Liberty Matters

Adapting Institutions

Our discussion seems to have splintered into two threads, both interesting and obviously related. One is on Hayek's evaluation of social institutions in terms of their epistemic properties, the main subject of Boettke's lead essay. The other thread is focused on the philosophy of social science, an undercurrent in Boettke's analysis brought to the surface by Koppl's comments. Before jumping in on the latter conversation, I want to explore the former a bit more.
A key message of Hayek's work is that, if society is to prosper, individuals need a large and secure sphere in which they can act without asking permission. Private property rights help secure such a sphere. Entrepreneurs must have the freedom to try out new ideas, both for the sake of increasing knowledge and in response to unavoidable and incessant changes in society and the physical world. As late as 1981, Hayek was still arguing contra Keynes that adaptability, not aggregate spending flows, is the key to sustained economic growth.
But what about the institutions—like property rights—that create that sphere? Here there is a surface level tension in Hayek that may vex some readers. In some of his work, Hayek puts on his Burkean hat. He emphasizes the accumulated knowledge of private property and related social institutions, which are the results of thousands of years of humans figuring out how to constrain conflict and facilitate cooperation (1988). This Hayek is congenial to conservative readers. Institutions can only guide our behavior to the extent that they are at least somewhat stable; if property law changed day to day, entrepreneurs would not have a secure sphere from which to experiment.
But Hayek also penned "Why I Am Not A Conservative" (1960). Here he argues that, while existing institutions deserve credit for getting us this far, they only deserve our allegiance as long as we do not have a better option on the table. Just as entrepreneurs might devise new methods of production, we might imagine better ways of living together. And just as economic activity proceeds best when we adapt to technological, social, and material changes, so too should we look for adaptability in institutions.
All of this is complicated by the fact that rules are shared. At least two people must recognize the force of a rule for it to have any effect. This makes institutional entrepreneurship thornier than ordinary market entrepreneurship, in that the attempt itself to create and enforce new rules might cause conflict rather than merely waste. We have a name for individuals who imagine and implement their own brand-new rules of private property: criminals. This is a prima facie point in favor of stability, since establishing new rules has often been a violent process.
How can those inspired by Hayek negotiate this apparent tension or tradeoff between institutional stability and institutional adaptability? If rules change too fast or too radically, they lose their coordinating function. If they are too rigid, they will prove fragile over time. One obvious point to make is that full-blown, top-down central planning performs poorly on both margins. Completely supplanting existing social institutions destroys hundreds or thousands of years of accumulated learning about how to get along in a particular environment. And maintaining adaptability always requires the utilization of dispersed knowledge, which central planning cannot take advantage of. While central planning can achieve rapid one-time reform, it tends to produce systems that are at once disruptive, simplistic, and fragile.
But once we get past treating society as a blank slate, negotiating the stability-adaptability tradeoff becomes much less clear. Five main types of "meta-institutions"—rules for changing rules—have been proposed that take this Hayekian dilemma seriously.
Customary Law: These rules are developed from the bottom-up in primitive societies, and took a long evolutionary path to produce liberal rules of property. (Hayek 1981)
Common Law: Hayek devotes some space to discussing what he calls judge-made law, which arises from particular cases and allows the accumulation of knowledge due to precedent. (Hayek 1973)
Piecemeal Legislation: Hayek also argues that there is a role for some top-down tinkering with the rules on a piecemeal basis because sometimes the common law runs into evolutionary dead ends. (Hayek 1973, 1979)
Polycentric Jurisdictions: Polycentric systems are those in which authority is fragmented throughout society. They allow for competition between rule-making jurisdictions—voting with your feet—creating a crude but potentially valuable approximation of a market in law. (Hayek 1948, ch. 12)
Market Anarchism: The most radical approach to balancing stability and adaptability is to create outright markets for institutions. (Stringham and Zywicki 2011) Systems like the merchant law in medieval Europe appear to have arisen this way. (Benson 1990)
Each of these alternatives has both advantages and disadvantages that merit careful comparative scrutiny.
Benson, Bruce. 1990. The Enterprise of Law. San Francisco: Pacific Research Institute.
Hayek, F.A. 1988. The Fatal Conceit. Chicago: University of Chicago Press.
_________. 1981 [2012]. "The Flow of Goods and Services," in Business Cycles Part II. Chicago: University of Chicago Press.
_________. 1973. Law, Legislation, and Liberty vol. 1. Chicago: University of Chicago Press.
_________. 1979. Law, Legislation, and Liberty vol. 2. Chicago: University of Chicago Press.
_________. 1960. "Why I Am Not A Conservative." In The Constitution of Liberty. Chicago: University of Chicago Press.
Stringham, Edward and Todd Zywicki. 2011. "Hayekian Anarchism." Journal of Economic Behavior and Organization, 78(3), 290-301.