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SPONTANEOUS EMERGENCE OF LAW:

CUSTOMARY LAW

Francesco Parisi

George Mason University School of Law

© Copyright 1999 Francesco Parisi

Abstract

In the ‘social contract’ framework, customary rules can be regarded as an

implied and often non-verbalized exercise of direct legislation by the members

of society. Those legal systems that grant direct legal force to customary rules

regard custom as a primary, although not exclusive, source of law. In such legal

traditions, courts enforce customary rules as if they had been enacted by the

proper legislative authority. Custom thus amounts to a spontaneous norm which

is recognized by the legal system and granted enforcement as a proper legal

rule.

Judicial recognition of spontaneous norms amounts to a declaratory (rather than

constitutive) function that treats custom as a legal fact. The legal system ‘finds’

the law by recognizing social norms, but does not ‘create’ the law. The most

notable illustration is the system of international law, where, absent a central

legislative 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 of

Justice; and Restatement 102 of the Foreign Relations Law of the United

States.)

Whenever they are granted legitimate status in a legal system, customary

rules are usually given the same effect as other primary sources of law.

Although often subordinated to formal legislation, customary rules derive their

force from the concurrence of a uniform practice and a subjective belief that

adherence to them is obligatory (opinio iuris), without necessarily being

formally incorporated into any written body of law. For this reason, they are

usually classified as ‘immaterial’ sources of law (Brownlie, 1990). This notion

implies that the custom remains the actual source of law even after its judicial

recognition. In this setting, the judicial decisions that recognize a custom offer

only persuasive evidence of its existence and do not themselves become sources

of law. In turn, this prevents the principle of stare decisis from crystallizing

customary law.

Modern legal systems generally recognize customary rules that have

emerged either within the confines of positive legislation (consuetudo

secundum 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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(that is, custom contra legem) the latter normally prevails. In some instances,

however, a custom supersedes prior legislation (that is, abrogative custom), and

some arguments have been made in support of emerging practices that conflict

with obsolete provisions of public international law (desuetudo, or abrogative

practice) (Kontou, 1994). The theoretical and practical significance of these

forms of spontaneous social order, which compete with enacted law in

influencing human choice, are discussed below.

JEL classification: K00

Keywords: Customary Law, Spontaneous Law, Social Norms

1. Introduction

Legal theorists define custom as a practice that emerges outside of legal

constraints, and which individuals and organizations spontaneously follow in

the course of their interactions out of a sense of legal obligation. Two categories

of social practices are generally distinguished:

(a) Practices that reflect mere behavioural patterns. In legal jargon, such

behaviour is a mere usage; in economic terms it simply represents an

equilibrium convention. A mere behavioural regularity does not generate a

customary rule.

(b) Practices that reflect an internalized belief that the practice is necessary or

socially desirable. These practices are considered necessary for social

well-being and are treated as proper legal custom, often entering the legal

system as primary sources of law.

The terminology used in the legal and economic literature should be

contrasted with the terminology employed in sociological literature (see, for

example, Weber, 1978, pp. 319-320). What is legally termed a mere usage is

defined in sociological literature as a custom (Sitte), in the sense of a typically

uniform activity that is not considered to be socially necessary. Convention -

the sociological notion closest to the legal concept of custom - amounts to

conduct manipulated by express approval or disapproval by other members of

the 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 to

embrace norms that they view as requisite to their collective wellbeing. An

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enforceable custom emerges from two formative elements: (a) a quantitative

element consisting of a general or emerging practice; and (b) a qualitative

element reflected in the belief that the norm generates a desired social outcome.

2.1 The Quantitative Element

The quantitative requirements for the formation of customary law concern both

the length of time and the universality of the emerging practice. Regarding the

time element, there is generally no universally established minimum duration

for the emergence of customary rules. Customary rules have evolved from both

immemorial practice and a single act. Still, French jurisprudence has

traditionally required the passage of forty years for the emergence of an

international custom, while German doctrine generally requires thirty years

(see Tunkin, 1961; Mateesco, 1947). Naturally, the longer the time required to

form a valid practice, the less likely it is for custom to effectively anticipate the

intervention of formal legislation, and to adapt to changing circumstances

overtime.

