Spontenaous Emergence of Law - Customary Law

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SPONTANEOUS EMERGENCE OF LAW:

CUSTOMARY LAW

Francesco ParisiGeorge Mason University School of Law

Copyright 1999 Francesco Parisi

Abstract

In the social contract framework, customary rules can be regarded as animplied and often non-verbalized exercise of direct legislation by the membersof society. Those legal systems that grant direct legal force to customary rulesregard custom as a primary, although not exclusive, source of law. In such legaltraditions, courts enforce customary rules as if they had been enacted by theproper legislative authority. Custom thus amounts to a spontaneous norm whichis recognized by the legal system and granted enforcement as a proper legalrule.Judicial recognition of spontaneous norms amounts to a declaratory (rather than

constitutive) function that treats custom as a legal fact. The legal system findsthe law by recognizing social norms, but does not create the law. The mostnotable illustration is the system of international law, where, absent a centrallegislative authority, custom stands next to treaties as a primary source of law.(See, for example, Article 38 (1) of the Statute of the International Court ofJustice; and Restatement 102 of the Foreign Relations Law of the UnitedStates.)

Whenever they are granted legitimate status in a legal system, customaryrules are usually given the same effect as other primary sources of law.Although often subordinated to formal legislation, customary rules derive theirforce from the concurrence of a uniform practice and a subjective belief thatadherence to them is obligatory (opinio iuris), without necessarily being

formally incorporated into any written body of law. For this reason, they areusually classified as immaterial sources of law (Brownlie, 1990). This notionimplies that the custom remains the actual source of law even after its judicialrecognition. In this setting, the judicial decisions that recognize a custom offeronly persuasive evidence of its existence and do not themselves become sourcesof law. In turn, this prevents the principle ofstare decisis from crystallizingcustomary law.

Modern legal systems generally recognize customary rules that haveemerged either within the confines of positive legislation (consuetudosecundum legem) or in areas that are not disciplined by positive law(consuetudo praeter legem). Where custom is in direct conflict with legislation


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604 Spontaneous Emergence of Law: Customary Law 9500

(that is, custom contra legem) the latter normally prevails. In some instances,however, a custom supersedes prior legislation (that is, abrogative custom), andsome arguments have been made in support of emerging practices that conflictwith obsolete provisions of public international law (desuetudo, or abrogativepractice) (Kontou, 1994). The theoretical and practical significance of theseforms of spontaneous social order, which compete with enacted law ininfluencing human choice, are discussed below.

JEL classification: K00Keywords: Customary Law, Spontaneous Law, Social Norms

1. Introduction

Legal theorists define custom as a practice that emerges outside of legalconstraints, and which individuals and organizations spontaneously follow inthe course of their interactions out of a sense of legal obligation. Two categoriesof social practices are generally distinguished:

(a) Practices that reflect mere behavioural patterns. In legal jargon, suchbehaviour is a mere usage; in economic terms it simply represents anequilibrium convention. A mere behavioural regularity does not generate acustomary rule.(b) Practices that reflect an internalized belief that the practice is necessary orsocially desirable. These practices are considered necessary for socialwell-being and are treated as proper legal custom, often entering the legalsystem as primary sources of law.

The terminology used in the legal and economic literature should becontrasted with the terminology employed in sociological literature (see, forexample, Weber, 1978, pp. 319-320). What is legally termed a mere usage isdefined in sociological literature as a custom (Sitte), in the sense of a typicallyuniform activity that is not considered to be socially necessary. Convention -

the sociological notion closest to the legal concept of custom - amounts toconduct manipulated by express approval or disapproval by other members ofthe group, but lacking the enforceability that characterizes a legal custom.

A. The Theory of Spontaneous Law

2. The Formative Elements of a Customary Rule

According to the theory of customary law, individual actors gradually come toembrace norms that they view as requisite to their collective wellbeing. An


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enforceable custom emerges from two formative elements: (a) a quantitativeelement consisting of a general or emerging practice; and (b) a qualitativeelement reflected in the belief that the norm generates a desired social outcome.

