.

      2. Lil'D

        Agreed that it’s never been perfect.

        But the argument is that things are getting worse, not about the starting point.

      3. pws

        I was watching a Western the other day. A man named William Blake receives a promise of a job in a town called Machine on the West Coast of the United States. He spends every penny he has to get out to the West Coast and goes in to the metal works where he is to be employed. However, the head clerk just laughs at him and says they already hired an accountant and that there is no work for him.

        He insists on seeing the boss, Dickinson, because Blake is angry that Dickinson has reneged on a contract. Dickinson greets him with a shotgun and says, “The only job you’ll get here is pushing up daisies from a pine box.”

        Things get worse for William Blake from there…

        So, this is modern America now.

        1. Mel

          Ran across some Dashiell Hammett that I’d never seen before. The story _Nightmare Town_ describes that kind of decline too. It’s from 1924! Before the 1929 endgame played out. I guess artists see things we don’t — or maybe just crime writers.

          Eponymous collection published by Vintage.

        2. McKillop

          The movie starred J.Depp and was quite heavily symbolic: Blake was actually dead and heading of to ‘wherever’ but wandering through Hell as frontier United States.

          Speaking of contracts. My extended auto warranty (hefty in price and with a $200.00 deductible will be paying for a car part and repair.
          Here’s the rub; Ford has discontinued here in Canada, (Ontario) the part I require and the part # has been “superceded” by a different, more costly part ($118.00). gmac, the insurer, having discovered that dealers in the usa still have the earlier numbered part in stock insists that because the part is available in the usa they are not obliged to pay for the superceded part _only_ available here in Ontario.
          The company itself can/will not provide the cheaper part but because it is available through a dealer, I pay. Or do without.
          Guess the ‘agent’ is looking for a bonus.
          Lucky me, it must be only a snall bonus!

          1. McKillop

            The film’s called “Dead Man”. Check out wikipedia for a review.
            Sorry for the we spelling errors.

      4. Fiver

        Real, in some instances spectacular, progress in minority and women’s rights, institutions, technology, living standards, workers’ rights, and other areas, was made during the period mentioned, though I would put the cut-off line for any real “progress” at roughly 1975.

        A hundred years ago a large percentage of the US population was without power, running water, indoor plumbing, sewers, toilet paper, any form of medical care, good food etc., and the average life span for an American born in 1900 was barely 50 years. That span increased 10 years over each subsequent 30-year period – almost entirely attributable to public health and other measures directed at communal well-being.


        PRIOR to real efforts at sanitation and provision of basic food security, things were not so cheery:


        If you think things have not deteriorated over the last 25 years, and that it is closely connected to a near-total collapse in “community mores and values” you haven’t been paying attention.

      1. EH

        That metaphor is going to be unavoidable for the next while, isn’t it. The world is going to force me to know what it means.

        1. financial matters

          Much better movie than I thought it would be. With a little imagination one can even see some OWS overtones in there….

        2. pws

          I’m glad to see a return of 70’s style social science fiction myself. Especially as our society rots away from the inside.

          My impression is it’s sort of similar to “The Running Man,” if you’ve seen that one.

    2. Michael Roberts

      The first part (the third world) is exactly the point I wanted to make. We lived in Puerto Rico for five years (and yes, I know that’s not entirely the third world) and I knew a couple of local businessmen. When you submit an invoice in Puerto Rico for commercial services, payment is considered essentially optional. It may take a year or more to see your payment.

      And yeah, most people see that as the main reason business in Puerto Rico doesn’t work very well.

  2. Francois T

    So it looks like Marx is being proven correct, that capitalism sows the seeds of its own destruction

    Oh My! Did I read Marx?

    Cue in the trolls* in 3…2…1…0

    *The term “troll” is understood to include political hacks, hyper partisan driven more by their thalamus and hormones than their so-called brain, total asshats and the likes.

    1. pws

      Hey, if I mention Charles Dickens on blogs these days he gets accused of being a “Commie/Marxist/Socialist/Hippie.”

  3. Alan Honick

    Yves, I’m just beginning a project that is intended to get at the roots of this problem, and I’d like to send you a link that I can’t make public, yet. How best to do that? BTW, I sent you the photo of the great blue heron taking off in the Fraser River delta several months ago.

  4. Narrow Perspective

    What of the big, affluent corporate lawyers who anonymously create those non-competitive fine print contracts we all have to sign to purchase goods and services? The first thing the Banksters emphasized to validate their predation on millions was moral hazard, and contract law. These long, one sided, theft agreements with gouging fees, later robo-signing and fraud are still considered contracts. They mean quite a lot in these cases, it’s different set of rules for the wealthy of course when they get screwed.

    1. pws

      “Moral hazard for thee, but not for me.”

      Or, as one shocked bankster put it, “The poor are honest, who would have thought it?”

  5. Curmudgeon

    Option thinking is even more of a problem at the consumer products level. Far too many consmer products firms consider providing goods and services that are fit for purpose to be entirely optional. The new business model is selling DOA goods and refusing the customer any recourse no matter what the sticker price.

    1. Lidia

      You’re so right. Shopping is a depressing enterprise these days. Forget planned obsolescence: some of these things barely make it out of the packaging without breaking.

      It seems as though there’s a headlong rush to turn good resources into as much bad product as possible, as quickly as possible, as though that’s somehow a ‘winning’ strategy.

      1. Lambert Strether

        I can go to the mall and spend twenty bucks for a man’s shirt, made off-shore, in a limited range of colors and sizes, that’s going to last a year or two before the thread goes or the collar frays. It’s also going to be slightly uncomfortable to wear.

        Or I can go to the thrift store and spend a dollsr for a man’s shirt made twenty or thirty years ago that’s still good, and will be good next year.

        And everything is like that.

        1. ambrit

          Mr. Strether;
          We regularly shop at the ‘Thrift Shops” for just that reason, plus price of course. We started doing that while raising our children, out of necessity, and have continued the practice even now, when they are grown and flown.
          As for quality, I now increasingly ‘advise’ customers at the DIY Boxxstore I work in to compare the quality of the older items they express a desire to replace with the quality of what’s on offer as a replacement. Then I leave them to their own devices.
          Finally, an observation: What will happen when this ‘new’ options oriented business model starts to corrupt the local services sector? Privatised water systems are already showing signs of the theft of previously sacrosanct infrastructure maintenance budget by the ‘return on equity’ crowd. Taking “All Politics Is Local” as my mantra, I would expect the previously blogged about counties MERS lawsuits to expand exponentially into public services takebacks. After all, when banks steal from each other and their deep pocketed clients, most ‘street level’ ordinary people don’t give a d—. When the local garbage isn’t picked up for a few weeks because the ‘private vendor’ who greased a few palms to get the contract suddenly can’t, or wont, pay the workers without a big labour ‘giveback, the locals get very irate indeed. I’m thinking that now would be a good time to invest in pitchforks and flambeaux. I forsee a growth market in them.

          1. Naked Person

            I refuse to buy cloths anymore because the cheap crap is deflationary and I refuse to give the Federal Reserve any more reasons to print money and give it to banks.

            I think of myself as a conscientious objector.

        2. pws

          I’ve noticed that the differential between used stuff and new stuff (except for “collectibles”) is ridiculously out of whack these days, to the point where you realize that the real price of goods is absurdly inflated. (That’s when the thing you want is available used at all.)

          1. pws

            By the way, if you learn a bit about electronics, you can often improve off the shelf devices to the point where they will last for a while. (One example, early Microsoft Xbox 360’s were shipped with a cooling problem that Microsoft was completely aware of and had been aware of before the first unit came off of the assembly line. It was serious enough that it would randomly kill people’s Xboxes after they had been using them for just a short time.

            Mircosoft figured that it would be cheaper to just deal with the warranty issues than correct the problem in the initial run. A small cottage industry sprang up to include corrective cooling for the Xboxes so they won’t “Red Ring of Death” on you. A kludge is just to get a cheap desk fan and aim it at the Xbox to keep it from overheating.

