Home > Uncategorized > János Kornai: Breaking Promises: The Hungarian Experience, Part II

János Kornai: Breaking Promises: The Hungarian Experience, Part II

January 13, 2013

The moral judgment of fulfilling and breaching promises

Many types of doubt might fill the heart of people. Still, I hope that most continue to believe in that promises should be fulfilled. Why do they think that? The answer is not self-evident, since the promiser often benefits from breaking his or her word. Here, the topic of my paper leads to a much wider issue, to the moral judgment of people’s acts.

There is no agreement among philosophers about the answers to the fundamental questions of ethics.[1] I do not feel competent to comment on the debates between the various schools of philosphy. I would like to set out from a different approach. How do the “people on the street”, the acting agents of the economy and politics, judge the breaching of promises?

A few pages earlier, when reviewing the main types of breaching promises a comment returned repeatedly: the victims of unfulfilled promises are annoyed and upset. Actually, they condemn even the mere fact of breaching of promises, since common decency would demand that everyone should keep his word. “I fulfill my promise – so I expect the same from you. What would it lead to, if everyone offers promises and later does not care a rap for his own words?” Quite many think this way, perhaps the great majority of people. Even if we have never had a philosophy book in our hands, here we get close to the Kantian position, and to the contractualists, to the school of philosophy, which derives ethical principles from the idea of a social contract.

My paper, first when discussing the main types, and later when introducing the interaction between the acts of breaching promises, highlighted with great emphasis the adverse consequences of the phenomenon. People think along similar lines, when they recount: how much loss they suffered as a result of the other party’s breaching of promise. In these instances the argument gets close to the line of thinking of another school of philosophy, to the so called consequentialists. We need to behave ethically, among others we need to fulfill our promises, because unethical behaviors have adverse consequences. This line of reasoning is almost obvious for economists.

When reading the literature of the issue in works written by philosophers, I got the impression that the above mentioned alternative approaches perhaps are not theoretically incompatible with each other.[2] In any case, they coexist, supplement and strengthen each other in the moral judgments of everyday people.

Let us see an example.The patient is angry, because the doctor, who treats him at a high cost in his private practice, promised that he will see him at a specific time – and yet he kept him waiting for a very long time. If following this he makes a judgment, then he sees this situation as the breach of common decency. “What would the doctor say, if next time he would be kept waiting for hours by his high charging lawyer or car mechanic?” And of course, he considers important the consequence he suffered by the breach of promise, the time wasted while waiting. He makes a comparison, he runs some kind of cost and benefit calculation in his mind: he would not have waited more than this either and he would have saved the fee, if he went to a government-financed, free clinic.

When we get over the first annoyances or indignation caused by the breach of promise and we bring ourselves to make moral judgments, then – like in the case of the judgments made within the juridical system – we do not apply simple formulas, overly simplistic schemata. We cannot be satisfied with the statement: all breaches of promise should be morally condemned. We need to weigh the circumstances under which the events unfolded.

I have not found such works in the literature written by legal scholars, sociologists or philosophers, which reported on systematic observation or questionnaire based survey among the Hungarian population. However, there are relevant American studies available. It is possible of course that the distribution of the American reactions is different from the Hungarian in similar situations, but even in this case, it will be illuminating (at least from the perspective of the applied research methodology) to report about a few American studies.

right and wrong

The title of Shavell’s (2006) paper hits right into the middle of our topic: “Is Breach of Contract Immoral?” The author has conducted a small sample survey. For instance, he asked the following question from the interviewees. Suppose that a Renovator has made a contract to do a kitchen renovation for a Homeowner. The Renovator then discovers that the job would cost him a lot more than he had anticipated. So the Renovator did not fulfill his promise. Question: Would the responder judge the breach of contract as unethical? The responders were able to answer on a five-point scale: beginning with the “Grade (1) definitely unethical” and ending with the “Grade (5) definitely ethical” answer. 38 answers out of the 41 responses spread between Grade (1) and Grade (3), and all together only three classified the situation “Grade (4) somewhat ethical”. No one classified it “Grade (5) definitely ethical”. However, the distribution of the answers significantly changed, when the original question was supplemented with other important details. For instance, it was included that: Have they stated in advance, what to do, if the costs rise above the originally calculated costs? Have they stated in advance that the contract is valid even if the costs are higher than originally expected? Have they agreed in advance about the indemnity in an event of the Renovator not fulfilling his promise? The more the respondents understood that there may be “mitigating circumstances” the more carefully they judged the situation.

Wilkinson-Ryan and Baron’s (2009) paper attempts to probe the moral judgments of people about the breaching of contracts through the help of similarly realistic examples. In relation to several kinds of hypothetical stories they asked questions, and to each story they surveyed the stances of different samples. For example, in one of the stories they offered for the interviewees to comment, the following problem arose. A couple rents out a restaurant for an anniversary party. However, the owner of the restaurant wants to wave the contract, because unexpectedly he received a much better offer. The story continues with two versions. In the first version the owner of the restaurant offers that they should sit down together, discuss the problem and come to an agreement about the amount of the indemnity payment. In the second version there is no direct negotiation, the owner asks for an outside mediator to help determining the amount of the indemnity payment. All experimental surveys prove that the knowledge of the terms of contract and the circumstances related to the breaching of the contract significantly influences those, who form a moral judgment about the situation.

