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Morality, social norms and the rule of lawas transaction cost-saving devices: the caseof ancient Athens

Anastassios D. Karayiannis • Aristides N. Hatzis

� Springer Science+Business Media, LLC 2010

Abstract The importance of the institutional framework for economic develop-

ment is widely accepted today and it is duly stressed in the economic literature. The

protection of property rights, the enforcement of contracts and an efficient legal

system are the pillars of the contemporary rule of law. However, formal institutions

cannot function without being internalized by the citizens and without the strong

backing of social norms. Morality and social norms are the major elements of the

informal institutional structure, the social capital, which is also critical for social

welfare and economic development. In this paper we will discuss both the formal

and the informal institutional framework of Ancient Athens, which was a free

market society with economic problems similar to contemporary market societies.

Athenians developed a highly sophisticated legal framework for the protection of

private property, the enforcement of contracts and the efficient resolution of dis-

putes. Such an institutional framework functioned effectively, cultivating trust and

protecting the security of transactions. This entire system however was based on

social norms such as reciprocity, the value of reputation and widely accepted

business ethics. Conformity to social norms as well as moral behavior was fostered

by social sanction mechanisms (such as stigma) and moral education. The Athenian

example is a further proof of the importance of morality and social norms as

The first draft of the paper was presented in the 11th conference of the European Society of the History

of Economic Thought, Strasbourg, July 2007. We wish to thank the participants and especially

Stephano Solari for their valuable comments and suggestions. The authors also extend many thanks to

Christos Baloglou, Aspasia Tsaoussi and an anonymous referee for their helpful comments and Danai

Avgeri for her excellent research assistance. The usual disclaimer applies. The translations of the

original Greek texts used in this paper are based on the English translations of the Perseus Project

(http://www.perseus.tufts.edu).

A. D. Karayiannis

Department of Economics, University of Piraeus, Piraeus, Greece

A. N. Hatzis

Department of Philosophy & History of Science, University of Athens, Athens, Greece

123

Eur J Law Econ

DOI 10.1007/s10657-010-9150-6

transaction cost-saving devices even in quite sophisticated legal systems. Their

absence or decline leads inevitably to the need for more regulation and litigation and

to a growing preference for clear-cut rules instead of discretionary standards.

Athenian law was pioneering in the development of rules and institutional mech-

anisms suitable for the reduction of transaction costs, many of them surviving in the

most complex contemporary legal systems.

Keywords Ancient Athens � Legal system � Social norms � Morality �Social capital � Transaction costs � Institutions � Economic growth

JEL Classification A13 � B11 � D02 � K10 � K41 � K42 � O43

Athena: I will select judges of homicide bound by oath, and I will establish

this tribunal for all time. Summon your witnesses and proofs, sworn evidence

to support your case; and I will return when I have chosen the best of my

citizens, for them to decide this matter truly, after they take an oath that they

will pronounce no judgment contrary to justice.

Aeschylus, Eumenides 480 (458 B.C.)

Yet Pericles, they say, advised you once that in dealing with impious persons

you should enforce against them not only the written but the unwritten laws

also […] which no one has yet had the authority to abolish or the audacity to

gainsay–laws whose very author is unknown: he judged that they would thus

pay the penalty, not merely to men, but also to the gods.

Lysias, Against Andocides 10 (399 B.C.)

In no circumstances shall magistrates enforce a law which has not been

inscribed.

Andocides, On the Mysteries 85 (399 B.C.)

1 Introduction

The importance of the institutional framework for economic development is widely

accepted today and it is duly stressed in economic literature. The protection of

property rights, the enforcement of contractual agreements and the efficiency of the

adjudication system are the pillars not only of a free market society but also of the

contemporary rule of law in modern constitutional liberal democracies. Without

these conditions a democratic society will collapse to an illiberal democracy

(Zakaria 2004) which (besides being authoritarian) will also be underdeveloped and

poor. However, formal institutions cannot function without being internalized by the

citizens and without the robust backing of social norms (Smith 1759; Posner 2000).

Morality and social norms (together with trust) are the major elements of the

informal institutional structure, the social capital, which is also critical for social

welfare and economic development (Greif 2005). The question is why social norms

have such significance in today’s globalized economies with their highly

sophisticated and complex formal legal infrastructure.

Eur J Law Econ

123

Since Coase (1988 [1960]) it is widely accepted that the major impediment to

economic development even in the most advanced economies is the existence of

transaction costs. Most authors have emphasized (and criticized) the positive

version of the theorem: ‘‘[T]he ultimate result (which maximizes the value of

production) is independent of the legal position if the pricing system is assumed to

work without cost’’ (Coase 1988, 104). This essentially means that the legal

delimitation of rights is irrelevant for the allocation of resources and thus the

allocation of rights (Ibid., 106, 114). The law has only consequences for the

distribution of wealth. However, Coase himself characterizes the positive version of

his theorem as ‘‘a very unrealistic assumption’’ (Ibid., 114) and emphasizes the

essence of his paper by writing that ‘‘the initial delimitation of legal rights does have

an effect on the efficiency with which the economic system operates’’ (Ibid., 115).

A particular ‘‘arrangement of rights’’ by a legal system ‘‘may bring about a greater

value of production’’ than another. The essence of Coase’s theorem is the

instrumental role of legal rules in decreasing the transaction costs which does not

only include the monetary cost of transactions but any kind of impediment to

mutually beneficial agreements based on consent. In this sense any norm that could

be a cost-saving device can play this efficiency-enhancing role.

Today a major source of transaction costs is the problematic protection of legal

rights and the impediments to their transfer and use. The existence of significant

transaction costs leads to the perpetuation of a misallocation of rights and

consequently to a misallocation of resources. The law and economics and the

neo-institutional economics literature are very rich on the problem of an institutional

framework that leads to the reduction of transaction costs and thus more

economically efficient outcomes. Since the pioneering article by Calabresi and

Melamed (1972) we know that even the way in which legal rights are (and should be)

protected depends on the existence of high or low transaction costs in the allocation

of these rights. An efficient legal system reduces transaction costs by clearly

delineating legal rights, avoiding their over- or under-protection by choosing the

right mix of property and liability rules, allowing (in the case of the so-called

‘‘inalienable’’ rights) and facilitating their transfer and finally reducing the cost of

their legal protection (Demsetz 1964; Barzel 1989). However, even the most efficient

legal system has some endogenous limitations to its ability to reduce transaction

costs. The major limitations for a legal system are incomplete information and the

cost of the administration of the system itself. The limitations of formal institutions

created the need for informal institutions filling the gaps of formal legal rules. These

informal institutions are derived and supported by conventional morality and social

norms. Conventional morality leads to a decrease of illegal acts disapproved by the

society at-large (Goodin 2008) and strong social norms reduce the need for legal

enforcement but also the cost of bargaining and monitoring (Reder 1979; Platteau

1994b; Yaffey 1998; Tanzi 2000; Bitros and Karayiannis 2008, 2010) since a good

reputation is instrumental in such markets.