            Similar cooling problems also show up in other electronics such as poorly designed laptops. Oh, and with some devices a DIY rechargeable battery replacement will allow you to plug the device in overnight without a worry that it will “overcharge” and kill the internal battery.)

          2. Demeter

            I had to laugh. My recently purchased dishwasher has developed a heat problem: it won’t run unless I pre-
            heat it for 20 minutes with a hairdryer that I dangle inside with the door closed. This is a recent development…perhaps a chip or a weld gone wonky. So that’s what I use my BSEE degree for….

  6. greg


    A contract is an agreement between equals. Only a society whose members are equals can have contracts.

    Clearly a corporation, which is a person, is more equal than a mere living person. And a big corporation is more equal still.

    This is one of the consequences of increased income inequality. The wealthy increasingly no longer consider the rest of us their equals. Clearly they increasingly no longer consider themselves to have any obligation to the members of the society which provides them their wealth. But this cuts both ways.

    It’s those small business people, and their local Chambers of Commerce, reflexively supporting the Republicans. Now they know what they’re voting for. Perhaps they could still talk to their Congressmen. Otherwise they will have their assets stripped: First the poor. Then the worker. Then the foreman. Then the manager. Then the small business man…so on up the pyramid until…!

    The absence of contract suggests the devolvement of relationship to naked force, ie. tyrrany.

    1. readerOfTeaLeaves

      There’s another layer contributing to inequality, and it is examined in ECONned: judges and judgeships. Conservative decisions have continued to shift the scales in favor of corporate-oligarchic interests, at the expense of the rest of us, for at least 30 years now. That has been a hidden trigger driving inequality.

      Federal judges have ruled over, and over in favor of corporate interests rather than small businesses, small farmers, or any other ‘normal’ individual.

      Given the overall dominance of corporate interests in obtaining legal decisions favorable to corporate interests, it is not at all surprising there has been a degraded sense of fidelity to one’s word.

      The problem is that unpredictability = no trust = no markets.

    2. bmeisen

      Before applauding yours’ and Yves’ formulations (not to mention Lambert Strehter’S) I note that the small business man I worked for in 1990 sank his bookshop pretty slowly by placing orders from publishers (including all the big ones – suppliers who traditionally gave shops 30 days), selling books, and not paying invoices. Receipts went largely into his private account and the bookkeeper was married to his coke dealer.

      1. pws

        One corrupt small bookseller goes out of business, well, another one will soon take his place.

        One gargantuan bookstore chain has similar corruption? Pretty soon you can’t find a book around for miles!

      2. diptherio

        Smart man…figured out how to use the big guy’s tactics for his own benefit. Once the small business owners catch-on this might become the norm rather than the exception. Also, being married to your dealer is always a good idea as it reduces both the price of your habit and marital squabbling about it.

  7. Maju

    “So it looks like Marx is being proven correct, that capitalism sows the seeds of its own destruction, although not by the route he envisaged, that of a worker revolt. Instead, it comes about via the capitalists turning on each other to try to secure an even better deal”.

    Actually, as far as I understand Marx and Marxism, both are two sides of the same (devalued) coin: worker class consciousness grows on the revelation that the Capitalist system is a fraud. This should eventually (soon) lead to worker revolt, revolution and a change of paradigm.

    In fact the apparent but not so real contradiction highlighted above by two commenters, one claiming to heaven for the collapse of good manners in Capitalism and the other hinting at the alleged falsehood of this myth of good manners and social contract in Capitalism, both are right: there was a time not really long ago when there was better manners and some contractual security and that was because the Capitalist empire was afraid of the USSR and the like (of their model being exported with whatever variants and improvements through social revolt/revolution, not of the plain military confrontation). And there was a time before then when Capitalism was so arrogant as it is again now.

    However things have changed a lot since the age of the robber barons and now. Much more than anyone seems able to understand. The world of the robber barons was an expanding world in which frontiers and technologies were flexible and still welcoming. Today’s world is a shrinking and already very much shrunk world: overpopulated, exhausted in its natural resources, in clear ecological collapse, and with an educated working class (here and in India) that knows and expects much more than 100 years ago.

    So I think that while there are some parallels with the universe of the robber barons, that’s in fact essentially limited to the intent of the elite, nostalgic of its own “glorious past” of ruthless and rule-less exploitation; all the rest is actually totally incompatible and hence the current reactionary Capitalist trend is a mere suicidal running forward.

    1. psychohistorian

      Capitalism is a fiction created by the Robber Barrons to obfuscate their control through inheritance and accumulated private ownership of things.

      The Robber Barrons are still around but they have evidently done a good enough job in your case to make you think they don’t exist anymore and that their fiction Capitalism is the problem.

      Nationalize the Fed. A government of, by and for the people could in no way do a worse job than the PRIVATE Fed at managing the money supply for humanity.

      When are folks going to wake up to ending our class based social system with a PRIVATE money supply? We don’t even have the fig leaf of rule of law anymore. How more shameful a civilization can you imagine?

      1. pws

        It seems unlikely that they are going to nationalize the FED when they are currently in the process of privatizing the Postal Service. (If you think things are bad now…)

    2. BondsOfSteel

      Yea, I think a better restatement is that “capitalism is sowing the seeds of humanity’s destruction”.

      Economics truly is the dismal science. One doesn’t need Malthusian theory to realize we will burn every drop of oil, liter of gas, and chunk of coal that is profitable. Damn the biosphere… short term profits ahead!

  8. falun bong

    ‘Tis a sad decline. Trust becomes optional. The rule of law becomes optional. Paying one’s mortgage becomes optional. Real casus belli becomes optional. This is bigger, more dangerous, and more insidious than people realize. I think the pivotal figure was George W. Bush. With his cowboy swagger and utter disregard for facts, the world just knew he was planning to do whatever the hell he wanted, when he wanted. The wrongs of 9/11 were to be righted with unlimited wrongs of his own, in perpetuity. The world is still under the thrall of the “wronged America seeking revenge” narrative. Add to that the self-absorbed narcissism of Facebook, and you have the perfect cocktail for the end of civilized life on Earth. I fear for the time when we are a world of men, not laws, and those men all think their individual wants and desires are superior to the good of the society.

    1. Rex

      I think Bush and the neocons were just a parallel thread to a general moral decline of our institutions, greed and erosion of integrity. There seems to be a long erosion where those with power and money have mathematically proven that honor, fair play and integrity are for chumps.

      I’d say Bush and his neocon buddies were a symptom of a process already underway. From their bully pulpit they certainly helped spread the disease, though.

    2. pws

      I don’t know for whom paying the mortgage is “optional.” I know a few people who did that. They no longer have houses and have large court judgments against them ensuring that they will never again be able to afford one.

      1. abprosper

        What is that line from Star Wars ? Ah yes… if money is all that you want its all that you’ll get …

        This is completely to be expected, its quite dare I say normal for most of history. People only did business with people they could trust or personally force to do what they want.

        This of course pooches prosperity and may pooch complex civilizations for various reasons but until honesty is restored at all levels, its to be expected.

        As the old saw goes “In Gods We Trust, All Others Cash Upfront.”

  9. Max424

    Marx’s destruction route may yet be proven right. For instance, I can envision “unanticipated” worker revolts turning Italia into a madhouse in a fortnight.

    And Italy is in a lot better shape, potential worker/unrest wise, than countries like say Egypt, Syria, Iraq, India, Indonesia, and the indisputably doomed Mexico, to name a few.

    But you’re right too, Yves. I’ve seen what your saying play out in pool rooms my whole life, the unsustainable nature of capitalism in microcosm.

    The metaphorical question always is: What happens to the lions after they have greedily –and unnecessarily!– devoured ALL the lambs?

    Well, devoid of their easy food source, the stupid bastards begin to starve, and they must, out of hunger and desperation, fall on each other.

    That’s the time, I suppose, when the ruthless competition that capitalist’s are always talking about, truly begins –in the End Stage.