What special “laboratory” conditions offered themselves during the past few years for Hungarian sociologists and legal experts, when about the half of the country was debating over the problems of helping out the “foreign currency debtors”! They could spare the application of artificially invented stories, because the real events produced those cases in which people could have been asked for moral judgments. It is a pity that the Hungarian social scientists did not seize the opportunity.

At this point, it is useful to summarize in a general manner: what are those circumstances, which needed to be weighed for those attempting to form a moral judgment about any breach of promise.

  1. Did the promiser commit himself in a bona fide manner? Or he had already known from the beginning that he would not fulfill the promise, yet in a deceitful way he still made the promise?
  2. The bona fide manner is a necessary precondition of a correct promise – necessary, but not sufficient. Did he carefully think about whether the promise can really be fulfilled? Schiller’s hero was ready for any struggle and daring endeavor to keep his word. But was he thoughtful enough, when he promised to return in three days? There would have been no problem with the three days, if there were no rain and floods, if robbers did not attack. The promiser – and this is quite a common phenomenon – undertakes the tightest deadline possible, which works, if there are no unexpected setbacks. However, in fact it happens rather frequently that there are setbacks, and because of this the realistic deadline should always be set with a “margin”, with some “reserve time”. Poor Damon, who was just condemned by the tyrant to be crucified, did not think too much about the reserve time. Yet, in the case of others, in much calmer situations, we can expect more careful calculation indeed. And this is true for not only the promiser, but also for the promised. Returning to the example of the “foreign currency debtor”, both the debtor and the lender calculated negligently and irresponsibly, ignoring the risk of unforeseen difficulties.
  3. In the case of a unilateral promise, did the promiser, or in the case of a bilateral agreement did both parties offer in advance careful terms safeguarding against an event of the promise becoming unfulfilled, and about what types of compensation the other party will receive in such case?
  4. What motives induced the promiser to breach the promise? Is he breaching his promise because of greater individual profit? Or external factors independent of him explain that the promise is only partially or not at all fulfilled?
  5. Did the promiser do everything to fulfill or at least partially fulfill the promise in the case of unforeseen obstacles? We respect Schiller’s hero among other things, because he struggled with a heroic effort to fulfill his promise.
  6. Regardless of the obstacles – does the promiser seek with due diligence the fulfilling of his promise or he does not fulfill his promise because of negligence?
  7. If the contract is broken, and the contract did not describe an exact compensation, does the promiser seek to reach an agreement with the aggrieved party? Or did he present the other party with a fait accompli in this respect? Or perhaps he keeps aloof from the compensation?

Those who wish to offer a moral judgment about the breach of promise must conscientiously weigh both the mitigating and aggravating factors. If the judgement is considered by the victim of the breach of promise, he must certainly face the question of to what extent he is also responsible. Those who committed the real breach, frequently apply the “blame the victim” tactics as a defense mechanism. This type of retort is of course often rightly rejected by the aggrieved party. But no matter how justified is in the given case the rejection of such kind of mean-spirited attack, it does not provide an automatic waiver for the aggrieved party from voluntarily examining: whether he is also responsible for what happened. Often he commits at least one mistake of which he can admit if to no one else to himself: that he is carrying at least a part of the responsibility. Two partners are needed to a deceptive commitment: the one who offers the false promise, and the other one who believes in it and allows to be taken for a ride.

Motives to fulfill or to breach promises; enforcing fulfillment

 I do not wish to narrow down the next argumentation to the cases of the breach of promise. According to my impression, even though this I cannot prove through any systematic observations and statistical data, luckily the fulfillment of promise is more common than its breach. I will discuss the motives behind the two opposing phenomena side by side.

I wish to talk not only about the motives of the promiser, but also about the motives of the promised, the beneficiary of the promise. Moreover, besides the two actors in the promise relation, there will be a discussion about the actors outside of the relation, who influence or who could influence the course of events. The term “motivation” refers to voluntary acts. In parallel, we also discuss the phenomenon of the enforcement of fulfillment.

Moral incentives

Here, we will actually follow the continuation of the train of thought, which began in the previous section of the paper. The great majority of the promisers are honest people, who make a bona fide commitment and bravely strive to fulfill their promise.

Let us take a look at the business world of the market economy. It would be a big mistake to think that every transaction is regulated by contracts legally formulated by lawyers. Many kinds of input and output flows take place without any special promise, by the routine-like repetition of “business as usual”. Or even if the producer and the buyer signed a contract, it does not mean at all that everything is regulated down to the tiniest details. The parties, trusting in the honesty of the other party, leave many questions open in the contracts. Macaulay (1963), a professor of law, conducted a survey among American businessmen and he found that they consider this informality natural, and they do not even attempt to build their relationships on all encompassing contracts. Incidentally, “contract theory” developed in economics provides a strict mathematical proof for the impossibility of a “perfect” contract and it would not even be economical to strive for such contract (Hart, 1998a and 1998b, Bolton and Dewatripont, 2005.)

The breach of promise could become less frequent, if the moral incentives motivating the fulfillment of promises would prevail stronger. I do not wish to start a moral preaching here, as it would obviously be received with an ironic smile. Evidently there is a need for an education that engraves in the brains of people the sanctity of the plighted word, in which process parents, all institutions of education, the managers of all work places and so on, should partake in. Out of the plethora of tasks in moral educations I highlight two elements.

