Spontaneity and Design in the Evolution of ... - Stephan Kinsella
Spontaneity and Design in the Evolution of ... - Stephan Kinsella
Spontaneity and Design in the Evolution of ... - Stephan Kinsella
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571"!;..SPONTANEITY AND DESIGN IN THEEVOLUTION OF INSTITUTIONS: THESIMILARITIES OF MONEY AND LAW*Steven Horwitz? HorwitzO1. IntroductionThe observation that human action is mediated by social <strong>in</strong>stitutionscomprises <strong>the</strong> beg<strong>in</strong>n<strong>in</strong>g <strong>of</strong> any <strong>the</strong>ory <strong>the</strong>Oly <strong>of</strong> social order. Differ<strong>in</strong>g explanations <strong>of</strong><strong>the</strong> orig<strong>in</strong>s <strong>and</strong> functions <strong>of</strong> such <strong>in</strong>stitutions will lead to very divergentconceptions <strong>of</strong> <strong>the</strong> nature <strong>of</strong> social order <strong>and</strong> <strong>the</strong> role that human action <strong>and</strong>human reason can play <strong>in</strong> establish<strong>in</strong>g it. In Tn particular, those who ascribe <strong>the</strong>orig<strong>in</strong> <strong>of</strong> social <strong>in</strong>stitutions to human design will see social order as <strong>the</strong> product <strong>of</strong>specific acts <strong>of</strong> human reason, while those who prefer evolutionary explanations<strong>of</strong> <strong>in</strong>stitutions will tend to view social order as deriv<strong>in</strong>g from <strong>the</strong> accumulatedhuman wisdom <strong>and</strong> tradition embedded <strong>in</strong> <strong>in</strong>stitutions that have survived <strong>the</strong>process <strong>of</strong> social evolution.The purpose <strong>of</strong> this paper is to compare <strong>the</strong> orig<strong>in</strong>s <strong>and</strong> functions <strong>of</strong> twospecific social <strong>in</strong>stitutions, lmoney ancl law, us<strong>in</strong>g an evolutionary approach thatsees social <strong>in</strong>stitutions as <strong>the</strong> results <strong>of</strong> ~an action but not human design. Morespecifically, I wish to po<strong>in</strong>t out some strik<strong>in</strong>g similarities between two recent sets<strong>of</strong> literature relat<strong>in</strong>g to <strong>the</strong> role <strong>of</strong> government <strong>in</strong> <strong>the</strong> production <strong>of</strong> money <strong>and</strong>law. An evolutionary approach to <strong>in</strong>stitutions can provide a common frameworkfor exam<strong>in</strong><strong>in</strong>g <strong>the</strong> <strong>the</strong>ory <strong>of</strong> free bank<strong>in</strong>g! <strong>and</strong> <strong>the</strong> more recent work on <strong>the</strong> nonpoliticalprovision <strong>of</strong> law. 2 The similarities between money <strong>and</strong> law as social• The author would like to thank Peter Petcr Bocttke, Mario Rizzo, Roger KorpI Koppl <strong>and</strong> olher o<strong>the</strong>r participants ,.I[ <strong>the</strong>Austrian Economics Colloquium at New York University for commcnts cornmcnrs on an earlier draft.o Assistant Assistanl Pr<strong>of</strong>essor <strong>of</strong> Economics <strong>and</strong> Flora Irene Eggleston Faculty Chair, Sf Lawrence University,Canton, U.S.A.I See White-1984, Selg<strong>in</strong>-1988, Glasner-1989, Dowd-1989, Dowd-1992, <strong>and</strong> Horwitz-1992a.2 See l3arnell-1985, Benson-1990, 1992
572 Journa! des h'conomisles eI des 1!,'!uc!es ]-ful7lcl!nes<strong>in</strong>stitutions suggest that cross-fertilisation bet\Veen <strong>the</strong> two sets <strong>of</strong> literature wouldhe mutually beneficial. Below, 1 will sketch a non-formal <strong>the</strong>oretical explan~ltion<strong>of</strong> <strong>the</strong> evolution <strong>of</strong> <strong>in</strong>stitutions <strong>and</strong> <strong>the</strong>ir role <strong>in</strong> facilitat<strong>in</strong>g social order, <strong>the</strong>nexplore how money <strong>and</strong> la\v IHight fit this explanation. I will also briefly discusssome examples <strong>of</strong> <strong>the</strong> apparent <strong>in</strong>ability <strong>of</strong> both money <strong>and</strong> law to provide order<strong>and</strong> how such failures might relate to <strong>the</strong> question <strong>of</strong> <strong>the</strong> appropriatearrangements for <strong>the</strong>ir supply.2. Rules, Institutions <strong>and</strong> Social OrderExplanations <strong>of</strong> social order are <strong>in</strong>evitably I,<strong>in</strong>ked to discussions <strong>of</strong>communication. Any workable notion <strong>of</strong> social order must recognize that oreler<strong>in</strong>volves some sort <strong>of</strong> complementarity <strong>in</strong> <strong>the</strong> expectations <strong>of</strong> social actors, This is<strong>the</strong> crucial element <strong>of</strong> Hayek's <strong>the</strong>ory <strong>of</strong> social evolution,3 For social relationshipstobe "orderly," actors must J) be able to form expectations abour <strong>the</strong> actions <strong>of</strong>o<strong>the</strong>rs that have some probability <strong>of</strong> be<strong>in</strong>g correct, 2) have some way <strong>of</strong> learn<strong>in</strong>g<strong>of</strong> <strong>the</strong> accuracy <strong>of</strong> <strong>the</strong>ir expectations, <strong>and</strong> 3) have some guidance as to how tocorrect <strong>the</strong>m if <strong>the</strong>y are mistaken. Ideally, social <strong>in</strong>stitutions can be <strong>the</strong> vehicles bywhich high degrees <strong>of</strong> social oreler are achieved. They can both communicate <strong>the</strong><strong>in</strong>formation needed to form expectations <strong>and</strong> provide feedback to actors to help<strong>the</strong>m adjust <strong>the</strong>ir expectations over time. Social <strong>in</strong>stitutions are l<strong>in</strong> this sense, socialcommunication processes that enable actors to orient <strong>the</strong>ir behavior towards <strong>the</strong>expected behavior <strong>of</strong> o<strong>the</strong>rs. 4Institutions perform this communicative function by constra<strong>in</strong><strong>in</strong>g <strong>the</strong>actions <strong>of</strong> those who utilize <strong>the</strong>m. Participants <strong>in</strong> social <strong>in</strong>stitutions are agree<strong>in</strong>g toabide by <strong>the</strong> procedures that are part <strong>of</strong> <strong>the</strong> <strong>in</strong>stitutions <strong>in</strong> question. As a result,actors arc able to form expectations about each o<strong>the</strong>r by obselv<strong>in</strong>g each one's use(or non-use) <strong>of</strong> an <strong>in</strong>stitution. The way <strong>in</strong> which <strong>in</strong>stitutional processes are sets <strong>of</strong>rules that constra<strong>in</strong> behavior, <strong>and</strong> allow for more accurate expectation formationprocesses, can be seen by sketch<strong>in</strong>g out a general explanation <strong>of</strong> <strong>the</strong> evolution <strong>of</strong>social <strong>in</strong>stitutions.Social <strong>in</strong>stitutions f<strong>in</strong>d <strong>the</strong>ir orig<strong>in</strong>s <strong>in</strong> some form <strong>of</strong> self <strong>in</strong>terestedbehavior. Those actions that are more successful become adopted as rules <strong>of</strong>thumb by <strong>the</strong> act<strong>in</strong>g <strong>in</strong>dividuals. The success <strong>of</strong> <strong>the</strong>se actions will be noticed <strong>and</strong>imitated by o<strong>the</strong>rs, As more imitation occurs, <strong>the</strong>se rules <strong>of</strong> thumb will likely be<strong>in</strong>creas<strong>in</strong>gly successful because many such rules <strong>in</strong>volve economies <strong>of</strong> scale <strong>in</strong>rule follow<strong>in</strong>g. In o<strong>the</strong>r words, certa<strong>in</strong> rules are more successful when <strong>the</strong>re arernore people us<strong>in</strong>g <strong>the</strong>m. These so-called "network externalities" can be seen <strong>in</strong>3 Havek-1973, 1989.4 Cr.·Lachmann~'19TI, p. 50, who describes social <strong>in</strong>stitutions as "nodal po<strong>in</strong>ls Itlmt] ... relieve Ius] <strong>of</strong> <strong>the</strong>need to acquire <strong>and</strong> digest detailed knowledge about o<strong>the</strong>rs <strong>and</strong> form detailed expectations aboLlt <strong>the</strong>irfuture actions."
