0:33 Intro. [Recording date: August 4, 2014.] Russ: Our topic for today is law: what is it and where does it come from? Of course, we all think we know what the law is: it's against the law to break into your neighbor's house, cheat on your taxes. As we've often discussed here on EconTalk, law is often thought of as, well, that's legislation; that's stuff the government does that tells us what we can do, what we can't do. But what we're going to talk about today is that's not all that the law is; and sometimes that's not law at all. Let's start with the basic of all basic questions: What is law? Guest: Well, this is something that philosophers and historians and legal theorists have worried about for a long time. And one of the interesting things to me is this is not really a topic in the social science literatures. So, the two biggest literatures in social science on law are Law and Economics; and then Positive Political Theory and the Law in political science and law. And neither of them ask this question. They both assume that there's a legal order and that the rules are enforced. And then the question is what should the rules be? Or, how do the rules get chosen? Those kind of questions. But that begs the question: what is law? Well, many people in that literature, like Ellickson, for example, assume that law is simply the rules that the state sovereign commands, that the state enforces. The problem with this, of course, is that's what dictators do. And dictators have friends and cronies and they tend to give privileges to their cronies. And more powerful cronies tend to get more. And so that's not a system of law. But how do we know that? Well, that's where we have an approach to the question what is law? And by 'we' I mean this is joint work with my colleague Gillian Hadfield of the law school at USC. Which we've been writing several papers on this general topic, what is law? And we have a three-part way of thinking about the law. And the first part is, law has certain characteristics that differentiate it from other forms of order, dictators in particular [?]. That is, the rules are general; they are prospective; they are universal. By 'general' we mean they apply in a wide variety of circumstances, not a very specific set. By 'universal' we mean they apply to everybody rather than just to you. Russ: Or the cronies. Guest: Or the cronies, yes. And a few other kind of technical characteristics like that. These are the legal attributes. The other ones are consistency; prospectivity is a really important one, the idea that you know what the laws are in advance, that laws are not made up after the fact. 'Oh, you did this; didn't you know that we just made, after you did this, that we decided that's illegal? And we're putting you in jail for this?' That's a very personal system. Russ: And that's not law. Guest: No. That's not law. Russ: We're going to talk about legal regimes, broadly defined. Let's hear some of those key descriptors again. They are consistent; they are universal--they apply to everyone. Known in advance. Guest: Publicity. Consistency. Feasibility. Those are the more technical. The big ones are generality and universality and prospectivity, I think. They apply to everybody; they apply to a general set of circumstances; and of course you have to know them in advance. Russ: And so a dictator, because there's an ad hoc crony aspect to it doesn't count as law? The laws of, say-- Guest: Right. They tend not to be general and they tend not to be universal. So, if different cronies get different deals by virtue of how powerful they are, then that's certainly not general because that means there's a name attached to those particular kind of privilege. Russ: So, in the TARP (Troubled Asset Relief Program) Bill, which was passed in 2008, there was a special provision in there for a subsidy to certain makers of electric cars. It didn't say which kind. In that sense it looked general. It turned out at the time it only applied to one carmaker, and that was General Motors. That was a form, for me, of cronyism-- Guest: Yes, I agree. Russ: So, what do we call that? Is that law? Guest: Well, that's obviously a violation of the general principle of generality, and universality, because here's something that's written in a very general language but is clearly designed to cover a very specific circumstance. One of my favorite examples of that goes back to this famous court case in the late 19th century called Munn versus Illinois. Which was about the issue of whether the State of Illinois could regulate grain elevators. And the law was written as, every city that had more than 100,000 people in the state of Illinois were subject to this regulation. Every single one of them. Chicago. Russ: So it looks universal but there's only one. Guest: Right.

5:48 Russ: But what you are particularly interested in, which is of course what I'm particularly interested in, is not the categorization of what is law and what isn't, but rather certain kinds of law that have emerged historically without centralized legislative governmental enforcement, coercion in particular. So, you and your coauthor are interested in some cases where law didn't require government. Correct? Guest: Yes. There are a large number of cases where there are communities that, for one reason or another, don't have law. In the case of medieval Iceland-- Russ: Don't have centralized law. Guest: Excuse me--don't have a centralized system of enforcing and coding and announcing the law and enforcing the law. So, the California Gold Rush is a very interesting example because the Gold Rush occurred in 1848 and California was not organized even as a territory at the time, the United States having gotten it at the end of the Mexican-American War, which ended in 1848. And there was no territorial government, and so no place to create property rights much less settle disputes over property rights. And the Gold Rush is all about property rights: who has a claim to look in what piece of land. And so a set of rules emerged in this case that have the 3 features we define as law. Russ: And most people would think, well, that's impossible. Because, by the previous conversations that have taken place, say in law and economics typically or in political science, to get law you need a police of some kind. Guest: Yes. A whole set of enforcement [?] Russ: Infrastructure institutions, etc. Guest: Yes. Well, our point is we differentiate a system of a code of conduct as to whether or not it has these legal characteristics. And then there are 2 sets of others that we haven't mentioned yet. And the enforcement mechanism is secondary. And there are many types of enforcement mechanisms. And I should say this is something that Hayek mentions in Law, Legislation, and Liberty book--that the way the rules are enforced are secondary in comparison to the nature of people obeying rules so as to create order.

