Behind the market stage where real societies exist ‐ part I: The role of public and private order institutions

Abstract

This two‐part article is an attempt to clarify the social conditions upon which the viability and efficiency of the market system rest. It strives to show that the ‘embeddedness’ thesis, that is, an explanation based upon the existence of long‐run personal ties involving the use of reputation mechanisms among transactors, cannot fully elucidate the question as to how the problem of trust is solved in market societies. As explained in Part I, there are difficulties of both theoretical and empirical/historical kinds and these explain why the ‘market order’ needs to be sustained by private and public order institutions. In Part II, the role of generalised morality in backing or supplementing such institutions is discussed in the light of game theory, and particular emphasis is put on the ability of moral norms to sustain honest behaviour by generating the right kind of preferences and establishing trust. The vexed problem of the dynamics of norm emergence and erosion is then addressed with a view to showing that norms of generalised morality — perhaps contrary to moral norms in small groups — cannot be easily created by fiat nor be expected to evolve spontaneously when they are needed to make economic exchanges viable. Ultimately, the cultural endowment of a society plays a determining role in shaping its specific growth trajectory, and history therefore matters. Finally, to illustrate the theoretical discourse, reference is made to present‐day Third World countries. It is argued that economic development is especially difficult in countries where norms of limited‐group morality prevail and do not readily give way to generalised morality.