Horwitz. <strong>Spontaneity</strong> <strong>and</strong> nesign <strong>in</strong> <strong>the</strong> 8uo/u./ion Bootution cftnsuuutons q/ln:.;/itutions 573<strong>the</strong> use <strong>of</strong> a language or a telephone system.z system.5 The use <strong>of</strong> ei<strong>the</strong>r is more effectivewhen larger numbers <strong>of</strong> o<strong>the</strong>r people are do<strong>in</strong>g <strong>the</strong> same.The use or non-use <strong>of</strong> a social <strong>in</strong>stitution is an example <strong>of</strong> whatSolvasson6, Solvassonv, follow<strong>in</strong>g Vanberg <strong>and</strong> Buchanan, calls a "trust "tnlst rule." The advantage<strong>of</strong> trust rules (such as "respect propelty") property") is that <strong>the</strong> benefits <strong>of</strong> follow<strong>in</strong>g <strong>the</strong>m are<strong>in</strong>ternalized <strong>in</strong>t.ernalized to <strong>the</strong> followers, while <strong>the</strong> benefits <strong>of</strong> o<strong>the</strong>r rules, such as Vanberg<strong>and</strong> Buchanan's "solidarity rules" ("pay for one's view<strong>in</strong>g <strong>of</strong> public television")provide external benefits to non-followers. Because <strong>the</strong> henefits benefits <strong>of</strong> trust rules are<strong>in</strong>ternalized, <strong>the</strong>y can spread to larger groups than can solidarity rules. To t.heextent social <strong>in</strong>st.itutions such as money <strong>and</strong> law rely on trust rules ("exchangewith money" or "follow <strong>the</strong> law"), <strong>the</strong>y are likely to spread to, <strong>and</strong> be useful with,large groups.As more actors follow a given rule, <strong>the</strong>ir expectation formation processeswill become more accurate. As long as <strong>the</strong> act <strong>of</strong> follow<strong>in</strong>g <strong>the</strong> rule is knowable byo<strong>the</strong>rs, <strong>the</strong>n actors can utilize <strong>the</strong> <strong>in</strong>formation conveyed hy <strong>the</strong> rule-follow<strong>in</strong>gbehavior <strong>in</strong> form<strong>in</strong>g <strong>the</strong>ir expectations. Benson's' po<strong>in</strong>t that membership <strong>in</strong> a legalassurance group was a signal about reputable behavior can be generalized toshow that participation <strong>in</strong> any social <strong>in</strong>stitution is also a signal about one'sbehaviors <strong>and</strong> <strong>in</strong>tentions.f <strong>in</strong>t.entions. 8 At some po<strong>in</strong>t, a large enough number <strong>of</strong> peoplefollow particular rules <strong>of</strong> action so that quite reliahle reliable expectations can be formedancl feedback to <strong>in</strong>correct expectations can be dissem<strong>in</strong>ated. Then we might saythat such rules <strong>of</strong> act.ion have become social <strong>in</strong>stitutions.Once social <strong>in</strong>stitutions emerge, <strong>the</strong>y ease <strong>the</strong> difficulties <strong>in</strong>volved wit.hexecut.<strong>in</strong>g our particular purposes <strong>and</strong> pl~ns, plans, Social <strong>in</strong>stitut.ions have no realpurposes <strong>of</strong> <strong>the</strong>ir own, o<strong>the</strong>r than to be participated <strong>in</strong> by actors so that <strong>the</strong>y maymore easily achieve <strong>the</strong>ir specific <strong>in</strong>dividual or collective purposes. Those whoparticipate <strong>in</strong> social <strong>in</strong>stitutions are putt<strong>in</strong>g limits on <strong>the</strong> k<strong>in</strong>d <strong>of</strong> possible actions<strong>the</strong>y might take. Institutions are thus a form <strong>of</strong> collective self-const.ra<strong>in</strong><strong>in</strong>gbehavior. These constra<strong>in</strong>ts make our behavior more predictable to o<strong>the</strong>rs <strong>and</strong><strong>in</strong>crease our chances <strong>of</strong> mutually coord<strong>in</strong>at<strong>in</strong>g our actions.? actions.9 In o<strong>the</strong>r words, social<strong>in</strong>stitutions ancl <strong>the</strong> rules that comprise <strong>the</strong>m are forms <strong>of</strong> communication. AsSchetter Schatter argues, <strong>the</strong> use <strong>of</strong> rules <strong>of</strong> action <strong>in</strong> a game-<strong>the</strong>oretic sett<strong>in</strong>g is "basicallyan <strong>in</strong>formation <strong>in</strong>format.ion device that allows players to <strong>in</strong>terpret that actions <strong>of</strong> <strong>the</strong>iropponents, "105 W
574 Juunw! des Ecouumisles el des Eludes J-luma<strong>in</strong>esImportantly, social <strong>in</strong>stillitions are repositories <strong>of</strong> knowledge that wemight o<strong>the</strong>twise f<strong>in</strong>d difficult, or impossible, to articulate. Frequently we are noteven aware <strong>of</strong> <strong>the</strong> knowledge that such <strong>in</strong>stitutions impart to us, <strong>and</strong> only whensomeone acts <strong>in</strong> ways that grossly violate our sense <strong>of</strong> propriety do we realize that<strong>in</strong>stitutions <strong>in</strong>volve <strong>the</strong>se tacit expectations <strong>of</strong> <strong>the</strong> limits to action. ll The fact that<strong>the</strong> range <strong>of</strong> permissible actions is frequently tacit makes it no less b<strong>in</strong>d<strong>in</strong>g <strong>in</strong> thatwe expect that range to be respected,It might also be <strong>the</strong> case' that <strong>the</strong> range <strong>of</strong> actions expected fromparticipation <strong>in</strong> an <strong>in</strong>stitution has little to do with <strong>the</strong> <strong>in</strong>tentions <strong>of</strong> <strong>the</strong> first actorswho began <strong>the</strong> process <strong>of</strong> emergence. Institutions take on a k<strong>in</strong>d <strong>of</strong> "life <strong>of</strong> <strong>the</strong>irown," which is dependent upon <strong>the</strong> various purposes <strong>of</strong> those who currently Lise<strong>in</strong>stitutionalized practices, As a result, <strong>in</strong>stitutions must be flexible enough tochange with <strong>the</strong>se differ<strong>in</strong>g purposes, yet still ma<strong>in</strong>ta<strong>in</strong> enough coherence to stillserve as guicleposts. Insufficiently flexible <strong>in</strong>stitutions will be unable to adapt tonew purposes for which <strong>the</strong>y might be useful, while overly tlexible <strong>in</strong>stitutionswill be unable to provide <strong>the</strong> stability necessary to allow <strong>the</strong> formation <strong>of</strong>reasonably accurate expectations. Successful social <strong>in</strong>stitutions strike a balancebetween too little <strong>and</strong> too much tlexibility.Because <strong>in</strong>stitutions lead us to follow <strong>the</strong> rules that comprise <strong>the</strong>m, <strong>the</strong>yenable LIS to communicate <strong>in</strong> ways that direct l<strong>in</strong>guistic communication alone doesnot. Social <strong>in</strong>stitutions are less constra<strong>in</strong>ed by physical space <strong>and</strong> time <strong>the</strong>n isl<strong>in</strong>guistic communication <strong>and</strong> <strong>the</strong>refore facilitate forms <strong>of</strong> communication thatwould o<strong>the</strong>twise be non-existent. Without social <strong>in</strong>stitutions <strong>and</strong> <strong>the</strong>ir ability tocommunicate, we would be unable to effectively coord<strong>in</strong>ate our actions <strong>and</strong> anynotion <strong>of</strong> order <strong>in</strong> social affairs would be problematic. We cannot directly know<strong>the</strong> purposes <strong>and</strong> plans <strong>of</strong> <strong>the</strong> multitude <strong>of</strong> anonymous o<strong>the</strong>rs with whom we must<strong>in</strong>teract to survive <strong>and</strong> prosper~ <strong>and</strong>~ as Langlois 12 summarizes <strong>the</strong>m, social<strong>in</strong>stitutions serve as "<strong>in</strong>terpersonal stores <strong>of</strong> coord<strong>in</strong>ative knowledge ... [that] serveto restrict at once <strong>the</strong> dimensions <strong>of</strong> <strong>the</strong> agent's problem-situation <strong>and</strong> <strong>the</strong> extent<strong>of</strong> cognitive dem<strong>and</strong>s placed on <strong>the</strong> agent."3. Money as a Social InstitutionThe exemplarly explanation <strong>of</strong> <strong>the</strong> spontaneous evolution <strong>of</strong> a social<strong>in</strong>stitution is <strong>the</strong> <strong>the</strong>oty <strong>of</strong> <strong>the</strong> orig<strong>in</strong> <strong>of</strong> money <strong>of</strong>fered by Carl Menger.13 Whencomb<strong>in</strong>ed with a fur<strong>the</strong>r exploration <strong>of</strong> how money, once evolved, facilitatessocial coord<strong>in</strong>ation, Menger's <strong>the</strong>ory can be transformed <strong>in</strong>to a more completeexplanation <strong>of</strong> <strong>the</strong> social <strong>in</strong>stitution <strong>of</strong> money.11 See Fuller-1969, p. 139: "There are some outcomes <strong>in</strong> human rclations too absurd to rise to <strong>the</strong> level<strong>of</strong> conscious exclusion:'12 L:.mglob-1986, p. 237.13 Menger-1892.
