ABSTRACT OF PAPER
Title: Morality, Social Norms and Rule of Law as Transaction Cost-Saving Devices: The Case of Ancient Athens
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The importance of the institutional framework for economic development 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 backing of social norms. Morality and social norms are the major elements of the informal institutional struc-ture, 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. Ancient Athens 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 disputes (they even introduced ADR methods such as arbitration). 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 business ethics. Conformity to social norms as well as “moral” behavior was fostered by social-sanction mechanisms (such as stigma) and moral education. The success of the Athenian institutions was significant in many respects and it was founded on the homogeneity of the Athenian society and its accumulated wealth before the Peloponnesian War. 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 decaying morals led to a parallel decline of the quality of the informal institutional framework. The consequences of the deterioration of the 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 and legal error were present even before the war, however these problems were heightened with the decline in morals. The Athenian example is a further proof of the importance of morality and social norms as transaction cost-saving devices even in quite sophisticated legal sys-tems. Their absence or decline leads inevitably to the need for more regulation, clear-cut rules, less judicial discretionary power and more litigation.
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