Institutions: It’s All Greek to Me

1 October 2007 at 9:36 am 2 comments

| Peter Klein |

The relationship between formal institutions (e.g., the legal environment) and informal rules (norms, culture, social conventions) is one of the least-well understood areas of the New Institutional Economics. Do norms create “order without law,” to borrow Robert Ellickson’s phrase, or should we understand private arrangements and law as complements, rather than substitutes (Cooter, Marks, and Mnookin, 1982)?

To understand all this, suggest Anastassios Karayiannis and Aristides Hatzis, we should turn to the ancient Greeks. Karayiannis and Hatzis’s paper, “Morality, Social Norms and Rule of Law as Transaction Cost-Saving Devices: The Case of Ancient Athens,” argues for a close relationship between Athenian legal institutions and supporting social norms:

Athenians developed a highly sophisticated legal framework for the protection of private property, the enforcement of contracts and the efficient resolution of disputes. Such an institutional framework functioned effectively, cultivating trust and protecting the security of transactions. This entire system however was based on social norms such as reciprocity, the value of reputation and business ethics. Conformity to social norms as well as moral behavior was fostered by social-sanction mechanisms (such as stigma) and moral education. The Athenian example is a further proof of the importance of morality and social norms as transaction cost-saving devices even in quite sophisticated legal systems. Their absence or decline leads inevitably to the need for more regulation, clear-cut rules, less judicial discretionary power and more litigation.

Entry filed under: - Klein -, Institutions, New Institutional Economics.

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2 Comments Add your own

  • 1. RRE  |  17 October 2007 at 4:34 pm

    Another paper I can’t write anymore.

  • 2. Michael F. Martin  |  28 April 2009 at 12:13 pm

    Social and legal norms can be arranged along a continuum with the relevant order parameter being either spatial, temporal, or both. When social norms work well to reduce transactions costs, they’ll be adopted in successively wider circles until they’re finally memorialized in statutes. Holmes knew all of this when he wrote the Common Law, and the law and economics theorists would do well to go back and read him.

    I think part of what’s going on is related to the Sapir-Wharf hypothesis. When people adopt a cultural norm, only a few people may be able to articluate their reason for doing so. Over time, however, as more and more people are able to articulate the basis for the norm, it becomes more embedded in culture. The spatial and temporal dimension to norms is direct in so far as cultural norms are either unspoken or word of mouth whereas legal norms are reduced to writing.

    The extent to which norms extend their temporal and spatial scope, their evolution will also be affected. Cultural norms might disappear or change abruptly because of the mechanisms through which they are transmitted within a network. Legal norms don’t disappear as fast — even when they should — but they’re also less likely to change abruptly — an effect most consider salutary because few enjoy a game in which the rules change in the middle of play. We are generally content to abide by legal norms even when the results are unfair so long as we believe that everybody has to play by the same rules. Our patience wears thin when this is not the case.

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