Horwitz. <strong>Spontaneity</strong> <strong>and</strong> <strong>Design</strong> <strong>in</strong> <strong>the</strong> <strong>Evolution</strong> <strong>of</strong>Instuutions q{lnstitutions 575Menger beg<strong>in</strong>s by assum<strong>in</strong>g a barter economy where consumption goodsare traded directly for o<strong>the</strong>r consumption goods. Assum<strong>in</strong>g even limitedspecialization <strong>in</strong> production, it follows that actors will have excess supplies <strong>of</strong> <strong>the</strong>good <strong>the</strong>y produce <strong>and</strong> will want to trade <strong>the</strong>se for <strong>the</strong> production <strong>of</strong> o<strong>the</strong>rs. Theproblem a given trader faces is f<strong>in</strong>d<strong>in</strong>g o<strong>the</strong>r traders who both produce what hewants <strong>and</strong> wants what he produces. These barter exchanges will be easier toexecute if actors can br<strong>in</strong>g to market goods that <strong>the</strong>y th<strong>in</strong>k o<strong>the</strong>rs will f<strong>in</strong>d to bedesirable. Even those who produce goods that are not very easily saleable couldtrade <strong>the</strong>m for somewhat more saleable goods <strong>and</strong> <strong>the</strong>n trade those for <strong>the</strong> th<strong>in</strong>gs<strong>the</strong>y ultimately desire. Because <strong>of</strong> <strong>the</strong> problems posed by differ<strong>in</strong>g degrees <strong>of</strong>saleability. a series <strong>of</strong> exchanges for goods <strong>of</strong> <strong>in</strong>creas<strong>in</strong>g saleability, lead<strong>in</strong>g to <strong>the</strong>ultimately desired good, may be an easier way <strong>of</strong> fulfill<strong>in</strong>g wants than hop<strong>in</strong>g for adirect match between <strong>the</strong> orig<strong>in</strong>ally possessed good <strong>and</strong> <strong>the</strong> one ultimatelydesired.Menger14 argues that discover<strong>in</strong>g which goods are more saleable "neverarises <strong>in</strong> every part <strong>of</strong> a nation at <strong>the</strong> same time." As <strong>the</strong>se <strong>in</strong>direct exchanges takeplace, those who successfully use <strong>the</strong>m to acquire what <strong>the</strong>y want willdemonstrate <strong>the</strong> relative saleability <strong>of</strong> <strong>the</strong> goods <strong>the</strong>y use. These processes <strong>of</strong><strong>in</strong>direct exchange generate <strong>the</strong> needed knowledge <strong>of</strong> saleability. In addition,observation <strong>and</strong> imitation provide ways <strong>of</strong> communicat<strong>in</strong>g this <strong>in</strong>formationwithout actors need<strong>in</strong>g to be consciously aware <strong>of</strong> what is happen<strong>in</strong>g. Assuccessful <strong>in</strong>direct exchange occurs, o<strong>the</strong>rs imitate that. success by us<strong>in</strong>g those<strong>in</strong>termediate goods <strong>in</strong> <strong>the</strong>ir own exchange sequences. This imitative processbeg<strong>in</strong>s to narrow <strong>the</strong> range <strong>of</strong> goods used as <strong>in</strong>termediate objects <strong>of</strong> exchange byspread<strong>in</strong>g knowledge <strong>of</strong> which goods are relatively more saleable. As thisconvergence occurs, actors beg<strong>in</strong> to more successfully coord<strong>in</strong>ate <strong>the</strong>ir actions, as<strong>the</strong> shr<strong>in</strong>k<strong>in</strong>g number <strong>of</strong> <strong>in</strong>termediate goods makes it easier for actors to formexpectations about which goods will be needed to execute <strong>in</strong>direct exchanges.The imitative behavior not only spreads <strong>the</strong> use <strong>of</strong> specific <strong>in</strong>termediategoods, it also enhances tbeir saleability. Now <strong>the</strong> <strong>in</strong>termediate goods are be<strong>in</strong>gdem<strong>and</strong>ed by both <strong>the</strong> orig<strong>in</strong>al users <strong>and</strong> <strong>the</strong> imitators, mak<strong>in</strong>g <strong>the</strong>m moresaleable <strong>and</strong> more suitable as media <strong>of</strong> exchange, thus heighten<strong>in</strong>g <strong>the</strong> success <strong>of</strong>those who use <strong>the</strong>m. This process <strong>of</strong> imitation <strong>and</strong> convergence cont<strong>in</strong>ues untilsome very small number (usually one) <strong>of</strong> goods emerge as <strong>the</strong> most saleable, <strong>and</strong>become generally accepted media <strong>of</strong> exchange, or money. Money, accord<strong>in</strong>g toMenger, is not imposed on a population by fiat, but emerges, as it were, frombelow, out <strong>of</strong> <strong>the</strong> preferences <strong>and</strong> actions <strong>of</strong> actual traders who use it. 15Once money emerges, it becomes one half <strong>of</strong> virtually every marketexchange. As such, it is pervasive <strong>in</strong> <strong>the</strong> market <strong>and</strong> underlies <strong>the</strong> entire process <strong>of</strong>economic calculation <strong>and</strong> coord<strong>in</strong>ation. In particular, <strong>the</strong> use <strong>of</strong> money symbolizesa form <strong>of</strong> trust tfilst <strong>in</strong> o<strong>the</strong>r traders <strong>and</strong> <strong>the</strong> social order. This relationship between14 Menger-1892, p. 249.L5 Cf. Mises~1966,p. 407, "only <strong>the</strong> conduct <strong>of</strong> exchang<strong>in</strong>g people can create <strong>in</strong>direct <strong>in</strong>direc[ exchange <strong>and</strong>money."
'5"76Journal des Economisles el des 81udes IJurna<strong>in</strong>esmoney <strong>and</strong> trust <strong>and</strong> its implications for money's role as a social <strong>in</strong>stitution havebeen explored <strong>in</strong> depth by <strong>the</strong> sociologist Georg Simmcl <strong>in</strong> The Philosophy qj'M oney16. Simmel argues that <strong>the</strong> use <strong>of</strong> money <strong>and</strong> <strong>the</strong> correspond<strong>in</strong>g expansion<strong>of</strong> economic relations,"eventually produce <strong>in</strong> <strong>the</strong> enlarged, <strong>and</strong> f<strong>in</strong>ally <strong>in</strong>ternational,circle <strong>the</strong> same features that orig<strong>in</strong>ally characterized only closed groups;economic <strong>and</strong> legal conditions overcome <strong>the</strong> spatial separation more <strong>and</strong>more, <strong>and</strong> <strong>the</strong>y come to operate just as reliably, precisely, <strong>and</strong> predictablyover a great distance as <strong>the</strong>y did previously <strong>in</strong> local communities."17By extend<strong>in</strong>g social trust, <strong>the</strong> use <strong>of</strong> money enables us to coord<strong>in</strong>ate ourbehavior with anonymous o<strong>the</strong>rs who are beyond <strong>the</strong> limits <strong>of</strong> <strong>the</strong> spoken orwritten word <strong>and</strong> face-to-face contact.IS The fact that people choose to trade us<strong>in</strong>ga given money <strong>in</strong>dicates <strong>the</strong>ir trust <strong>in</strong> <strong>the</strong> will<strong>in</strong>gness <strong>of</strong> o<strong>the</strong>rs to accept it <strong>and</strong>base <strong>the</strong>ir expectations on it.For Simmel, <strong>the</strong> implication is that money is a k<strong>in</strong>d <strong>of</strong> tool. Ra<strong>the</strong>r thanbe<strong>in</strong>g an end <strong>in</strong> itself, money becornes a universal means for <strong>in</strong>dividuals to pursue<strong>the</strong> ends t.hey desire. SimmelI9 po<strong>in</strong>ts out that money, like all social <strong>in</strong>stitutions,enables us to "atta<strong>in</strong> ends for which [our] personal abilities would never suffice."Money facilitates this coord<strong>in</strong>ation process by constra<strong>in</strong><strong>in</strong>g us to trade us<strong>in</strong>g <strong>the</strong>specific medium <strong>of</strong> exchange that is socially acceptable. A monetary economyvirtually rules out barter exchnnge.s, even though <strong>the</strong>y might be "easier" <strong>in</strong> specific<strong>in</strong>stances. 20 By follow<strong>in</strong>g <strong>the</strong> trust rule <strong>of</strong> "trade Lls<strong>in</strong>g money" we send signals too<strong>the</strong>rs that enhance our long rlln ability to achieve our ends.Because we all use <strong>the</strong> medium <strong>of</strong> exchange to trade for our ultimate ends,social order is enhanced. Successful exchanges are easier to execute because wereduce <strong>the</strong> transactions costs <strong>of</strong> f<strong>in</strong>d<strong>in</strong>g desirable exchange opportunities. Thesesaved resources, comb<strong>in</strong>ed with money's ahility to serve as a po<strong>in</strong>t <strong>of</strong> reference foreconomic calculation, <strong>in</strong>crease productivity <strong>and</strong> social wealth.4. The Legal Order as an Institutional FrameworkWhile argu<strong>in</strong>g that money emerges through a long <strong>and</strong> cont<strong>in</strong>uousprocess <strong>of</strong> evolution is not overly controversial, maki J -' same argument for lawis much more difficult <strong>in</strong> a century dom<strong>in</strong>ated b egal po, itivis . Legal positivisl1116 Simmel-1978.17 Simmel-1978, p. 182.18 Compare 13enson-1992n, p. 5 on <strong>the</strong> evolution <strong>of</strong> law: "Under certa<strong>in</strong> conditions, <strong>the</strong> social contractunderly<strong>in</strong>g <strong>the</strong> production <strong>of</strong> bw can he achieved through <strong>the</strong> process <strong>of</strong> <strong>in</strong>dividual agreements with<strong>the</strong> result<strong>in</strong>g rules spread<strong>in</strong>g to o<strong>the</strong>r members <strong>of</strong> <strong>the</strong> relevant (hut perhaps geographically dispersed)collective group jf <strong>the</strong>y are useful rules."19 Simmcl-1978, p.ll1.20 See 011-1989 for a discussion <strong>of</strong> how optimality <strong>in</strong> <strong>the</strong> use <strong>of</strong> money might still leave room for barterexchanges if <strong>the</strong> transactions costs <strong>of</strong> some monetary exchanges are too high.