2.1 The Quantitative ElementThe quantitative requirements for the formation of customary law concern boththe length of time and the universality of the emerging practice. Regarding the

time element, there is generally no universally established minimum durationfor the emergence of customary rules. Customary rules have evolved from bothimmemorial practice and a single act. Still, French jurisprudence hastraditionally required the passage of forty years for the emergence of aninternational custom, while German doctrine generally requires thirty years(see Tunkin, 1961; Mateesco, 1947). Naturally, the longer the time required toform a valid practice, the less likely it is for custom to effectively anticipate theintervention of formal legislation, and to adapt to changing circumstancesovertime.

Regarding the condition of universality, international legal theory isambivalent. Charney (1986) suggests that the system of international relationsis analogous to a world of individuals in the state of nature, dismissing the ideathat unanimous consent by all participants is required before binding customarylaw is formed. Rather than universality, recent restatements of international lawrefer to consistency and generality (see DAmato, 1971). Where it isimpossible to identify a general practice because of fluctuations in behavior, theconsistency requirement is not met (see Asylum (1950) pp. 276-277; andWimbledon (1923), Ser. A, no. 1). Similarly, more recent cases in internationallaw restate the universality requirement in terms of increasing and widespreadacceptance (see, for example, Fisheries Jurisdiction (1974), pp. 23-26;NorthSea Continental Shelf (1969), p. 42), allowing special consideration foremerging general norms (or local clusters of spontaneous default rules) that areexpected to become evolutionarily stable over time.

With regard to rules at the national or local level, the varying pace withwhich social norms are transformed suggests that no general time or

consistency requirement can be established as an across-the-board condition forthe validity of a custom. Some variance in individual observation of the practiceshould be expected because of the stochastic origin of social norms. A flexibletime requirement is particularly necessary in situations of rapid flux, whereexogenous changes are likely to affect the incentive structure of the underlyingrelationship.

2.2 The Qualitative ElementThe second formative element of a customary rule is generally identified by thephrase opinio iuris ac necessitatis, which describes a widespread belief in thedesirability of the norm and the general conviction that the practice representsan essential norm of social conduct. This element is often defined in terms of


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necessary and obligatory convention. (Kelsen, 1939, 1945; DAmato, 1971;Walden, 1977). The traditional formulation of opinio iuris is problematicbecause of its circularity. It is quite difficult to conceptualize that law can beborn from a practice which is already believed to be required by law.

The practical significance of this requirement is that it narrows the rangeof enforceable customs: only those practices recognized as socially desirable ornecessary will eventually ripen into enforceable customary law. Once there is

a general consensus that members of a group ought to conform to a given ruleof conduct, a legal custom can be said to have emerged when some level ofspontaneous compliance with the rule is obtained. As a result, observableequilibria that are regarded by society as either undesirable (for example, aprisoners dilemma uncooperative outcome) or unnecessary (for example, acommon practice of greeting neighbours cordially) will lack the subjective andqualitative element of legal obligation and, therefore, will not generateenforceable legal rules.

B. The Emergence of Spontaneous Law

According to the traditional legal approach to customary law, two elements aregenerally required for the emergence of a binding custom: (1) the practiceshould emerge out of the spontaneous and uncoerced behaviour of variousmembers of a group, and (2) the parties involved must subjectively believe inthe obligatory or necessary nature of the emerging practice (opinio iuris). Toan economist, the first element corresponds to the rather standard assumptionof rational choice. The second element may be appraised as a belief of socialobligation, emerging in response to game inefficiencies, to support behaviouralrules that avoid aggregate losses from strategic behaviour.

The law and economics literature has examined some additional structuralconditions for the emergence of customary law, which will briefly be analyzedbelow. (For a more extensive analysis, see Parisi, 1998b.)

3. Structural Symmetry and Incentive Alignment

The literature on social norms focuses on non-contractual mechanisms andconsiders the situations that are more easily governed by spontaneous law.Under symmetrical conditions, norms that maximize group welfare alsomaximize individual expected payoffs. Thus, no one has any reason tochallenge the emerging norm. Paradoxically, therefore, there is no need for lawor norm enforcement in an environment characterized by perfect incentivealignment, as contracts or relationships are self-enforcing (Klein, 1996).