    1. digi_owl

      Argentina have already seen workers occupy the very factories they worked in, until the owners have closed down under various pretenses and left the nation. They then run them as small democracies, trying to keep it going to get food on the table rather than a compound 3% for the owner and his cronies.

    2. Fiver

      Already in evidence – note the only acceptable role for Europe and Japan now is to take whatever measures deemed necessary by the “Market” (i.e., Wall Street/Washington/London) NOT to address their own real sovereign interests, but rather to keep this sordid global financial wrecking crew in business – even if it means throwing numerous previous “partners” under the bus.

  10. albrt

    The bankers and their government servants appear to be trying to move us toward a cashless system, in the US and globally, to make skimming and surveillance easier.

    Yet at the same time they appear to be giving us the most powerful incentives in my lifetime to hold cash or tangible wealth outside the financial system – lack of trust, low interest, increased fees, etc. I really don’t get it.

    For example, Bank of America could have waited to jack up their retail account fees until after the Holder justice department announces that anyone holding more than $5 in cash is presumed to be a terrorist or a drug dealer. That should be happening any day now, and then we will all have to pay whatever fees the banks decide to charge or risk prison (or assassination if approved by the President’s special death squad committee). But Bank of America apparently couldn’t wait.

    I hope the reason for the lack of coordination is that the oligarchs really are that short-sighted and greedy. It’s our only chance.

    1. Fiver

      I think the “short-sighted” and “greedy” holds only for some. Those that pursued a deliberate campaign aimed at penetrating key Governments, media, academia, multinational corporations, multinational institutions (World Bank, IMF, BIS etc.) et al have done a brilliant job of taking control of their host States over the last 30-odd years – Goldman having the highest public profile in that regard, while JPM and its alter-ego, the Fed, less visibly, but no less effectively pursuing the same end – freedom from societal restraint or obligation of any kind.

  11. psychohistorian

    Another scenario about large companies withholding payment is that they may know more than the public and they are hoarding cash as the economy grinds to a halt this summer/fall.

    Show me the fundamentals that say it couldn’t happen……..the future is here, it is just not evenly distributed…….

    1. Rex

      Whatever the motivation, that doesn’t make it right or reasonable or legal.

      I try to do unto others as I would have others do unto me. They just forgot the second part.

  12. vlade

    This happens a lot. I blame managers being taught about working-capital, and some divisions being incentivised on minimising it. Of course, small working capital is great, but if everyone tries to squeeze their suppliers (to accept late payments) and they purchasers (to pay promptly), the relative strenght shows.

    And eventually the whole system colapses, for the individual companies don’t even understand or care there is an underlying system.
    Having a vague recollection of Japanese vs. Western practices – of having a few, well cared for, suppliers (who in return were expected to be super flexible with extremely high quality standards) vs. a bunch of cut-throat competition “you’re all dispensable if you don’t get me the best price” suppliers.

    Guess who did better?

    1. Lidia

      Yes, I always paid my suppliers in 30 days, even if it came out of my own pocket. And then they would come through for me when I had a nutty client request. The longest-term relationships worked the most smoothly, saving far more time/money/energy than shopping around would have done.

    2. ambrit

      Dear vlade;
      The problem with that, as I see it from the showroom floor, is that the decisions are now being made by upper and upper middle management people with little or no experience with the ‘nuts and bolts’ of whatever enterprise they are running. When ones’ job becomes the shufling around of numbers, all else below you soon ends up being treated as a number too. As I believe Mz Smith was saying, when business becomes financialized from top to bottom, commerce ceases to have concrete meaning. (Apologies if I have misrepresented you Madam.)

  13. Rotter

    Consider the worldove rthe 350 or so year history of capitalism. as another commenter pointed out, it was “expanding”.. technlogies to mass manufacture and harvest the resources needed to do it were yet to be. most of the best farmland was unplowed..etc., etc., the nonsense talk about undiscovered technolgies making up for what we dont have is absolute gibberish. economists must be some of the most self deluding, and or scientifically ignorant people in history. that world is used up. If we “discover” these magical technologies and they run on economist hot air and flatulence flautlence we may have a shot at keeping this going, otherwise it would be smart for the vastly outnumbered but very wealthy, to learn to live nicely with the dirt poor but teeming in number.

  14. minty

    We’ve lost both the cultural norms and the threat of punishment for fraudulent behavior.

    Ironically, a benevolent dictatorship like Singapore is probably more free in a meaningful sense than the United States is now. There, businesses and doctors operate under the threat of real, harsh penalties for misbehavior. Part of why the Singaporean healthcare system is so excellent and well-behaved.

    1. Susan the other

      Losing our religion. Capitalism was/is a faith based concept. Makes me understand a bit better the NRDP that Obama just signed. Now the government, at the behest of the military (or is it the other way around?) can dictate to you the terms of any transaction, contract or not, and pay you exactly what they want. All that needs to be done is declare, or maybe just announce, a war.

        1. Bam_Man

          When people refer to “Marshall Law” I always wonder which Marshall. General George C. Marshall?

  15. Anonymous Jones

    Contracts are meaningless in the sense that life in meaningless. Each is both meaningless and not meaningless at the same time.

    I have drafted more long contracts than I care to remember. Except for a brief time that I was a wee, naive lad, I did not draft these contracts based on the idea that they would be litigated. Oh yes, certainly, there is a risk that one of these contracts would lead to litigation. There’s also a risk I might win the lottery this week. Neither risk has a great deal of influence on my decisions.

    I do not remember a time in my career when the optionality YS speaks of was not paramount. Yes, we are only talking about a two-decade plus time frame, and I am not familiar with other cultures (I believe her re: Japan), but whatever, it’s here now.

    For me, a negotiated contract is about two things: (1) a road map for the future relationship, and (2) a way to structure incentives to make sure the benefit of the bargain accrues in the manner contemplated when the bargain is struck.

    One may scoff at the road map idea, but that seems slightly foolish and contrary to most experience I know. There is a moral dimension to affixing one’s signature to a document that is quite clear as to one’s obligations. I am not saying that people adhere to their obligations. No, far from it. But I am saying that people by and large acknowledge them when confronted with them at a time that a change in circumstances leads to a reversal and a request for renegotiation. The term “road map” is really just an allusion to the idea that facts on the ground (the things you encounter in the future) are almost never what you expect, and one must alter the route upon finding, say, a tree fallen in the middle of the road.

    Which leads to the second point about structuring. A detailed contract can lead to beneficial outcomes when there are incentives to work in good faith, when each party holds some leverage in the face of changing circumstances. One can develop escrows and dispute resolution mechanisms and shared downside and shared upside. Bien sur, this is impossible to do in a the sense of pursuing perfection. But life is complicated. Things change. We do our best. We cannot expect to perfectly predict the future. We can at least try our best to examine the potential forks in the road and plan accordingly.

    In any event, the advice implicit in the statement at the beginning of the post is the most wise. Seek out trustworthy people with whom to do your business. A written contract is unlikely to save you. What is important is finding a counterparty that for one reason or another is likely to adhere to his or her obligations.

    Facts change. People will let you down, in your personal and professional lives. Some people, in some circumstances, are less likely to let you down. Those people, it seems, are traditionally undervalued, in both a personal and professional sense. We are often attracted by shiny things and also the sense that we are saving a buck or two. Sparkles often fade, just as we are often only in hindsight recognizing that we’ve been a little penny-wide and pound-foolish.

    I have no way to empirically test the idea that standards have fallen as far as YS suggests. I remain skeptical that they were ever very high, but she could be right (I do not dispute that contracting in small groups over decades (like two men in small town 18th century america) did not have far higher incentives for conduct that at least appeared much more honorable). Regardless, optionality is always there, and whether it’s worse now (or *will be worse tomorrow*) is not as relevant to me as its existence today (or its potentially worse existence tomorrow) as the idea that the prudment man plans for it.

