Rules and Progress

In his post from Monday, Michael asked the question of what rules are designed to do and gives us two types of frameworks to answer his question: In Rawls’ reflexive equilibrium rules are designed to produce some end state. With Bentham’s rule utilitarianism, the rules are designed to allow people to take risks in the interest of progress (I hope I am explaining this correctly). In talking about Bentham, Michael points out that there is a fundamental tension between stability and growth. I want to draw on Elinor Ostrom’s work to expand on that point a little. I have to admit sheepishly that I read her article on collective action and the evolution of social norms, which was published in the Journal of Economic Perspectives in 2000, for the first time yesterday. The article is a great summary of evolutionary psychology and experimental economics results applied to her field studies on the design of governance institutions. Ostrom reports that to more accurately model the evolution of cooperation, we have to distinguish between different types of actors. She describes two different types: Rational egoists and conditional cooperators. Rational egoists behave like the standard homo economicus. Conditional cooperators will thrive on trust and are better off if the people they interact with reciprocate their trusting. The incorporation of these other agent types helps her to explain why in experimental settings, cooperation exceeds the game theoretic predictions. In fact, it can explain why societal norms and values emerge that support cooperation. Rules that facilitate cooperation can emerge in the real world in the absence of centralized direction. More specifically, it explains how groups of people can overcome common pool resource problems successfully.

At this point you are probably wondering how this diatribe is related to the argument about stability vs. growth. Well, I would like to assert that economic growth is correlated with changes in the norms and values that society is build on. This is not really my idea; I am taking it from Hayek in his Constitution of Liberty where he explains how societal norms change when a critical mass of individuals decides to violate the existing set of rules because they prevent them from taking an action that promotes their own self-interest. Such changes do not necessarily have to occur for the basic norms that facilitate trust and cooperation, but maybe for norms and values that determine what is appropriate behavior more broadly. You might say that such norms are a reflection of the man within the breast from Adam Smith’s Theory of Moral Sentiments. Think for example of the idea that it is somehow repugnant to sell your blood or your organs and the social norm against exchange for such goods, which is based on this intuition. Because of this societal norm, severe shortages of blood and organs persist and people die every day who could be cured easily, if we just got over ourselves already and decided that it would be ok for people to sell their kidney. This is somewhat of a crazy problem if you think about it, because we have all of the knowledge and technology that is required to save people’s lives when they need an organ transplant or a blood transfusion. The only thing that keeps us from actually saving them is the fact that there is some norm that says it would be wrong to exchange body parts for money. If you consider an increased ability to save lives progress, then these norms that prevented people from selling their body parts are in the way of progress.

Now this is very tricky because the same norms that facilitate trust and cooperation in the advanced division of labor can become obstacles to progress and the advanced division of labor. So while they provide for enough stability to allow people to form expectations about each other’s behavior and trust each other, they can at the same time provide too much stability. What I am trying to claim here is that this fundamental tension between stability and growth is determined by the rule structure that governs social interactions. If rules are too loose, cooperation is difficult. If rules are too tight, movements towards increased cooperation become difficult. This brings me back to Elinor Ostrom and the emergence of self-governance norms and rules. If rules are indeed the factor that determines the balance between growth and stability in a society, then formalization of rules will always result in a more stagnant society because it increases the cost of change. Informal rule systems on the other hand will be more fluid and adaptive and therefore better able to facilitate growth. So not only can informal rules emerge in the absence of formal government. Informal rules are also more likely to promote economic growth than formalized systems of rules. Now my question for Michael is the following: Does Bentham propose formalization of rules and if so why did he not favor informal social norms over formal laws (since formalization seems to slow down the rate of progress)?