\..Q"l \6~i~-\~ilJ'" !!-!ol"{oi!z, Horuntz: <strong>Spontaneity</strong> 5J)on!ane;t~y <strong>and</strong> <strong>Design</strong> <strong>in</strong> <strong>the</strong> !::f.)OIUlion tiuolution q/fnsti/utiuns cfInstitutions 577argues that whatever statutes are passed by a recognized political authority shoulcbe considered law, <strong>in</strong>dependent <strong>of</strong> how <strong>the</strong>se statutes cohere <strong>in</strong>to <strong>the</strong> I. 'oadeframework <strong>of</strong> society or <strong>of</strong> how <strong>the</strong>y relate to <strong>the</strong> actions <strong>of</strong> <strong>the</strong> <strong>in</strong>dividuals boundby <strong>the</strong>m. By contrast, <strong>the</strong>re is <strong>the</strong> work <strong>of</strong> o<strong>the</strong>r legal <strong>the</strong>orists, notably LonFuller 21 , who argues that <strong>the</strong> term law should refer to "<strong>the</strong> enterprise <strong>of</strong> subject<strong>in</strong>ghuman conduct to <strong>the</strong> governance <strong>of</strong> rules," <strong>and</strong> lifuno Leoni 22 who sees judgemadelaw as a form <strong>of</strong> collective self-constra<strong>in</strong>t self-constrA<strong>in</strong>t that only works if it emerges from<strong>the</strong> actions <strong>of</strong> <strong>the</strong> parties to disputes. Fuller's def<strong>in</strong>ition emboclies both <strong>the</strong> notion<strong>of</strong> law as an <strong>in</strong>stitution 'with a function (ra<strong>the</strong>r that a mere set <strong>of</strong> decrees) <strong>and</strong> <strong>the</strong>conception <strong>of</strong> governance as imply<strong>in</strong>g some sort <strong>of</strong>consistency or cOherence)among <strong>the</strong> rules. Fuller's explanation <strong>of</strong> <strong>the</strong> orig<strong>in</strong> <strong>and</strong> function <strong>of</strong> <strong>the</strong> law alsoparallels Menger's <strong>the</strong>ory <strong>of</strong> <strong>the</strong> orig<strong>in</strong> ancl function <strong>of</strong> money.Fuller's explanation <strong>of</strong> <strong>the</strong> emergence <strong>of</strong> customary law <strong>and</strong> <strong>the</strong> law <strong>of</strong>contract is particularly notable for its evolutionary perspective. He 23 def<strong>in</strong>escustomary law as "consist<strong>in</strong>g <strong>of</strong> <strong>the</strong> reciprocal expectations that arise out <strong>of</strong> human<strong>in</strong>teraction ,.. lit is! a language <strong>of</strong> q{ <strong>in</strong>teraction."24 Individuals beg<strong>in</strong> to deal wi<strong>the</strong>ach o<strong>the</strong>r <strong>in</strong> fLlce-to-face face-to-face situations. Even <strong>in</strong> <strong>the</strong> absence <strong>of</strong> written contracts,certa<strong>in</strong> behavioral norms will emerge through repeated <strong>in</strong>teraction as peopleattempt to mutually coord<strong>in</strong>ate <strong>the</strong>ir behavior. If <strong>the</strong> <strong>in</strong>teraction is thought to bemutually beneficial, beneficLod, both parties will have <strong>in</strong>centives to behave <strong>in</strong> ways that eacho<strong>the</strong>r expect <strong>in</strong> order to facilitate <strong>the</strong> <strong>in</strong>teraction. If, over time, certa<strong>in</strong> behavioralpatterns emerge so strongly that <strong>in</strong>dividuals beg<strong>in</strong> to form expectations basedupon <strong>the</strong>m ancl spread <strong>the</strong>m to o<strong>the</strong>r <strong>in</strong>teractional contexts, <strong>the</strong>n we have <strong>the</strong>emergence <strong>of</strong> customary law. As Fuller po<strong>in</strong>ts out, out~normally we reserve <strong>the</strong> term"law' "Ia\l.,r"for sets <strong>of</strong> rules that are imposed from outside a given two- partyrelationship. However, if law is to be understood as <strong>the</strong> enterprise <strong>of</strong> subject<strong>in</strong>ghuman conduct to <strong>the</strong> governance <strong>of</strong> rules, <strong>the</strong> expectations aris<strong>in</strong>g from repeatedtwo-party <strong>in</strong>teractions could legitimately be seen as law. Once such expectationalexpecratlonalpractices arc transferred to multiple situations, <strong>the</strong>n clearly we have what we moretraditionally th<strong>in</strong>k <strong>of</strong> as law, law_As <strong>in</strong> Menger's story <strong>of</strong> <strong>the</strong> orig<strong>in</strong> <strong>of</strong> money, <strong>the</strong> emergence <strong>of</strong> law is anun<strong>in</strong>tended consequence <strong>of</strong> self-<strong>in</strong>terested behavior. The two parties to <strong>the</strong>relatIonship want only to be able to accurately expect <strong>the</strong> behavior <strong>of</strong> <strong>the</strong>.e<strong>the</strong>r. <strong>the</strong>.-a<strong>the</strong>r.They need not have <strong>the</strong> <strong>in</strong>tention <strong>of</strong> creatmg a precedent for o<strong>the</strong>r suchrelationships. However, if certa<strong>in</strong> practices or rules are successful <strong>in</strong> generat<strong>in</strong>greliable expectations, <strong>the</strong>y will tend to be imitated <strong>and</strong> spread <strong>in</strong> <strong>the</strong> same way as<strong>in</strong> our general explanation <strong>of</strong> <strong>in</strong>stitutions <strong>and</strong> Menger's <strong>the</strong>ory <strong>of</strong> money.Eventually, we will be left with a set <strong>of</strong> more or less coherent practicesthat we can call law. Analogous to a "generally accepted medium <strong>of</strong> exchange,"we might call law a "generally accepted set <strong>of</strong> rules for <strong>in</strong>terpersonal <strong>in</strong>teraction."21 Fullcr-1969, p. 106.22 Leoni-1972, p. 3.23 Fullcr-1981, Puller-teat, p. 176, emphasis <strong>in</strong> orig<strong>in</strong>al.24 O<strong>the</strong>rs Olhers lla\'c have argued thato~ <strong>in</strong> this way, see Warnel)'d-1990 <strong>and</strong> HorwitL. Horwlrz199211.