8:04 Russ: Before we get there, and before we get to some of the examples, I want to talk about a distinction between norms and law. So, I will say in the past on EconTalk, we often talk about the law loosely as a set of norms. And that's not what you have--you have a more specific definition in mind. So, in your paper with Gillian Hadfield, there are a lot of social customs that emerge that people adhere to--shaking hands, paying their bills in certain ways, etc. But you are talking about something--there is a specific characteristic of enforcement and punishment that you have in mind. So talk about what that is and why that's important. Guest: I think the real key to the difference between a set of informal social norms and law has to do with a characteristic we haven't talked about yet. And that's a characteristic of law whereby there is some kind of official steward. That is, there's someone or some group or some body--maybe they are judges, maybe they are a council of elders, maybe the men in the community that meet at the diner every morning for breakfast. And what the legal stewards do is they worry about disputes that are not obviously covered by the existing rules. And so the way this arises is unforeseen circumstances occur all the time. And so, so much of what the steward does is say, Well, what rules ought to be applicable here? Often, new circumstances have multiple ways in which the existing set of rules could be extended. And in fact often the two parties disagree, and each being self-serving, make the suggestion, Oh, the obvious way to go here is for you to extend this rule in the way that makes me better off. And the other party says, No way; you want to do it in this other way that makes me better off. And so as a consequence, the role of the steward is to make a common-knowledge announcement of how to extend the rules in these circumstances. Russ: That, of course, raises the question: Who picks the steward? Where does the steward come from? When we think of the Sheriff as a very blunt adjudicator of disputes in the wild West--we have some idea of what that means. Let's talk about it in the context of, say--let's talk about ancient Greece, which is an example, of what you and I have talked about before. We started this utterly fascinating--Ancient Greece had law. But it was emergent. It was from the bottom up. It was voluntary. Explain how it worked. Guest: Ancient Greece is very interesting and it changes in a series of circumstances, a series of steps, moving roughly from the end of the 8th century B.C. through the high democratic era of the 3rd century or the 4th century B.C.E. And it is a system that mixes private ordering and public ordering. So, there is a set of body that's called 'law.' But there are no judges. And sometimes the law, in some periods the law is codified and in others it is not. But what they have is a system of private adjudication, whereby individuals, private individuals are responsible for apprehending wrongdoers, prosecuting the case, making the case, and sometimes even dishing out the punishment. Russ: And how would that work in, let's say a property rights dispute, the kind that's going to be common in a lot of these issues? So, I think you've got my cow or a piece of my land--and I don't agree. I think you've got my cow and you say, No, it's not; it's your cow. How would that get adjudicated? In a modern system, I'd go to the court. And I'd go to the government, the local government, and I'd sue you, or vice versa. But Greece had a weird system. Guest: Well, weird from our eyes. Because we're used to thinking about the rule of law, and law itself as coming from judges who sit and make determinations. But this was different. As part of the private prosecution, the individual bringing the dispute was responsible for collecting evidence, for stating what the law that exists as ought to apply in these circumstances, and as well as bringing forth witnesses. And the same for the defendant. And so they bring evidence; and if the evidence is dispositive in one way or another, then the jury decides. We haven't talked about juries. Russ: Yeah. Let's talk about the jury. There's no judge; but there's a jury. Guest: Yes. There's a jury, in effect they sit as a judge, performing a judge-like function. But they are not a judge and not official. Every year there are 6000 male citizens chosen as a pool of jurors, and for any given trial they pick a number that's between 200 and 6000 jurors. And so that means there will be 201 jurors. And what they do is they listen to the cases, and at the very end they have tokens and they basically it's just counting. You just count which way the vote goes. Each juror in effect votes for one of the two litigants, and then if one wins, one has a clear majority, then they are chosen. Russ: So, who decides the number of jurors? Guest: I'm not sure how that works, myself. Russ: But it's in the hundreds. Which is strange. And you've speculated that there's a good reason for that. Seems like a bizarre waste of time, right. Why not have 3? Three would seem like plenty. Why would we want 201? I can understand why we'd want 201 rather than 200. But why hundreds? Guest: One of the key things that Hayek says about the law is that it is not only rules of conduct, but rules of conduct with the idea of coordinating people's expectations. So that I have a sense of what you expect in a given set of circumstances; and you have a sense. And if those are not matched then we are likely to have some kind of problem, because I expect one thing and you expect another and we are both behaving according to what we think expectations are. And bad things happen. And so part of the reason for having large numbers of jurors is that that way you are getting a sense of what the average Athenian citizen expects in this situation. Russ: Right. If you draw three random people, they might be peculiar people. But 201, hard to get peculiar people out of 201. It's worth mentioning before we go a little further into the Greece example. At this time, how many people are living in Athens? Guest: I think the number is around a quarter of a million. The number of citizens is of course much smaller. Russ: Which is roughly? Guest: I think maybe 25,000. I could be off on that. I should say by the way that the part about ancient Greece, we are working with Federica Carugati, who is the classics expert. And she could not be here by virtue of being in Italy at the moment. And so-- Russ: It's okay. We'll put up something eventually that gets these numbers more precise. But the point is, that population is relatively large; the number of people serving on these juries is relatively small. But the proportion of people in any one jury is relatively high compared to the people that could be drawn on.

