Centralized legal systems lower exchange costs and raise relational mobility

Evidence

Work by Greif (2006), a historical institutional economist, suggests that systems that societies use to reduce uncertainty in exchange relationships can have a profound impact on the ability for individuals to form new exchange relationships. His research examined two groups of medieval traders, the Maghribi and the Genoese. Both groups faced the same basic problem of dealing with uncertainty in economic exchanges, but they took completely different approaches to address the problem. The Maghribi formed a closed system of trading, where one could only trade with other members of the same closed society. By taking this “collectivistic” solution, they could be assured that no one would behave in an untrustworthy manner as those who did so would be promptly excluded from the closed network. The Genoese traders, on the other hand, approached this problem by investing in a centralized legal system that relied on third parties such as courts for contract enforcement, enabling those who broke contract to be subject to litigation. Such centralized legal systems, such as police and courts of law, greatly reduce the costs associated with seeking out new exchange relationships and likely lead to the increase in mobility of trading relationships in many Western societies (Greif, 2006). It is possible that implementation of such a system made it possible for North American societies to prosper by enabling immigrants from various countries around the world and who were otherwise strangers to communicate and interact with each other with reduced social uncertainty. — Roderick M. Kramer, Geoffrey J. Leonardelli, Robert W. Livingston, Social Cognition, Social Identity, and…, 1649

Categorization

• XREF: Connects directly to the Milgrom law-merchant material on the Maghribi versus Genoese trade institutions and reputation versus court enforcement.
• SEED: Article angle: how a society’s dispute-resolution infrastructure silently shapes the depth of its interpersonal relationships — courts as shapers of sociability.
• DEEPTHINKING: A genuinely non-obvious causal chain running from legal institutions to personality and friendship patterns across whole societies.
• ADDENDUM: Echoes the law-merchant theme of centralized courts versus communal reputation systems reducing monitoring costs.