Introduction

In these two final chapters of the book, we are concerned with the economic logic of social institutions, particularly those formal and informal rules, norms, and customs of a community that affect economic behavior, the organization of production, and economic outcomes. Chapter 9 looks at stateless societies and international property rights, and Chapter 10 deals both with autocratic states and with the political institutions of democracy. The approach is the same as in Chapters 6 and 7, where we examined the logic of various organizations in input and output markets, such as the firm, sharecropping, or warranties. As we see it, exchange in the political arena interacts with the environment (i.e., exogenous variables such as information technology, resource endowments, or geographical location) and gives rise to contractual arrangements – that is, social institutions. Again, in the political field, both the outcomes of contractual relationships and the structure of the contracts themselves are shaped by transaction costs. It is important to note that the NIE approach to social institutions does not require that the environmental (exogenous) variables be the same from one study or model to another. For example, depending on circumstances we may want to treat population growth or technological change as either endogenous or exogenous variables. Laws, norms, and custom can be modeled either as endogenous variables or as a part of the environment (a constraint).