15:47 Russ: So, coming back to our earlier question, is there a steward here? You said sometimes the law is written down or codified in ancient Greece, sometimes not. Who's in charge if it's all sort of voluntary and private and I'm as the litigant the prosecutor in the sense that I'm bringing the evidence and making my case. Who decides? Who is in charge? Guest: Well, there are three levels at which that question gets answered. One is the level of constitution, and there are moments where individuals create new, come forth, typically in periods of crisis, and create a new set of rules. So this happens early on, with Solon. And then later on with Pericles, the ancient Pericles. So that's one. Two, there is the Athenian assembly, and so there's a system of actually creating law at a moment and other rules at a moment where there seem to be problems that the current set of rules and expectations are not being dealt with. And then finally, the cases themselves can be idiosyncratic, but there are famous cases in which individual litigants argue in a very persuasive way about how to think about a given problem and from that emerges a rule. Russ: So, what if I don't agree with the decision? I think it's my cow, but I lose. Why would I abide by this 201-person jury that I think is just crazy, didn't see the facts right, got confused, didn't understand expectations? What's enforcing the judgment? Guest: Yeah. Russ: Is it just a social norm there, or is it something else? Guest: A lot of it is social norms. And so there is a sort of sense of a possibility of ostracism. Or even death--putting people to death for various things. As we know, the most famous case from ancient Athens is the trial of Socrates, in which the punishment is death. And he very famously pours hemlock in his ear and dies, as a consequence of the rules. Russ: In that case, in the case of ancient Greece, there is no steward in the sense of-- Guest: There's no unique steward. But think about our system. There's not a unique steward here, either. We've got many different levels of courts. There's state courts, they're supervised on constitutional issues by the federal courts. The federal courts are supervised by the Supreme Court. There's legislation that's passed by Congress and signed by the President, or over his veto, passed over his veto. And then of course there are executive orders. So there are a large number--and then there are all these regulatory agencies out there making rules. So our society has no unique steward. And yet they all fit together in a way. Russ: We have lots of stewards. If you don't obey the law, you get put in jail. So in Greece, if you didn't obey the law, did you get--you said you could be ostracized? Are there vigilantes who would appropriate property or hurt people who didn't follow the rules? Guest: I think that's right. I think that a lot of it is private enforcement. And there are certain things that become okay to do to somebody in this position, who fails to comply with the judgment. That one wouldn't normally do with an average citizen.

