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The man that won the Nobel prize in economics for contract theory shares his thoughts on smart contracts

Oliver Hart won the Nobel Memorial Prize in Economic Sciences in 2016 for his work in contract theory, the study of how contracts and incentives influence decision-making and business relationships.Hart sat down with Business Insider’s Sara Silverstein at UBS’s Nobel Perspectives Live event in Brooklyn. Hart talks about the rise of blockchain-based smart contracts. He explains that smart contracts don’t solve the problems of incomplete contracts that his work is focused on. Following is a transcript of the video.

Sara Silverstein:You won the Nobel Prize for your work in contract theory. Can you tell me at all about what you think about smart contracts that we’re seeing now? Are they gonna revolutionise everything? Do they solve all the problems that you were working on?

Oliver Hart:That’s right, they’re gonna take the prize away. It’s all gonna be irrelevant.

I must admit – first, that I know little about smart contracts. I’m trying to understand more about them as I am about bitcoin, blockchain, all the rest. It’s all a bit mysterious. I’m doubtful that it’s going to be a cure-all. I mean, it seems that for some things it could be quite useful ’cause it can automate certain things. And so, you know, if I have some sort of insurance contract which says that if a certain event happens then I’m gonna get paid something, then we can sort of make that automatic so it just comes right into my account. I don’t have to check on anything or call up the insurance company. So, things like that can certainly help but they’re not going to solve – unfortunately the problems I’ve been particularly concerned with are contracts that are written for the long-term and where people are in long-term relationships and economic relationships and they’re trying to anticipate what might happen in the future which is very difficult to do, and write a contract which takes into account these eventualities. They can’t do it because the future’s very uncertain, many things can happen that we don’t really expect, or are able to predict. I don’t see how smart contracts are gonna solve that problem. Or to be more concrete, I mean, if we have a long-term economic relationship I think it’s important that we’re on the same page, we understand each other, if something unexpected comes up we have some reasonable way of dealing with it that makes us both comfortable, happy. I don’t – that’s much more about communication between us I think, at the time we write the contract than it is about any sort of automated device.

Silverstein:And last question can you give an example of the types of incomplete contracts and the bad incentives that those create?

Hart:I use the example of a power plant that locates next to a coal mine and wants to use the coal to burn to make electricity. And this is a real example – I mean there’s empirical work on things like this and the thing is once you’ve located next to the mine, you really want that relationship to work out, because it’s very costly to now ship the coal in from somewhere else. But many things can happen during the course of this relationship so just deciding ahead of time, you know, exactly what kind of coal, how much, how much I should pay you, and all that. Very difficult given that the world’s going to be changing. New sources of energy, solar power gonna come along and that’s gonna affect the industry but we probably can’t anticipate that and write that into the contract. And so later on we may get into some argument about: “I want a different kind of coal,” and the question is how much should I pay for it and this can be costly, this kind of argument and distort incentives and, you know … I don’t think a smart – you know – I’d love to see a computer solve that problem, but I think we’re some way away from that.

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