One is the role of the media. Rare is the day on which an anomaly or even a scandal around the fulfillment of a promise would not appear on the screens, in the sea of letters of the print media and on the internet. But almost never appears or one hears such analysis, which objectively and intensely scrutinizes the ethical side of the events and would be ready to offer a moral judgment. The flood of superficial news about the breach of promises gives birth to cynicism. “If so many are doing it – why should not I do the same as well?”

The other problem, which I wish to mention in regards to the discussion of moral incentives is related to the phenomenon, which I called in my works as the “the soft budget constraint syndrome”. In the first part of my study, when discussing the B and C types of breaches of promise, the case of those debtors (indebted households, firms, hospitals, local governments and other organization that are in financial trouble) have appeared, who do not meet their financial obligations. Should they be saved? Or should we leave them alone, and leave it to them how to get out of their difficult situation? When the topic arises in relation to a given episode, the commentators bring up numerous economic arguments in favor of saving them or against it: how would it influence production, employment, the state of the banking system and the government budget and so on. However, the ethical aspect of the question usually gets lost. The often occurring, almost certain “bail-out” has a pedagogical effect. It teaches the debtor to feel free to breach his promise; there is nothing to be ashamed of in doing that. But not paying back a debt is indeed shameful – even if there are mitigating circumstances! I have never recommended that without exception everyone, who cannot get out of trouble on his own, should be let down. However, this should not be done in mass proportions, in a way that the question of the debtors’ own responsibility hardly ever arises; very rarely is a single word spoken about the moral aspects of the breach of promise.

That is just what happened in Hungary when the government announced it would shoulder the full local-government debt of some 1500 small municipalities and much of what larger municipalities owed as well – on average half.  In the second case the bailout proportion is not uniform; it would depend on how wealthy or poor each community is. Thus the scale of rescue did not depend on how far the debt had resulted from irresponsibility and wastefulness by local leaders. The idea of the moral responsibility of those who had contracted the debt was not even mentioned in the rescue announcement. “Why be thrifty if those who battle to cut expenditure and strive to keep their promises are treated just the same as those who are irresponsible and waste the community’s money?” many local leaders grumbled.

I illustrate the idea with another peculiar, hardly believable episode of the long history of the “foreign currency debtors”mentioned already before. The episode, the wide-spread application of the so called “preferential full repayment” scheme early 2012, is worth a special mention. Let us think about two typical stories.

The person in the first story is a poor man, with little school education, who is the head of the family; he lived in depressing housing conditions, when he received the opportunity to get a better flat through the help of a loan. The bank practically fibbed the loan off on him, and it did not sufficiently warn him of the risks. The story continues in a sad manner. At the time of taking out the loan, he still had a job, but since that he has lost his employment. Because of the weakening of the forint his installments grew high. Now he has been unable to pay for some time. Since the apartment where he and his family is living, served as mortgage, perhaps soon he will be evicted. In his case indeed two ethical principles collide: the principle of solidarity, which obliges us to help those in trouble, and opposing that the principle of individual responsibility, according to which each individual is responsible for his own decisions, even for his bad borrowing decision. In this case, according to my own moral sense the first principle, the principle of solidarity weighs heavier; this man and his family should be saved from the tight situation.

The person in the second story is competent, knowledgeable, well paid, with an economic or legal education. Some of them are working as government officials. He lives in a nice flat. He took out a large loan, because home building seemed to be a good investment, since housing prices grew month by month. It turned out that he made a bad decision; he has lost a lot on this business. He still has his job, he still makes good on his installments. Eviction does not threaten his usual life-style, since the place where he is actually living did not serve as mortgage. He bought or built another apartment or house. He will not become homeless, if this additional dwelling would be taken away from him. In his case I do not see a moral problem. If he made a profit on the investment, I would not envy him. If he lost – that should be his own problem.[3]

Well, the “preferential full repayment process”, which was legally enacted by the ruling political force, made it possible for the “foreign currency debtor” to repay his loan in a lump sum payment. The application of the procedure was tied to several conditions. According to Condition No.1, the debtors had to properly make the installment payments due during the past six months. By this they have already excluded the person in the first story, who is in such a big trouble that he is unable to properly make the necessary installment payments. Condition No.2 is this: the residual debt must be paid right away, by one single payment. How could our poor man gather so much money? In contrast, Conditions No. 1 and 2 can be easily fulfilled by the person in the second story. The second story represents well-to-do social strata, who are receiving special favors in exchange for their political support.

The preferential full repayment had to be paid in Hungarian forint, at an exchange rate imposed upon the banks by the government, exchanging at a significantly lower rate the arrears than the actual market rate. The people applying the “preferential full repayment ” scheme, (most of them similar to the person figuring in our second story) altogether have won 370 billion forints with this opportunity, mainly at the expense of the banks, and at a smaller degree at the expense of the treasury (in other words of the tax payers). (Pénzügyi Szervezetek Állami Szervezete, 2012e).[4] This is a staggeringly high sum, which, inexplicably, did not get much emphasis in political debates.

The ruling political group provided an extreme example of softening the budget constraint. Everyone can learn from this. It is worth to breach a promise – in this case: the commitment to repay the loan in a proper manner. If you took out a loan in order to make a profit and you belong to the well-to-do strata of society favored by the government, you will not face any disgrace.You even may receive a bonus, a significant amount of your debt will be paid back by others.

Against this “pedagogy” the naive warning of the parent or the teacher (“Be careful my child, not to make irresponsible promises!) does not carry much weight.

Reputation

In order to increase their reputation, the promisers are motivated to keep their word. The breaching of many small promises or even a spectacular defaulting on the fulfillment of one large commitment can destroy a reputation.

