On Institutions

An institution is any mechanism for organizing the behavior of a set of individuals within a given human population over multiple generations.

Social orders, and particularly those that depend upon a division of knowledge and labor with fragmentary knowledge and disparate interests, require three sets of institutions in order for humans to coordinate their actions. Those institutions consist of informal  institutions (norms), technical institutions (methodologies that facilitate cooperation among people in a division of knowledge and labor), and formal institutions (a judiciary, a government, a religion). These institutions correspond to the three possible methods of human coercion: threat of exclusion, voluntary exchange, and threat of violence. They provide human beings with the rules (norms), tools (technologies) and enforcement against cheating (formal).

(Note: use the word coercion in its wider sense, meaning “cause someone to take a particular action.)

Specifically, institutions help us:
a) To avoid arbitrary violence, and allow cooperation.
b) They are necessary for human cooperation at any scale beyond the family.
c) They codify rules of what to do, how to do it, and what not to do.
d) They provide a means of education and enforcement, and as such a means of perpetuating those rules across generations.
(Note: I’m using ‘rule’ by its wider meaning: “guideline or principle”.)


Informal InstitutionsEnvironmental
(Implied Choice)
a) manners, ethics, morals, norms,
b) traditions, narratives, myths, rituals,
c) public rituals, and religions.
Environmental exposure and habituation, intentional pedagogy, and childrearing habits for the purpose of establishing normative behavior and signaling cooperation with the group. ie:Tradition. Inclusion or exclusion from opportunities. (esp. by social class.) Forgone opportunities for conduct of involuntary transfers.
Technical InstitutionsVOLUNTARY
(Requires Choice)
a) history (the narrative of causal relations),
b) numbers, arithmetic, money, prices, accounting, lending (private banking)
c) objective truth, contracts, interest, .
Methodological canon employed by Professions/Guilds/Crafts for whom the methodology represents an income source. Calculative Utility in extending perception and facilitating cooperation. Effort In Learning the methodology.
Formal InstitutionsINVOLUNTARY
(No Choice)
a) formal organizations for capital concentration (Government).
b) fiat money banking, (not necessary)
c) courts, legislatures, armies,
Formal Hierarchical Organization paid for by forcible transfer of property (taxation). Avoidance of Force or Violence a) Forgone opportunities to conduct involuntary transfers.
b) Taxation.


1) Informal Institutions:
Informal institutions are ENVIRONMENTAL norms, and are maintained by verbal repetition, and human demonstration. They contain general principles which are used by group members to made decisions. Much of the content of these norms is unarticulated – only implied.  Use of norms signals inclusion in or exclusion from the group’s common objectives..  Groups consist of self-organizing voluntary organizations operating on the promise of opportunity or the threat of loss of opportunity.

Normative systems must have economic consequences for the groups that adhere to them — a means of enforcement, and a reason for enforcing them. All groups contain members who cheat. Most members cheat. The norms exist to identify and discourage cheaters.

But regardless of the content of the norms, the only punishment is ostracization, and the reward, inclusion. That is the property that identifies an informal institution.

2) Technical Institutions:
Technical institutions are UTILITARIAN methodologies, adopted by choice, consisting of calculable rules that are objectively testable, and are self-maintained because of their utility in providing practitioner’s income, and in turn by helping us cooperate in production, distribution, and sale of goods and services.

3) Formal Institutions:
Formal institutions are INVOLUNTARY and COERCIVE in the sense that these institutions exist to apply force in order to alter behavior: be that good (restitution, prevention) or bad (slavery, taxation).

However, all three forms of Institutions are open to abuse precisely because they alter human behavior:

1) Informal institutions can be used to create abuses like the oppression of women and the manufacturing of ignorance (islam). It can create create vast differences in the possibility of creating a high trust society (intermarriage). It can doom a society to competitive failure by pervasive corruption (Sinic Face). It can cause dissolution of a high trust society (anglo universalism).

2) Technical institutions can be abused in order to create guilds, which capture unearned profits. Or to engage in involuntary transfers due to asymmetric information.

3) Formal institutions can be abused by making laws that appropriate from market participants (citizens) in order to benefit institutional participants (government). Or by debasing money for the same reason. Or by transferring wealth from one group to another without compensation.

(Note: I view ethical transfers as those that are voluntary, and where each party works to ensure that there is no asymmetry of understanding. This approach relies upon the warrior exchange ethic. The rothbardian ethic relies upon the bazaar exchange ethic.)