578 Journal des Economistes et des F.tudes Huma<strong>in</strong>esThe imitative process turns purely self-<strong>in</strong>terested customs <strong>in</strong>to social ones thatenable an <strong>in</strong>f<strong>in</strong>ite number <strong>of</strong> anonymous o<strong>the</strong>rs to act effectively by utiliz<strong>in</strong>g <strong>the</strong>emerg<strong>in</strong>g <strong>and</strong> evolv<strong>in</strong>g customary law.In <strong>the</strong> same way that Menger's story implies that money must emergethrough actual exchange <strong>and</strong> cannot be imposed from without, so does Fuller'sexplanation <strong>of</strong> customary law <strong>in</strong>sist that tnle law arises from <strong>the</strong> <strong>in</strong>teraction <strong>of</strong> realsocial actors. Both money <strong>and</strong> law come from <strong>the</strong> bottom up: "Only those whoknow those <strong>in</strong>terests <strong>in</strong>timately, who can feel <strong>the</strong>ir way toward <strong>the</strong> best reciprocaladjustment <strong>of</strong> <strong>the</strong>m, are competent to f<strong>in</strong>d a truly satisfactory solution",25 AsVihanto 26 po<strong>in</strong>ts out <strong>in</strong> his discussion <strong>of</strong> legal <strong>in</strong>stitutions, <strong>the</strong>y "are usually firstunderstood <strong>and</strong> approved by only a small number <strong>of</strong> <strong>in</strong>dividuals" beforespread<strong>in</strong>g to <strong>the</strong> population as a whole. This also suggests an evolutionaty orig<strong>in</strong>for such practices <strong>and</strong> that <strong>the</strong>ir cont<strong>in</strong>ued evolution is, as Vihanto stresses, aprocess <strong>of</strong> discovery.Fuller argues fur<strong>the</strong>r that if <strong>the</strong> law is a codification <strong>of</strong> "reciprocal<strong>in</strong>teractional expectancies," <strong>the</strong>n it must derive from <strong>the</strong> mean<strong>in</strong>g that partiesattach to <strong>the</strong>ir contracts. But where does this mean<strong>in</strong>g come from? Fuller27answers that "courts may imply a contract entirely from <strong>the</strong> conduct <strong>of</strong> <strong>the</strong> parties;though no verbal exchange has taken place ... " Leoni also po<strong>in</strong>ts out that <strong>the</strong>fuction <strong>of</strong> judges is to discover <strong>the</strong> mean<strong>in</strong>g that <strong>the</strong> various parties attach to <strong>the</strong>iractions:"<strong>the</strong> whole process can be described as a sort <strong>of</strong> vast, cont<strong>in</strong>uous,<strong>and</strong> chiefly spontaneous collaboration between <strong>the</strong> judges <strong>and</strong> <strong>the</strong> judged<strong>in</strong> order to discover what <strong>the</strong> people's will is <strong>in</strong> a series <strong>of</strong> def<strong>in</strong>ite<strong>in</strong>stances. With repeated use <strong>the</strong>se <strong>in</strong>teractional expectancies becomeWidespread enough to rise above <strong>the</strong> local contexts from which <strong>the</strong>yorig<strong>in</strong>ated <strong>and</strong> <strong>the</strong>y become law."28Fuller 29 also po<strong>in</strong>ts ut e expectancies that customary law gives rise 1,""to are not, <strong>and</strong> cannot ully articula d. Often <strong>the</strong> most important expectations t/that are part <strong>of</strong> any human action are those we never pause to consciouslyarticulate, Fuller 30 borrows Wiltgenste<strong>in</strong>'s example <strong>of</strong> a mo<strong>the</strong>r who tells ababysitter to "teach my child a game" <strong>and</strong> returns to f<strong>in</strong>d that <strong>the</strong> sitter has shown<strong>the</strong> child how to duel with kitchen knives. Clearly that game was not one that <strong>the</strong>mo<strong>the</strong>r had <strong>in</strong> m<strong>in</strong>d, yet she never conscioLlsly paused to consider that her wordswould be <strong>in</strong>terpreted that way.In <strong>the</strong> same way, parties to an <strong>in</strong>teraction (or an explicit contract) will bebound by tacit limits as to what each can reliably expected to do. As parties <strong>in</strong><strong>in</strong>teractional relationships converge toward mutal1y acceptable rules <strong>of</strong> conduct,<strong>the</strong>y will be unable to consciously consider <strong>and</strong> elim<strong>in</strong>ate every feasible behavior25 Fullcr-1981, p. 210.26 Vih
HonlJi!z. Horuntz: <strong>Spontaneity</strong> <strong>and</strong> <strong>Design</strong> <strong>in</strong> <strong>the</strong> <strong>Evolution</strong> <strong>of</strong>Institutions c!llnstitutions 579<strong>the</strong> o<strong>the</strong>r might take. 'The bounds <strong>of</strong> <strong>the</strong> consciously explicable will be related to<strong>the</strong> specific context <strong>of</strong> <strong>the</strong> orig<strong>in</strong>al relationship. However, similar contexts willlikely produce similar explicit expectations, <strong>and</strong> <strong>the</strong> tacit limits that underlie <strong>the</strong>mwill become part <strong>of</strong> expectation formation processes when <strong>the</strong> explicit customaryrelationships are codified <strong>in</strong>to law. Like money, <strong>the</strong> law becomes a communicationprocess that provides knowledge beyond that which can be explicitly put <strong>in</strong>tolanguage.Ano<strong>the</strong>r way <strong>of</strong> conceiv<strong>in</strong>g <strong>the</strong> function <strong>of</strong> law is to see it as a set <strong>of</strong>guideposts for human action. Roberta Kevelson 31 sees <strong>the</strong> legal system as a system<strong>of</strong> signs <strong>and</strong> analyzes it us<strong>in</strong>g <strong>the</strong> method <strong>of</strong> semiotics (<strong>the</strong> <strong>in</strong>terpretation <strong>of</strong> signs).For Kevelson32 <strong>the</strong> system <strong>of</strong> signs that comprises <strong>the</strong> legal order is one <strong>of</strong> anumber <strong>of</strong> "verbal <strong>and</strong> non-verbal sign systems" that human be<strong>in</strong>gs have evolvedto effect social coord<strong>in</strong>ation. The law delimits actions deemed to be appropriate,provid<strong>in</strong>g actors with po<strong>in</strong>ts <strong>of</strong> (tacitly) agreed upon mutual contact which assist<strong>in</strong> form<strong>in</strong>g accurate expectations. As Hayek argues <strong>of</strong> exist<strong>in</strong>g laws:"<strong>the</strong>y give rise to expectations e~pectations that guide peoples' actions, <strong>and</strong>what will be regarded as b<strong>in</strong>d<strong>in</strong>g will <strong>the</strong>refore be those practices thateverybody counts on be<strong>in</strong>g observed <strong>and</strong> which <strong>the</strong>reby have become <strong>the</strong>condition for <strong>the</strong> success <strong>of</strong> most activities".33In much <strong>the</strong> same way that actors <strong>in</strong> a barter economy would f<strong>in</strong>d it quitedifficult to pursue <strong>the</strong>ir own purposes <strong>and</strong> plans because <strong>the</strong> coord<strong>in</strong>ation <strong>in</strong>ducedby <strong>the</strong> use <strong>of</strong> money would be absent, so would actors f<strong>in</strong>d social coord<strong>in</strong>ationdifficult <strong>in</strong> a world without law, as game-<strong>the</strong>oretic attempts to leap out <strong>of</strong> <strong>the</strong>Hobbesian jungle have illustrated. Money, by facilitat<strong>in</strong>g economic calculation,also enables us to select out <strong>the</strong> economically feasible from <strong>the</strong> bewilder<strong>in</strong>g array<strong>of</strong> potential production processes. Similarly, law, by <strong>of</strong>fer<strong>in</strong>g.an agreed upo~f'.-rules . . n <strong>and</strong> promulgat<strong>in</strong>g accurate expectation formation processes,-"rescue[s] man from <strong>the</strong> bl<strong>in</strong> pay 0 c ance <strong>and</strong>...putlsl <strong>and</strong>...put[s] him safely on <strong>the</strong> road topurposeful <strong>and</strong> creative activity".345. Money, Law <strong>and</strong> <strong>the</strong> MarketIf <strong>the</strong> orig<strong>in</strong>s <strong>and</strong> functions <strong>of</strong> money <strong>and</strong> law are so similar, <strong>the</strong>re mightalso be similarities <strong>in</strong> <strong>the</strong> way <strong>in</strong> which both are supplied <strong>in</strong> modern societies.What is strik<strong>in</strong>g about both <strong>in</strong>stitutions is that <strong>the</strong>y are nor .0·4- e firstones whose direction is presumed to he most efficientlerformed bytest teo AsBell po<strong>in</strong>ts out:31 Kevelson-1988.32 op. cit. p. 4.33 Hayek-1977, p. 97.34 Fuller-1969, p.9.
580 Journal des Ji'coJ1omL\-tes et des Htudes Huma<strong>in</strong>es"Money <strong>and</strong> law developed <strong>in</strong>parallel fashion ... medievalEuropeans enjoyed competition <strong>in</strong> currencies <strong>and</strong> legal systems untilmonarchies took over both fields. And state monopolies <strong>in</strong> money <strong>and</strong>law now present common hazards".35Historically, any suggestion that ei<strong>the</strong>r money or law be provided byvoluntary exchange <strong>in</strong> a market would have been seen as suspect. However, thisprejudice is slowly chang<strong>in</strong>g. An exam<strong>in</strong>ation <strong>of</strong> <strong>the</strong> literature on <strong>the</strong> potentialbenefits <strong>of</strong> depriv<strong>in</strong>g <strong>the</strong> state <strong>of</strong> its monopoly over <strong>the</strong> production <strong>of</strong> money <strong>and</strong>law can help to see whe<strong>the</strong>r <strong>the</strong> ideas developed above can add to <strong>the</strong> arguments<strong>of</strong> both literatures.That <strong>the</strong> production <strong>of</strong> both money <strong>and</strong> law has quickly become [,prerogative <strong>of</strong> <strong>the</strong> state is not a co<strong>in</strong>cidence\ By tak<strong>in</strong>g overb(5'fflTfiStftutions,governments are able to use <strong>the</strong>m as sources <strong>of</strong> revenue. I e governments<strong>the</strong>mselves may benefit from <strong>the</strong>se methods <strong>of</strong> f<strong>in</strong>ance, that <strong>the</strong>y are lesspolitically costly than direct taxation, it is questionable whe<strong>the</strong>r state provision <strong>of</strong>money <strong>and</strong> law is more, or even equally, likely to <strong>in</strong>duce <strong>the</strong> same degree <strong>of</strong> socialorder as would private provision.As historians <strong>of</strong> bank<strong>in</strong>g have shown, <strong>the</strong> orig<strong>in</strong>s <strong>of</strong> central banks have<strong>in</strong>variably been l<strong>in</strong>ked to <strong>the</strong> revenue needs <strong>of</strong> governments, particularly <strong>in</strong> times<strong>of</strong> war. 36 Ra<strong>the</strong>r than attempt to raise [he needed funds by direct taxation, or <strong>in</strong>cur<strong>the</strong> expense <strong>of</strong> debt, governments have simply directly taken over, or o<strong>the</strong>rwisemanipulated, bank<strong>in</strong>g systems to do <strong>the</strong> job. Most obviously this could beaccomplished by <strong>the</strong> state claim<strong>in</strong>g a monopoly right to produce currency <strong>and</strong><strong>the</strong>n us<strong>in</strong>g newly produced currency to purchase supplies. O<strong>the</strong>r means would<strong>in</strong>clude giv<strong>in</strong>g a monetary authority <strong>the</strong> special right to conduct open marketoperations <strong>and</strong> buy up government debt or by creat<strong>in</strong>g regulations that forcebanks to buy up government debt as a condition for conduct<strong>in</strong>g specific bank<strong>in</strong>goperations.37 When governments have used regulations to guide bankers <strong>in</strong>torevenue-rais<strong>in</strong>g activities, banks have historically found ways around <strong>the</strong> law,lead<strong>in</strong>g to dem<strong>and</strong>s for fur<strong>the</strong>r regulation <strong>and</strong> eventual centralization. The v<strong>in</strong>ualdisappearance <strong>of</strong> compet<strong>in</strong>g currency producers across <strong>the</strong> world, despite <strong>the</strong>irone time proliferation, is evidence for this process.38As Bruce Benson's39 study <strong>of</strong> <strong>the</strong> law illustrates, it too was once providedby voluntary arrangements between panics only to be slowly taken over bygovernments <strong>in</strong> order to raise revenue. 40 He describes <strong>the</strong> change <strong>in</strong> English lawbrought on by early Norman rule:J,35 8cll-1991/92, p. I.36 See, for example, Smith~1990 ancl Glasner-1989.37 The former power was given to <strong>the</strong> Feci as part <strong>of</strong> <strong>the</strong> Bank<strong>in</strong>g Act <strong>of</strong> 1935, while <strong>the</strong> latter was apart <strong>of</strong> <strong>the</strong> U.S. Nation:l1 Bank<strong>in</strong>g System 0863-1914). The NBS required national banks to buy upgovernment bonds as a condition <strong>of</strong> currency issue. Legislators were expHcit <strong>in</strong> us<strong>in</strong>g this regulation asa way <strong>of</strong> rais<strong>in</strong>g revenue for <strong>the</strong> Civil War.38 See Schuler-1992 for a discussion <strong>of</strong> <strong>the</strong> numerous countries th;1t historically h,ld at le;lst partialform.s <strong>of</strong> free bank<strong>in</strong>g for some period <strong>of</strong> time.39 Hcnson-1990.40 See Bell-1991/92 <strong>and</strong> Benson-1992b for a more detailed discllssion <strong>of</strong> <strong>the</strong> issues below.