Firms have several kinds of motivations to increase their reputations. Recognition helps them selling their products and services. I have already mentioned that the buyers are gladly relying on familiar and highly esteemed suppliers. The better reputation is a significant advantage in the competition with rivals. To that extent, economic interests are connected to reputation as well. This is supplemented and even strengthened by psychological effects. “We are among the first ones”, “everyone has a high opinion of us” – this sense rightly flatters the company managers’ vanity.

The same can be said about the reputation of political parties and organizations. It is obvious that the voters do not base their choice only on the successes and failures of the days before the election, but reputation, which has developed over a long time, also plays a big role. Better reputation improves the chance of winning the elections and seizing power. But not only the fight for power motivates them to increase their reputation. The politician takes pleasure in his reputation, enjoys recognition and popularity – this is easy to understand psychologically.

The promiser fulfills his promise. Why? Is it because, this is what his conscience, his healthy moral sense tells him to do? Or is it because he knows that his honest behavior, the transforming of his words into actions will make a good impression on others and it will increase his reputation – and he can also leverage this into an advantage in economic competition or in the political arena? Difficult to separate the two; the two kinds of motivations jointly exert their effect.

The degree of reputation is not a continuous variable, which at times can be increased at an arbitrary rate, or at times its decline can be accepted without further due. It is one of those social phenomena, the changing speed of which – setting out from a given point – depends on the direction of the change. The reputation of a firm, a political party, an economic or political leader often increases slowly and gradually, as the numbers of the positive experiences grow among the people watching his work. But if it comes into the open that he breached his word, his reputation may suddenly collapse.

The third factor that motivates the fulfillment of promises is the legal and juridical system that enforces the fulfillment. We will get to this point soon, but here I would already like to offer one remark ahead. In the business world the first and the second factors to a certain degree and under certain circumstances are able to replace  the third (Macaulay, 1963, Kornhauser, 1983). The stronger the promiser’s inner moral motivation to fulfill the promises and the contracts, and the more he is striving for increasing his reputation, the less will be needed for referring the consequences caused by the breaching of promise to legal recourse.

The enforcement of contract fulfillment by legal means

Here, we can safely limit ourselves to the business contracts. The breaching of the irresponsible promises made in an election campaign is not prohibited by law. This type of breach of promise is punished by the voter – provided that he recognizes the offense committed against him and he wishes (and is able) to employ the possibility of punishment in the polling-booth.

The modern rule of law applies sophisticated legislation to punish the breaching of contracts. In private lawsuits they award damages. For the deceitful false promises, and for the serious negligence leading to default on the fulfillment of a contract, the prosecutor can press charges and penalties may be imposed by the court. Special legislations regulate the bankruptcy proceedings, the sale of assets seized to pay off debts, the evictions as a result of mortgage foreclosures, and so on. The rigor of the law is not only meant to help compensating the aggrieved party as much as possible. At the same time, they expect a deterrent effect from it as well: the promiser should be afraid of the consequences of breaching the promise.

Even in the countries with the oldest tradition of the rule of law, the apparatus meant to enforce contract fulfillments does not work at one hundred percent efficiency. Unfortunately, in Hungary this machinery is much more creaking than in the more developed democratic countries. Many lawyers and corporate attorneys are less skillful than their counterparts in the West. Litigations are prolonged for long. Erroneous rulings are not uncommon.

The handling of bankrupt firms deserves special attention. If it comes to light that a firm is unable to repay all of its debt, then a bankruptcy procedure will ensue. This is in the jurisdiction of the courts; they will appoint a liquidator (a bankruptcy commissioner), who on the basis of the relevant legislation decides, among other things, about how to sell off the remaining properties of the firm, and about which creditor should be indemnified and to what extent. Here, we are far from the complete fulfilling of the contracted payment obligations, rather the benefits of the partial fulfillment and the remaining assets of the firm have to be distributed among the aggrieved parties of creditors. Several factors complicate the rear-guard fights for the last partial fulfillment of the contracts.

One of the complicating factors is the well known institution of modern capitalism: the idea of limited liability. The owners of a corporation or an LLC are only responsible for the debt accrued by the company to the amount of the capital they invested. In the worst case this can be completely lost; the remaining assets will be transferred to the aggrieved creditors. However, the owner is not responsible with his own private wealth. Alo, if the owners and the executives were clever, then – somewhere between legality and illegality – at the last moment they transferred out a good part of the wealth of the company and they left not much for the indemnification of the creditors. There are many legal loopholes, which facilitate this type of trickery – for the benefit of the breaching parties, and at the expense of the aggrieved parties. Smart attorneys, pettifoggers specialized in the knowledge of legal loopholes write the contracts from the outset in such a way, that their client – without breaking the letter of the law – can circumvent the spirit of the law, which would protect the interest of both parties in a fair manner.

It is still the lesser evil, if the company under bankruptcy proceedings even exists at all. Other companies simply disappear, if they have a gallows look. The Hungarian business jargon calls these peculiar firms “phantom companies”. They appear on the scene, they promise the moon, they utilize the products and services ordered – but by the time they have to pay, they disappear. There is no one to call to account for the debt.

We expect from the state to enforce with its own instruments the fulfillment of private contracts, and by doing so to strengthen the “sanctity” of respecting contracts. During the past years in Hungary just the opposite move happened several times.. The government struck heavy blows at the prestige of private contracts. I present three examples; each caused a stir in the public.