Regarding the condition of universality, international legal theory is

ambivalent. Charney (1986) suggests that the system of international relations

is analogous to a world of individuals in the state of nature, dismissing the idea

that unanimous consent by all participants is required before binding customary

law is formed. Rather than universality, recent restatements of international law

refer to ‘consistency’ and ‘generality’ (see D’Amato, 1971). Where it is

impossible to identify a general practice because of fluctuations in behavior, the

consistency requirement is not met (see Asylum (1950) pp. 276-277; and

Wimbledon (1923), Ser. A, no. 1). Similarly, more recent cases in international

law restate the universality requirement in terms of ‘increasing and widespread

acceptance’ (see, for example, Fisheries Jurisdiction (1974), pp. 23-26; North

Sea Continental Shelf (1969), p. 42), allowing special consideration for

emerging general norms (or local clusters of spontaneous default rules) that are

expected to become evolutionarily stable over time.

With regard to rules at the national or local level, the varying pace with

which social norms are transformed suggests that no general time or

consistency requirement can be established as an across-the-board condition for

the validity of a custom. Some variance in individual observation of the practice

should be expected because of the stochastic origin of social norms. A flexible

time requirement is particularly necessary in situations of rapid flux, where

exogenous changes are likely to affect the incentive structure of the underlying

relationship.

2.2 The Qualitative Element

The second formative element of a customary rule is generally identified by the

phrase opinio iuris ac necessitatis, which describes a widespread belief in the

desirability of the norm and the general conviction that the practice represents

an essential norm of social conduct. This element is often defined in terms of

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necessary and obligatory convention. (Kelsen, 1939, 1945; D’Amato, 1971;

Walden, 1977). The traditional formulation of opinio iuris is problematic

because of its circularity. It is quite difficult to conceptualize that law can be

born from a practice which is already believed to be required by law.

The practical significance of this requirement is that it narrows the range

of enforceable customs: only those practices recognized as socially desirable or

necessary will eventually ripen into enforceable customary law. Once there is

a general consensus that members of a group ought to conform to a given rule

of conduct, a legal custom can be said to have emerged when some level of

spontaneous compliance with the rule is obtained. As a result, observable

equilibria that are regarded by society as either undesirable (for example, a

prisoner’s dilemma uncooperative outcome) or unnecessary (for example, a

common practice of greeting neighbours cordially) will lack the subjective and

qualitative element of legal obligation and, therefore, will not generate

enforceable legal rules.

B. The Emergence of Spontaneous Law

According to the traditional legal approach to customary law, two elements are

generally required for the emergence of a binding custom: (1) the practice

should emerge out of the spontaneous and uncoerced behaviour of various

members of a group, and (2) the parties involved must subjectively believe in

the obligatory or necessary nature of the emerging practice (opinio iuris). To

an economist, the first element corresponds to the rather standard assumption

of rational choice. The second element may be appraised as a belief of social

obligation, emerging in response to game inefficiencies, to support behavioural

rules that avoid aggregate losses from strategic behaviour.

The law and economics literature has examined some additional structural

conditions for the emergence of customary law, which will briefly be analyzed

below. (For a more extensive analysis, see Parisi, 1998b.)

3. Structural Symmetry and Incentive Alignment

The literature on social norms focuses on non-contractual mechanisms and

considers the situations that are more easily governed by spontaneous law.

Under symmetrical conditions, norms that maximize group welfare also

maximize individual expected payoffs. Thus, no one has any reason to

challenge the emerging norm. Paradoxically, therefore, there is no need for law

or norm enforcement in an environment characterized by perfect incentive

alignment, as contracts or relationships are self-enforcing (Klein, 1996).

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In the presence of perfect incentive alignment, cooperation will result in

both the case of repeated games in which the players are faced with high

discount factors, and in one-shot games. It is worth noting that situations

characterized by symmetric payoffs or role reversibility do not present an

opportunity for strategic preference revelation. The expected costs and benefits

of alternative rules are the same among the members of the group. Each

individual has an incentive to agree to a set of rules that maximize the

aggregate welfare of the group, consequently maximizing his expected share

of wealth. True preferences will therefore be revealed in situations of stochastic

symmetry. Conversely, strategic choices are more likely to characterize real life

situations with misaligned individual incentives.