    [One small point about a previous comment: nonrecourse loans are options. This just in: there is optionality in options. There is supposed to be! A nonrecourse loan is implicitly an agreement to either repay the debt or hand over the collateral. The lender knows this! That’s what makes it an option. It’s ok to have optionality in options. Seriously. No, really.]

    1. James Cole

      Perhaps it’s the delightful bits of French you sprinkle into your writing that have prevented your contracts from being litigated, because it’s certainly not the clarity of your prose. Are you saying that contracts are a roadmap and detailed contracts are good, or is it best to just pick trustworthy counterparties because a written contract is unlikely to save you, or what?

      1. mark

        Way back when during one of the many British resecions in the 1980s we has a saying:

        “Even the people with no intention of paying have stopped ordering.”

        this is not a new phenomina, anyone with experience doing business with wallmart will know about the final 2 percent. It used to make some vauge kind of sence, if I pay you now will you give me an extra discount or you can wait for a while and pay interest on the outstanding balance. Now witht he cost of money being almost nothing it makes no sence at all.

    2. Charlotte Amalie

      @Anonymous Jones

      “If we could truly see ourselves the way others see us we’d disappear on the spot.” – Emil Cioran

  16. Jessica

    What is described here is not an aggressive elite, such as Marx dealt with, but a decaying one. They have no long-term vision, not even one for their own preservation.
    If there are any clues to be had, Gramsci is more relevant than Marx.
    It is hard to quantify and therefore not discussed as much, but I think the current system is burning up trust at an accelerating rate.
    Just as the Soviet Union reached the limits of what could be done as a society based on fear, intimidation, and envy, we have reached the limits of how much complexity and scale can be handled by a society based so much on greed and self-interest.

    1. Fiver

      They’ve fully captured the Government of by far the most powerful entity on Earth, and have shown no compunction whatever at the thorough and complete trashing of anything and anyone that gets in their way.

      I see an increasingly aggressive elite, now fused with the Pentagon as global enforcer, that each and every day promulgates the nullification of public interest values as one of its chief objects. The destruction of even the basis for trust is the ultimate “divide and conqueor” strategy, and it’s succeeding. The “right” always believed people are essentially driven by fear, greed, lust for power, etc. Thirty years of retreat has left the “good guys” with nothing but a wall at their backs.

      1. Rcoutme

        I disagree. Officers who were commissioned in the 80’s (I was one) were heavily schooled on honor and, “My word is my bond”. The Pentagon is loaded with high-ranking officers from that era. I don’t know about the current crop (I have not talked to recently commissioned officers), but that the highest levels of the military were still schooled in honor leads me to believe that they will not follow the orders of dishonorable people. That will be especially true concerning citizens of their own country.

        In other words: the elite had better not count on the backing of the military. The military won’t join their side.

        1. Jack Parsons

          The military is being eaten by evangelical christian termites. They have taken over the Air Force Academy in Colorado Springs, CO.

  17. rjs

    Illinois isnt paying it’s vendors, either; havent for two years…when one fails they contract another…

    and according to LPS’s mortgage monitor, one out of eight homeowners arent paying on their mortgages…

    1. CaitlinO

      One out of eight homeowners or one out of eight mortgage holders?

      Remember there are a whole lot of us out here who paid the dang things off whether it made economic sense or not.

  18. Rex

    I have drafted more long contracts than I care to remember. …

    Some people, in some circumstances, are less likely to let you down. Those people, it seems, are traditionally undervalued, in both a personal and professional sense.

    Thanks for your insights.

    Perhaps you are part of the problem.

  19. beowulf

    The Hunger Games = The Highlander for chicks (so far as I can tell, haven’t seen the movie either).

    “But when this sort of behavior becomes common, the cost of doing business escalates since no one can trust anyone’s commitments”
    Its like they say, a sociopath trains his victims to be sociopaths (which starts by destroying trust in others).

  20. linkfest

    It’s the ongoing decline of social capital in the US, eg norms that reward trustworthy behavior and allow people to cooperate and pursue shared goals.

    Greg Smith is the poster boy…counterparties replace clients… HFT computers replace NYSE marketmakers, perform same function but have no responsibility for orderly markets. Looter mentality, I’ll be gone, you’ll be gone.

    Division and civil war is the worst form of social capital. You can’t have social capital with ethnic and social division. demonizing, each assuming that the other side only cares about itself and not the country or broader good, inability to develop institutions and norms because the rules are changing.

    Leonard Cohen… Everybody knows the boat is leaking / Everybody knows the captain lied / Everybody got this sinking feeling / Like their father or their dog just died /Everybody talking to their pockets / Everybody wants a box of chocolates / and a long-stemmed rose / Everybody knows

    1. Gerard Pierce

      Our modern day corporations have forgotten the first rule of barbarian conquest: “pillage — then burn”.

  21. F. Beard

    I think the problem is pretty much as simple as this:

    During the boom everyone can afford to play nice and during the bust they can’t.

        1. Simple Minded Data Guy

          Ah. So financially stable companies don’t pay their bills because they may need the money later!

          This will cause havoc with the rating agencies.

          1. F. Beard

            So financially stable companies don’t pay their bills because they may need the money later! Simple Minded Data Guy


            The generous man will be prosperous, and he who waters will himself be watered. Proverbs 11:25

            Like much wisdom, it appears the “Paradox of Thrift” was lifted from the Bible.

      1. Yves Smith Post author

        No, profits aren’t up, and forward guidance is being lowered. You’d never know that reading the financial media these days.

        1. Simple Minded Data Guy

          Au Contraire

          Numerous charts of S&P500 earnings charts out there. Don’t have one handy tho. 4Q was $95 if memory serves. 1q forward at $105, but many think that’s BS.

          But speaking of BS, we know banking sector earnings are BS. Maybe creative accounting elsewhere as we get into the phase where corps push their numbers to meet expectations.

          Big mystery is where did thetaxes go..

          1. Yves Smith Post author

            Go look at Yardeni’s latest. He shows the guidance being lowered in every sector. Corporate profits peaked at the end of 2010 if you adjust for inventory valuation and capital consumption.

          2. Simple Minded Data Guy

            I read yardeni and I saw that. Analyst have been lowering guidence just before earnings season for at least the last two Qs now. Then the market goes up on “beats”. Whoopi!

            What I’m saying is actual S&P 500 earnings have rebounded from the crash and are around 2007 levels again.

          3. Yves Smith Post author

            The market is now driven by the Bernanke put. Spain looks like it is falling over overnight, and Bernanke reassures investors that he is on the case today.

            And S&P earnings ARE falling:

            The four calendar quarters of 2011, as reported EPS, in chronological order:


            And as I said, Yardeni show guidance is being lowered in every sector for this quarter.

          4. Simple Minded Data Guy

            I don’t think we are in disagreement. My origonal point was companies are profitable again so there is no good reason for paying net 90 or whateever.

            The actuals for 2011 you looked up add up to about $85. My faulty memory was at $95.

            Ya, the Mr B Put. Today the market took his comments to mean QE3 is back on again. That trumped Spain, a crappy home sales report and a crappy Dallas Fed mfg report.

            But what’s to worry…Ben will do more of the same….

        2. Fiver

          But coming off spectacular, record results is not the same as imminent demise. So long as Bernanke et al maintain their clearly stated intention of backstopping equities and other (for them) easy-to-game assets, merely “good” results from S & P will keep the bulk of money doing what it has been doing: riding the successive waves of liquidity knowing (again) there’s no way all of this year’s debt can be financed without an occasional panic into Treasuries, or Fed purchases. A 20% correction some time this year is a distinct possibility – but less and less likely the further into the year we get (Wall Street could not possible get a better hood ornament than Obama). But not one worth sweating (for those vested) absent a true wild card, eg., a high-level attack of honesty generates a scandal that nails Bernanke and Geithner, for instance.

      2. nonclassical

        S & P is owned by McGraw-Hill book publishers, who lived near-grew up with Bush family, got contract for Bush “No Child Left Behind” new textbooks..