In 2009, the “Budapest Transport Company” (BKV), owned by the capital city, paid out enormously large severance payments to many high ranking executives leaving the company. The payments were based on valid and legal labor contracts,The news created a public outrage. Fidesz, the current governing party, which was in opposition at that time, began a huge campaign – accompanied by the sympathy of the public – and demanded the repayment of these severance payments. Following the elections the parliament, now dominated by Fidesz hastily enacted a new legislation regulating severance payments retroactively (!) for several years back. According to this, on severance payments over a certain threshold value granted after 2005 a 98% extra tax was imposed in the state sector (budgetary authorities, companies owned by the state, etc.).[5] Yes, but through this extra tax they not just regained for the treasury the immorally large severance payments of some transport executives, but they confiscated a part of, or the whole, compensations of such old teachers, doctors and other workers, who through a lifetime of diligent work acquired the right to a modest severance just in excess of the statutory limit set by the 98% confiscating legislation. The ruling political forces and the parliamentary majority dominated by them, abusing their legal opportunities, retroactively crushed the private labor contracts freely signed by the employers and the employees many years ago; contracts which included the provisions of the severance payments.

The other example is connected to that chain of events, which we have discussed already several times: the story of the “foreign currency debtors”. The bank and the debtor signed a proper contract. Today, it seems certain that significant portions of these contracts contained many such elements, which caused harm to one or the other or both parties, and the damages rippled through the other parts of the national economy. The mass revision of the contracts was fully justified. However, this should have been done voluntarily by the two contracting parties. The government can persuade them to do so, they can provide guidelines in regards to the content, and they can provide them with economic incentives to facilitate the changes. Also courts can annul the contracts and they can call upon the parties to sign a new contract. But under the rule of law the executive and legislative branches of the government cannot force retroactively the contracting parties to modify the contract against their own judgment. However, that is exactly what happened repeatedly, mainly at the expense of the banking sector. The executives of the banks were bristled up, but eventually as a result of the governmental pressure they swallowed the bitter pill, and they were ready to apply the contractual changes being forced upon them. These tough state interventions certainly reduced dramatically the prestige of the “private contract”.

The third example is also drawn from the story of relations between the government and the banking sector. One important stage in the negotiations on foreign-currency lending was reached on 15 December 2011, when a “Minute of Understanding” formulated in Hungarian and English was signed by Minister György Matolcsy and State Secretary Gyula Pleschinger on behalf of the government and Dr. Mihály Patai, president, and Dániel Gyuris, vice-president of the Banking Federation. (For the statement issued see Bankszövetség 2011, pp. 5 and 9.) Point 1 stated, “The Government declares that the basis and the rate of the bank tax will remain unchanged in 2012 compared to the regulation in effect, while the rate will be decreased by 50% in 2013. The Government declares also that there be no bank tax levied on banks in 2014 higher than the bank tax defined by the legal framework of the European Union, or the average of the bases and the rates of bank taxes in effect in Member States.” Yet the budget for 2013 submitted to Parliament in the fall of 2012 left the rate of special bank tax unchanged instead of reduced by 50 percent. The government had not kept its promise.

Concluding remarks

In a dictatorship the tyrant does not have to make promises to the people.[6] He does not rise time and time again to the top post of the country through the open competition of alternative political forces; rather this happens with the help of the machinery of repression and violence, i.e. the institutional system of the dictatorship serving him to hold onto his power. In contrast, in a democracy the promises of the competing parties play an especially important role. The voter – if he has good memory – can assess how much the ruling party fulfilled during the past term the promises made before the last election. If they fulfilled their promise, then it will strengthen them, if they breached it, then it will weaken the trust towards them. Of course, comparing the promise and the action is not the only criterion, according to which candidates are compared, but without a doubt it is one of the most important ones. Those who weaken the trust in the political promises, undermine one of the foundations of democracy.

The socialist command economy can do without promises. The vertical coordination is moved by commands, which are given by the superior body to a subordinate body. A command is a command – there is no need for promises, rather the command should be fulfilled. In contrast, in the capitalist market economy, the horizontal coordination primarily takes place according to voluntary private contracts between buyers and sellers. Of course, the fulfillment of private contracts, the fulfilment of promises made by the seller and the buyer, the creditor and the debtor, is only one kind of the various coordination processes, but without a doubt one of the most important one. Those who weaken the prestige of the private contracts, undermine one of the foundations of the capitalist market economy.

It is to be feared that in Hungary exactly this – the weakening of the foundations – takes place right in front of our (and outside world’s) eyes. I do not know what others experience in their countries about the spread of the above detailed hideous phenomena – researchers there are expected to uncover and analyze them. I am certain, however, that the population of Hungary is suffering due to the almost everyday routine of broken promises.