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In the presence of perfect incentive alignment, cooperation will result inboth the case of repeated games in which the players are faced with highdiscount factors, and in one-shot games. It is worth noting that situationscharacterized by symmetric payoffs or role reversibility do not present anopportunity for strategic preference revelation. The expected costs and benefitsof alternative rules are the same among the members of the group. Eachindividual has an incentive to agree to a set of rules that maximize the

aggregate welfare of the group, consequently maximizing his expected shareof wealth. True preferences will therefore be revealed in situations of stochasticsymmetry. Conversely, strategic choices are more likely to characterize real lifesituations with misaligned individual incentives.

Additionally, in the absence of perfect incentive alignment, the discountfactor plays an important role. In situations where the probability of futureinteraction is relatively high, the discount factor captures two analyticallydistinct elements. First, it acts as a function of the players time preference.Second, the discount factor is a function of the probability of futureinteractions.

The discount factors role in evolutionary models is therefore critical.Environments promoting a high probability of future interaction and low timepreference are therefore more likely to induce optimizing equilibria. In the caseof a one-shot game, on the other hand, the probability of future interaction iszero, so that the expected value of future cooperation is also zero (see,generally, Axelrod, 1984).

Another area of research in the customary law literature considers the roleof morality and internalized obligations as a means for inducing cooperationin conflict games (see, for example, Gauthier, 1986; Ullmann-Margalit, 1977).Internalization of the norm is a source of spontaneous compliance. Forexample, individuals internalize obligations when they disapprove and sanctionother individuals deviations from the rule, or when they directly lose utilitywhen the norm is violated. In this setting, Cooter (1994a) suggests that a legalcustom will successfully evolve when the ex ante individual incentives arealigned with the collective public interest. Cooter (1994a, p. 224) calls this

proposition the alignment theorem.

4. Stochastic Symmetry and Role Reversibility

Traditionally, strategic preference revelation is viewed as a hindrance to thespontaneous emergence of cooperation. Such a problem is likely to beminimized in situations of role reversibility or stochastic symmetry (Parisi,1995). Similar to a Rawlsian veil of ignorance, role reversibility and stochasticsymmetry induce each member to agree to a set of rules that benefits the entiregroup, thus maximizing her expected share of the wealth.


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These conditions in fact occurred during the formative period of themedieval law merchant (lex mercatoria), when traveling merchants acted in thedual capacity of buyer and seller. If they articulated a rule of law which wasfavourable to them as sellers, it could have the opposite effect when they actedas buyers, and vice-versa. This role reversibility changed an otherwiseconflicting set of incentives (buyer versus seller) into one that converged towardsymmetrical and mutually desirable rules.

The law merchant therefore illustrates a successful system of spontaneousand decentralized law (see Benson, 1989, 1990; Greif, 1989). Fuller (1969, p.24) observes that frequent role changes foster the emergence of mutuallyrecognized and accepted duties in a society of economic traders. By definitionthe members of such a society enter direct and voluntary relationships ofexchange. ... Finally, economic traders frequently exchange roles, now selling,now buying. The duties that arise out of their exchanges are thereforereversible, not only in theory but in practice.

Certainly, the emergence of consensus for a given rule does not exclude thepossibility of subsequent opportunistic deviation by some individuals whenroles are later reversed. This is a typical enforcement problem, however, andthe possibility of strategic defection does not undermine the rules qualitativefeatures. The general acceptance of or acquiescence to a custom dependsprimarily on its anticipated effect on the group. Those strategies that maximizethe expected payoff for each participant if reciprocally undertaken evolve intonorms. This conception of spontaneous law is examined by Stearns (1994, pp.1243-1244), who observes that if the participants were unable to devise rulesgoverning future interactions, and unforeseen circumstances placed them in aforced market relationship requiring post-contractual negotiations, courts andlegislatures might have a comparative advantage over the participants indevising market facilitating rules. Unlike market participants, courts andlegislatures choose from among alternative solutions as if the underlying eventshad not yet occurred, without attempting to strategically maximize theadvantage caused by unforeseen circumstances (see also Shubik, 1987). Whererules are breached following role reversal, norms play a collateral yet crucial

