In what contexts are there limits to what can be done by laws and contracts?

It’s clear that there are such limits. As Oliver Hart and Ronald Coase (pdf) pointed out, it can be prohibitively expensive or perhaps even impossible to write contracts specifying what each party should do in every contingency. In such cases, it makes sense for firms to do jobs in-house rather than contract them out and enter the “Coasian hells” described by Alex.

A similar thing applies to laws in general. These can be badly written or too difficult or expensive to enforce.

Two different things I’ve seen recently pose this question.

One is the university lecturers’ strike. It seems to me that universities are a domain in which Akerlof’s gift exchange model of labour markets must operate. Lecturers and researchers work outside of their contracted hours – not least because creativity doesn’t switch on at 9 o’clock and off at five. They therefore supply goodwill. But this requires reciprocation in the form of employers respecting pension rights and not being heavy-handed. Lecturers must transmit to their students not just knowledge but an enthusiasm for their subject. They cannot do this if everybody is sticking to the letter of contracts and if they feel oppressed and ripped-off. Mutual understanding creates a better environment.

My second example is Brexit. Remainers point out that Brexiters’ demands are “logically impossible to deliver.” This is true if we think in purely legalistic terms. But it might not be if we think more loosely. I suspect* that Brexiters think that whilst legal formalism might require a hard border between Northern Ireland and the south they need not in practice actually police it. And if this leads to a bit of smuggling, that’s a price worth paying to keep everybody happy. De jure and de facto can diverge.  

David Allen Green has said:

The EU produces papers and drafts. The UK produces newspaper articles and speeches. The EU is using process, the UK is using publicity. This is why the EU has the advantage in the Brexit negotiations.

He’s right, there is a culture clash here. The EU looks to law and formal agreements, whilst Brexiters speak of “statements of intent” and of working things out which their interlocutors find irritatingly vague.

But what if the vagueness is a feature not a bug? What if – pace Polanyi – some things cannot be expressed formally? Maybe solutions lie in there being a divergence between the law and the truth on the ground.

Now, I offer these only as tentative suggestions. I might be wrong about either or both.

But there’s an oddity here. Many of you, I suspect, agree with me in the first case but disagree in the second and vice versa. And it’s possible that some of you are right. But the issues in both cases are surprisingly similar; both pose questions about the merits of laws and contracts relative to informal understandings.

* Based on that under-appreciated research method, conversations in pubs.