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Matolcsy György (2010).  Nemzeti ügyek politikája [The politics of national issues], p. 27. Downloadable: http://static.fidesz.hu/download/481/nemzeti_ugyek_politikaja_8481.pdf (Last download: June 15, 2012)

Magyar Nemzeti Bank [Hungarian National Bank]  (2012): Jelentés a pénzügyi stabilitásról. Report on the financial stability] November 2012. Downloadable: http://www.mnb.hu/Root/Dokumentumtar/MNB/Kiadvanyok/mnbhu_stabil/mnbhu_stab_jel_201211/jelentes_penzugyi_stabilitas_201211_hu.pdf (Last download: November 5, 2012)

MTI – Figyelő (2012): Hároméves költségvetési keretet kér az építőiparnak az ÉVOSZ. [A three-year budget is requested by EVOSZ]. Downloadable: http://www.figyelo.hu/cikk_print.php?cid=377736_haromeves_koltsegvetesi_keretet_ker_az_epitoiparnak_az_evosz  (Downloaded: November 12, 2012)

MTI – Stop (2012): Nincs kiút a körbetartozások ürdögi köréből? [No way out from the vicious circle of circular indebtedness?] Downloadable: http://www.stop.hu/gazdasag/nincs-kiut-a-korbetartozasok-ordogi-korebol/1083388/ (Last download: November 12, 2012)

Nemzeti Fogyasztóvédelmi Hivatal [Hungarian Authority for Consumer Protection] (2012a): Beszámoló a 20008-es évről [Report on 2008]. Downloadable: http://www.nfh.hu/data/cms13403/beszamolo_2008.pdf (Last download: June 8, 2012)

Nemzeti Fogyasztóvédelmi Hivatal [Hungarian Authority for Consumer Protection] (2012b). Beszámoló a 2009-es évről [Report on 2009]. Downloadable: http://www.nfh.hu/data/cms29775/beszamolo_2009.pdf  (Last download: June 8, 2012)

Nemzeti Fogyasztóvédelmi Hivatal [Hungarian Authority for Consumer Protection] (2012c). Beszámoló a 2010-es évről [Report on 2010]. Downloadable: http://www.nfh.hu/data/cms40651/beszamolo_2010.pdf (Last download: June 8, 2012)

Nemzeti Fogyasztóvédelmi Hivatal [Hungarian Authority for Consumer Protection] (2012d). Beszámoló a 2011-es évről [Report on 2011]. Downloadable: http://www.nfh.hu/data/cms49597/2011_eves_beszamolo.pdf (Last download: June 8, 2012)

Népszava [a Hungarian daily paper] (2012). Ötven milliárd az intézmények tartozása [Institutional debt 50 billion]. Downloadable: http://www.nepszava.hu/articles/article.php?id=553569&referer_id= (Last download: June 15, 2012)

Patterson, Dennis M. (1992). „The Value of a Promise”. Law and Philosophy, Vol. 11, pp. 385-402.

Pénzügyi Szervezetek Állami Felügyelete [Hungarian Financial Supervisory Authority] (2012a): Tájékoztató a Felügyelet 2007. első negyedévi panaszügyi tevékenységéről. [Summary on the Authority’s complaint management, first quarter 2007.] Downloadable: https://www.pszaf.hu/data/cms422928/paszafhu_panaszstatisztika20071.pdf (Last download: June 6, 2012)

Pénzügyi Szervezetek Állami Felügyelete [Hungarian Financial Supervisory Authority] (2012b): Tájékoztató a Felügyelet 2009. I. negyedévi panaszkezelési tevékenységéről. [Summary on the Authority’s complaint management, first quarter 2009.] Downloadable: https://www.pszaf.hu/data/cms2014511/Panaszkezel__si_t__j__koztat__.pdf (Last download: June 6, 2012)

Pénzügyi Szervezetek Állami Felügyelete [Hungarian Financial Supervisory Authority] (2012c): Összefoglaló a felügyelet fogyasztóvédelmi célú 2012. I. negyedéves hatósági tevékenységéről. [Summary on the Authority’s consumer protection activity, first quarter 2012.] Downloadable: https://www.pszaf.hu/data/cms2350942/fogyved_hatosagi_tev_2012Q1.pdf (Last download: June 6, 2012)

Pénzügyi Szervezetek Állami Felügyelete [Hungarian Financial Supervisory Authority] (2012d): Kockázati jelentés. 5. Melléklet – ábrák és táblázatok. [Risk report. Appendix 5 – figures and tables.] Downloadable: http://www.pszaf.hu/data/cms2352358/kockazati_jelentes_2012_I_mellekletek.pdf (Last download: June 14, 2012)

Pénzügyi Szervezetek Állami Felügyelete [Hungarian Financial Supervisory Authority] (2012e): Sajtóközlemény: Közel százhetvenezer család végtörlesztett a záróráig. [Press announcement: Nearly 170,000 families exploit preferential full repayment by the deadline] March 12, 2012. Downloadable: http://www.pszaf.hu/bal_menu/jelentesek_statisztikak/statisztikak/vegtorlesztesi_stat (Last download: June 15, 2012)

Raiser, Martin, Alan Rousso, and Franklin Steves (2004). „Measuring Trust in Transition: Preliminary Findings from 26 Transition Economies”, in János Kornai, Bo Rothstein, and Susan Rose-Ackerman (eds.): Creating Social Trust in Post-Socialist Transition. New York. Palgrave Macmillan, pp. 55-70.

Schiller, Friedrich ([1799], (2004). „Die Bürgschaft” in Sämtliche Werke, Carl Hanser Verlag, München-Wien. Vol. I, pp. 352-356.

Sharp, F.C. (1934). „The Ethics of Breach of Contract”, International Journal of Ethics, Vol. 45, pp. 27-53.

Shavell, Steven (2006). „Is Breach of Contract Immoral?”. Emory Law Journal, Vol. 56, pp. 439-460.

Simonovits, András (2011). „The Mandatory Private Pension Pillar in Hungary: An Obituary”, International Social Security Review, Vol. 64, pp. 81-98.