role in sanctioning case-by-case opportunism.Conditions of role reversibility, coupled with norms that generate

disincentives to adopt opportunistic double standards, are therefore likely togenerate optimal rules via spontaneous processes. The groups ability to imposea sanction obviously depends on an individuals accountability for his pastbehaviour. Benson (1992d, pp. 5-7) explores the role of reputation in situationsof repeated market interaction, observing that reputation serves as a source ofcollective knowledge regarding past actions.


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5. Induced Symmetry and Reciprocity Constraints

Prisoners dilemma-type games are plagued by the dominance of opportunisticbehaviour because of the potential accessibility of off-diagonal, non-cooperativeoutcomes. Schotter (1981), Lewis (1969) and Leibenstein (1982) analyze therole of conventions in correcting prisoners dilemma situations.

Among the devices capable of correcting prisoners dilemma-type games,

the players can bind their strategic choices to those of their opponents,drastically changing the equilibrium of the game. Ensuring automaticreciprocity by binding a players strategy to that of his opponent eliminatesaccess to off-diagonal outcomes and renders the reward for unilateral defectionunobtainable. Just as no rational player will employ defection strategies in thehope of obtaining higher payoffs from unilateral cheating, neither will arational player be induced to select defection strategies as a merely defensivetactic. Automatic reciprocity mechanisms thus guarantee a shift towardoptimizing cooperation. As pointed out by Parisi (1997), ancient customs ofretaliation, based on conceptions of symmetry and punitive balance, provide anintriguing illustration of the principle of reciprocity at work (see, for example,Exodus 21:23; and Code of Hammurabi Paragraphs 108 and 127). Parisi(1998a) considers another example of a reciprocity constraint. Art. 21 (1)b ofthe 1969 Vienna Convention, which articulates an established custom ofreciprocity, creates a mirror-image mechanism in the case of unilateralreservations in the process of treaty ratification: A reservation established withregard to another party ... modifies those provisions to the same extent for thatother party in its relations with the reserving state. The effects of thisautomatic reciprocity mechanism are similar to a tit-for-tat strategy without theneed for active retaliation by states: whenever a treaty is modified unilaterallyin favour of one state, the result will be as if all the other states had introducedan identical reservation against the reserving state. By imposing a symmetryconstraint on the parties choices, this rule offers a possible solution toprisoners dilemma problems.

Parisi (1998a) further observes that, while the principle of reciprocity solves

conflict situations characterized by a prisoners dilemma structure (in bothsymmetric and asymmetric cases), alone it is incapable of correcting otherstrategic problems. When a conflict occurs along the diagonal possibilities ofthe game (such that the obtainable equilibria are already characterized bysymmetric strategies), a reciprocity constraint will not eliminate the divergenceof interests between the players and will not affect the results of the game. Thedynamic process of norm formation may unveil the existence of a tilt pointbeyond which emerging beliefs become stable and self-sustaining. In light ofreciprocal constraints undertaken by other members of the community,individuals who frequently exchange roles in their social interactions haveincentives to constrain their behaviour to conform to socially optimal norms of


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conduct. Buchanan (1975) insightfully anticipated this result, suggesting thatan even stronger logic explains the emergence of cooperation in situations ofinduced reciprocity. In both cases, the non-idealistic and self-interestedbehaviour of human actors will generate optimal norms.

