The complex financial contracts produced in the canyons of Wall Street had their antecedents in the canyons of the Old West—and anywhere else that farmers and ranchers faced the vagaries of weather and of imperfect people. Futures, forwards, options, and many other complex financial contracts were common in agricultural settings long before they appeared in industrial and other non-agricultural markets.
Economics is all about incentives, and a contract is nothing but a bundle of incentives, all tied together to elicit desired behavior from all the signatories. A single contract can deal simultaneously with multiple, interrelated risks. One need not look to the great financial centers to see how this works. A fine illustration appears in “The Cattle Drive,” a short story by B. Traven. Traven was a secretive, enigmatic writer who used many names and purposefully shrouded his true identity and history beneath layers of mystery. His best-known work is The Treasure of the Sierra Madre, a novel that later became a John Huston film, starring Humphrey Bogart. Another novel, Death Ship, concerns murderous incentives emanating from maritime insurance contracts and immigration laws. Traven's works often delve into the minute details of contracts involving working people in remote places, and these details illuminate the ways that financial incentives bend human behavior toward desired ends.