    1. Anon and On

      Yes it is simple. This is deflation. This is why it is so horrible.

      Easy credit fueled the boom and now there are no buyers, no cash, the system has overcapacity, fixed costs are fixed, so noone pays anyone else unless they really have to.

      All that talk about “options” is just reflective of the reality of doing business in a deflationary environment. Most people have never seen this before so they think it is “new” but there is only new for our generation.

      1. Mark P.

        You are correct.

        Besides limiting financial exposure to any given customer, a way to do business in such times is, unfortunately, to be prepared to target individuals in companies — who are mostly very naive since they imagine that being part of a corporation protects them — and bring those individuals to the realization that in fact they have not much protection against people who, when cheated, are crazy and/or prepared to break the law.

        It’s ugly and energy-consuming, and one has to be prepared to treat lawful behavior as optional as these companies do. One becomes no better than they are. And, of course, the result is that, as you say, everybody behaves more or less illegally during these times.

  22. F. Beard

    And the boom-bust cycle is a consequence of a money supply that is lent, not spent into existence.

  23. paul

    I am surprised to see the comments about not being paid from major corporations and institutions. I thought it was just me.

    One month into a new quarter with a payable to me already 4 months old the company said ” We are not cutting any checks until the beginning of next quarter”. I received my check one month after the start of the next quarter.

    With things like this being rampant can we trust the “profits” that all of these companies have been posting for the past 4 years?

    “Catch 22 says they can do anything that we can’t stop them from doing.” Well….

  24. Norman

    Fear not, fair kiddies, for the ride down, from the toilet bowl to the sewer pipe, is a robust one. Soon, it will all be over, even the shouting, leaving but the shooting. You will have to choose sides, but be careful which side that is. Keep in mind, that you will be required to rebuild, in the aftermath. The whole American process is crumbling, because we have allowed it too.

  25. James Cole

    Marx may be somewhat appropriate for this analysis but the better explanation can be found in Max Weber, who is most famously known for his theory regarding The Protestant Ethic and the Spirit of Capitalism. In a nutshell, after identifying in Protestantism (in particular, Northern European Calvinism) certain ethical principles that Weber claimed were the seeds of capitalism (specifically, the notions of salvation and predestiny and the impact those notions had on folks’ propensity to accumulate capital), he predicted that, over time, as capitalism became the central organizing principle of civil society, the religious/ethical principles that originally moderated capitalism’s sharper edges and thereby made it somewhat more palatable than it would otherwise be, would fall away, leaving what Weber called an “iron cage” of unmoderated and, Weber rightly feared, rapacious raw capitalism.

    1. Fiver

      There is a good deal of truth in that – that a huge portion of US “Christianity” has gone over to the Dark Side in service of easy money is everywhere in evidence.

  26. chris

    This experience, and it’s acceleration, has deteriorated significantly in the last 15 years, as any small business dealing with a large business can tell you.

    We are a supplier to the largest global IT companies and are now regularly treated to unilaterally revoked contracts, AP departments that are “shut down” for some indefinite time, for some bogus reason and byzantine processes designed for only one purpose; to circumvent payment.

    We routinely get letters from companies unilaterally informing us of their new payment schedule that lengthens our collection time to 90 days or more from invoice, in the guise of extolling a “more efficient” process!

    Obviously, if we tried that with our phone or electric company, we’d be shut down.

    Big companies do this routinely. It is as commonplace and obvious as the way any financial trader’s first move in a trade is to “paint the tape” with dis-information, the way a company throws their weight around to leverage government regulations or the tax code or sees their customer as a resource to exploit to the maximum.

    Anyone who is shocked at the routine thumbing-of-nose in these situations isn’t seeing reality. This is the society that we have become. Financial power is all-intoxicating and corrupting. No one who stretches payments to supplies (lobbies DC or paints the tape) cognitively thinks they are doing anything wrong. In fact, they think they are doing their job well, and they are lionized by their peers and society.

    It’s accelerating and irreversable, so just a matter of time before the system kills itself. Simple “tragedy of the commons”.

    1. F. Beard

      “Then I will draw near to you for judgment; and I will be a swift witness against the sorcerers and against the adulterers and against those who swear falsely, and against those who oppress the wage earner in his wages, the widow and the orphan, and those who turn aside the alien and do not fear Me,” says the LORD of hosts. Malachi 3:5 New American Standard Bible (NASB) [bold added]

      Behold, the pay of the laborers who mowed your fields, and which has been withheld by you, cries out against you; and the outcry of those who did the harvesting has reached the ears of the Lord of Sabaoth. James 5:4 New American Standard Bible (NASB)

      1. James Cole

        What a helpful interjection of Scripture. The stiffed await the “swift witness,” who appears, if at all, at intervals the length of which exceeds, by orders of magnitude, their lifespan.

        1. F. Beard

          There’s judgment in this lifetime too.

          But yea, the Lord is very patient with societies UNTIL He isn’t.

          But we can’t say He doesn’t warn us.

        2. F. Beard

          Btw, an expression I often heard was: “I know the system is crooked but as long as it lasts my lifetime, I don’t care”. Ironically, it may not last that long.

          1. MB

            BTW, there was an interesting FRESH AIR featuring Erica Pagels on the meaning and book of REVELATIONS. The discussion discusses the history ad metaphor and interpretation. Not a new endeavor, granted. But, sadly, she seemed to conclude that it gave “hope” of re-empowerment of the weak, and that was an uplifting message.

            I was browsing at Barnes and Noble last winter and came across a book that described life in the Roman Empire, with full descriptions of the tortures that humans heaped upon each other. It was too abominable to keep reading, and I have not forgotten what I did read. I don’t think we can comprehend the depth of human hell on earth, at least as described in that book. I am tending to agree with James Cole, with trepidation.

          2. F. Beard

            with full descriptions of the tortures that humans heaped upon each other. MB

            A theologian I respect postulates that the torments of Hell are to prevent even worse torments that the inhabitants would inflict on each other if they could.

            The Old Testament, btw, seems very humane compared to say the Inquisition with a couple of exceptions that bother me, I must admit. However, Christians are not under Old Testament law so my concern is somewhat obsolete.

  27. Frank Drebbin

    Let’s see, that’s two, no three times that “borrowers” are compared to corporations, ludicrous.
    There is frequently no comparison, many borrowers couldn’t pay because food, and healthcare and other concerns came first. It is important to know that Bank management was keenly aware of the high likelihood of default in issuing liars loans and other forms of one sided usury. Indeed, the information technology companies provisioned ways (insurace, MERS, fraud, captured lobbyists, judges, legislation ) to continure to profit, we’ve seen they simply never “lose”.

    Whom, in hindsight would engage with a Bank that had bet against them long before they had signed a so-called contract? The lie of homeownership, or shelter, a basic need – covered and obscured their desire to harm at all costs.

    Incidentally, the early “defaulters” who simply moved somewhere else were much wealthier people who had many options and breaking a contract and for them was a business decision. In this way, they were insulated from Bank extraction. We all know Banks break contracts all the time and engage in moral hazard relentlessly.

    Debt bondage is not a contract, it is an act of violence.
    Any type of engagement that puts in jeopardy, basic human dignity, or rights is not a contract. The premise of this nice post should be a discussion of law itself, not the so-called sanctity of legalized extortion.

    1. Sam Scrantch

      Have to enjoy Hedges, he’s not talking about lowlifes not payin’ they bills, which is where this thread seems to be leading – in a typical pile on ‘the mob has spoken’ how dare you – predictable direction. Fear not, we have a Supreme Court willing to hear your absolutist “pay up” cries – we’ll jail the “contract” absconders. Just be careful what you wish for, since the law already doesn’t favor the lesser wealthy:

      “Totalitarian systems always begin by rewriting the law”

      1. MB

        In response to your comment:

        “Totalitarian systems always begin by rewriting the law”

        Yesterday, while listening to NPR as I drove, I heard of another “president” (dictator) of some miserable country, who just “re-wrote the constitution”, to allow himself a third term. I laughed to myself. I thought, amazing how these bastards get away with crap like this. Why on earth don’t people just get rid of him? But that’s tyranny, ain’t it? I just googled “rewrite the constitution” to look up the name – and I was surprised by what I saw. But why should I be?