HOrLoi1z. Honottz. JpoJ1laneiZv <strong>Spontaneity</strong> <strong>and</strong> <strong>Design</strong> <strong>in</strong> <strong>the</strong> Hua/utiar! Eoolution q/<strong>in</strong>sliluliuns <strong>of</strong>Instuutions 581"one <strong>of</strong> <strong>the</strong> earliest <strong>and</strong> most significant changes <strong>the</strong> Normansmade <strong>in</strong> English law was replac<strong>in</strong>g <strong>the</strong> old restitution-hased restitution-based system...witha system <strong>of</strong> f<strong>in</strong>es <strong>and</strong> confiscations along with corporal <strong>and</strong> capitalpunishment.,,41punlshmcnr.vt!Later on, <strong>in</strong> <strong>the</strong> 1100s, K<strong>in</strong>g Henry II fur<strong>the</strong>r extended <strong>the</strong> state's role <strong>in</strong>judicial decisions hy <strong>in</strong>troduc<strong>in</strong>g what we now know as <strong>the</strong> dist<strong>in</strong>ction betweencivil <strong>and</strong> crim<strong>in</strong>al law. Prior to this time, <strong>the</strong> k<strong>in</strong>g's direct <strong>in</strong>volvement was limitedto disturbances aga<strong>in</strong>st <strong>the</strong> k<strong>in</strong>g's person or castle, known as "disturb<strong>in</strong>g <strong>the</strong> k<strong>in</strong>g'speace." However, Henry extended this concept to almost any disturbance thatoccurred <strong>in</strong> <strong>the</strong> l<strong>and</strong> politically controlled by <strong>the</strong> k<strong>in</strong>g. As Benson describes it:"These <strong>of</strong>fenses came to be known as "crimes," <strong>and</strong> <strong>the</strong> contrastbetween crim<strong>in</strong>al <strong>and</strong> civil causes developed, with crim<strong>in</strong>al causesreferr<strong>in</strong>g to <strong>of</strong>fenses that generated revenues for <strong>the</strong> k<strong>in</strong>g or <strong>the</strong> sheriffsra<strong>the</strong>r than payment to <strong>the</strong> victim".42The whole notion <strong>of</strong> a crime "aga<strong>in</strong>st <strong>the</strong> state" derived out <strong>of</strong> thisextension <strong>of</strong> royal power designed to redirect <strong>the</strong> payment <strong>of</strong> monetary restitutionto <strong>the</strong> state ra<strong>the</strong>r than <strong>the</strong> victim. Aga<strong>in</strong>, this process parallels <strong>the</strong> progressivepoliticization <strong>of</strong> money. Solvasson's study43 <strong>of</strong> <strong>the</strong> stateless order <strong>of</strong> ancientIcel<strong>and</strong> parallels Benson's view <strong>of</strong> medieval Engl<strong>and</strong>. Solvasson expla<strong>in</strong>s how <strong>the</strong>decentralized choices <strong>of</strong> <strong>in</strong>dividuaLs <strong>in</strong>dividuals <strong>in</strong> ancient Icel<strong>and</strong> generated successful legal<strong>in</strong>stitutions that are fairly similar to those <strong>of</strong> medieval Engl<strong>and</strong>. He also documentshow this spontaneously evolved system began to fall apart with <strong>the</strong> arrival <strong>of</strong> state<strong>in</strong>tervention, Solvasson places somewhat less emphasis on <strong>the</strong> revenue-rais<strong>in</strong>g<strong>in</strong>terest <strong>of</strong> <strong>the</strong> state per se than he does on <strong>the</strong> rent-seek<strong>in</strong>g activities <strong>of</strong> actorsoutside <strong>the</strong> political process. Various actors with<strong>in</strong> <strong>the</strong> Icel<strong>and</strong>ic system stood toga<strong>in</strong> if <strong>the</strong> state became more <strong>in</strong>volved <strong>in</strong> <strong>the</strong> legal system <strong>and</strong> such actors activelysought that result. Prior to its fall, <strong>the</strong> !cel<strong>and</strong>ic legal system was a fur<strong>the</strong>rillustration <strong>of</strong> how a spontaneously evolved legal order can better generate socialorder than one consciously designed from <strong>the</strong> top down.As Ai) a result <strong>of</strong> piecemeal attempts to squelch <strong>the</strong> spontaneous process <strong>of</strong>legal evolution, modern legal <strong>in</strong>stitutions <strong>and</strong> procedures reflect not <strong>the</strong> consciousdesign <strong>of</strong> an omniscient lawgiver, lawgiver~ but are ra<strong>the</strong>r <strong>the</strong> un<strong>in</strong>tended consequences <strong>of</strong>state <strong>in</strong>tervention. ---More s. ically, as <strong>the</strong> state became more <strong>and</strong> more <strong>in</strong>volved<strong>in</strong> <strong>the</strong> law, it created u . tended- onsequen s that frustrated its orig<strong>in</strong>al purposes<strong>and</strong> required fur<strong>the</strong>r <strong>in</strong>tcrvcri <strong>in</strong>tcrvcn '} escription that could equally apply to <strong>the</strong>history <strong>of</strong> monetary <strong>in</strong>stitutions, <strong>in</strong>stitutions~Benson says <strong>of</strong> this process:"The explanation lies <strong>in</strong> forces set <strong>in</strong>to motion hundreds <strong>of</strong> yearsearlier...Each cl' chs ge <strong>in</strong>i 'ated iated by government created problems thatrequired additional chan ~. When law is deliberately designed, whe<strong>the</strong>rwell-<strong>in</strong>tended or not, <strong>the</strong>re will always be manifestations that <strong>the</strong>..