19:21 Russ: So, let's go the Gold Rush, which would seem to be a difficult place to have private enforcement of law. There's a lot of money at stake. There is, I would think, having seen The Treasure of the Sierra Madre, a lot of potential for violence. My social science texts are very widely chosen. There's a lot of potential for violence over large sums of money. And yet, despite the fact that there was no government in California at the time, and no, even, territorial government--it certainly wasn't a state--what made it work? What emerged to keep people from killing each other over, that's my plot and you are in my way? Guest: Well, this illustrates a very basic point. Your last part of the question about the emergent order and the prospect for violence which has this case as do so many others. And one of the really interesting legal theorists is a scholar named Peter Stein, whose 1984 book on Legal Institutions characterizes law as the slow progression of transforming violent disputes into nonviolent ways of bargaining that involve some form of public fashion. So that's what's happening here as well, in this Gold Rush case. So, yes, violence is a problem; but violence on two different levels. Violence between two individual miners who might have competing claims, for example; but also between outsiders and insiders. You've got to not only protect yourself from internal disputes but from people coming over the hill with guns and telling you you've got to leave. And so part of the reason, I think, we get this organization in these local communities or a site is that they need to defend themselves. And so the series of camps emerge, whereby you get cooperation among the miners in the camp and they tend to have similar rules, although they are not exactly alike, and they borrow from each other. But they sit in what we would now call the 'committee of the whole'--that is, every miner that's in a particular camp is part of a committee where the community gets together to hear disputes. And part of what they are interested in is creating rules that are very general, not that apply to individuals, because they know they want to settle this dispute in a way that prevents future disputes of the same kind. Russ: This is sort of off the topic for the second, but it just jumps to mind: Why is there such a thing as a camp? Why aren't there just a bunch of random people spread out across geographic area who are trying to find gold? Are these economies of scale they are trying to exploit, in terms of food, and protection? Guest: I think it's protection, is one. And other thing is there are so many people there. Right? And so you have to have some method of saying who has the right to what claim. And as time goes on--sometimes in the period of months rather than long period of years--a certain set of rules emerge. Such as each miner is allowed at most 15 square feet to dig in. And part of that, you can see what the density of people must be, if that's what the rule is. Another aspect has to do with: Are you allowed to leave? And how do you come back? And so there's a rule about--the Shovel Rule, which I think has this name 'Jackass Gulch Rule' or something, which has to do with: you are allowed to be away for 5 days. If you wait more than 5 days then it is considered that you have abandoned your claim. And then there are exceptions for exceptional circumstances. Like, you broke your leg on the way down and can't get back up. Russ: And is somebody keeping an eye on that? On the 5 day thing? Guest: Oh, I think they do. I think everybody knows. Remember, if you've got 15 square feet-- Russ: That's true. Bill's gone. Guest: You're not more than 2 shovel lengths away from me. And there's a guy on the other side, another guy's that way, and guys to the left, guys to the right. Russ: So, when a dispute arose, how did it get settled in this setting? Guest: I figure[?] the parties don't settle it--that's not wholly clear from the literature. And we have not gone back and looked at original sources, as others have. But it appears if the dispute is not readily resolved by the people involved, then you get--then the camp sits as this group and hears something about what's going on. And they are concerned about creating a general rule. I think they understand--they want to create general rules because you want to create expectations, so you have fewer disputes of this nature. And so that leads them toward generality, publicity, universality, consistency--all the kind of legal attributes we identify with law. And of course if they get to, as we said, unforeseen circumstances, they sit as a legal steward in the sense that they are creating new rules. And so in that sense it has all the pieces of law. Russ: So the steward in this case is the community of the whole. And do they write this stuff down? Or is it word of mouth? Oral tradition? Guest: I think it's an oral tradition, because everybody sitting with everybody, often they eat together. Russ: But I'm a newcomer, say. And I've heard about this Gold Rush stuff, and somebody's gone for three days. Looks like there's a nice spot, and I just jump in and I start digging. Guest: Well, I think that's like any community. People will--if they have something like 15 square feet, or even before it gets that dense, if it's say even 100 square feet, 10 by 10, there are people that are going to be around, and they are going to see that. And as in any formal system of social norms, they will react: That's not yours; you can't do that. On the other hand, if not every 15 square foot of land has a claim and a newcomer comes, then there is some land that's available for the newcomer to claim. Russ: Which is fine.

25:48 Russ: Now, what role does--let's talk about punishment. Obviously no system of law is perfect. I always like it when people complain about some aspect of some legislative solution, or some private solution on the other hand, as if there were a perfect solution sitting--I think it's called the 'Nirvana Fallacy,' that, you know, Oh, I want to live in a world where all the law is kept and nobody has to be punished. Of course, inevitably there's misunderstanding, there's disagreement, there's anger, and violence out of the blue sometimes. You talk about what you call 'decentralized collective punishment.' Which would be contrasted with 'centralized coercive punishment.' So, centralized coercive punishment, we understand. That's where the police come up to your house and they take you off in handcuffs. That's pretty straightforward. And you are very emphatic about the importance of this kind of serious punishment as something that takes law above just a social norm. Because if you don't behave politely to me, I don't beat you up. I just say, well, I guess he's rude. Or, he didn't get the memo, that you shake hands, this particular way. But if somebody steals my stuff, it's a little more serious. So, what is the importance of decentralized collective punishment? How does it come to be? Because a lot of people would presume that by definition, without a centralized coercive situation, we'd have a big free rider problem; you've got public goods here; there's no way a private decentralized solution is going to emerge. So, why is it important and what is it? Guest: Well, these centralized enforcement works in really interesting ways, I think. And so, so many cases, instances where there is issues involved get settled wholly privately. So, for example, you have trees that lean in your neighbor's yard. This is a very common occurrence. And most of the time those get settled wholly privately. They don't go to court. And sometimes if a neighbor does something that's egregious, all the other neighbors talk about that. And that, you know, there's the normal social norm kind of punishment, you know. Ultimately being a banishment from the community, or at least ostracized from the community. Russ: You know--you don't get invited to the good potluck parties. And your kid doesn't get invited to Little League. Etc. But that's not what we are talking about here. We are talking about something a little more intense. Guest: Well, I mean, if you look at modern contract law, we see exactly the same thing. Complex--courts are really good at enforcing rules that they can observe and verify that are publicly verifiable. So, you have a--you buy a bond from a corporation. And it says that they will pay you x amount of interest, quarterly, and then at the end of 2 and a half years they pay back the bond. Courts are really good at saying, and you think the payment wasn't at the prescribed amount, that it wasn't made on time. You know--was the bond paid back. Courts are really great at that. When you talk about these complex relational deals that are so common among firms, of course have no clue what the parties intended. Let alone what kind of expectations are appropriate. And they really muddle that stuff up. And so there's--in this case, there's, many of these cases never go to court either, because they don't expect the courts to be able to solve the problem. And yet, part of the reason they have a contract is to set expectations, as much as they can.