6. Articulation Theories in the Formation of Customary Law

Notable scholars have considered the conditions under which principles of justice can emerge spontaneously through the voluntary interaction andexchange of individual members of a group. As in a contractarian setting, thereality of customary law formation relies on a voluntary process through whichmembers of a community develop rules that govern their social interaction byvoluntarily adhering to emerging behavioural standards. In this setting,Harsanyi (1955) suggests that optimal social norms are those that wouldemerge through the interaction of individual actors in a social setting withimpersonal preferences. The impersonality requirement for individualpreferences is satisfied if the decision makers have an equal chance of findingthemselves in any one of the initial social positions and they rationally choosea set of rules to maximize their expected welfare. Rawls (1971) employsHarsanyis model of stochastic ignorance in his theory of justice. However, theRawlsian veil of ignorance introduces an element of risk aversion in thechoice between alternative states of the world, thus altering the outcomeachievable under Harsanyis original model, with a bias toward equaldistribution (that is, with results that approximate the Nash criterion of socialwelfare). Further analysis of the spontaneous formation of norms and principlesof morality can be found in Sen (1979), Ullmann-Margalit (1977) and Gauthier(1986).

Legal theorists and practitioners have addressed a similar issue whenconsidering the requirements ofopinio iuris. In attempting to solve one of theproblems associated with the notion of opinio iuris, namely the troublesomeproblem of circularity, legal scholars (notably, DAmato, 1971) have considered

the crucial issue of timing of belief and action in the formation of customaryrules. The traditional approach emphasizes the awkward notion that individualsmust believe that a practice is already law before it can become law. Thisapproach basically requires the existence of a mistake for the emergence of acustom: the belief that an undertaken practice was required by law, wheninstead, it was not. Obviously, this approach has its flaws. Placing such relianceon systematic mistakes, the theory fails to explain how customary rules canemerge and evolve overtime in cases where individuals have full knowledge ofthe state of the law.

In this context, legal theorists have proposed to look past the notions ofopinio iuris and usage concentrating on the qualitative element of


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articulation. Consistent with the predicament of the economic models,articulation theories suggest that greater weight should be given to beliefs thathave been expressed prior to the emergence of a conflict.

Here, it is interesting to point out a strong similarity between the legal andthe economic models. Articulations that are made prior to the unveiling ofconflicting contingencies can be analogized to rules chosen under a Harsanyianveil of uncertainty. States and individuals will have an incentive to articulate

and endorse norms that maximize their expected welfare. Given some degreeof uncertainty as to the future course of events, the emerging rules will be suchas to maximize the expected welfare of the community at large. Conversely,rules that are articulated after an outburst of conflict may be strategicallybiased. Once the future is disclosed to them, parties will tend to articulate rulesthat maximize their actual welfare, rather than the expected welfare to bederived from an uncertain future. Thus, ex ante norms should be given greaterweight in the adjudication process.

This predicament seems to be contradicted by the empirical and anecdotalevidence on commercial customary law. Bernstein (1996) examines customaryrules that have developed in various modern commercial trades. Her findingsseem to indicate that in the adjudication of business disputes, commercialtribunals tend to enforce customary rules that are quite different from thebusiness norms spontaneously followed by the parties in the course of theirrelationship. Rather, customary rules develop around practices developedduring the conflictual phase of a relationship. In this setting, Bernsteindistinguishes between relationship norms and end-of-the-game norms. Whenadjudicating a case, courts are faced with parties who have reached the endpoint in their relationship. The end-of-the-game norms of the conflictual phasethus tend to be enforced, while the cooperative norms developed in the courseof their relationship remain outside the domain of adjudication.

C. The Failures of Customary Law

According to the popular paradigms of economic analysis, decentralized marketprocesses have a comparative advantage over centralized allocativemechanisms in the creation of efficient equilibria. Customary law formationcan be analogized to a decentralized decision making process, with acomparative advantage over centralized processes in the creation of efficientrules.