o 582Journal des Economistes et des Etudes Huma<strong>in</strong>esoV\:'\~&rr UJdesigners did not anticipate. When some <strong>of</strong> those manifestations prove tobe undesirable, new rules are designed, which will also haveunanticipated consequences".44For example, <strong>the</strong> development <strong>of</strong> jails was a way to punish those who didnot pay <strong>the</strong>ir f<strong>in</strong>es <strong>and</strong> <strong>the</strong> whole notion <strong>of</strong> rules <strong>of</strong> evidence <strong>and</strong> <strong>the</strong> right todefense counsel developed <strong>in</strong> response to k<strong>in</strong> sed prosecutors <strong>in</strong>crim<strong>in</strong>al cases. 45 On <strong>the</strong> monetary I , one can view <strong>the</strong> Federal Reseas a response to <strong>the</strong> un<strong>in</strong>tended desirable consequences <strong>of</strong> <strong>the</strong> NationalBank<strong>in</strong>g System's regulations, <strong>the</strong>mselves responses to <strong>the</strong> failures <strong>of</strong> <strong>the</strong> variousregulations <strong>of</strong> <strong>the</strong> so-called "Free Bank<strong>in</strong>g Era,,,46 These various un<strong>in</strong>tendedconsequences created <strong>the</strong> pro~at called forth fur<strong>the</strong>r regulations <strong>and</strong>fur<strong>the</strong>r un<strong>in</strong>tended consequences. The complexities <strong>and</strong> apparent COnlradictions<strong>of</strong> both modern monetary <strong>and</strong> legal <strong>in</strong>stitutions are driven by political purposes,ra<strong>the</strong>r than be<strong>in</strong>g spontaneously evolved solutions to underly<strong>in</strong>g coord<strong>in</strong>ationproblems.The problem created by <strong>the</strong> historical course <strong>of</strong> events is <strong>the</strong> currentassumption that <strong>the</strong> state must be <strong>the</strong> source <strong>of</strong> monetary <strong>and</strong> legal order.However, as Menger <strong>and</strong> <strong>the</strong> free bank<strong>in</strong>g literature argue, money <strong>in</strong> fact growsout <strong>of</strong> <strong>the</strong> practices <strong>of</strong> traders <strong>and</strong> <strong>the</strong> state can only give sanction to what alreadyhas become accepted as a medium <strong>of</strong> exchange. Both Fuller <strong>and</strong> Benson see law<strong>in</strong> a similar light. To Fuller, <strong>the</strong> mistake <strong>of</strong> legal positivism is to see law as be<strong>in</strong>g"an <strong>in</strong>strument <strong>of</strong> social control" <strong>and</strong> thus identify law with whatever <strong>the</strong> statedecrees. 47 Fuller argues that this def<strong>in</strong>ition necessarily abstracts from <strong>the</strong> questions<strong>of</strong> why law develops <strong>and</strong> exists, <strong>and</strong> how it does so. Like G. F. Knapp's famous"State Theory <strong>of</strong> Money"48 which argued that money is whatever <strong>the</strong> state def<strong>in</strong>esas money, we might refer to <strong>the</strong> positivist conception <strong>of</strong> law as a "State Theory <strong>of</strong>Law.,,49 As <strong>the</strong> arguments above <strong>in</strong>dicate, both <strong>the</strong>ories are problematic becauseboth forgo any explanation based on <strong>the</strong> functions <strong>of</strong> <strong>the</strong> <strong>in</strong>stitutions <strong>in</strong> question.6. Market Responses to Government FailureMore evidence for <strong>the</strong> parallels between <strong>the</strong> spontaneous orig<strong>in</strong>s <strong>of</strong>money <strong>and</strong> law comes from exam<strong>in</strong><strong>in</strong>g periods <strong>of</strong> crisis <strong>in</strong> <strong>the</strong> state control <strong>of</strong> both<strong>in</strong>stitutions. Tn <strong>the</strong> crises that occurred dur<strong>in</strong>g <strong>the</strong> U. S. National Bank<strong>in</strong>g System,44 Benson-1992b,e,---- 0~45 op. cit, pp. 62-76. /'46 In particular, onc can view thc National Currency Act that created <strong>the</strong> National Bank<strong>in</strong>g System as anattcmpt to create a uniform national currcncy to replace <strong>the</strong> state-based currencies <strong>of</strong> thc Free Bank<strong>in</strong>gEra. Law aga<strong>in</strong>st <strong>in</strong>terstate bank<strong>in</strong>g, as well as restrictions on <strong>the</strong> assets th
Honoue. HOrloitz. <strong>Spontaneity</strong> <strong>and</strong> <strong>Design</strong> <strong>in</strong> <strong>the</strong> <strong>Evolution</strong> a/Institutions 583<strong>the</strong> national banks were unable (due to various revenue-rais<strong>in</strong>g regulations)reglllation~)lO to create sufficient currency to meet public dem<strong>and</strong>s. In response, <strong>the</strong> banks<strong>the</strong>mselves came up with a number <strong>of</strong> different ways <strong>of</strong> evad<strong>in</strong>g <strong>the</strong> law <strong>and</strong>provid<strong>in</strong>g forms <strong>of</strong> currency for public use. 50 For example, banks used negotiable,round-denom<strong>in</strong>ation cashier's checks that circulated by repeated endorsement orwere made payable to <strong>the</strong> bearer. Some firms paid workers <strong>in</strong> negotiable roundrouncldenom<strong>in</strong>ationchecks (a $35 wage payment might be made <strong>in</strong> 3 $10 checks <strong>and</strong>5 $1 checks) written <strong>of</strong>f <strong>the</strong> firms' bank accounts. In addition, numerous saleable,yet <strong>of</strong>ficially non-money, objects served as money <strong>in</strong>clud<strong>in</strong>g gra<strong>in</strong> purchase orders<strong>and</strong> street car tickets,In <strong>the</strong> panics <strong>of</strong> both 1893 <strong>and</strong> 1907, <strong>the</strong>se spontaneously generatedmoneys quickly emerged <strong>in</strong> <strong>the</strong> face <strong>of</strong> <strong>the</strong> failure <strong>of</strong> <strong>the</strong> government-regulatedmonetary system. In almost all cases, actors were not concerned with <strong>the</strong> globaleffects <strong>of</strong> <strong>the</strong>ir actions, <strong>the</strong>y were simply develop<strong>in</strong>g solutions to <strong>the</strong> contextspecificproblems <strong>the</strong>y faced <strong>in</strong> mak<strong>in</strong>g exchanges. As <strong>in</strong> <strong>the</strong> <strong>the</strong>oreticalexplanation earlier, <strong>the</strong>se beneficial practices were quickly noted <strong>and</strong> imitated,<strong>and</strong> spread rapidly among <strong>the</strong> money Lls<strong>in</strong>g us<strong>in</strong>g public. Despite <strong>the</strong> fact that <strong>the</strong>securrency substitutes were clearly illegal <strong>and</strong> carried no form <strong>of</strong> governmentassumnce, assurance. <strong>the</strong>y were quickly adopted as money <strong>and</strong> served <strong>the</strong>ir role well. Thelosses to users <strong>of</strong> <strong>the</strong>se currency substitutes were negligible <strong>in</strong> both panics. Theoverall effect was that <strong>the</strong>se illegal <strong>and</strong> privately produced currency substituteseffectively restored monetary order where state provision had created chaos.Benson provides some similar examples from legal history. He51 describesSan Francisco's Fmncisco's experience with vigilante justice when <strong>the</strong> citizens lost confidence<strong>in</strong> <strong>the</strong> city's ability to enforce <strong>the</strong> law <strong>in</strong> <strong>the</strong> late 1840s <strong>and</strong> early 18505. In <strong>the</strong>spr<strong>in</strong>g <strong>of</strong> 1851 a committee was formed to shadow <strong>the</strong> <strong>of</strong>ficial legal structure <strong>and</strong>"assist city <strong>of</strong>ficers <strong>in</strong> discover<strong>in</strong>g <strong>and</strong> apprehend<strong>in</strong>g crim<strong>in</strong>als".5 2 For severalmonths <strong>the</strong> committee arrested <strong>and</strong> tried suspected crim<strong>in</strong>als. Ra<strong>the</strong>r than <strong>the</strong>chaos <strong>and</strong> violence one might expect from vigilantes, <strong>the</strong> committee, accord<strong>in</strong>g toBenson <strong>and</strong> his sources, acted <strong>in</strong> moderation <strong>and</strong> with genu<strong>in</strong>e justice. Dur<strong>in</strong>g <strong>the</strong>hundred days <strong>of</strong> <strong>the</strong>ir operation, <strong>the</strong>y made 91 arrests, hanged four men, banishedseveral o<strong>the</strong>rs from <strong>the</strong> city <strong>and</strong> called for <strong>the</strong> deportation <strong>of</strong> a number <strong>of</strong> o<strong>the</strong>rs,all after trials took place.53 Benson also reports that 41 <strong>of</strong> <strong>the</strong> 91 were dischargedafter be<strong>in</strong>g found <strong>in</strong>nocent. This was hardly vigilanteism <strong>in</strong> <strong>the</strong> colloquial sense.To <strong>the</strong> contrary, accord<strong>in</strong>g to reports, dur<strong>in</strong>g <strong>the</strong> period <strong>the</strong> committee was <strong>in</strong>existence, <strong>the</strong> city returned to relative peace <strong>and</strong> quiet.Five years later, when <strong>the</strong> city government was riddled with a corruptionsc<strong>and</strong>al, <strong>the</strong> committee reformed to enforce <strong>the</strong> laws <strong>the</strong>y felt <strong>the</strong> corrupt policedepartment was aga<strong>in</strong> neglect<strong>in</strong>g. Once aga<strong>in</strong> reports <strong>in</strong>dicate that <strong>the</strong> committeeconducted itself reasonably <strong>and</strong> was successful <strong>in</strong> deterr<strong>in</strong>g <strong>and</strong> elim<strong>in</strong>at<strong>in</strong>g50 These episodes are explored more fully <strong>in</strong> Horwitz-1990 <strong>and</strong> Horwirz-Jocza. Horwitz~:l992a, chapter 4, whichprovide <strong>the</strong> sources for <strong>the</strong> examples below.51 Bcnson-1990, Benson-toea, pp..315-21.52 1bid., 1bid., p. 317.53 Ihid., p. 318.
