The Market Order as a Perilous Precondition for Social Cooperation
A second limitation to simple rational choice analysis is that the rules of the social game are typically assumed as given and exogenous to the decisions of the participants. For example, players in the classic prisoners’ dilemma situation do not have a role in establishing the rules and nor are they given an opportunity to revise the rules. In the real social world, the rules of an encounter or set of social circumstances are not given but constituted by the beliefs and practices of the participants (Trantidis 2016, 22). So rational choice analysis can show the significance of the rules of the game for determining outcomes but has less of an account of how agents determine the rules of the game. Yet the rules themselves are absolutely critical. Depending on the rules, the same actors could end up cooperating successfully as a community or falling into desperate conflict.
Buchanan and Tullock (1999) offer a quasi-normative solution within the public choice framework by distinguishing between constitutional and postconstitutional stages in the political process. They conceptualize agents as mutually agreeing on the rules of their interactions prior to playing, competing, and cooperating, self-interestedly within the rules. The weakness is that the constitutional stage in this framework is implausibly idealized. It involves far-sighted actors convening at a constitutional moment and coming to unanimous agreement (Meadowcroft 2014) on a shared institutional framework in a way that is completely unlike any real constitutional convention. For this reason, Buchanan (2000, 100) ultimately treats this scenario as a hypothetical contract that, in some sense, legitimizes a status quo that has some relatively stable rules of the game, regardless of the real origins of those institutions. The actual development of institutions remains somewhat mysterious.
How might agents go about the process of institutional development in a more realistic scenario? This is where the market process’s second level of analysis, the market order, can supplement the public choice account. The same agents who participate in the market process engage in a process of political entrepreneurship, attempting to develop modes of cooperation that better protect their interests. Institutions of communication, coordination, and dispute resolution emerge through trial-and-error processes combining spontaneous experimentation and bargaining between groups in a way that parallels acting within a preexisting set of rules (Pennington 2015, 470). When sufficiently advanced and productive, these institutions can disseminate useful guidance and coordinating information that is beyond the direct comprehension of any single individual that participates in and benefits from them.
Unlike individual action within a preestablished framework of voluntary exchange, there is no expectation that institutional formation will work spontaneously in the direction of an efficient, or even generally socially beneficial, outcome. There is no preestablished prohibition on exploitation or predation, or their formalization in institutions such as slavery. Indeed, Kirzner (2000, 77) is suspicious of any attempts to apply economic analysis to the creation of private property institutions rather than exchange activity within them. Leeson and Boettke (2009) are more open to an account of market governance that is endogenous to entrepreneurial activity but acknowledge the contingency of convergence on institutions that facilitate, rather than impede, exchange. Entrepreneurial activity, the actor’s pursuit of more effective ways of discovering and achieving their interests, is omnipresent. However, it is only within a given framework of market institutions that such pursuit leads systematically towards socially beneficial outcomes:
In social evolution, without recourse to the mechanisms provided by property rights, freely adjusting prices, and the lure of profit and the discipline of loss, all we can say is that practices that evolve serve as focal points of action. (Boettke 2014, 241)
This still-open question regarding the differences and similarities between political and market entrepreneurship, these unguided, nonrational, evolutionary accounts contribute to a richer description of the emergence of institutions (Boettke and Storr 2002, 164) than neoclassical accounts. Within a neoclassical lens, elite or powerful actors establish institutions on the basis of their interests and capacities (North 1991, 104). This is classically modeled as Olson’s (1993) account of the transition of roving bandits to stationary bandits to the despotism of the primitive state. This is an evolutionary account of institutions, but it is driven primarily by self-interested actors, especially those attempting to engage in more efficient forms of predation. So when, for example, Acemoglu, Johnson, and Robinson (2001) attempt to demonstrate that institutions are an important factor determining long-run economic progress, it is based on the presumption that individuals facing different incentives will settle on different institutional compromises, thus inducing exogenous variation.
A potential paradox of this neoclassical approach is that, insofar as institutions are tightly determined by the incentives and capacities of elites at critical points in time, they actually weaken the relevance of the “institutions matter” hypothesis (Przeworski 2004). The institutions become merely the mechanism through which powerful actors attempt to reap relative rewards, with some configurations of incentives and given resources contingently generating more attractive growth outcomes over the long run.
By contrast, a market process account suggests that institutions need not be, and indeed usually are not, the result of conscious design, nor strictly determined by the self-interest of actors. Institutions such as language, law, property, and money more often emerge through bottom-up practices and traditions that, in some cases, solve social problems for those participating in them (Pennington 2011, 42). This means that the range of people capable of participating in institutional innovation (the “policy makers”) is larger than that of people with preexisting forms of political power. While innovators are likely to face conflict with those that subjectively benefit or approve of existing institutions, this conflict need not be intractable, as the disagreement may be the result of an epistemic deficit rather than genuinely divisive interests. Interestingly, in one of his lesser known essays, Olson (1989) recognizes the importance of ideas, as opposed to interests, but also acknowledges this point is somewhat at odds with the thrust of his general work.