Customary rules are generally accepted by the community, with a largershare of rules followed spontaneously by the community and a consequentreduction in law enforcement costs. In the decentralized dynamic ofspontaneous law, individual decision makers directly perceive the costs andbenefits of alternative rules, and reveal their preferences by supporting or


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If we agree that path dependence has something to do with the emergenceand evolution of customary law, we should follow this logic to its conclusion,revisiting the very foundations of the efficiency claim. The main question iswhether path dependence could ever lead to inefficient results. According tocurrent research (Roe, 1996), path dependence may lead to inefficientequilibria. Once a community has developed its norms and conventions, thecosts of changing them may outweight the benefits. Less efficient rules may

persist if the transition to more efficient alternatives is costly. Thus, if oneallows for some randomness and path dependence, norms and conventions,although driven by an evolution-toward-efficiency dynamic, may stabilizearound points of local, rather than global, maximization. Our history, in thissense, constrains our present choices. We may wish we had developed moreefficient customs and institutions, but it would be foolish now to attempt tochange them. The claim of efficiency of spontaneous law thus becomes arelative one vis--vis the other sources of law. The point then becomes that ofweighing the relative advantages of spontaneous law-making against theattributes of engineered legislation, taking full account of the pervasive publicchoice and information problems underlying such alternatives.

8. Rational Abstention and Norm Manipulation

A public choice analysis of customary law should consider the vulnerability ofnorms and customs to the pressure of special interest groups. This line ofanalysis - relatively undeveloped in the current literature - should search forparallels between the legislative process and the dynamic of norm formation.In that setting, the opportunity for collective beliefs and customs to bemanipulated by special interest groups should be analyzed. Any claim thatcustomary sources are superior to proper legislation will have to rest on a solidunderstanding of the relative sensibility of each source to possible politicalfailures.

The application of a well-known theorem of public choice to the study of

customary law generates very interesting results. Unlike legislation in arepresentative democracy, customary law rests on the widespread consensus ofall individuals affected by the rule. If principal-agent problems are likely toarise in a political world characterized by rational ignorance and rationalabstention of voters, no such problems appear to affect customary sources.Individuals are bound by a customary rule only to the extent that they concurred- actively or through voluntary acquiescence - in the formation of the emergingpractice.

Imperfect information, however, may induce voluntary acquiescence - oreven active concurrence - to an undesirable practice. Economic models ofcascade or bandwagon behaviour have shown how inferior paths can be


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followed by individuals who rely on previous choices undertaken by othersubjects, and value such observed choices as signals of revealed preference.Economic models have shown that, when information is incomplete, excessiveweight can be attached to the signal generated by others. Others choices maybe followed even when the agents own perception conflicts with the content ofthe observed signal. In this way, a biased or mistaken first-mover can generatea cascade of wrong decisions by all his followers, with a result that may prove

relatively persistent under a wide array of conditions.Cascade arguments may also unveil the relative fragility of spontaneoussources of law in light of the possible manipulation of collective beliefs throughbiased leadership. If information is imperfect, the input of politically biasedfirst-movers may generate undesirable norms. These norms may persist becauseof the weight attached to the choices of our predecessors. Thus, once generated,wrong beliefs may become stable and widespread in any community ofimperfect decision makers.

9. Collective Action Problems in Customary Legal Regimes

Another potential weakness of customary law is revealed by the application ofa collective action framework to the study of the formation and enforcement ofcustomary rules. We can start the analysis by observing that legal rules and lawenforcement are public goods. In the case of customary rules, collective actionproblems may thus arise at two distinct stages: first, in the formative processof customary rules; and second, in the enforcement of the emerged customs.

The process of a custom formation relies on the spontaneous andwidespread acceptance of a given rule by the members of a group. Individualsoften face a private cost when complying with the precepts of the rule, and theygenerally derive a benefit because of the compliance of others with existingrules. Thus, the formation of customary law can be affected by a public goodproblem. When discussing the conditions under which customary rules caneffectively develop, I illustrated the analysis with a game-theoretic framework.

The public good problem considered here is in many respects similar to thestrategic tension that we have examined in the context of customary lawformation. If individuals face a private cost and generate a public benefitthrough norm creation, there will be a suboptimal amount of norms createdthrough spontaneous processes. Any individual would like others to observe ahigher level of norm compliance than he or she observed. The resulting levelof norm compliance would thus be suboptimal. Collective action problems inthe formation of customary rules have traditionally been corrected by normswhich sanctioned opportunistic double standards, and by metarules imposingreciprocity constraints on the parties.