In this paper we will discuss both the formal and the informal institutional

framework of Ancient Athens which was a free market society with economic

problems quite similar to contemporary market societies. Athenians developed

a highly sophisticated legal framework for the protection of private property,

Eur J Law Econ

123

the enforcement of contracts and the efficient resolution of disputes (they even

introduced advanced alternative dispute resolution mechanisms such as arbitration

and mediation).1 This institutional framework functioned effectively, cultivating

trust and protecting the security of transactions. This entire system however, was

based on social norms such as reciprocity, the value of reputation and the wide

acceptance of business ethics. Conformity to social norms as well as ‘‘moral’’

behavior was fostered by social-sanction mechanisms (such as stigma) and moral

education. These mechanisms can be seen as complements of the formal legal rules

since they offered the essential informal institutional backdrop for the smooth

enforcement of these rules.2 Nonetheless they can also be seen as substitutes, since

the informal rules filled the many gaps a pre-modern legal system unavoidably had

during a time of transition and especially during a period of the most significant

political and institutional innovation. After the demise of these informal rules,

which followed the tragic end of the Peloponnesian War, more strict, detailed,

advanced and sophisticated legal rules stepped in as substitutes of the informal rules

of the archaic and ‘‘Golden-Age’’ period.

The success of the Athenian institutions was significant in many respects and it

was founded on the homogeneity of Athenian society and its accumulated wealth

before the Peloponnesian War (431–404 B.C.). During the war and especially after

it, changes in the composition of society, the development of more complex

commercial transactions, the economic destruction due to the war and the ensuing

decaying morals (North 1947) led to a parallel decline of the quality of the informal

institutional framework. The consequences of the deterioration of informal

institutions were the sharp rise in legal disputes and the need for more legislation

and as a result the increase of transaction costs. The presence of problems like the

opportunistic behavior of the contracting parties, the corruption of public officials,

legal error and mistrial (Lysias, Defence Against a Charge of Subverting theDemocracy, 26) were present even before the war, however these problems were

heightened with the decline in morals. The Athenian example constitutes further

proof of the importance of morality and social norms as transaction cost-saving

devices even in quite sophisticated legal systems. Their absence or decline leads

inevitably to the need for more regulation, clear-cut rules, less judicial discretionary

power and more litigation.

In the first part of the paper we will examine the ways in which conventional

morality and social norms in Golden Age Athens (fifth century B.C.) led to fairness

in commercial transactions and thus to less litigation, reducing transaction costs

both at the stage of bargaining and of enforcing contracts. In the second part of the

paper we will examine the development of formal institutions especially designed to

educate citizens, to induce moral behavior and the creation of efficient social norms

1 Even advanced legal procedural concepts, such as directed verdict summary judgment, were known to

the Athenians. See e.g. Antiphon (The Second Tetralogy: Prosecution for Accidental Homicide 1.1) who

noticed: ‘‘Cases in which the facts are agreed upon are settled in advance either by the law or by the

statutes of the Assembly, which between them control every branch of civic life’’. See also Antiphon, Onthe Choreutes.2 The formal Athenian court system played a vital role in maintaining order by enforcing informal norms,

see Lanni (2009).

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123

and to reduce the cost of the functioning of the legal system but also of dispute

resolution in general. We will also try to illustrate how analogous the weaknesses of

the Athenian legal system were to contemporary systems and also how similar their

solutions were to ours. Athenian law was pioneering in the development of rules and

institutional mechanisms suitable for the reduction of transaction costs, many of

them surviving in the most complex modern legal systems.

2 Conventional morality and economic transactions

Conventional morality3 that encourages trust, honesty and punctuality in economic

transactions, reduces the cost of searching, bargaining and enforcing agreements

(Etzioni 1988: 63–6, 68–69, 82–3; Platteau 1994a, 535–7). The evolution of moral

principles governing exchanges and in particular long-term relational contracts

is due to the emergence of norms which surpass prisoner’s dilemma situations:

a dishonest behavior will be punished and an honest behavior will be rewarded by

social-sanction mechanisms such as tit-for-tat (Axelrod 1984: ch. IV). A narrow-

minded maximizing strategy is considered immoral and has personal and social

costs. On the other hand, cooperation and reciprocally altruistic behavior could lead

to mutually beneficial agreements in the long run. Moral behavior is beneficial and it

is in the interest of the people involved to adhere to the social norms (Axelrod 1984:

ch. III, VI; Rabin 1993) when (and so far as) the majority does the same. Rule-

following thus resembles a moral instinct and derives its power from its widespread

acceptance.4

A mature civilization not only can make good use of the advantages of moral

rules and social norms but it can also cultivate them and enhance them. Such was

the case of Ancient Athens which during its Golden Age (5th B.C.) and its decline

(4th B.C.) had economic institutions and an economic market that are very similar

to the ones in today’s market societies. It also had legal institutions, social structure

and moral values reminiscent of today’s modern democracies (Karayiannis 2007,

ch. 1). Even the problems at the economic and the institutional level were often

identical to contemporary problems, as well as their proposed solutions.

The norm of reciprocity was not unknown to the Athenians. According to

Aristotle (Nicomachean Ethics, 1132b, 25–30), the norm of reciprocity was first

3 For the difference between conventional morality (what people in a community believe to be morally

correct) and critical morality (what is in fact morally correct), see Hart (1963) and Bix (2004): 138. For

our purposes we are interested only in conventional morality, i.e. the moral principles that were widely

accepted by the Athenian society of the era. Usually these moral principles were evolved from a set of

older social norms, namely, from ‘‘custom to morals’’ (see Plutarch, On the Education of Children, 3F).4 This theory is reinforced by the view of modern sociobiology on the evolution of morality. Individuals

adopt a moral behavior as an ‘‘evolutionary stable strategy’’ which ensures their longest survival

(Dawkins 1976: ch. 3, 5; Wright 1995: ch. IX) and it is optimal in the sense that it cannot be dominated by

a better alternative strategy. See Goodin (2008): for law to do what law is supposed to do, which is to be

action-guiding, people need to be able to intuit without detailed investigation what the law is for the most

common and most important cases of their conduct. From a law & economics perspective, see Shavell

(2002) who argued that exploring the optimal domains morality and law should be employed jointly or

separately.

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123

discussed by the Pythagoreans. Such a principle is an indispensable norm for social

justice, political stability, and social harmony (Ibid., 1133a, 1–15). Furthermore,

Demosthenes (Against Meidias, 185) observed that whoever is ‘‘kindly disposed and

merciful’’ will receive help from others, but if he is ‘‘shameless and insulting’’

nobody will assist him. To reinforce this kind of moral behavior Athenians adopted

two social control mechanisms: (a) an appropriate ‘‘expressive’’ education for the

young5; and (b) social stigma and shame-penalties.6 More specifically, Isocrates

(Antidosis, 181–192) stresses the importance to Athenians of the exercise not only

of the body but of the mind as well. The mind was exercised with philosophy and it

had as its objective the acquisition of knowledge but also its proper use. Another

objective of moral education was for the young people to learn not to harm one

another. They were taught not to do everything ‘‘for the sake of pleasure or gain or

honor’’ (Ibid., 217, see also Isocrates, Panathenaicus, 30–2).7 The cultivation of

altruism was also a central objective (Bitros and Karayiannis 2010).