584 Joun-lal des Econornisles el des Eludes Huma<strong>in</strong>esongo<strong>in</strong>g crime. Much <strong>in</strong> <strong>the</strong> same way that <strong>the</strong> currency substitutes restoredmonetary order, so did <strong>the</strong> legal suhstitute <strong>of</strong> <strong>the</strong> vigilante committee restore legalorder. Bell argues that:"By demonstrat<strong>in</strong>g wisdom <strong>and</strong> impartiality private courts can<strong>of</strong>fer for sale judgments that people respect [just as] people will onlyrespect <strong>the</strong> currency <strong>of</strong> [free] banks that demonstrate adequeate reserves<strong>and</strong> good management."54Benson's conclusion concern<strong>in</strong>g <strong>the</strong> vigilante committees is worthrepeat<strong>in</strong>g:"Generally, vigilante movements <strong>in</strong>volved law-abid<strong>in</strong>g citizensenforc<strong>in</strong>g <strong>the</strong> law <strong>and</strong> re-establish<strong>in</strong>g order. Those who view a vigilantemovement under any circumstances as an example <strong>of</strong> lawlessness arevictims <strong>of</strong> one <strong>of</strong> <strong>the</strong> most serious flaws <strong>in</strong> <strong>the</strong> argument that law <strong>and</strong> itsenforcement must be monopolized by government. When law is onlyMwhat government says it is, <strong>the</strong>n vigilantes are always lawless <strong>and</strong> deserveto be 'put down by force'. "55By contrast, if law is seen as a set <strong>of</strong> rules for order<strong>in</strong>g human <strong>in</strong>teraction,<strong>the</strong>n "vigilantes" may be more law-abid<strong>in</strong>g than <strong>the</strong> state. Legal relationships arereciprocal, as Fuller Insists, <strong>and</strong> <strong>the</strong> producers <strong>and</strong> enforcers <strong>of</strong> law have anobligation to t.hose who utilize it to procee'd <strong>in</strong> fair <strong>and</strong> reasonable ways. Theetymological relationship between "vigilante" ancl "vigilant" is <strong>the</strong> source <strong>of</strong>Benson ancl Fuller's po<strong>in</strong>t: users <strong>of</strong> legal <strong>in</strong>stitutions must rema<strong>in</strong> vigilant as to <strong>the</strong>duties <strong>of</strong> those who "operate" such <strong>in</strong>stitutions ancl he will<strong>in</strong>g to enforce <strong>the</strong>implied obligations if need be.One might well ask why state run legal <strong>in</strong>stitutions are likely to breakdown. The answer is parallel to explanations <strong>of</strong> why government. central bank<strong>in</strong>g ../has failed, namely that <strong>the</strong> aims <strong>of</strong> government central banks have little to do withproduc<strong>in</strong>g a money that can serve as an effective social <strong>in</strong>stituuon ror guid<strong>in</strong>ghuman behavior. Because <strong>the</strong> knowledge needed to design accurmely bothmoney <strong>and</strong> law is both tacit <strong>and</strong> volum<strong>in</strong>ous, <strong>and</strong> cannot be marshalled <strong>in</strong> acentral authority, political actors f<strong>in</strong>el attempts at rational design unsuccessful <strong>and</strong>turn to pursue <strong>the</strong>ir more self-<strong>in</strong>terested purposes. Leoni56 explicitly argues that<strong>the</strong> problem fac<strong>in</strong>g a legislator try<strong>in</strong>g to create law whole cloth is a version <strong>of</strong> <strong>the</strong>problem fac<strong>in</strong>g a central economic planner. Leoni says <strong>of</strong> <strong>the</strong> Mises-Hayekepistemological critique <strong>of</strong> plann<strong>in</strong>g that it is54 Bell-1991/92, p. 9, however, does claim that one advantage free bank<strong>in</strong>g <strong>the</strong>ory has is that it canargue that free bank<strong>in</strong>g systems will br<strong>in</strong>g markets closer to <strong>the</strong> ideal <strong>of</strong> general equilibrium, while noparallel ideal exists <strong>in</strong> legal <strong>the</strong>ory. While free bank<strong>in</strong>g does penali;.:e banks which deviate frommonetary equilibrium, <strong>the</strong>re is no necessary reason to th<strong>in</strong>k this tendency is toward generalequilibrium also, particularly <strong>in</strong> <strong>the</strong> technical sense used by economists. In general, argument.c; for <strong>the</strong>market that rely on tendencies to equilibrium are quite problematic (see Bocttke/Hon:vitziPrychitko1986) anel it is legal <strong>the</strong>ory's strength not its \vcakness that it has forgone an unachievable ideal as itsst<strong>and</strong>ard <strong>of</strong>Sllccess.55 Benson-1990, p. 320.56 Leoni-1972, p, 18.
Horwitz. Spontaneuy ,<strong>Spontaneity</strong> <strong>and</strong> <strong>Design</strong> <strong>in</strong> <strong>the</strong> Eoolution Euolution <strong>of</strong>Institutions q/fnstitutioJlS 585"a special case <strong>of</strong> a more general realization that no legislatorwould be able to establish by himself...<strong>the</strong> rules govern<strong>in</strong>g <strong>the</strong> actualbehavior <strong>of</strong> everybody <strong>in</strong> <strong>the</strong> endless relationships that each has wit.heverybody else,"Peter Aranson57 makes a similar argument aga<strong>in</strong>st <strong>the</strong> Coasean orPosnerian judge who must render <strong>the</strong> appropriate legal decision based on aweigh<strong>in</strong>g <strong>of</strong> <strong>the</strong> economic costs <strong>and</strong> benefits <strong>of</strong> each alternative, "Any coult court thatseeks to calculate such cost ... is engaged <strong>in</strong> a central plann<strong>in</strong>g, economiccalculation<strong>and</strong> direction activity. And so all <strong>of</strong> <strong>the</strong> Austrian <strong>and</strong> 1. S. E. critiquesfully apply." When faced with <strong>the</strong> impossible task <strong>of</strong> consciously choos<strong>in</strong>g <strong>the</strong><strong>in</strong>stitutions or practices that will promote economic, legal, or social order, politicalactors will fall back on decisions that t.hat reap <strong>the</strong>m political ga<strong>in</strong>.As a result <strong>of</strong> <strong>the</strong>se epistemological problems government produced law<strong>and</strong> money has taken a direction that has progressively less to do with "<strong>the</strong>enterprise <strong>of</strong> subject<strong>in</strong>g subject.<strong>in</strong>g human conduct to <strong>the</strong> governance <strong>of</strong> rules," or provid<strong>in</strong>g agenerally accepted medium <strong>of</strong> exchange, <strong>and</strong> more to do with serv<strong>in</strong>g <strong>the</strong> self<strong>in</strong>terest<strong>of</strong> legal-political actors <strong>and</strong> government's need for resources <strong>and</strong> power.7. ConclusionSocial <strong>in</strong>stitutions evolve as crystallized sets <strong>of</strong> rules that have proved tobe successful for lchiev<strong>in</strong>g our different purposes <strong>and</strong> j3TIll1s. Money <strong>and</strong> law <strong>in</strong>particular are examples <strong>of</strong> social <strong>in</strong>stitutions that have emerged to serve <strong>the</strong>sepurposes. If <strong>the</strong> "purpose" <strong>of</strong> both money <strong>and</strong> law is 1O serve as llniversal~ansfor <strong>the</strong> success <strong>of</strong> numerous different human actions, <strong>the</strong>n <strong>the</strong> ways <strong>in</strong> which both~are produced should ensure <strong>the</strong> monetary <strong>and</strong> legal rules <strong>and</strong> <strong>in</strong>stitutions thatresult will bear some relationship to <strong>the</strong> purposes <strong>and</strong> plans <strong>of</strong> <strong>the</strong> actors thatmake use <strong>of</strong> <strong>the</strong>m. Politically monopoliz<strong>in</strong>g money <strong>and</strong> law leaves <strong>the</strong>m unable tobest serve as frameworks for social order <strong>and</strong> subjects <strong>the</strong> production <strong>of</strong> both to<strong>the</strong> purposes <strong>of</strong> politicians <strong>and</strong> those with sufficient weight to <strong>in</strong>fluence <strong>the</strong>m,ra<strong>the</strong>r than to <strong>the</strong> needs <strong>of</strong> <strong>in</strong>dividual actors act.ors who rely on both for guidance <strong>in</strong> aworld full <strong>of</strong> uncerta<strong>in</strong>ty <strong>and</strong> constant change. The results res~lts<strong>of</strong> <strong>in</strong>creasedpoliticization <strong>and</strong> monopolization will be a loss <strong>of</strong> <strong>the</strong> signall<strong>in</strong>g function <strong>of</strong> both<strong>in</strong>stitutions <strong>in</strong>stitut.ions <strong>and</strong> a correspond<strong>in</strong>g decl<strong>in</strong>e <strong>in</strong> social order. As scholars <strong>in</strong> bothmonetary economics <strong>and</strong> legal <strong>the</strong>ory cont<strong>in</strong>ue t.o explore <strong>the</strong> <strong>the</strong>oretical <strong>and</strong>policy issues surround<strong>in</strong>g <strong>the</strong>se questions, <strong>the</strong>y should take advantage <strong>of</strong> <strong>the</strong>important similarities between <strong>the</strong> two fields. .J I (( I. ." 't I~'~~~"(~),:al ~\,57 Aranson-1992, p. 305.Jlo ~ \r
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