29:30 Russ: I'm interested in a case where I didn't get the memo. But it's something really important. So, I didn't--you came back three days later and I just insisted you didn't come back after 3 days. And I just took your land. Because you write about cases where, in those situations, private individuals take it upon themselves to hurt somebody who fails to comply with the law of the land. In those kinds of situations. I say 'the law of the land'--it's not written down anywhere, often. Guest: Yeah. Well, I think a great example is Bob Ellickson's book on Order Without Law. About the property right system that evolves very informally among the ranchers in Shasta County, California. And there we do see a hierarchy of punishments. So this is a system of property rights--as you mention, cows; it does involve cattle. And what happens is, in the community, when things work well, each rancher has a minimal tally with each of his neighbors, in terms of the violations of property rights. So a cow wanders from your land onto mine and destroys something. And so they just keep a tally. And so most of the time they just settle up--I don't remember how long it was. Once a year, once every six months, who knows? But every so often you get somebody that's recalcitrant. That doesn't want to play by the rules. So there's a hierarchy of punishment. The first is the community starts to gossip about you. If that doesn't work then you can't find some of your cows. It's not that they've been sold, they've been driven up into the hinterland, and so they are hard to find, and you've got to go find them. And one of the great illustrations of the case had to do with a new person who came, a rich person who came just and wanted sort of a boutique[?] ranch, to have a ranch. Didn't care about what the community thought about him. And so they gossiped. They [?] ran his cows up into the mountains. Didn't do anything. And I think if memory serves, the way they finally get the man's compliance is, they let it be known: You know, he's sort of in a different place, and that the volunteer fire company couldn't guarantee that if there was, if his ranch caught on fire, that they couldn't get there on time to save the house. So. Russ: And that gets your attention. But there is also, what we would call, something closer to vigilantism. And some of these examples, where not just sort of, we all gossip about them, or we all--people take "the law" into their own hands. Something that I think, at least in the movies is sometimes considered bad form. But you are just--it's good form. Because it's the way that the law gets enforced. Guest: It is. But I think that we need to distinguish between cases where the vigilante is acting both as judge and enforcer. Which I think, in parts of the Wild West--you alluded to the Sheriff. That's what the Sheriff did. The Sheriff was the local judge as well as--. And sometimes, but the, but that's--. And sometimes in places where there was an absence of that, people might act. But I think in these communities that we've been talking about--that is, where there are relatively stable groups, the key is, is that no punishment occurs without the community agreeing on what to do. So it's not an individual that's saying, 'Oh they hurt me; I'm going to retaliate.' That's a feud. And part of the whole purpose of law is to substitute law and legal reasoning for the nature of--for these violent feuds and other kinds of forms of vengeance like that. Russ: I think a lot of economists would argue that nobody's going to take the enforcement law into their own hands because it's risky. You bear all the costs. If the guy you are going after is a better shot than you or doesn't like you coming after him. And therefore there is going to be this free rider problem, and so people are going to get away with stuff. Because no--there's no police force. There's all just a bunch of people individually. And yet somehow some sort of enforcement mechanism gets put in place. How does that happen? Guest: Well, I think it's important to note is, that, all the cases that we don't see of this. We don't see it because it's actually hard to rig. In that the places where you see it, is that there's some value that you get from it, that, I think, allows people to sustain these rights. I think the places where you see this--there's a reason why you can name these examples. And that is because there aren't hundreds of thousands of them. This is not the typical case. We're very interested in the case where some form of order like this emerges and how it emerges. And so in a lot of cases, you never see this kind of stuff. In a lot of cases, you get a local strongman or a dictator, and it's a very hierarchical, non-legal system. Legal in that there may be things that are called laws, but they are not laws in the sense of these legal attributes that we've been talking about.