Sik Endre (2011): A magyarok ötöde nem tudja fizetni a számlákat. [A fifth of Hungarians cannot pay their bills.] TÁRKI Zrt. Downloadable:  http://www.tarki.hu/hu/news/2011/kitekint/20110830.html (Last download: June 3, 2012)

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Varga Mihály (2010).  “Év végére már jobb lehet” [It can be better by the end of the year], interview given to the journal Demokrata, February 17, 2010. Downloadable: http://www.demokrata.hu/ujsagcikk/ev_vegere_mar_jobb_lehet (Last download: June 15, 2012)

Wilkinson-Ryan, Tess and Jonathan Baron (2009).”Moral Judgment and Moral Heuristics in Breach of Contract”. Journal of Empirical Legal Studies, Vol. 6, pp. 405-423.

Woodruff, Christian (2004). „Establishing Confidence in Business Partners: Courts, Networks, and Relationships as Pillars of Support”, in János Kornai, Bo Rothstein, and Susan Rose-Ackerman (eds.): Creating Social Trust in Post-Socialist Transition, New York: Palgrave Macmillan, pp. 111-125.

____________

[1] The “Promises” entry of the Stanford Encyclopedia of Philosophy (2008) provides an extensive overview of the main alternative ethical theories. Also see Patterson’s (1992) paper, which comments on several important works from the literature dealing with the values of promises.

[2] In the philosophical literature there are such works that attempt partial, limited reconciliation. See for example: Nozick (1974).

[3] The problem has been around for years, yet neither the government, nor the banks or the research institutes have organized large-scale surveys to figure out the social and economic distribution of the indebted households. No approximative estimations have been available to overview the proportion of those in need, ethically entitled to be supported, and those taking the loan for financing an investment.

[4] In order to illustrate the magnitude of the amount I indicate that: this is more than half of the planned state budget deficit of 2012.

[5] A detailed discussion of exceptions and parital exemptions is beyond the scope of this paper.

[6] It is not a coincident that it is Napoleon to whom the following statement is attributed: “The best way to keep one’s word is not to give it.”

  1. John
    January 13, 2013 at 3:41 pm | #1

    Have to strongly disagree with Kornai here, because while the above is detailed analysis, some of it is nonsense. For example he seems to assume that a broken promise is always a bad thing, and he includes legal contracts as promises.

    This line of thought is in direct support of slavery, which at the time was defined through contracts and promises. A wealthy university professor, or plantation owner could buy a few slaves at the time for exorbitant sums of money and could expect returns on that investment. The contract was guaranteed by the laws of the land at the time. Yet all these promises made to the slaveowners were completely broken, and their invested capital wiped out.

    Kornai does not care about the possibility when breaking promises is a moral necessity.

    But maybe the example is too far fetched so let’s take a Hungarian example. The 2009 BKV contracts were “legal and valid” according to Kornai but he ignores the fact that in many cases these contracts were negotiated between the BKV leaders on one hand as employers, and the BKV leaders as employees on the other. I think we all remember the case in which a BKV employee paid out over 100 M forints to herself, as a result of a “legal and valid” contract. If these contracts were not broken later, it would create an enormous incentive for this practice to be repeated.

    Now I can for sure create a hypothetical, where Kornai and everyone else would demand the breaking of “promises”, -contracts in this case.

    Let us imagine that the BKV contracts were not broken. That there were protests for “keeping of the promises”. That this became the norm. In this world Fidesz leaders by the start of 2014, dismayed by poor showing in polls, realize they cannot win the election.

    Thus, they create signed, legal and valid contracts that stipulate that if they get fired (read lose the election), they would receive 300M forints for MPs, and 500M for cabinet members. These sums are only 3x and 5x times greater than the sum paid out (in a legal and valid way), to a single BKV HR director (not even the top leader of BKV). So legally speaking it could easily be justifed, because a cabinet member holds much more responsibility, than some BKV woman. So these contracts would be certainly legal and valid (assuming the BKV ones were). Based on them should Fidesz lose the election they would receive each hundreds of millions of forints.

    Additional provisions could be added that former ministers are entitled to mansions, bodyguards, employees, etc etc. These are of course all legal provisions and currently exist for the President already. It could be easily extended (legally speaking) to former MPs even.

    When all said and done these contracts, and these promises (made by the State, with the power of the law), not only SHOULD be broken, they MUST be broken if we don’t want a political class that awards itself say 3$ billion every time they lose power in an election. Once it becomes a norm through Kornais absurd adherence to contracts and promises, the other side would quickly follow suit and award itself even more money.

    The cycle can only be broken if one realizes that in some cases, such immoral promises, and such immoral contracts MUST be broken in order for normality to be restored. And yes they must be broken retroactivly. Should Fidesz award itself several $ billion, it would’nt be enough to say “well they are legally entitled to that money, it is best they keep it”.

  2. CharlieH
    January 13, 2013 at 4:02 pm | #2

    London Calling!

    This is all very well – but the ‘breacher-in-chief’ is the Government – sans doubt.

    I am rapidly coming to the conclusion that the present electoral climate is so un-conducive to a fair election in 2014 that any outcome will be considered a fraud.

    The moral compass is in a spin!

    The only hope for Orban loosing the election – which is extremely unlikely given his sewing up of all the usual safeguards in his dictatorial manner – is an interim ‘Caretaker’ government.

    The registration-boycott is now out of the question.

    So the united opposition don’t need to publish/negotiate/improve their election offerings just yet.