Decision-making had to follow the rules of rationality and morality. According to

Aristotle (Nicomachean Ethics, 1144a, 5–10), ‘‘Prudence as well as Moral Virtue

determines the complete performance of man’s proper function: Virtue ensures the

rightness of the end we aim at, Prudence ensures the rightness of the means we

adopt to gain that end’’. Other philosophers also preached the necessity of morality.

Plato analyzes in the Republic (332a–369a, 433a–449b) the various concepts and

characteristics of righteous acts and fairness in behavior as well of justice in general.

Aristotle followed with a similar discussion in Nicomachean Ethics (1129a–1132b,

1134a–1138b) emphasizing the conditions and the content of ‘‘fair exchange’’

(Ibid., 1133a-b), and examining the elements of a virtuous behavior and of the

‘‘good way of living’’ (Ibid., 1096a–1097b, 1102a, 1106a, 1113a–b). Using

contemporary terminology, Athenians attempted to use moral education in order to

internalize in their utility functions moral, even altruistic (supererogatory) behavior

for an optimal result even in economic relations where self-interest seems to be the

principal motive.

Shame as a form of punishment was another mechanism that Athenians used as a

powerful tool of social control. Any behavior that was contrary to the prevalent

legal and moral norms was considered disgraceful (Isaeus, On the Estate ofAristarchus, 3.8). For example, the social sanctions for embezzlement were quite

severe (Isocrates, Trapeziticus, 1) and they supplemented legal punishment

(Hyperides, Against Athinogenes 1, 511–2) making the crime more costly and

5 Moral education was considered then (as it is today) an antidote to the nihilistic skepticism and

relativism (e.g. see Platteau 1994b: 792). See also the discussion in Aristotle’s Politics (1277a) for the

importance of a good citizen in a democracy and Lysias (On the Murder of Eratosthenes 35) who pointed

out that ‘‘every city makes its laws in order that on any matter which perplexes us we may resort to them

and inquire what we have to do’’.6 For the use of stigma and shame by the law, see recently Nussbaum (2004), ch. 4, 5.7 As Plutarch (On the Education of Children, 5E) observed centuries later, ‘‘but learning alone, of all

things in our possession, is immortal and divine. And two things there are that are most peculiar to human

nature, reason and speech; of which two, reason is the master of speech, and speech is the servant of

reason’’.

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123

having a strong deterrent effect,8 especially when the deviant behavior was marginal

and not widespread. This implies that there was a social norm which had been

internalized by individuals in their utility (/disutility) function: the approval or

disapproval of their acts by society (Akerlof 1980: 749–50, 753–4). In Athens past

behavior often determined the future since the names of those convicted for some

crime were written in public places for everyone to see. Any failure to comply with

the military, tax or religious obligations precluded someone from election to public

office.9 Thus, individual (esp. deviant) behavior was common knowledge in a city

where privacy was not protected in the same way as in today’s constitutional liberal

democracies. This is illustrated in numerous speeches written by orators to help

their clients persuade a jury of their peers in Athenian courts about the social

status of themselves or their adversaries based on sources open to the public.10

The importance of personal reputation in economic transactions was great due to the

widespread use of personal exchange. As it is accepted in contemporary literature

(see e.g. Kandori 1992; Platteau 1994a: 546, 548) long-term relationships, repetitive

exchanges and an almost perfect information on the character and the trustwor-

thiness of the other party lead to a reduction of frauds, deceptions, mistakes and

opportunistic behavior in general, even in cases where the parties are complete

strangers. Opportunism was deterred by this prevalent transparency on individual

morality and behavior which was also backed up by the widely accepted social

norms.11

Accordingly, a good individual reputation was instrumental for the reduction of

transaction costs in searching for a contracting party and the opposite in case of a

bad reputation. Trust was important human capital for Athenians as the following

quote from Demosthenes illustrates: ‘‘It is remarkable what a striking thing it is in

the eyes of people who are active in commercial life and in banking, when the same

man is accounted industrious and is honest […] for money-making, the best capital

of all is trustworthiness’’ (For Phormio, 44–5).12 Reputation13 and trust was (as it is

today) the most important cost-saving devices since the parties could conclude

their transactions orally without written contracts and without worrying about

8 Aristotle (Rhetoric 1383b, 25–30) emphasized that it was also disgraceful for someone to exploit a

weaker party or someone in a state of necessity, thus disapproving what we now call ‘‘unconscionable

contracts’’ (laesio enormis in continental legal systems).9 See Aeschines (14–5, 18–22, 25), Lysias (For Mantitheus, 2–3; On the Scrutiny of Evandros, 3,8),

Aristotle (Athenian Constitution, XLV, 3, LV).10 See, e.g., Lysias (Against Theomnestus 1, 2–3; Against Alcibiades 1, 25–9; For Mantitheus, 11–2;

Against a Charge of Subverting Democracy, 12); Demosthenes (Against Theocrines, 27–9).11 As Lysias (Against Andocides, 6) wrote: ‘‘For Andocides is by no means unknown either to foreigners

or to our own people, such has been the impiety of his conduct; since it needs must be that, if they are

specially outstanding, either good or evil deeds make their doers well-known.’’ See also Lysias, AgainstAgoratus (67–9).12 A remarkable view recently advanced by von Weizsacker (1980); Anderson and Tollison (1992): 373.13 Lysias (Defence Against a Charge of Subverting the Democracy, 4) notes: ‘‘And I claim, gentlemen, if

I am found to have been the cause of none of our disasters, but rather to have performed many services to

the State with both my person and my purse, that at any rate I should have that support from you which is

the just desert, not merely of those who have served you well, but also of those who have done you no

wrong.’’.

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123

enforcement and monitoring costs (cf. Coleman 1990: 109–110). It is characteristic

that even deposits in banks were made without written receipts (see e.g. Isocrates,

Trapeziticus, 2)! The close relation of reputation and market power (recently

expounded by Dobson 2004) was not unknown to Athenians. A good reputation in

the Athenian market meant more sales, less transaction cost, i.e., more trust

(cf. Klein and Leffler 1981). Since consistently honest behavior by an individual14

was rewarded by the market and a dishonest and opportunistic behavior was

punished by the market, the society and the law, it was only rational for Athenians

to act morally in their market exchanges15 as long as these norms were enforced by

the society at large.16 Athenians disapproved the exploitation of the other party due

to necessity, coercion or asymmetric information. This kind of ‘‘profiteering’’ led to

unconscionable or coercive contracts which were considered by them a case of

unjust enrichment.17 Any case of unjust enrichment was severely criticized.