34:47 Russ: So, what are some of the characteristics, do you think, that lets these kind of legal systems emerge and not have a dictator or the centralized coercive solution? Guest: That's a great question. This is not one which in the series of papers we've yet to deal with. But obviously it's an important one, and we ought to. And here's the way I would think about it. I think, so, Ancient Greece, before it becomes democratic, has an oligarchic system. And they tend to have, they'd begun to devise rules of conduct, informal codes. But the feuds and disputes among the elite continued to threaten stability. And so part of the reason, part of the value in a situation like this of creating law, is that if the elites have some reason for cooperating that's beyond simply preventing violence, then I think that's where the law comes in. I'm not being very clear here. In my book with Doug North and John Wallace, Violence and Social Orders, which we talked about in a previous podcast episode, we talked about how most countries, most societies in the world have been what we call 'natural states.' These are states that limit the access, limit access to organizations, so there is limited competition in both politics and economics. There's a set of privileges and the violence potential is widely dispersed. And so there's lots of disputes and lots of violence. And so I think this is the typical case. And part of the question is, how do these places like, say, ancient Greece, emerge with something different? And what's the motivation? Well, I think most places never emerge from that. They just go thousands of years through this cycle of this. And that's why we say, the natural state, we call these natural states, because they are by far the longest set of--they are by far the most prevalent form of governments, that's incurred among human civilization. Russ: And when you have that, your opportunity to grow, through, say, savings or innovation is low, because you can't really rely on it being there tomorrow. Guest: That's right. Russ: Someone's going to take it. Guest: [?] If you don't have violence potential to protect yourself, you become a target if you accumulate. And so-- Russ: So, the natural state is a poor one. Guest: Yes. And so the question is: Why do certain places like ancient Greece emerge out of this? And I think it had to do with that they are trading states. And that in order to facilitate trade and get rich beyond what you could do by being a self-sufficient landlord, requires a different set of rules. And that's where they begin to create a new set of rules with a much wider body of citizens. That also creates this form of law, with legal attributes and legal stewards, as we've discussed. Russ: The part that seems important to me, just from our brief discussion, is the limits on entry--either actual limits or effective limits. So, you have a situation where--Elinor Ostrom's work on the problems of the Tragedy of the Commons--you have the same group of people interacting over and over again, and it's a small enough group so that transactions costs you can all get together in one room--the example of the community of the whole and the camp. It's so valuable to figure out stuff that would reduce dispute and specify property rights that there are natural forces to push in that direction. But when you have large groups, it seems--and there is turnover within the group, or who can come into the group--that's going to be a lot harder. Right? Aren't those factors going to be important? Guest: Absolutely. I think there are a whole variety of factors. And especially one that both Hayek and North worry about quite a bit, which goes by the term, 'adaptive efficiency.' I think it's a really badly named concept, but the idea is that, how well does a society adapt to changing circumstances? And if every time the circumstances change, there's a dispute in part because individuals with violence potential--in order to cooperate and have peace they need to consider themselves better off under peace than violence. And one of the problems with changing circumstances is that the relative capacities change all the time. Russ: And you are never sure where you are on that divide, right? Guest: That's right. There's a lot of uncertainty. And problems of credible commitment, asymmetric information, the standard ones that break down--bargaining, peaceful bargaining.

39:57 Russ: So, you talk about how rare these kinds of emergent orders are, that have these features that are attractive that lead to some potential for property rights, growth, trade, etc. Is there any theory out there about why they get replaced with centralized systems? I think the standard temptation of economists is to say, Well, this is better because centralized is more efficient. Or, centralized is going to allow more flexibility. But of course sometimes centralized is just centralized is better for some groups that have power. So, what are your thoughts on that? Guest: Well, I think you are right. Most centralization occurs in the natural state framework and has this very asymmetric society whereby there's lots of privileges and dispersed violence potential. So the key is: How do you find forms of order that, you know, move beyond that, that allow you to support property rights contracts, stable political system, and hence economic growth? And I want to observe that that's relatively rare in the world. We now talk about 'developed societies,' but there's not more than--many more than--2 dozen on the planet. So, approximately 10-15% of all countries. All the rest are a very different form of natural states. Russ: And I think, for better or for worse, we often think we just need to get them to be more like us. Talk about that for a minute. We've had a lot of episodes on here about development and poverty. What does this perspective that you are bringing about emergent law tell us about their potential to adopt our so-called rules? Guest: I think it's very difficult because when it comes to law, there's not a recognition of what the law is. There's a sense of thinking about it--if you think about law in the more standard way, social science way, as being sovereign commands issued by some central authority and enforced by the state, then you want to approach the creation of law and rule of law from a very different standpoint than if you realize that the mechanism of enforcement is separate from the nature of law. That law is these two criteria--first, the set of legal attributes as we've discussed, and this function of the legal steward of some sort. And designing that is very different I think than designing a system with centralized coercion, in part because these are countries where it's very hard to create centralized control over coercion. And when you do, you often get Nazi Germany or the Soviet Union or Mao's China rather than a system of the United States in the 19th century that was relatively peaceful. Russ: You said it's hard to design those attributes and the