        1. Ms G

          That dictator in some other country might well have taken his cue from a successful coup in New York City, US, where 2-term Bloomberg rewrote the City Charter (New York City) to give himself a third term as mayor (Thug Oligarch) of New York City and then spread $100 million worth of his wealth to buy up votes to give it to him.

          The days are long gone when we read about despots and political crooks in “other countries” as though they were quaint actors in far away lands (not ours).

          1. ginnie nyc

            Thank you very much, Ms. G. I think Bloomberg is the spear-head of the totalitarian possible in the US – whatever he can get away with, so can any local wannabe. He lights the way (cough cough).

      2. nonclassical

        actually, I believe that’s rule #8, Mike Malloy, fascists 12 rules of instigating fascism…

  28. Renodino

    Very good discussion here. Deflation means that only suckers pay full price and the terms change daily to the downside. In politics, we are taking our lead from our leader who told us after the election that all those promises were just to get elected and if you thought otherwise you were a stupid sucker. We have returned to our roots as a nation of hucksters as described by both De Tocqueville and Dickens as they made the rounds 150 years ago. During the last century, we climbed out of that morass, only to slip back in. Why? My guess it’s our natural state of mind as a nation and we could only walk the line so long before falling off the wagon. It will take hitting bottom before we pull ourselves back up again.

  29. ep3

    here’s my example yves.
    a client of mine refuses to pay late charges (or surcharges. they are in clothing, so most vendors charge an extra fee when you order small quantities.). So he subtracts the charge off the invoice. and then the vendor calls and says “why didn’t u pay this?”. And these charges will remain around for sometimes months until the vendor gives up and writes off the charges because it’s not worth their time and money to chase $3 here and there. But shouldn’t the client pay those charges as part of doing business?
    I see companies as so cash strained that they won’t reject or deny payment over small matters. Like a credit card settlement, the world seems happy to bill you $100 for a tank of gas. But when the agreed upon payment date comes, negotiations begin to decide what dollar amount the two parties can agree upon (as well as when to pay). So, the two may say “pay u $75 in two weeks”. And as long as the seller gets something, that’s better than nothing.
    I think this is creating a terrible rot in our society yves. Things like honesty and trust are being thrown away. Instead, greed has made us all scavengers. We are willing to feast upon any carcass now, because who knows what tomorrow will bring.

  30. Jesse

    Perhaps the only portion of the trickle down theory that really works.

    “Whoever commits a fraud is guilty not only of the particular injury to him who he deceives, but of the diminution of that confidence which constitutes not only the ease but the existence of society.”

    Dr. Samuel Johnson

    1. Jesse

      “Our government…teaches the whole people by its example. If the government becomes the lawbreaker, it breeds contempt for law; it invites every man to become a law unto himself; it invites anarchy.”

      Louis D. Brandeis

      It was fairly easy to see this coming. It will most likely get worse, and what comes next makes this look like a summer rain.

  31. Jimmy Dimeans

    Lawyers n’ Contracts oh my:

    “Employees for the major Wall Street firms must sign away their right to access the nation’s courts in any dispute with their employer. A crony-run arbitration system that relies on “equity” rather than the rule of law replaces the taxpayer supported court system where the jury is randomly selected from a large pool. The U.S. Supreme Court has enshrined Wall Street’s ability to serve as judge and jury in multiple decisions. Congress has failed to get a bill out of committee to outlaw these kangaroo courts in two decades of documented abuse.” – Pam Martens

  32. MB


    “For an example, our firm completed work for a major corporation last month (successfully) and they will not accept the invoice for our work. While we have had to lay out cash to perform the work, they have not. Although they came to us to do the work for them, they have shut down their procurement/accounts payable dept and they have kept it shut for about 2 months now. This is a major international corporation and I believe they are treating other suppliers like this, trying to make their Q1 performance look better than it is.

    I consider this to be theft of service. Until they re-open their procurement/accounts payable system, they are in effect refusing to acknowledge that they owe anything.”

    THIS IS NOT A NEW GAME? In the 80s, a former boyfriend of mine manufactured the electronics in a doll that “talked” when the accessory book was near it. It was November and the company, Worlds of Wonder refused to pay him and was waiting for it’s next shipment.

    My Dad, god bless him, understood what they were doing. My ex BF was going to get stiffed after XMAS. So, my Dad SAT IN THE LOBBY all day, loudly discussing the situation with any vendor who came in. He made it clear that he was not leaving without a check, and the XMAS delivery had to be pre-paid. Yes, kneecap tactics. They needed that delivery and finally, finally, after two days of business, a guy from accounting walked out with a check which was promptly cashed. I certainly came to understand that ALL business is kneecap business. Now though, few have the strength to do this, because we are all put in the position of begging for crumbs. As for the BF, he made his nut and retired with rental income and a small rolling farm property. He exited the “system”. Good for him! There is not even a show or pretense of ethics anymore. The system has devolved to dog eat dog, cannibalizing each other – unless you are dealing with the wolves, and they are another thing all together.

  33. Sean

    This is nothing new. Unfortunately I’ve seen this (and heard about it even more) in developing countries like India. It is a common practice to pay bribes to Purchase officers and then have to suck up to AP clerks/officers to get paid for those orders. It is the way of doing business (if it has changed recently, please educate me). This is what I call Indianisation of USA. In another 10 years, I predict you can just give a small “fee” to the police officer who stops you and go on your way. It’s coming here fast as we get poorer relative to earlier years.

    It’s just that folks who have lived here their entire lives and have not been exposed to these environments find it shocking. And it is. It’s very sad where we are going.

    Anyway. I am not picking on India. It’s just that my experience is from India. It is probably the same in Pakistan, Russia, China or Vietnam.

  34. MB

    One more thing. When my husband set up his practice (a psychologist), we made the decision to only accept cash and no insurance. We’re located in a wealthy area of the country, so it works here.

    We knew a therapist who went out of business and couldn’t make it, because the health insurance panel he accepted clients paid him half his rate and then delayed that by stretching him out at times over 160 days, forcing him to be their bank and forcing him to spend tons of time trying to “re-document” their rejections and stalling tactics. We took note of that and realized that the value insurance provided the provider was illusory and decided to forego it. It has been a GREAT decision.

      1. Ms G

        I think this might be happening without anything so obvious as laws being passed — just “private sector” developments like the “innovations” in digital payment systems through iphones and androids and Paypal, etc. . . .

        The Onion could do a CIA-Facebook piece about the “private” advances in digital payments.

  35. mcgee

    Inevitable. Finite area with finite resources and exponential demand.

    Corporations are proxies for neo-feudal control of everything. The perfect buffer for the .1%. Staffed by field bosses and trusties.

    Servitude for security. Choose citizen…inside the wall or outside in the slums.

  36. Ishmael

    And this is surprising. A couple of years before GM’s BK, my SO did work for them and their payment terms were 90 days despite her being much cheaper than other vendors and having quite a bit of out of pocket. Later on they called and asked her to propose on something and once again quite a bit cheaper but a lot of out of pocket (this is PR and marketing type of work). Well since I financed her business I got involved and told them we either had 2 week terms or a retainer. Their response is do you know who we are, my response was “Oh, you are correct I forgot you are GM so we will only do the work on retainer.” We ended up walking.

    I work consulting, my general policy is you pay a two week retainer. You will be billed weekly and have 7 calendar days to pay the bill. If not paid in that time the work ends. Yes, sometimes I lose a client but hey the two worse things than not having work in order are (1) having out of pocket and not getting paid for it and (2) incurring time and not getting paid for it. The other things I have noted are (1) the more I know someone the more likely they will attempt to screw me (a few exceptions) and (2) the more someone argues about the fee or billing terms the more likely they will screw me.

