Welcome to our weekly discussion of the ways that world news, the Word of God, and our own lives intersect. The material in this post is drawn from The Wired Word (thewiredword.com). Please feel free to join in the discussion throughout the week by adding your own responses and experiences in the "comments" section (click on "comments" at the end of the post to add your comments), then continue the conversation with other members in person on Sunday at Coffee Hour! Blessings, Sylvia+
This week's theme: Covenants, Contracts & Promises
Nobel Prize in Economics Awarded to Two Professors for Work on Contracts
The Wired Word for the Week of October 16, 2016
In the News
"Modern economies are held together by innumerable contracts," said the Royal Swedish Academy of Sciences, this past Monday, in explaining why it had awarded the Nobel Memorial Prize in Economic Science to two professors employed in separate Boston-area universities for their work in improving the design of contracts.
One awardee, UK-born Oliver Hart, 68, has been a professor at Harvard since 1993. The other, Finland-born Bengt Holmstrom, 67, has been a professor at the Massachusetts Institute of Technology since 1994.
The Nobel Prize was given to the pair for work they had done collaboratively as well as for that which they had done separately, but all in the field of contracts. They will split an 8 million Swedish kroner ($924,000) award.
Hart's work starts from his observation that contracts are incomplete instruction manuals that cannot specify what to do in every case, since not everything that comes up can be anticipated. Instead, contracts can spell out how decisions should be made.
"His research provides us with theoretical tools for studying questions such as which kinds of companies should merge, the proper mix of debt and equity financing, and which institutions such as schools or prisons ought to be privately or publicly owned," the academy said in summarizing his work.
Holmstrom's focus has been on employment contracts, an area in which conflicts between owners and employees are inherent. He spelled out the benefits of simple contracts between an "agent" who is paid by a "principal" in order for the principal to achieve some "benefit." The most common example is an employee being paid by a business owner, but it is just as applicable to everyday life, such as a waitress being paid by a customer. He also pointed out that in compensation arrangements with executives and senior managers, there is value in deferring some remuneration until the results of that person's work had been evaluated.
However, Holmstrom also argued that executives shouldn't be rewarded for gains that reflect a broader change in the industry's fortunes, or punished for setbacks beyond their control. This principle has not been widely adopted in executive pay arrangements.
Similarly, many people will tip a waitress less when the food comes out prepared badly or is delayed -- and tip more generously when the food is more tasty, even though the cook, not the waitress, is responsible for the results.
In a 1986 paper the two men co-wrote, they observed that actual contracts are often much simpler than theory would predict, noting that companies do not include a complete set of expectations. To do so would be counterproductive, and would encourage too much reliance on results that are easily quantified versus those that may be less easily measured but which may be more important to the company overall.
This stems in part from Holmstrom's seminal work on the "moral hazard of teams," where only the team results can be measured, allowing a relative freeloader to benefit from the extra hard work of more industrious team members. This has been extended to multi-tasking, where there can be many different actions and a difficult-to-measure result. In all of these, specifying incentives in a contract is both difficult and complex, and may not be soluble.
In summary, the academy said, "The new theoretical tools created by Hart and Holmstrom are valuable to the understanding of real-life contracts and institutions, as well as potential pitfalls in contract design."
The Wired Word talked with Dr. Ed Schroeder, a retired professor of economics living in New Jersey. He said, "I'm familiar with Holmstrom's work -- I read some of it for my dissertation, back in the 1970s. I know Hart's name, but am not really familiar with his work in detail. What occurs to me, about both, really, is that they are trying to answer questions that really matter, unlike many economists."
More on this story can be found at these links:
Harvard and MIT Professors Win Nobel prize in Economics. CNN Money
Oliver Hart and Bengt Holmstrom: Contract Theory. Royal Swedish Academy of Sciences
Oliver Hart and Bengt Holmstrom Win Nobel in Economics for Work on Contracts. The New York Times
Nobel Prize in Economics Awarded to Oliver Hart and Bengt Holmstrom for Work on Contract Theory. The Wall Street Journal
In a Bind: the Economics Nobel. The Economist
The Big Questions
Confronting the News With Scripture and Hope
Here are some Bible verses to guide your reflection:
Listen! The wages of the laborers who mowed your fields, which you kept back by fraud, cry out, and the cries of the harvesters have reached the ears of the Lord of hosts. (For context, read 5:1-6.)
Here James chides certain "rich people" (v. 1) for in effect, breaking a contract between themselves and laborers they have hired to mow their fields. Even if the contract was not in writing, it was binding: The laborers would do the requested work and the owners would pay an agreed-upon wage. But some owners, knowing the laborers did not have the resources to force the payment of those wages, simple did not pay them.
Questions: For what kinds of arrangements are contracts essential today? When is a verbal contract enough? Is it better to have most arrangements under actual contracts? Why or why not?
2 Corinthians 3:5-6
... our competence is from God, who has made us competent to be ministers of a new covenant, not of letter but of spirit; for the letter kills, but the Spirit gives life. (For context, read 3:1-18.)
The apostle Paul, speaking of himself and his coworkers, wrote the words above. He goes on in the context verses to speak of how the old covenant in a sense serves as a veil that obstructs the view of Christ (see especially v. 14).
We can perhaps make a connection with the news story in that Paul here spoke of the original covenant as being superseded by a new one that was less dependent on things that can be quantified -- like keeping the letter of the commandments -- and more dependent on matters not quantifiable -- like the things of the Spirit.
Questions: In what ways have you found that the "Spirit gives life"? What is the essential difference, as Paul sees it, between the old and new covenants?
Responding to the News
This is a good time to think about promises we have made, and what we need to do to be faithful to them.
O Lord, our great Promise-Keeper, help us to be faithful people who live by promise. In Jesus' name. Amen.