Wisdom, Alterability, and Social Rules

Abstract

This paper uses cost-benefit analysis to evaluate the relative efficiency of three competing sources of social rules: legislation, norms, and private rules. On the benefit side we consider the “wisdom” and “alterability” of social rules produced under each source. Wisdom refers to the extent to which social rules reflect society members’ rule demands. Alterability refers to the ease with which society members can change social rules when their rule demands change in response to changed conditions. On the cost side we consider the production and external costs associated with producing social rules under each social-rule source. We find that legislation is relatively alterable but unwise. Norms are wiser but unalterable. Private rules avoid the wisdom-alterability tradeoff. They’re both wise and alterable. However, private rules have higher external costs than legislation. And they have higher production costs than norms. Many societies may be able to produce more efficient social rules privately.

Keywords: Alterability, Legislation, Norms, Private Rules, Wisdom of Crowds