Euripides in Helen (903–908) expresses this sentiment:

For the god hates violence, and commands everyone to have their possessions

without robbery. [Wealth that is unjust, though it may bring some power,

ought to be avoided.] Heaven is common to all mortals, and so is the earth,

where people ought to fill up their homes without having another’s property,

or taking it away by force.18

This kind of opportunistic behavior is known (see Williamson 1985: 64; Nooteboom

1998: 172) to lead to the failure of cooperation and harm economic transactions,

exchanges, even the organization of production by augmenting transaction costs as a

consequence of the lack of trust in a market. The widely accepted norms of market

behavior in Athens were instrumental in decreasing the transaction costs induced by

opportunistic behavior.19 The social norms that evolved in Athens were not the

result of religious teachings despite the use of the power of religion to reinforce

them (see statues in honor of Shame fastness, Rumor, etc., see Pausanias, Attica,

14 Athenian law focused solely on individuals and did not recognize the separate legal existence of

partnerships (Harris 1989), i.e. legal entities.15 Lysias (On the Property of Aristophanes, 55) wrote: ‘‘I propose next to tell you briefly about myself. I

am now 30 years old, and never yet have I either had a dispute with my father or been the subject of a

complaint from any citizen; and although I live near the market-place, I have never once been seen in

either law-court or council-chamber until I met with this misfortune’’. And as elsewhere (AgainstEratosthenes, 4–5) he noted ‘‘never did he [my father], any more than we, appear as either prosecutor or

defendant in any case whatever, but our life under the democracy was such as to avoid any offence

against our fellows and any wrong at their hands’’.16 This is something completely acceptable nowadays (cf. Shapiro 1982; Akerlof 1983; Casson 1995: 87,

210–6).17 According to Aristotle (Eudemian Ethics, 1232a, 8–10), ‘‘the profiteer is mean […] in accepting

anything’’. See also Xenophon (Symposium, IV, 36–7, 42), Aristotle (Politics, 1267a, 10–15, Rhetoric,

1369a, 10-15); Lysias, Defence Against a Charge of Subverting the Democracy 16; Karayiannis

(1990, 1992).18 Unjust enrichment has been socially disapproved since Hesiod (Works and Days, 320–325).19 It was John Stuart Mill (1848): 887 who emphasized the importance of honesty in transactions as

instrumental to economic progress, a view that is prevalent today (see e.g. Reder 1979; North 1990: 33;

122–3; Platteau 1994b): 753–4, 756–9.

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123

17,1). These mechanisms of incentives and sanctions were purely instrumental in

their nature since their objective was social welfare. It was important for them to

ensure the widespread acceptance of these norms as a prerequisite of their

effectiveness since as it has been shown (Fehr and Schmidt 1999) only in that case

of consensus are transaction costs reduced, cooperation rewarded and social welfare

increased.

The importance of social norms for the Athenian democracy was emphasized

by Pericles himself in his famous funeral oration recorded by Thucydides

(The Peloponnesian War II, 37). Pericles considered these norms to be compatible

with the liberal element of Athenian democracy and not antithetical to the idea of

positive written law since the sanctions were social and not legal:

But all this ease in our private relations does not make us lawless as citizens.

Against this fear is our chief safeguard, teaching us to obey the magistrates

and the laws, particularly such as regard the protection of the injured, whether

they are actually on the statute book, or belong to that code which, although

unwritten, yet cannot be broken without acknowledged disgrace.

Nevertheless, the decline of Athens after the Peloponnesian War (404 B.C.) led to a

decay of social norms (North 1947) and a parallel shrinkage of the acceptance of

conventional morality (see Isocrates, Panegyricus; Thucydides, III. 82; Aristo-

phanes, Clouds 5–10, 728–740, 1090–5). The long duration of the war and its

catastrophic consequences for the morale of the city and its inhabitants reduced the

moral defenses of individuals, led to alienation, destroyed the social fabric and

intensified political rivalry.20 At the same time Athenian economy became more

complex for several reasons:

• It was ‘‘globalized’’ since exports and imports greatly increased and commerce

within the city’s boundaries was transformed with the arrival of numerous legal

immigrants (i.e. metics) and commercial visitors. Athens was not as homoge-

neous as before the war.21

• The great increase in the number of economic transactions led to the

development of more sophisticated economic institutions (banking, insurance,

etc.), the transactions became one-shot games and impersonal and their cost rose

sharply.22

20 Diodotus speaking in the Ekklesia (the popular assembly in Ancient Athens) indicated the following

causes of unlawful acts: ‘‘poverty’’, ‘‘plenty’’, ‘‘other conditions of life’’, ‘‘fatal and master passion’’,

‘‘hope and cupidity’’, ‘‘fortune’’ and the ‘‘human nature’’ (Thucydides III, 45).21 According to Plato (Republic, 557b, c) this diversity was expected in a liberal democratic society:

‘‘and is not the city chock-full of liberty and freedom of speech? And has not every man license to do as

he likes?’’ ‘‘So it is said,’’ he replied. ‘‘And where there is such license, it is obvious that everyone would

arrange a plan for leading his own life in the way that pleases him.’’ ‘‘Obvious.’’ ‘‘All sorts and conditions

of men, then, would arise in this polity more than in any other?’’.22 For the need of a legal system to enforce contracts in a developed economic system, see North (1990):

76–7, 233.

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123

• Corruption became a major problem in both public administration and private

relations.23

• Distribution of wealth became greatly unequal24 leading to more corruption and

increase in crime; while social envy led to political turmoil (Demosthenes,

Philippic 4, 35–45). This led to an even more abrupt decline of moral norms and

cooperation.

• The political turmoil due to inequality and corruption put democracy in danger.

This led to special legislation for its protection (Schwartzberg 2004).

In general, the increased complexity of economic life led to a demand for more

formal institutions since conventional morality and social norms proved insufficient

for the new era. As a result of such transformation of Athenian democracy and

economy, the norms of trust and reciprocity waned, cooperation failed and

transaction costs were increased since information was costly to acquire, contracts

were written and complex with clauses reflecting the lack of trust and the

uncertainty of the era (cf. Cheung 1969; Hatzis 2003). The Athenian democracy

became eventually more liberal and tolerant. According to Aristotle, the first

characteristic of democracy was ‘‘for a man to live as he likes; for they say that this

is the function of liberty, inasmuch as to live not as one likes is the life of a man that

is a slave.’’ (Politics 1317b). The emphasis on liberty, individuality and free

choice25 led to the erosion of social norms that are usually not prevalent in open

societies.

In his speeches, Demosthenes (Against Aristogeiton 1, 24–5) emphasized the

need for strict legal rules to avoid ‘‘the bad overcoming the good’’. The new laws

were greatly influenced by the social norms of the previous period which were

internalized in the behavior of law-abiding citizens (reminding us of Hayek’s

spontaneous order; see Sugden 1989) and for this reason were widely accepted.

Returning to Coase (1988 [1960]: 118), ‘‘there is no reason why, on occasion,

such governmental administrative regulation should not lead to an improvement of

economic efficiency [especially when] the costs of handling the problem through the

market […] may be high.’’ The increase of economic transactions in Athens and the

parallel growing complexity led to the weakening of social norms. Transaction costs

rose sharply, rendering formal institutions crucial for the protection of private

property and the security of transactions. Legal rules had, thus, to substitute the

fainting norms.

23 Even in the era of Aristides the Just, corruption and bribery were not unknown (Plutarch, Aristides, 4).

The situation deteriorated rapidly. As Aristophanes observes in Plutus (362–3), ‘‘there is no honest man!

not one, that can resist the attraction of gold!’’. See also Lysias, On the Refusal of a Pension 17–18;

Lysias, Against Epicrates and his Fellow Envoys, 6.24 For fifth century Athenians, sharp inequality of wealth led to social and political turmoil (Foxhall 2002;

Karayiannis 2007, ch. 2).25 An idea embedded in the Athenian democracy as early as in the period preceding the Peloponnesian

War as it is obvious in the famous statement made by Pericles: ‘‘The freedom which we enjoy in our

government extends also to our ordinary life. There, far from exercising a jealous surveillance over each

other, we do not feel called upon to be angry with our neighbor for doing what he likes, or even to indulge

in those injurious looks which cannot fail to be offensive, although they inflict no positive penalty.’’

