Standards and the Form of Agreement 2002 Presidential Address Western Economic Association

I. INTRODUCTION The use of standards in exchange agreements involves a great deal more than meeting some criteria or quality level. (1) Standards are necessary for communication, they facilitate trade, and their use economizes on the cost of information. Figuratively speaking, they turn amorphous entities into orderly ones. More concretely, standards bring under a common denominator commodity attributes that may appear disparate. In the absence of standards, long-term relations are best suited to enforce agreements. On the other hand, the state's comparative advantage is in enforcing standardized components of agreements. Standards, along with state enforcement, move the economy toward perfect competition. That standards enhance competition has been understood for a long time. The 1937 Encyclopaedia Britannica states that standardization "enables buyers and sellers to speak the same language and makes it possible to compel competitive sellers to do likewise ... thus putting tenders on an easily comparable basis it promotes fairness in competition." Despite its long standing, this basic understanding of standards has not been incorporated into the economic literature. I am concerned primarily with commodity standards independent of who sets them or whether they are voluntary or mandatory. The basic hypotheses of this article are that new commodity standards created by a fall in the cost of measurement turn private information about commodities into a public good that may also be publicly available; shift self-enforced components of agreements into their contractual, state-enforced components; lead to less vertical integration; increase the incidence of theft; and make the contents of commodities clearer, more comparable, and easier to enforce, and thus make competition more "perfect." The Random House Dictionary's (1967) apt definition of standard is: "an object considered by an authority or general consent as a basis of comparison." "Apples," for instance, meet this dictionary's definition of a standard, because there is general consent about the term. On the other hand, for a "ton," general consent is lacking; the dictionary lists six definitions for it. For the term ton to be used as a basis of comparison, then, an authority must decree what the standard is. In the absence of such a ruling, transactors may hold conflicting views as to the exact meaning of the term. If, however, a court rules, and the ruling publicized that a ton is 1000 kilograms, the term becomes a public good. New users need not spend resources to determine what it means. Consider now a commodity such as Campbell's Tomato Soup. A buyer unacquainted with it may try a can. However, he or she will not deem it necessary to compare it with other cans of Campbell's Tomato Soup. An assumption seems to be at work: that in its desire to protect its brand name, Campbell's will produce all tomato soup cans to the same standard. However, commodity standards do not fully cover every commodity. In terms of what the standard covers, apples differ from Campbell's Tomato Soup. Whereas there is general consent for the meaning of the term apple, the standard does not fully delineate apples. It does not cover the diverse features of the individual specimens. Thus part of the information one gathers when examining an apple is a private good, and it has to be gathered separately for each apple. Standard units as well as graded commodities (discussed in section III), such as eggs, have been around for a long time. Commodity standards, however, seem to have been rare before the Industrial Revolution and the enhanced level of commodity uniformity that it brought about. One of the earliest industrial standards was for screw threading, suggested by Whitworth in 1841 and introduced in England shortly thereafter (Hemenway [1975], 3). (2) I hypothesize that the emergence of standards brought about an increase in litigation to resolve disputes about the quality of commodities, disputes that in earlier times were resolved primarily by the use of long-term relations. …