steward. Of course, by definition those attributes and the steward emerge. They weren't designed. Guest: Yes, good point, yes. Russ: So, in a way--I want to be careful here--I think--let me phrase it this way. People say I'm a small-government guy, which I often say--they say, oh, you want to live in Somalia. No, I don't want to live in Somalia. Somalia's a bad place. I don't know enough about Somalia to really comment other than it appears to be a very bad place, where there's no law. There's just a bunch of thugs driving around with guns. And that's a bad place to live. Well, everybody agrees with that. So, what do we learn from this discussion of emergent law that might be practical? Especially for poor countries. Guest: You asked more than one question; and the first question had to do with my comment about design. And I was thinking about design in the context of the aid community--so, the World Bank, the IMF (International Monetary Fund), the USAID (United States Agency for International Development) or European Bank for Economic Development. Because they are in the business of designing legal systems. And part of what I was suggesting there, without referring to them--I should have--is that they have a very different conception of what the law is. And as a consequence I think the nature of the systems they design are bound to fail because they don't have all the features that are necessary. Secondly, there's the whole question about whether or not one can sustain law in these circumstances. And I'm a big doubter about that. I think that part of the problem is that in societies where violence potential is decentralized it's very hard to have stable rules, because as we discussed a minute ago, circumstances are always changing and different groups are getting more powerful, and when they get more powerful they want privileges. To have more privileges they have to take them from somebody, and often those people are really disgruntled about that. And will fight instead. And so as a consequence it's really hard to sustain these legal characteristics, like stability. I think we didn't discuss stability, but stability I think is one of them. So, how do you create stability in societies with dispersed violence potential, which means that all kinds of people will fight for what they want, and if they get stronger then they demand the rules change.

45:44 Russ: So what's the implication then--I'm going to put Barry Weingast in charge of the World Bank for this week. What would you do differently? Or USAID, these organizations--or a private charity that's trying to good work in a very poor place? Are you suggesting it's a waste of time? Guest: I don't think it's so much a waste of time. But there's a phrase you used a moment ago having to do with transplanting institutions from the developed world into the developing world. And I think that this is one of the mistakes that the donor community makes: 'So, you don't have markets. Create markets. You don't have good governance. Well, you need a legislature or president, and judges, a separation of power system--' Russ: Constitution. Guest: Oh, yes. Russ: What's wrong with that approach? It works for us. Guest: It does. That's the problem. It works for us. I think we are now moving away from the what is law question into my previous work with North and Wallace that I've mentioned on violence and social orders. But part of the problem is that it's very difficult to get these institutions to work in these natural states where there is dispersed violence potential. And one of the rules, I think, of creating stability is the nature that the bargain should limit the stakes of power. And the reason is, you can think about Chile, 1973, where there was a dramatic military coup and I[?] took over the government. And part of the reason that the coup worked was the government was a left government and they were threatening the property rights system; and so landowners, large landowners were willing to support the military in this fairly bloody coup as a consequence. And so the key is, if societies have the ability to limit the stakes then they lower the chances that this kind of coup will happen. Coups are important for what we are talking about because they typically dramatically change the nature of the rules. So if you want to create stable expectations, coups really could get in the way of that. Russ: Right; and it's actually surprising how well Chile has done since then, given that most of its neighbors, which have an enormous amount of uncertainty around their rules are not doing very well. And that's part of the reason--they just kind of limp along and wait for the next crisis. Guest: Argentina--we see that in Argentina, right? It's been about a decade, maybe a few more years than that, since their last huge crisis, and it looks like they are teetering on the verge of bankruptcy again. Whereas Chile managed to set up, in some inadvertent ways, a system that ended up working. And part of the reason it worked, in the beginning, in 1989 and 1990 when they were transferring power to create a democracy, was because the dictatorship still had control over the army. And so the left didn't have much option with respect to the constitution. And so they accepted the Pinochet constitution, which has a bunch of peculiar features--peculiar from our standpoint. From the standpoint of the West. In that it creates a bunch of veto enclaves. And so for example it was expected that the left would be able to take the presidency and I believe the lower house. But they rigged the system for the upper house so that the conservatives, the party on the right that the dictatorship supported, would have a veto in the senate. And the way they did that was that there were a number of senators that were appointed for life. And so the expectation, which turned out to be true, was that the party on the right could get between 35 and 45% of the senate. And so when you added in a certain number of senators for life, they had a majority--they were able to make it so they had a majority and hence a veto over all power. What makes it interesting is that the left does not consider this a legitimate constitution in the beginning--legitimate in the sense that they were not willing in any way to defend it. They don't think it commands them. It's just the fact--the army commands them. But over time what happens to these senators for life? They're not immortal. And so the left begins to take command over these veto enclaves, and they become over time less and less of a constraint. And so it turns out, I believe in 2005, the left is finally able to alter the constitution and remove these. But it does so with the means that were given in the constitution for changing the rules. And by that time, they've come to seriously--the left--accept the constitution. And so that's one of the conditions of, I think, a successful constitution: that people think, these are the rules that are appropriate for us and we should defend them.