(Thucidides, The Peloponnesian War II 37).

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3 Formal legal rules

The weakening of social norms and the old customs led to a demand for more

formal rules and institutions after the end of the fifth century. The following

statement by Andocides (On the Mysteries 87) is characteristic of the legal

positivism that was emerging in fourth century Athens (citing a law) intertwined

with the concept of the rule of law26:

In no circumstances shall magistrates enforce a law which has not been

inscribed. No decree, whether of the Council or Assembly, shall override a

law. No law shall be directed against an individual without applying to all

citizens alike,27 unless an Assembly of six thousand so resolve by secret

ballot.

This led to the creation of a more sophisticated and developed legal system whose

elements are observed even today. At the same time orators in Athens (since there

were no lawyers in the modern sense; see Chroust 1954) helped the interpretation

and enforcement of the law with their work.28 The weakening of social norms led

also to an increase in litigation and consequently to a subsequent great rise in the

demand for orators who prepared speeches for the parties to use in judicial disputes.

This was not the only cost of the enforcement of the law.29 As is known, at least

from the time of Mill (1848): 110–1, higher litigation rates resulted in an all-

encompassing rise in transaction costs and of impediments in economic

development.

Let us now see in more detail the objectives, the principles and the essential

elements, as well as the deficiencies of the Athenian legal system in its attempt to

reduce transaction costs. First of all, Athenians considered their legal system

instrumental for deterring unlawful behavior30 and a pillar of Democracy

(Demosthenes, Against Timocrates, 2, 5). In his speech Against Leocrates (3–4)

Lycurgus writes:

[t]he things which in the main uphold our democracy and preserve the city’s

prosperity are three in number: first the system of law, second the vote of the

26 See also Lysias, Against Philon 27 for a statement similar to nullun crimen, nulla poena, sine lege. See

also Lysias, On the Murder of Eratosthenes 49.27 See also Antiphon, On the Murder of Herodes, 17.28 Antiphon (middle of fifth century B.C.) was the first orator of this kind, a ‘‘logographos’’ (speech

writer). Orators were professionals dedicated to support the case of their clients, and were not interested

in the administration of justice. Their role is, thus, similar to today’s defense lawyers. Their

‘‘professionalism’’ was severely criticized by Lycurgus (Against Leocrates, 1, 138) who observed: ‘‘If

they and their kind defend the criminals it is proof that they would associate themselves with the actual

crimes’’. See in general Parush (2001) and Buis (2004) for the theatrical nature of the confrontation in

Athenian courtrooms.29 For a similar turn from social norms to formal institutions for the protection of private property, see the

case of Western Europe in the end of the feudal era and the beginning of mercantilism (North 1992; Greif

2005).30 Lycurgus (Against Leocrates, 1, 67) argued: ‘‘you must punish this man with death if you intend to

make the other citizens better, oblivious of the fact that he is only one’’ (cf. ibid., op. cit. 1, 110). See also

Lysias, On the Murder of Eratosthenes, 47 and Lysias, Against Philon, 30.

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123

jury, and third the method of prosecution by which the crimes are handed over

to them […] And thus both law and jury’s vote are powerless without an

accuser who will hand transgressors over to them.31

Athenians were accused of being litigious (Thucydides, I, 77), this being the result

of the existence of many laws trying to enforce order and morality in both economy

and society,32 but also of the complexity of their social and economic life

(Aristophanes, Ecclesiazusae 650–5) after the fast economic development which

followed the Persian Wars. Isocrates (Antidosis, 79) defines quite clearly the

twofold benefit derived by the laws: (a) laws are ‘‘the source of very many and very

great benefits to the life of humanity’’, and (b) ‘‘a boon which, in the very nature of

the case, is limited to the affairs of our state and to the engagements which you enter

into with each other’’, thus, laws encourage people to behave morally and

reasonably (Ibid., 84–5). Their legal system was, since the time of Solon

(Fragments, 204–5, 246) an instrument of social control with the main objective

of preventing social turmoil.33 According to Pericles (‘‘Funeral Oration’’ quoted in

Thucydides, II, 37) Athenians did not reproduce the laws of other cities but the

opposite was true.34 For them Eunomia (Legal Order) was the equivalent of the Rule

of Law (Aristotle Politics, 1294a6) but with a strong natural law flavor (ibid., 1270a

31–3; Demosthenes, Against Aristogeiton 2, 25–7).35 The quality of law and legal

order was considered instrumental for the efficient organization and the adminis-

tration of the city- as they are considered today (see e.g. North 1990: 116, 124–5;

Rawls 1971: 255–266). For them, ‘‘laws were the currency of the State’’ and they

should not be adulterated (Demosthenes, Against Timocrates, 213–4).

Thus, the idea of the Rule of Law was not alien to the Athenians but it also

constituted the cornerstone of their legal system.36 According to Aeschines (AgainstTimarchus 1, 5–6) the idea of the Rule of Law was the major difference between

democracies and authoritarian regimes: ‘‘and be assured, fellow citizens, that in a

democracy it is the laws that guard the person of the citizen and the constitution of

31 In Athens a written private lawsuit was necessary since there was not an office similar to the

contemporary office of public prosecutor (see esp. Lycurgus, Against Leocrates 4; Lysias On the Murderof Eratosthenes 44).32 See characteristically the comment of Lysias (On the Murder of Eratosthenes): ‘‘For to my thinking,

every city makes its laws in order that on any matter which perplexes us we may resort to them and

inquire what we have to do.’’.33 Two examples are characteristic of their attitude: During wars private disputes were not adjudicated

(Lysias, Relating to Offences Directly Against the State, 3 and On the Property of Eraton 3) since many

persons were absent and there was a danger of destroying unity. Also, during the major religious holidays

the collection of debts was also forbidden in order to avoid social dissatisfaction and tension

(Demosthenes, Against Meidias, 10).34 According to Titus Livius (Ab urbe condita, III 31, 8a) Roman consuls visited Athens in the middle of

the fifth century to copy some of the most successful Athenian legal institutions.35 The citizens’ obedience was considered a more important element for the smooth functioning of the

city than high-quality laws (Thucydides, II, 37, cf. Pound 1910 and Bix 2009: 177–185).36 For an expanded analysis of procedural due process requirements of the modern American legal

system that appeared in ancient Athenian law, see Zimet 1973 (the right to jury trial; the right to counsel;

the right to speedy trial; the right to subpoena witnesses; the right of confrontation and cross-examination;

the privilege against self-incrimination; the right to appeal). But see Lanni (2004).

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123

the state, whereas the despot and the oligarch find their protection in suspicion and

in armed guards’’. According to Lysias (Defense Against a Charge of Subverting theDemocracy, 3), the rule of law was instrumental for the preservation of democracy:

‘‘while yours is to allow an equal enjoyment of civic rights to those who have done

no wrong; for in this way you will secure to the established constitution the greatest

number of allies.’’37

Moreover, the laws should not only have been compatible with the democratic

system of government but the concept of a liberal democracy was also emerging.