    I even had a client ask for some of his money back after the work was done and terms were very well lined out in our job arrangement letter and Yes I did laugh. As an old business partner of mine one time said, “Ish, you aren’t very charming.” On the other hand that is why most people hire me.

  37. Bam_Man

    I remember a (Bill Moyers?) interview with Tom Wolfe many years ago. It must have been the early 1990’s because I think it was to promote his book “A Man in Full”. As usual, Wolfe was at least a decade-and-a-half ahead of anyone else in recognizing where this society was heading. Wolfe said at the end of the interview that he believed that as a result of this debacle there would be a spiritual re-awakening – a widespread return to organized religion. He might turn out to be right yet again.

    1. The First National Bank Of God

      We think corporations will love the tax exempt status that a church enjoys.

      We have lawyer-priests that can evaluate your situation and see if going religious makes sense for your company!

  38. Steve Groening

    Speaking of contracts, Ofraud’s Health Care betrayal is up for discussion at the USSC. The similiarities to the housing “crisis” are as plain as day. Ofraudcare is to maintain the profits of bloodsucking insurance middle men who are the reason health care costs are out of control to begin with. No Politican will even mention it, nor frame the discussion with any honesty, the faithful faux opposition is concerned that Obamacare will potentially threaten the middle men’s exorbiant profit taking. So it is with housing. It’s what people need, but more money is made by denying people this right.

  39. Steve Bradley

    I trace this to a major philosophical / theological move that arose in the 1960’s; back then, “situational ethics” was relatively new, and it was presented as an answer to some vexing problems way back when I was a college freshman. Fast forward to 2012, and this is where we are today, as a result.
    I wonder why anyone is even surprised by this. Debtors and creditors alike cheat people. That’s really not news. The new is both its prevalence and the fact that this is also done in every branch of business;
    governments think it’s fine to lie;
    banks think it’s fine to do all the bad stuff we’ve discussed.
    Congress thinks it’s fine that taxpayers have to pay for their (Congress’) mistakes; bankers ask for bailouts.
    Congress is re-elected by what amounts to a system of bribes.
    The office of the President is demeaned by “deals” to “make the healthcare program work,” because it’s for the “higher good.” (which, I suppose means re-election);
    Businesses and customers regularly cheat one another.
    The solution? Probably some sort of “shaming device,” which notifies everyone in the same industry as to who is a deadbeat. That’s the simplest answer, and probably not very effective. The other one, unfortunately, is force in some form or other–and the kneebreakers seem to have gone out of fashion in our society.

    1. Capo Regime

      Yes! And thusly you devolve from a reasonably honest and functional nation to a corrupt and unpleasant. Its like in time going from being say Norway in terms of functionality of rule of law and norms of honesty to Zimbabwe (no its not a racist comment already, just the facts). But on the other hand, as we became poorer as country there seems to have been an increase in scams and dishonesty

      1. scraping_by

        Life in a banana republic, both getting there and staying there, is a vicious cycle. Being honest guarantees failure, while dishonesty guarantees disaffection, which guarantees failure. A steady state, though one about the level of ragpicking. And it’s all ragpicking, just for slightly less offensive leavings.

        The Populist movement and its urban cousin, the Progressives, made good government a central issue around a hundred years ago. The New Dealers were just the greater population getting in on the act. Probably have to start with niche groups again.

  40. Hugh

    This kind of thing is exactly what you would expect to see in mid to late stage kleptocracy. In a kleptocracy, everything that has value, whether it is just sitting there or involves a transaction, is a potential target of looting. Initially, looting is sporadic, what is easiest and most profitable to loot is looted. But as kleptocracy expands, more and more classes of targets are hit. You can see examples of this in the housing mess where it wasn’t just some of the areas were hit but eventually everything from origination to the far end holders of mortgage based securities were, and it wasn’t just the retail rubes at the start of the process but sophisticated investors with legal departments at the other end, and the dreck that was being fobbed on these toward the end was completely toxic.

    You can see how the kleptocratic process becomes more direct and your in face. Ronald Reagan had to lie back in 1983 to get Americans to overpay for Social Security. Social Security was the “third rail”. This was true even as recently as the Bush Administration, but now Obama the Democrat routinely attacks the program, and if re-elected rest assured he will continue his efforts to slash it, just as he has much more successfully slashed Medicare and Medicaid.

    As here, contracts are under attack because they involve money and value. It’s not just union contracts that have been trashed. The whole mortgage and securitization process involved contracts, millions of them, and their provisions were ignored at every turn.

    What we see with suppliers is merely an extension of this. The rot is both descending down the food chain and spreading across it. It is becoming more general.

    Again if you accept the kleptocratic perspective, this is all predictable. This is a great tragedy because if we, the 99% acted, we could stop this in an afternoon, but we are caught in a malaise that will see most of us trudge off to the polls in November to vote for various Republican and Democrat footsoldiers of kleptocracy. It is a tragedy because democracy and a good and decent life will not end with a bang or a whimper but because we could not get off our fat asses to do anything about it.

    1. Capo Regime

      Right you are Hugh. The point of contention I have with the NC perspective is as follows–1% bad. 99% good and virtuos and unwitting victims. Sadly, many of the 99% are as corrupt, feckless and mean as the worst of the 1%. There is no us and them–its only us.

      1. JTFaraday

        That 99/1% thing is just the OWS bumper sticker slogan. It’s a handy enough shorthand but it is an oversimplification of the views on this site, which has profiled MANY people in the 99% who are feckless and mean– albeit usually effectively enablers of “the 1%”– which is how they made themselves relevant in the first place.

        What this site DOES do is consistently acknowledge disproportionate economic and political power, which is not typical. Americans are champions of decontextualized false equivalencies, which are a big part of the reason WHY we can’t address our systemic and institutional failures.

        For example, every time someone like Bill Black tries to address control fraud at the banks, some numnut jumps up and down and starts yelling about the crooked home buyer who somehow magically submitted their loan application without proof of income, thinking it would never come back to haunt them.

        Certainly, there is a whole chain of failure there amongst so-called “professionals” in the FIRE sector. Many, many people in the 99% busy keeping their all important “jobs” while they do things they know they shouldn’t be doing–like accepting loan applications without proof of income, thinking it would never come back to haunt them.

        I don’t have a problem with anyone who wants to criticize, even prosecute in an appropriate manner, every single one of these people from the top to the bottom.

        And if there is one thing I am sick of, it is the tyranny of the “job.” Sending sh*t tons of people to jail for “just doing their job”– as if that explains and excuses anything and everything– would be culturally bracing.

    2. nonclassical


      as you are aware, it was not “the people” who gave government to the highest bidders..it was the bidders who bought it..

  41. Ralph Crown

    More years ago than I care to remember, I got my first private-sector job at a small firm. The owner routinely paid his bills late or not at all. It was the same with all his customers, who were also small firms. Maybe it was all about cash flow, maybe it was a sort of brinksmanship, maybe it was just a bunch of hicks trying to outsmart each other. The point is, most of the time they finally broke down and paid those bills. They were basically honest people.

    If those small-business owners ever feel like they can get away with never paying their bills, this country will grind to a halt.

  42. Memory

    104 comments, and (though I may have missed the reference) it has not yet been suggested that anyone interested in these questions read Hirschman’s “Rival Views of Market Society” in order to gain a bit of perspective on how the erosion of norms by markets might create a self-destructive spiral in capitalism. The question has been addressed on a large scale at least three times in modern history, and the Hirschman piece (which my undergraduates always loved) is a great starting point for thinking about it – I can’t recommend it too strongly as a way of providing a framework for comparing the claims in this article with what markets have arguably always done to social trust and relationships.

    Even before social scientists decided that the entire universe could be coherently misunderstood by reference to defection in a Prisoner’s Dilemma model, people were addressing this exact question. It is worthwhile to have some idea of what they thought.