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The issue has only marginally been addressed in the economic literature.The reader may look at Hirshleifer (1982) who discusses enforcement by thesanction of one time retaliation by defection in a prisoners dilemma setting;and Witt (1986) who discusses enforcement by costly retaliation and otherpunishment not depending on repeat interactions.

More serious collective action problems emerge in the enforcement ofspontaneous norms. If the enforcement of norms is left to the private initiative

of individual members of the group, a large number of cases will becharacterized by a suboptimal level of enforcement. Punishing violators of anorm creates a public good because of the special and general deterrent effectof the penalty. Yet if imposition of the penalty is left to private initiative,punishers would be willing to enforce norms only to the point at which theprivate marginal cost of enforcement equals its private marginal benefit. Thisequilibrium obviously diverges from the social optimum, where enforcementwould be carried out until the marginal cost equals the social, rather thanprivate, marginal benefit.

This consideration explains why the customs of ancient societies recognizedand sanctioned only a limited category of wrongs. Generally speaking, onlythose wrongs that had a well-identified victim were likely to be addressedthrough a system of private law enforcement. For the system of private lawenforcement to function properly, it was necessary for the victim or his clan tohave a strong interest in carrying out the punishment. This also explains whyother categories of wrong with a broader class of victims tend to emerge duringmore advanced stages of legal development, when law enforcement is delegatedto a central authority.

In sum, collective action problems may be pervasive in the enforcement ofcustomary rules, with a consequential risk that enforcement will be suboptimal.This conclusion suggests that the decentralized process of law formation maybe successfully coupled with a centralized mechanism of law enforcement. Inthis way, the advantages that customary sources have in gathering diffuseinformation will be available, free from the collective action problems thattypically affect decentralized processes of law enforcement.

10. Adjudicating Social Norms

According to the theory of spontaneous law, customary law has a comparativeadvantage over the other institutional sources. The intellectual basis of thisclaim is related to the proposition that any social arrangement that isvoluntarily entered upon by rationally self-interested parties is beneficial tosociety as a whole.

The inductive process which underlies spontaneous law builds upon the roleof individuals giving direct effect to their revealed preferences, without the


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interface of third-party decision makers. To the extent that social practices haveemerged under competitive conditions (that is, so long as there is an implicitcost for indulging in inefficient equilibria) without Pareto-relevant externalities,we may be able to draw plausible conclusions regarding the desirability ofemerging customs. It is in this latter sense that custom may reclaim full dignityas a source of law. The evolutionary and game-theoretic appraisals of the law-making process have shed new light on the normative foundations of

spontaneous law, but they require an appropriate analysis of the incentivestructure in the originating social environment (Cooter, 1992).Evolutionary theories of cooperation have indeed explained the ability of

rationally self-interested individuals to cooperate for the sake of mutual gain.Evolutionarily stable cooperative strategies serve efficiency goals and mayemerge as social norms recognized by the community to be obligatory. Onceemerged, customary rules generate the expectations of the other members ofsociety and those expectations in turn demand judicial enforcement. In someinstances, peer pressure and spontaneous processes of norm internalization willsupport their enforcement.

The legal system may further this process by recognizing and enforcingwelfare-maximizing social norms. In this regard, Cooter (1994a) argues thatlegal recognition and enforcement should consequently be denied in the caseof non-cooperative practices, under a test that amounts to a structural analysisof the social incentives that generated the norm. He further argues that in theprocess of common law adjudication, a distinction must necessarily be madebetween cooperative norms and non-cooperative practices. Courts are notspecialized in the adjudication of most norms. They must therefore resort to astructural approach, first inquiring into the incentives underlying the socialstructure that generated the norms, rather than attempting to weigh their costsand benefits directly.