Thus, the enforcement of laws was based on a rationale that is reminiscent of social

contract theories38:

And it behooves us, I think, not only when we are enacting laws, to consider

always how the laws that we make may be good and advantageous to the

democracy, but when once we have enacted them, it equally behooves us, if all

is to be well with the state, to obey the laws that we have enacted, and to

punish those who do not obey them. (Aeschines, op. cit. 1, 6).

The citizens upon their coming of age gave an oath not only to protect their city but

also its laws promising to oppose anyone trying to violate the rules or subvert

democracy (Lycurgus, Against Leocrates¸ 1, 100). Also the jury members/lay

judges gave a similar oath in the beginning of their term: ‘‘[A]nd I will harbor no

grievance and submit to no influence, but will give my verdict in accordance with

the laws in force at the present time.’’ (Andocides, On the Mysteries).

The longevity of a law was an indication of its rightness and efficiency–a kind of

natural selection of efficient legal rules reminiscent of contemporary approaches

(Rubin 1977; Goodman 1978: 393):

Yet it would be unanimously agreed, I think, that the[se] laws […] are the

most admirable and righteous of all laws. Not only have they the distinction of

being the oldest in this country, but they have changed no more than the crime

with which they are concerned; and that is the surest token of good laws, as

time and experience show mankind what is imperfect (Antiphon, On the

Murder of Herodes, 14; see also Isocrates, Antidosis, 82–3)

The abrogation, replacement or amendment of a law was examined by the Boule (a

body of representatives selected by lottery) and the Ekklesia during a process of

‘‘ratification of laws’’ (Demosthenes, Against Timocrates, 20–23, 33; AgainstLeptines, 89–94). The major reason for the introduction of new laws was the

criminalization of new activities (Lycurgus, 9–10; Hyperides, In Defence ofEuxenippus, 5).39 We read in Isocrates (Panathenaicus, 144–5) that Athenian laws

37 According to Maio (1983): 16, ‘‘Athenians themselves recognized [that] the system of adjudication

and the basic political ordering, or politeia, of fourth-century Athens were inter-dependent’’.38 For an early classic statement of a social contract theory based on the tacit consent of the citizens, see

Plato, Crito.39 Legal precedent was also another way of lawmaking. Lycurgus (Against Leocrates, 1, 93) claimed: ‘‘It

is therefore most essential that you should be not merely judges of this present case but lawmakers

besides’’.

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123

were inscribed in tables placed in public places,40 ‘‘few in number, though adequate

for those who were to use them and easy to comprehend, just and profitable and

consonant with each other’’.41

A fundamental principle of the Athenian legal system was fairness and equality

before the law: ‘‘Nor shall it be lawful to propose a law applying to a particular man,

unless the same be applicable to all Athenian citizens, except by the votes of not less

than six thousand citizens voting in the affirmative by ballot’’ (Demosthenes,

Against Timocrates, 59, Against Aristocrates, 86).42 Demosthenes emphasized

(Against Aristogeiton 1, 16–7) that ‘‘the laws desire what is just and honorable and

salutary; they seek for it, and when they find it, they set it forth as a general

commandment, equal and identical for all’’.

Equality before the law was pivotal for the Athenian rule of law: (a) Nobody

(a citizen, a legal immigrant or a slave) could be punished without a trial (Antiphon,

On the Murder of Herodes, 47, 48; Lysias, Against the Corn Dealers. 2).

(b) Impartiality was considered very important as a safeguard so the judges were

chosen by lottery (Demosthenes, Against Aristogeiton 1, 27) and their decisions

were made in majority and in a secret voting (Lycurgus, 146; Isaeus, On the Estateof Dicaeogenes, 19).43 (c) Despite the emergence of legal positivism, especially in

the fourth century, the nature of the trial systems permitted the Athenian law to

develop the concept of equity (Lysias, On the Murder of Eratosthenes 1; AgainstAgoratus 4; Against Philon 11).

For Athenians, criminal law was a tool for deterrence44 but it also had an

expressive function (Sunstein 1996) with a signaling effect and an educational value:

‘‘there are two objects for which all laws are framed: to deter any man from doing

what is wrong, and, by punishing the transgressor, to make the rest better men’’

(Demosthenes, Against Aristogeiton 1, 17).45 According to Isocrates (Antidosis, 23):

‘‘intelligent men ought to be such when they are judges of others, as they would

40 ‘‘[New L]aws as may be necessary shall be inscribed upon tables by the Nomothetae elected by the

Council and named hereafter, exposed before the Tribal Statutes for all to see, and handed over to the

magistrates during the present month.’’ (Andocides, On the Mysteries 83; see also Lysias, ForMantitheus, 6–7).41 Athens had written law since Solon’s time. A kind of codification took place around 410 B.C. which

included a better organization and classification and also a clearing up. According to Lysias (AgainstNicomachus, 2–3), the whole project took 6 years instead of the initial 4 months of the mandate and the

members of the committee were accused of arbitrary abrogation and introduction of laws according to

their interests and the bribes they had received (see Clinton 1982; Rhodes 1991).42 See also Lycurgus, Against Leocrates, 1, 93 (for the ‘‘fair treatment by the law’’).43 For a description of the selection of judges, see Hamel (2003): ch. 8. Cf. Lysias, Against Agoratus 36–

38 (during the reign of the Thirty Tyrants there was no secret voting).44 Lysias presents the deterrence function of law in no unclear terms in Against Alcibiades 1.12–13):

‘‘I conceive that your judgement is given, not merely with a view to the offenders, but also for the

reformation of all other insubordinate persons. Now, if you punish men who are unknown, not one among

the rest will be improved; for nobody will know the sentences that you have passed: but if you inflict the

penalty on the most conspicuous offenders, everyone will be apprised, and so the citizens, with this

example before them, will be improved.’’ See also op.cit. 16–19. See also Lysias (Against Nicomachus,

23–25, 30).45 See also Lysias (Against Philon 25) who argued: ‘‘Or is it to make the citizens better when they see all

men honored alike–is this why he is to be approved? But the danger is that good men, when they observe

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expect others to be to them in like case’’.46 The penalties were quite high (since

Draco’s laws of 621 B.C.) in order to deter antisocial behavior (e.g. see Lysias,

Against Ergocles, 15; Demosthenes, Against Aristogeiton 1, 1, Lycurgus, AgainstLeocrates, 1, 66).47 It is characteristic that penalties were set not in accordance with

the graveness of the crime but to its antisocial character48 and immoral nature

(Lycurgus, Against Leocrates 1.66).49

A penalty was a disincentive and a signal to society (Lycurgus, 119–20;

