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Another example is that of the American “Wild West.” In
order to farm, ranch and mine, the settlers of the American
West established land clubs, cattlemen’s associations and
mining camps. The land clubs were voluntary associations of
landowners who adopted constitutions that established the
rules with elected officers to enforce them. Each member
knew that he could safely reap the fruits of his lands
because he trusted his fellow members―as they trusted him―to
protect him from encroachers. Cattle ranchers and miners
adopted similar mechanisms to allow trade. No governments
were involved; they relied solely on mechanisms that
encouraged civility (because de facto property rights
were enforced) in order for trade to flourish (Anderson and
Hill, 1979).
However, such informal arrangements are not necessarily the
most efficient on larger scales because they grow costlier
due to enforcement difficulties.
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“Law, Order and Trust” or “How
to Sustain Free Markets” |
Vast societies require formal institutions that enshrine the
value of property rights. Otherwise it would become
difficult to have joint-stock companies, corporations,
insurance companies, bills of exchanges, enclosures, prices
and patents. In short, we would be deprived of the tools
necessary to realize economies of scale (which in turn allow
us to specialize), improve the efficiency of capital and
labour markets, encourage innovation and reduce market
imperfections (North and Thomas, 1973). To these ends, a
formal and impartial judicial system must be built.
This does not mean that as a result, we must discard
trustworthiness, civility, solidarity, honesty and integrity.
In fact, smaller institutions (of the kind that enhance
trustworthiness and civility) must cohabit with larger
institutions. This cohabitation is crucial since without
these smaller institutions, society would be crushed, while
without the larger ones, society would collapse (Hayek,
1988).
To illustrate this, we can think about contract law in the
United States, which includes a lot of room between
contracting parties to adapt and build trust while avoiding
opportunistic behaviour from all the contracting parties (O’Hara,
2008). This makes it easier for contracting parties to meet
and conclude their exchanges without resorting to costly
legal means to solve differences.
We can also illustrate this with the concept of “social
capital,” or how an individual feels embedded in his
environment. Through channels like norms, networks and
associations, an individual will find it easier to bridge
with others and he will be able to reap more fruits from
cooperation and exchange (Chalupnicek, 2010). These channels
provide information that could hardly be written formally
into laws and regulations but that are crucial for well-functioning
markets. We can think of rules on how to behave in public,
norms about business relationships, rules within a given
trade, information on how to adapt in a new job, etc.
It is imperative to understand that while institutions like
courts, police and judges may allow trade to become
specialized and complex, they can also be ill-suited to
solving minor differences because of their heavy-handed
nature. Smaller institutions like contract law, social rules
and norms that promote civility and trustworthiness avoid
the problems inherent to the larger, coercive governmental
institutions. They are complementary to the larger
institutions.
Economic Nobel laureate, Elinor Ostrom explained it best
when she said that “social norms are needed to instantiate
and maintain enough [warm glow (in the sense of
trustworthiness)] to sustain a stable free market society” (Ostrom
and Schwab, 2008: 209). As we have seen, game theory,
economics, biology and history all clearly support this view.
So the question of whether or not free markets run contrary
to “morality” broadly defined is irrelevant when we consider
that free markets might not even exist without “morality.”
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In The Evolution of Cooperation, Robert Axelrod (1984: 27-54)
relates how he organized a tournament between different computer programs to
compete for points. The winning program was the simplest of all and was aptly
named “tit-for-tat.” The wonder of “tit-for-that” was that it always sought to
cooperate first and imitated the previous move of the opposite player. It would
cooperate if cooperation had been observed in the past or would retaliate if
defection had been observed. Moreover, “tit-for-that” would also be forgiving
after retaliation in order to restore trust and mutual cooperation. In short: it
won because it managed to build a “reputation” for trust and for retaliation in
case of betrayal that allowed it to gain from repeated exchanges. 