11. Local Information and Evolutionary Traps

When the private incentives of the parties diverge from the collective good andthe parties cannot enter into binding and enforceable social contracts,inefficient social interactions may follow. These situations may generatesuboptimal Nash equilibria as the benefit pursued by each individual player isinsufficient to compensate for the harm suffered by the other players. While attimes benefitting a few members of the group, strategies of this kind may resultin a net social loss for the collectivity. Generally considered undesirable, theymay be condemned from the other members of the group. In this way, rules thatare expected to harm the aggregate wellbeing of the community will not besupported by a belief of social necessity. By discouraging the adoption of


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socially suboptimal strategies, the group ethic may serve to destabilizeundesirable stalls in the evolutionary process. Therefore, those societies thatfoster a strong group ethic will maintain a comparative advantage over others.Whenever the societies operate in an intergroup environment marked by strongcompetition, competing societies will adopt the norms of societies with thecomparatively strong group ethic, or else they will suffer negative selection.

In a different setting, one may also think of a group ethic evolving to correct

for evolutionary stalls and to stabilize individual behaviour on a point of globalmaximization (Hirshleifer, 1982). Figure 1 illustrates a possible scenario for anevolutionary trap, where, even in the absence of any strategic interactionbetween individuals, global maximization is facilitated by the existence ofnorms.Whenever the non-convexity of individual preferences does not permit aprogressive shift from B to A without a utility loss, the point of localmaximization B may be characterized as a behavioural trap. In these situations,individuals face a no pain, no gain dilemma. Individuals are at a point oflocalmaximization and - because of imperfect knowledge or perhaps inertia in theirconsumption or behavioural habits - are unlikely to shift to a differentoptimizing point without external incentives. Imperfect information, in thiscontext, implies that individuals may have complete information about wherethey are, but not necessarily about where they are going - such that thepreferences that are revealed through the observed choices of the parties maynot be used as an absolute proxy for individual optimization.

Figure 1 The Utility-Enhancing Norm


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When this type of evolutionary stall persists in a group, social norms ofacceptable behaviour may emerge (Levy, 1988). Those who depart from thesenorms may be subjected to sanctions (condemnation).

Individuals, perhaps even the large majority of individuals in society, maybe trapped in behaviour B due to incomplete (ly known) preferences over never-experienced alternatives. It would then be utility enhancing for society (or othermembers within the group who have obtained information over the alternative

states of the world) to influence the consumption choices of other individualsby stigmatization or punishment, in order to lead the individual out of his orher trap. Such stigmatization - one may observe: paternalistic in nature - maywell evolve spontaneously in societies because it makes individuals and societyas a whole better off. In an evolutionary setting, societies that developed suchnorms - be them social, ethical, or moral in nature - will enjoy a comparativeadvantage over other societies.

Despite the general economic motion which views constraints as bads foroptimization problems, Figure 1 thus shows the possibility of autility-enhancing constraint capable of correcting a suboptimal equilibriumobtained in a point of local maximization along a non-convex preference set.Within a local optimization setup, moral constraints may supply informationnot otherwise revealed by the local surface. Together with social norms andgroup standards, moral constraints transmit the accumulated wisdom of pastexperience to individual decision makers. In this framework, norms oftradition, morality, and group ethics do not conflict in any general way with theeconomic paradigms of efficiency and optimization. Evolution assures thatpractices which are socially inferior (in the sense that they do not make acost-justified contribution to human wellbeing) are less frequently adoptedbecause they are labelled as immoral, socially inappropriate, or ethically wrong.Of course, evolutionary processes are never completed, and their task is onlystochastically accomplished. Still, the strong correlation between activities andinstitutions that are efficient, and the communitys moral approval of them,should not be underestimated. Many activities that are generally consideredimmoral (for example, stealing, cheating, lying, and so on) are also inefficient

in that they dissipate human wealth. While counterexamples exist in whichmorally condemned behaviour actually contributes to overall human welfare,social norms and moral principles of the type described above should beconsidered rules of thumb principles of conduct for individuals who operatein a world of imperfect information and limited cognitive competence (see,Heiner, 1983; Frank, 1987; Parisi, 1995).


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Spontenaous Emergence of Law - Customary Law

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