Demosthenes, Against Timocrates, 68–9; cf. Meares 2002). For example, in case of

theft the convicted paid a fine of twice or even ten times the value of the stolen good

and was incarcerated (Demosthenes, Against Timocrates, 105, 115). For Athenian

law, a criminal was a rational individual who compares the expected benefit and the

expected cost of the crime.50 The severity of punishment had as its main objective to

deter crime by increasing the cost of crime (Andocides, 73; Thucydides, III, 45) and

in line with recent findings (see e.g. Ehrlich 1996: 43–4, 53–6) discouraging deviant

behavior in general. However, the culpability of the accused should have been

proven beyond a reasonable doubt as in the contemporary rule of law systems: ‘‘in

dealing with such serious crimes you must base your vote, not on conjecture, but on

certainty’’ (Lycurgus, Against Leocrates 1, 28).51 Nevertheless, the sense of justice

played a key role in the decisions made by juries.52

Footnote 45 continued

that they and the bad are honored alike, will desist from their good behavior, expecting that the same

persons who honor the wicked may well be forgetful of the virtuous.’’.46 Impartiality had as its rationale an idea reminiscent of Adam Smith’s ‘‘impartial spectator’’ (1759):

110–3.47 Of course penalties also had the element of retribution (Beis 2003).48 See e.g. Lysias (Against Agoratus 1–3) who remarked that ‘‘by this conduct he inflicted not only

grievous losses on me and each of their relatives as individuals, but serious injuries–so I consider–on the

whole city at large, by depriving it of men of that character’’.49 For Aristotle (Rhetoric, 1368b, 7–8) injustice is ‘‘voluntarily causing injury contrary to the law’’, a

behavior that should be punished severely since for him deterrence was the primary concern

(Nicomachean Ethics, 1179b–1180a). For a detailed analysis of the variety of penalties in Athens, see

Allen (2000). See also the sophistry in Lysias, Against Philon 27.50 A behavior of individuals analyzed by Becker (1968): 180; see also, Tullock and McKenzie (1975):

122–4.51 See also Aeschines, Against Timarchus 1, 91 who claimed that the truth is determined by

circumstantial evidence. Lysias’ introduction in Against Eratosthenes (1) is a famous example in rhetoric

and an excellent case of private prosecution speech: ‘‘The difficulty that faces me, gentlemen of the jury,

is not in beginning my accusation, but in bringing my speech to an end: so enormous, so numerous are the

acts they have committed, that neither could lying avail one to accuse them of things more monstrous than

the actual facts, nor with every desire to speak mere truth could one tell the whole; of necessity either the

accuser must be tired out or his time must run short.’’ See also Andocides, On the Mysteries 15 (immunity

in case of confession).52 Lycurgus (Against Leocrates 1, 540) notes: ‘‘When therefore certain actions have been […]

condemned by you who were the judges appointed by lot, when they have been recognized by the people

as demanding the severest punishment, will you give a verdict which opposes all these views? If you do,

you will be the most unconscionable of men and will have few indeed ready to risk themselves in your

defense’’. See also Lysias, Defense Against a Charge of Subverting the Democracy, 34. See in general

Hyde (1917).

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Fines were also a source of income for the state, especially for financing police

(‘‘guardians of the city’’). Even military crimes were punished with excessive fines

(Lysias, For the Soldier, 6, 9).53 Politicians and Generals were fined with even higher

amounts, sometimes even ten-times greater (Hyperides, Against Demosthenes, XV,

XXIV). The high fines and harsh penalties were substitutes for the lack of strong

social norms and the waning power of conventional morality in the fourth century.54

The weakening of social norms did not only lead to the development of the idea

of the rule of law and the parallel evolution of the criminal law towards deterrence

(and away from retribution). It was also instrumental for the development of

Athenian private law (Carey 1994), especially property and contract law. The main

objectives were the protection of property rights and the enforcement of contracts in

order to achieve social welfare and economic development:

(1) The emergence of written contracts55 and the prevalence of the principle of

contractual freedom led to rules reminiscent of the parole evidence rule: ‘‘the

agreement does not permit anything to have greater effect than the terms

contained in it, nor that anyone should bring forward any law or decree or

anything else whatever to contravene its provisions’’ (Demosthenes, AgainstLacritus, 39). Aristotle emphasized the importance of the enforcement of written

contracts but also of oral agreements (Eudemian Ethics, 1243b, 25–30;

Nicomachean Ethics, 1164a, 20–35). Of course there was a number of formation

defenses, e.g. for fraud56 due to asymmetric information.57 As is known,

asymmetric information augmenting transaction cost led to the emergence of

institutions like warranty and trademarks and to a number of sophisticated

contract clauses (Akerlof 1970; Barzel 1982; Hatzis 2003). Athenian contract

law dealt with this problem regulating cases of uncertainty and commercial

impracticability. A characteristic example was the financing of agreements and

insurance for maritime commerce. Bargaining and monitoring costs were quite

high because of the moral hazard for the debtors, since the interest rate was too

high for internalizing a risk with an excessive expected cost.58 This is the reason

for the existence of many related judicial disputes (Baloglou 2004: 92–112).

(2) When the contracts were not written and they were based on oral agreements,

the court tried to distinguish the elements of the oral agreements, especially in

cases of loans or leases without witnesses (Isocrates, Against Euthynus, 4-6).

53 For the advantages of the use of fines, see Becker (1968): 193–8, 208 and more recently Polinsky and

Shavell (2000): 58, 70.54 Moral people commit crime only when the expected benefit is quite high. People bounded less by

morality become criminals for lesser benefits (Wynarczyk 2002).55 For a detailed discussion of the Athenian law of contracts see Phillips (2009).56 See Lycurgus (24); Isocrates (Trapeziticus, 20, 25–30); Hyperides (Against Athenogenes 1, 13; AgainstDemosthenes, 1); Demosthenes (Against Zinothemis, 1; Against Dionysodorus, 7–8, 26–7, 36–8; AgainstPhormio, 5, 32–6; Against Apaturius, 1); see also Engen (2005): 361. A written contract can be found in

Demosthenes (Against Lacritus, 10–4).57 See e.g. for a trial concerning the buying of a firm where the firm owner deliberately understated its

liabilities in Hyperides (Against Athenogenes 1, 7–10).58 Demosthenes (Against Dionysodorus, 1–2; Against Zinothemis, 5; Against Phormio, 6–7; AgainstLacritus, 10, 22).

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(3) The protection of property was absolute (Calabresi and Melamed 1972).

Expropriation without the owner’s consent was a serious crime (Lysias, On theConfiscation of the Property of the Brother of Nicias, 17; Aristotle, Rhetoric,

1374a, 15–20).59

(4) Special laws protected creditors whose main business was to offer loans to/or

invest to businesses. Their economic role was considered important

(Karayiannis 1992) and they were protected by special legislation (Demosth-

enes, Against Phormio, 50–2). A related case is illustrative: a citizen disputes the

expropriating of an estate by the state because he was also a creditor seeking

relief from the same property (Lysias, Relating to Offences Directly Against theState, 4, 6).

(5) In inheritance law the testator was free to arrange the distribution of his

property in his will with a few exceptions in cases of incapacity or fraud.60 The

heirs also inherited the claims of the testator (see e.g. Aischines, AgainstTimarchus 1, 100).

(6) Nuisance law was also developed as is illustrated in a case where the erection

of a wall caused the flooding of neighboring land. The externality was

internalized with both compensation of the victim and a fine (Demosthenes,

Against Callicles, 3, 9–14, 20–1, 25–6).

(7) Money damages were enforced strictly. If the compensation was not paid, the

debtor was considered an embezzler and he was punished as such (Demosthenes,

Against Meidias, 44).