    Just a waste of time.

    The parties need to draw up a ‘contract’ with the people. One that draws up a new valid constitution with all stakeholders; one that ‘retrieves’ the pension fund situation; one that promises a proper Banking climate; one that introduces a progressive income tax; one that makes education independent from political interference of the kind experienced so far; one that re-jigs voting rights for resident Hungarians who pay tax…..etc.

    The people of Hungary need to know that the next election is just a caretaker government whilst the obvious wrongs are righted – and that a fair society will ensue.

    Once the constitution is retrieved and the ‘contract’ with the people drawn up – then a proper election can be held – preferably with ‘Western’ observers – and not anyone from Belarus.

    A level playing field for all the interested parties – sanctioned, yes, by the EU.

    ‘My word is my bond’ – once more

    Regards

    Charlie

  3. Kirsten
    January 13, 2013 at 4:16 pm | #3

    I see that the issue of how to enforce contracts has been addressed in the second part. In what I agree is that in countries with more experience with democracy than Hungary, it is also a great problem that people do not generally ‘trust’ politicians, often quite understandably. And yet the only ‘solution’ to this – should autocracy or pervasive distrust is to be avoided – is that first there have to be people who will act honestly (to the extent this remains possible) despite everything and do not change their standards (actual, by which they live and not which are only stated). These then have to create a public atmosphere which does really sanction breaking of contracts (through not electing crooks again, running campaigns etc.). But all this can make sense only if the ‘alternative set of people’ who not only themselves do try to adhere to the principle of fulfilling (reasonable) contracts, but who will also work towards occupying those positions in the state that are crucial for enforcement. I do believe that Hungary possesses a sufficient number of these people – but it would be good if they accept that this connects them more than the perceived ‘insurmountable’ differences divide them.

  4. Kirsten
    January 13, 2013 at 4:19 pm | #4

    Writing from a phone is a real problem, so the missing words are here: ‘if the alternative set of people EXISTS’…

  5. wolfi
    January 13, 2013 at 4:23 pm | #5

    All this is morally and legally complicated so I won’t dare say what’s right and wrong …

    Just let me add an old Schwab proverb that came to my mind (translated into High German):

    Reicht es nicht, dass ich es versprochen habe – muss ich es auch noch halten?

    Ain’t it enough that I made a promise – do I really have to keep it too ?

  6. Heiner
    January 13, 2013 at 5:22 pm | #6

    OT: Please note the story(ies) of January 9 (The Hazards of Arrogance) at the Friends of Hungary facebook page (that post is a reply to a comment that was made by Eric Beckett Weaver to an earlier post of FOH page, in which post it was reported that some Hungarians will run for the commemoration of the II Hungharian Army). It is weird and crazy. A good background is at http://cink.hu/3001482. The FOH would be worth a lot of investigative journalism efforts. It is obviously a money syphone (about 5bn forints without any oversight) for pro-government people and god only knows who is really behind this shameful operation.

  7. Kingfisher
    January 13, 2013 at 5:28 pm | #7

    Refined intellectual analyses like these just strike me as being desperately irrelevant. The reality is that the Interior Minister is using his power to expand his own business interests on a quite extraordinary scale, the National Development Ministry is headed by a puppet placed there by Orbán rapacious school friend who is also in control of MTVA, EU land subsidies are being swallowed up by favoured party officials, and the electoral system has been rigged. And that itself is a stunningly incomplete summary of current iniquities. Add to this the complicity of the entire Hungarian political class over the past twenty years in using government as a means of personal enrichment and Professor Kornai’s concerns are just … well, impotent and fatuous.

    Hungary does not need philosophy, it needs investigative journalism and an opposition worthy of the name.

  8. Some1
    January 14, 2013 at 7:52 am | #8

    Heiner :
    OT:..The FOH would be worth a lot of investigative journalism efforts. It is obviously a money syphone (about 5bn forints without any oversight) for pro-government people and god only knows who is really behind this shameful operation.

    I think it is just one of the organizations that started by the Orban group that should take a number in a long line of dubious organizations that is pumped up with taxpayers money to serve as a PR for the government. I did post way back about my doubts on many organizations that has very low profile, receives huge private donations and/or government support, but when you really look into it, they do not do to much that justifies all that money. My conclusion is simple “money laundering” to serve Fidesz, and in many cases bypass the party donation rules.

  9. January 14, 2013 at 8:50 am | #9

    Omg! The comments on the post about the remark on the Don bend soldiers on the Friends of Hungary fb page are horrible! The Hungarian stupidity is epic!

  10. Bowen
    January 14, 2013 at 9:39 am | #10

    Re: “Friends of Hungary” on Facebook.

    I think they just copied this:
    https://www.facebook.com/#!/pages/Friends-of-North-Korea/189914707741963?fref=ts

  11. gdfxx
    January 14, 2013 at 10:50 am | #11

    Does anyone know whether the possibility of recall or impeachment of any government official exists in Hungary?

  12. Protest Protest
    January 17, 2013 at 7:21 am | #12

    The question is why the Kornais are not on the barricades?
    The streets of Hungary should be filled with protesters.
    The Kornais are missing in these actions.
    I vote for the Dorottya Karsays who will lead Hungary out of these miseries.

    [youtube http://www.youtube.com/watch?v=47FNmXDDXTg?feature=player_detailpage&w=640&h=360%5D

    What has not been done in WWII, and the nation went to slaughter on the Don without significant protests, must be done now.

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