50:48 Russ: So, let's go back to our [?], although I enjoyed that digression a great deal. What's the rule of law? What does it mean, in everyday language. I find it fascinating what people--it means a lot of different things to different people. What is the meaning? Guest: It does. Well, historically, the rule of law has meant that the rules are known in advance; they are stable; they are general; they apply to people--in other words they have these legal attributes we've been talking about. In the last 25 years there's a tendency to lump all good things that people want--such as good governance, equity, and the like--to be considered as part of the rule of law. Those are all good things. But they are not the rule of law. And so, Hayek of course is one of the great theorists of the mid-20th century about the rule of law. And he's famous for emphasizing the importance of the stability of the rules and expectations. And you can see, as we've already discussed, that he's one of the foremost people that emphasized the importance of aligning people's expectations for settling disputes. So, one way to think about that--and this is an example from my coauthor John Wallace: If the speed limit is 65, how fast should I drive? That's one question; that's one way to think about it in terms of a code of conduct. But it's more than that, and that is, if the speed limit is 65, how fast are other people going to be driving? And I need to know that and have some expectations before I make my decision about me. And that's the point that Hayek makes about the coordination function of the way in which the legal rules coordinate people's expectations. And that's a real key for the rule of law. Russ: It's such a great example--Don Boudreaux has used it here when we talked about Hayek, particularly when we were talking about the differences between law and legislation. The legislation says you can't go faster than 65. In some situations, keeping that so-called law, abiding by that legislation, is a violation of that law. Because everybody expects to go 72, or whatever it is--it might be 80 in certain situations. If you are going 58, you are actually making it dangerous for people. My favorite example, I don't know if I've mentioned it on the program before, but it's such an important example, where a person, a friend of mine, forget who it is now--perhaps that person will come forward and is listening--he's driving in a bad neighborhood and he gets pulled over by the police. And he gets pulled over for stopping at a red light. And the policeman says: You don't stop at a red light in this neighborhood; it's a bad idea; keep going. And in particular, you think, okay, so you are over-cautious, you are over-careful about keeping the law, meaning to stop at the red light: not only are you putting yourself at risk for trouble for stopping, but you can get hit, you can get rear-ended. Because no one expects you to stop at the red light. I remember another example--I apologize to listeners if I've mentioned this before--but I moved to Washington, D.C. in the middle of a hurricane. This was 2003. And all the lights on one of the main streets were out. And so it was very unclear what the law was at this point--meaning what was the expectation of what I would do when I came to an intersection. And in general what people do in that situation is, if you were on the main street, you've got the right of way. If you are entering the main street, you've got to stop. At least in America. There are other cities, of course, around the world where that is not the case. And that's the way it works. So if you slowed down and came to a stop because, well, the light's out and I've got to be careful, you could get yourself killed because someone could hit you from behind, not expecting that. Obviously, if you live in a place where the lights go out all the time, those type of expectations emerge. They are consistent. Everybody knows them except the newcomers, and they learn them very quickly. Because they get hit. Guest: I think that's right. And one of the things that interest me is I think we can get so many good examples of this from traffic, because it's part of our everyday experience. So, part of the coordination game, people always talk about the simplest kind of--do you drive on the left versus the right? And much more interesting expectations occur at these more complex situations. And you mentioned one. Another one has to do with this intersection that's at one of the main entrances to Stanford--not the main entrance, but the next one over here at Galvez and the big street, El Camino, that goes for miles. So, you get people that want to turn left from any given direction, people that want to go straight, and people that want to turn right. And there's tons of cars all the time. And so it's a very complex intersection with complex rules. And one way--I saw how efficient these rules were relative to a circumstance, because a private plane one day crashed into the lines leaving the power plant in Palo Alto, and the electricity in Palo went out. And so the lights were flashing red. And the lines were miles long. Because nobody could get--every single person had to stop, wait their turn; there was confusion as to whose turn was next. Russ: Some of you listening may have seen these incredible videos of cities that have no lights at any intersection; and in particular the ones I'm thinking of are in Asia, where cars are going at extreme speeds--maybe it's a speeded-up video, but it looks like they are going 40-plus miles and hour. And they merge into traffic somehow, seamlessly-- Guest: All going one way? Russ: And then all of a sudden it changes and goes the other way. But there are no lights that change that give people the right to go across one way or the other. And yet somehow fear of--and I'm sure they have lots of accidents, by the way. Guest: So do we. Russ: Exactly. So do we. This is true.