These laws were mainly geared towards the enforcement of contracts and the

limitation to the arbitrary economic and political power held by the elites. Both

objectives are instrumental for socioeconomic and political progress (Greif 2005)

since they ensure the security of transactions and they reinforce the sense of fairness

and trust that leads to the conclusion of more contracts. They offered the

institutional framework that was conducive to the economic and social development

of Athens. To protect the market from illegal and opportunistic behavior, they

introduced laws and regulations such as:

(a) Counterfeiting was punished severely (Demosthenes, Against Leptines, 167).

(b) Fraud against the other party or against the state was also severely punished.

(c) Collusion, i.e. forming a cartel to keep a price high (esp. wheat, see Lysias,

Against Corn Dealers, 5–7) was considered the worst case of profiteering.61

The exploitation of consumers because of the volatility of the market and the

59 Minors and women did not have the right to possess and transfer private property (Isaeus, On theEstate of Aristarchus, 10).60 Isaeus (On the Estate of Cleonymus, 8, 10–11, 17, 41; On the Estate of Philoctemon, 9–10; On theEstate of Astyphilus, 2, 27); Hyperides (Against Athenogenes 1, 17). In some of these cases of fraud, the

fine was so severe as to reach the amount the accused wished to embezzle (Isaeus, On the Estate ofNicostratus, 11).61 A special agency was responsible for the control of sufficiency and the price of wheat in the City

whose commercial ships trading wheat had to sell a fraction of it to the City’s market to avoid disruptions

in supply (Lycurgus, 27; Demosthenes, Against Lacritus, 51).

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abrupt change in supply and demand of products was also considered immoral

and illegal (Ibid., 11–6).

(d) Excessive usury was considered immoral (Isaeus, On the Estate of Cleonymus,

12).

(e) Guarantees for loans were claimable only for 1 year so property could be

utilized and developed without encumbrances (Demosthenes, Against Apatu-rius, 27).

The transaction costs of the high rate of litigation (Stigler 1970; North 1990: 69)

were acknowledged (legal fees, costs for the administration of justice, cost of legal

information, etc.; see Hyperides, Against Athenogenes 1, 13–4). There was also the

cost of legal (and administrative) error that was often the result of slander (Lysias,

On the Property of Aristophanes, 45–9, 51) or bribery (Aristophanes, Clouds 5–10,

728–740; Wasps 100–5; 550–5)62 and extortion (Lysias, Against Philocrates 1–3).

This led to appeals and more administrative and judicial costs since slander literally

plagued the city (Isocrates, Antidosis, 37–9; Aristophanes, Ecclessiazusae 560–5;

Acharnians 945–55). It was easy for a brilliant orator to influence judges (i.e. his

peers) and destroy an innocent man (Antiphon, On the Murder of Herodes, 6).

However, for many commentators the problems of the Athenian legal system were

minimal in comparison with the problem of the administration of justice today

(Lanni 1999).

This situation led to the emergence of institutions like mediation and arbitration,

especially in economic disputes,63 as mechanisms of avoiding the excessive costs of

trials (Landes 1971): 66–9. The arbitrators were a body of mature men chosen every

year by lottery.64 The authorities had the discretion to transfer an action to them

instead of bringing it to the court. If the disputants accepted to be bound by their

decision, arbitrators took over the case and were paid by both parties.65

There were other sources of transaction costs, similar to modern legal systems

(Stigler 1970: 528; Glaeser and Shleifer 2003), especially corruption (bribery)66 and

rent-seeking.67 The penalties for bribery were very severe (deprivation of the rights

of citizenship, confiscation, inscription of the name on a public table) but the

problem persisted despite them (Demosthenes, Against Meidias, 113; Apollodorus

62 Lycurgus (Against Leocrates, 1.200 wrote: ‘‘You know too well that desire for bribes and favors

induces many witnesses to forget what they know, to fail to appear, or to contrive some other excuse’’.63 For a detailed analysis of legal disputes with economic reasons, see Isager and Hansen (1975): 107–

135.64 In one case of a dispute between two immigrants, an immigrant with the rights of a citizen (isotelis)

was appointed as arbitrator (Demosthenes, Against Phormio, 18–20).65 See Isaeus (On the Estate of Menecles, 29–31); Isocrates (Against Callimachus, 10, 13–16);

Demosthenes (Against Meidias, 94; Against Apaturius, 16–9, 28–9).66 Lycurgus (20); Isocrates (Trapeziticus, 12; Antidosis, 18); Lysias (Against Philocrates, 12);

Demosthenes (Against Meidias, 197); Aristophanes, Frogs 360–370.67 Lysias (For the Invalid, 17–8; Against Epicrates and his Fellow Envoys, 6, 9); Demosthenes (AgainstMeidias, 96–99, 124; Aristotle (Rhetoric, 1372a, 10–20).

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Against Stephanus 2, 26; Philippic 3, 45).68 It was also not uncommon for someone

to sponsor socially beneficial activities in order to become popular, get elected and

embezzle public money (Lysias, On the Property of Aristophanes, 57; Aristophanes,

Ecclesiazusae 173–7)! Only purely altruistic behavior was considered praiseworthy

so they criticized donations for political or other selfish reasons (Aristophanes,

Knights 575–80; Plutarch, Aristides, 1).

From all the above it has been illustrated how the Athenian legal system not only

promoted economic development and economic progress in the Golden Age of

Athens through social norms and customs but also that even after the decline, they

offered a series of institutional solutions to the imperfections of markets that have

survived in modern legal systems with similar success.

4 Conclusions

There are two main conclusions drawn from the above analysis: (a) For economic

and social development a legal framework protecting private property and ensuring

the enforcement of transactions is necessary; and (b) this framework should be

backed up by moral principles and social norms which reinforce legal rules and

contribute significantly to the reduction of transaction costs and ensure the better

protection and transfer of property rights. Athens managed to succeed, fulfilling

both conditions for economic development. However, their institutions had many

weaknesses which had been acknowledged by the Athenians who tried to resolve

them with strict legal rules, systems of incentives and the boosting of efficient social

norms. One main concern was the development of rules and norms as transaction-

cost saving devices.

Athenians had not developed these concepts theoretically, despite the very useful

discussion found in the legal documents of the era. Their advanced legal system

(even for today’s standards in many respects) with its constitutional safeguards, the

sophisticated legal enforcement and alternative dispute resolution (ADR) mecha-

nisms and the exploitation of social norms corroborates the conclusion that many

institutional solutions to the above economic problems were first discovered in

Athens. This is not a coincidence. The Athenian economy was in many respects

‘‘globalized’’ and free. Commerce was one of their main sources of income

(especially after the fall of the Athenian Alliance) and eventually Athens had to deal

with all the problems that plague economies today. The way Athens reacted to these

problems and the institutional devices it discovered or used is illuminating not only

for legal history but also for the economics approach to institutions. Not only

because it is obvious that the same tools can be used in pre-modern society

(cf. Posner 1979) but also because we can draw very useful conclusions on the

parallel evolution of legal rules and social norms and their interconnectedness.

68 Taylor (2001a, b) examines the many known cases of bribery of public officials, as well as the efforts

of Athenians to discourage it legally but also morally. See esp. Aristophanes Knights (402–5, 825–30);

Frogs (113–7, 1083–87).

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123

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