  43. Details

    I used to work at a company called Advion Biosystems. In the mid-2000’s, they hired a crack management team, who implemented a policy of stretching out accounts payable to a minimum of 90 days, regardless of whether the suppliers agreed to it. We would routinely see “account overdue” notice letters in the mail going to our facilities outside of corporate. The management was extremely proud of this cost-saving measure, they called it “using other people’s money” — the modern way of doing things. Valuable lesson.

  44. Capo Regime

    Great post. There is an additional and troubling dimmension to the optionality issue. Namely, things in “business” or the broader general practice of getting by in the u.s.a is such that being honest is a suckers bet. Much has been said of the rise of sociopaths/psychopaths in the u.s.a and the opitionality of contracts is part and parcel of this. If only this were confined to board rooms as they say. This corruption is everywhere from health care, family law (been divorced or in a custody dispute anyone?), employment law, banking and so forth. It is as Kuntsler today called it “a matrix of rackets”.

  45. Student

    Here is my story on how $3,300 auto damage claim becomes “worth” $500.

    A few years back I had an auto accident in NYC that demonstrated what the politically connected taxi owners can get away with. A yellow cab hit my BMW while making an illegal U-turn smashing my driver side door. As the auto insurance in NYC is incredibly expensive (easily $3000 a year) I only carried liability insurance.

    So there I am with $3,300 worth of damage but the taxi owner does not have any insurance but is “self-insured”. So I have to deal with some Brooklyn firm of shysters (out of the same firm came Judge Gerry Garson, the only New York judge to serve jail time, as far as I know) and present evidence to justify my claim. Finally I get a call from some Brooklyn shyster who says my claim is “worth” $500.

    At this point everybody (including my wife who is a corporate lawyer) advises me to stop and take the $500. But I am so upset at the lowball offer that I decide to take my case to the Small Claims Court and with some luck I win.

    But that does not mean that the taxi company owner feels he has to pay me! For months I try call the Brooklyn firm of shysters, but no one ever picks up the phone or returns my calls. I contact the (taxpayer funded!) New York Taxi and Limousine Commission, but there is nothing they can do to help either. Finally by accident I discover that I can turn to the Department of Motor Vehicles in Albany to petition that the taxi driver’s license be suspended for non-payment of judgment.

    Now the Brooklyn shysters wake up. They tell me that they will Fedex the payment immediately together Supporting Affirmation for me to sign. The shysters now call me up to four times a day and make threats sue if I will not sign and return the Supporting Affirmation. With great pleasure I take the payment but since it has been more than a year since the accident I tell the shysters that I will not sign unless they pay me interest for late payment.

    All in all it was probably not worth the time and effort but this illustrates why most people settle for $500 instead of what is truly owed to them.

  46. Capo Regime

    I think some time ago Ives hit a home run when she noted that in other nations (namely those that rank higher in honesty) legal systems operate on the basis of principles versus the U.S. where its a rules based system and well you can endlessly rig up rules–no wonder our legal profession as a portion of labor force dwarfs that of any nation–what is it 5% of population but 60% of the worlds lawyers? We have a lot of rules but precious few principles of I want mine and I want it now dammit.

  47. theadr

    In 1998-99, while employed at a TBT-E, our adjoining document department employed about a dozen temps from a local firm. The firm appplied to my lending department for a line of credit. It was declined because a majority of its receivables were over 90 days past due…most of 90 DPD receivables were owed by our documentation department.

  48. Jim

    What kind of politics follows from an age of normlessness?

    How can trust be reestablished?

    Can a common culture be reconstituted in the U.S.?

    Does culture need a religious base?

    To what degree are both the political right and left responsible for the emerging nihilism?

  49. indio007

    I got to this late so I can see from the volume of comments that this practice has been happening for sometime. I honestly think this started with the IT industry first saw it happening which is where I first saw this stuff. I don’t mean the IT industry doing it to other businesses. It was the IT industry that was first subjected to this crap in the early 2000′. First it was paying in Net 20 then 45, then 90 days. Now they just take a calculated risk to screw you. Alot of IT businesses went under from getting screwed over like this.

  50. scraping_by

    I’ve watched this happen from the other side. My director and his general director had a former employee contracted to finish up for data entry/data scrubbing. At the end of every month, one would turn to the other and ask, “Money in the budget for the contractor?” and the other would smile and say “Nope!” and then they’d both laugh. Back and forth, straight line and punch line, month after month. They’d always send him work and promise payment someday.

    The retiree who was the object of their comedy routine was well known and liked by both. It’s the Godfather principle again.

    Stiffing the vendors started life as seminar/business book/magazine stuff, under various names like “cash discipline” or “invoice maturing”. And like any other management fad surfing, eventually what were once vices are now habits. It always grows from an occasional sniff to a sunrise to sunset jones. And it always needs to crank up the voltage, from pushing the envelope to breaking the window.

    We can wait until their disregard of simple law bites management in the butt. Assuming we’re around that long.

  51. LAS

    It was surprising to see my comment taken as the inpiration for a new essay, but also a pleasure. I’m very fond of Yves and this blog. Thank you all for your interesting remarks.

    Personal and contractual betrayals have happened throughout all of human history. Nevertheless, it seems to me the United States has taken a step downward in its values, policies and public actions over recent years. Population protections are under attack and deteriorating. I do not care about GDP, or corporate profit if it costs us in public health. And it certainly is costing us in public health.

    1. scraping_by

      I think the point here is that betrayal is no longer an outlier, an individual failing in a specific situation. It’s become institutionalized, normalized, widespread, sanitized, and, indeed, praised, codified, and indeed indeed, lawful. Perhaps by default, but lawful nonetheless.

      And I though all my boyhood days reading dystopia science fiction were wasted.

      1. ambrit

        Hear, hear. I too thought all that Ballardesque reading was simply a symptom of depression. Now we live in a depressed society, in all senses. I’m beginning to re-appreciate Phillip K Dicks’ work. I was really hoping though that the stuff by Asimov and Clarke would come true. Who was it who said: “No one ever went broke underestimating the intelligence of the public?” That man should be made a saint, a fallen one.

  52. Fiver

    Locating the “enemy” in a tiny, bad apple 1%, rather than in the more broad-based moral and ethical failure across the elite spectrum that, after all, has constructed this entire edifice, falls short of engaging the nut of the problem.

    There have always been bastards, and a subset of very smart bastards. It took hundreds of years and of millions of dead to finally erect in “developed” countries systems of laws and conduct that at least partially constrained their wealth, privilege and power. A substantial degree of our notion of “progress” is anchored by that long, hard-won achievement.

    It isn’t and wasn’t a surprise that the worst of us would attempt to regain greater control – that is what they ALWAYS DO. The question is what happened to the supporting tiers of the elite, vastly larger in total numbers, that had NOT supported the Worst of the Worst only a few years previously.

    The 1% had nowhere to go had moral/ethical plasticity of the thin-edged-wedge type not already prepared the way in the lower echelons, first within the elites, then in broader society.

    It’s not as if it all happened in some other century on another planet. It happened right in front of our eyes, even with some brave souls screaming and pointing all the way, and was for the most part ignored, scorned or labeled onto the margin. Something more than greed gone mad had to be operating – you had to put effort into NOT seeing it.

    Good people ignoring bad laws. Bad people, good laws. Cheating on taxes, your spouse or in school all perfectly understandable. Changing towns, sides, careers, teams, children, religions, personalities, resumes, the facts, faces, history. Anything goes in the Land of Infinite Me – nuclear nihilism on never-grow-up ecstacy in a low values at the lowest prices, plain Testament bun.

  53. V

    I’m still waiting for $5k in business expense reimbursements from my employer, some of which have been due to me since mid February. All of 2011 and the latter half of 2010, I went thru this with them with 10’s of thousands of dollars … they would eventually pony up but it was just like I am their banker instead of their employee.

  54. Thanks a lot

    I have to say, On the Meaningless of Contracts and the New Optionality naked capitalism is a really nice thoughts. I would like to offer you my personal hi and thanks. Cheers, Thanks a lot

Comments are closed.