Additionally, in the absence of perfect incentive alignment, the discount

factor plays an important role. In situations where the probability of future

interaction is relatively high, the discount factor captures two analytically

distinct elements. First, it acts as a function of the players’ time preference.

Second, the discount factor is a function of the probability of future

interactions.

The discount factor’s role in evolutionary models is therefore critical.

Environments promoting a high probability of future interaction and low time

preference are therefore more likely to induce optimizing equilibria. In the case

of a one-shot game, on the other hand, the probability of future interaction is

zero, 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 role

of morality and internalized obligations as a means for inducing cooperation

in conflict games (see, for example, Gauthier, 1986; Ullmann-Margalit, 1977).

Internalization of the norm is a source of spontaneous compliance. For

example, individuals internalize obligations when they disapprove and sanction

other individuals’ deviations from the rule, or when they directly lose utility

when the norm is violated. In this setting, Cooter (1994a) suggests that a legal

custom will successfully evolve when the ex ante individual incentives are

aligned 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 the

spontaneous emergence of cooperation. Such a problem is likely to be

minimized in situations of role reversibility or stochastic symmetry (Parisi,

1995). Similar to a Rawlsian veil of ignorance, role reversibility and stochastic

symmetry induce each member to agree to a set of rules that benefits the entire

group, thus maximizing her expected share of the wealth.

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These conditions in fact occurred during the formative period of the

medieval law merchant (lex mercatoria), when traveling merchants acted in the

dual capacity of buyer and seller. If they articulated a rule of law which was

favourable to them as sellers, it could have the opposite effect when they acted

as buyers, and vice-versa. This role reversibility changed an otherwise

conflicting set of incentives (buyer versus seller) into one that converged toward

symmetrical and mutually desirable rules.

The law merchant therefore illustrates a successful system of spontaneous

and decentralized law (see Benson, 1989, 1990; Greif, 1989). Fuller (1969, p.

24) observes that frequent role changes foster the emergence of mutually

recognized and accepted duties ‘in a society of economic traders. By definition

the members of such a society enter direct and voluntary relationships of

exchange. ... Finally, economic traders frequently exchange roles, now selling,

now buying. The duties that arise out of their exchanges are therefore

reversible, not only in theory but in practice.’

Certainly, the emergence of consensus for a given rule does not exclude the

possibility of subsequent opportunistic deviation by some individuals when

roles are later reversed. This is a typical enforcement problem, however, and

the possibility of strategic defection does not undermine the rule’s qualitative

features. The general acceptance of or acquiescence to a custom depends

primarily on its anticipated effect on the group. Those strategies that maximize

the expected payoff for each participant if reciprocally undertaken evolve into

norms. This conception of spontaneous law is examined by Stearns (1994, pp.

1243-1244), who observes that if the participants were unable to devise rules

governing future interactions, and unforeseen circumstances placed them in a

forced market relationship requiring post-contractual negotiations, courts and

legislatures might have a comparative advantage over the participants in

devising market facilitating rules. Unlike market participants, courts and

legislatures choose from among alternative solutions as if the underlying events

had not yet occurred, without attempting to strategically maximize the

advantage caused by unforeseen circumstances (see also Shubik, 1987). Where

rules 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 to

generate optimal rules via spontaneous processes. The group’s ability to impose

a sanction obviously depends on an individual’s accountability for his past

behaviour. Benson (1992d, pp. 5-7) explores the role of reputation in situations

of repeated market interaction, observing that reputation serves as a source of

collective knowledge regarding past actions.

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5. Induced Symmetry and Reciprocity Constraints

Prisoner’s dilemma-type games are plagued by the dominance of opportunistic

behaviour because of the potential accessibility of off-diagonal, non-cooperative

outcomes. Schotter (1981), Lewis (1969) and Leibenstein (1982) analyze the

role of conventions in correcting prisoner’s dilemma situations.

Among the devices capable of correcting prisoner’s dilemma-type games,

the players can bind their strategic choices to those of their opponents,

drastically changing the equilibrium of the game. Ensuring automatic

reciprocity by binding a player’s strategy to that of his opponent eliminates

access to off-diagonal outcomes and renders the reward for unilateral defection

unobtainable. Just as no rational player will employ defection strategies in the

hope of obtaining higher payoffs from unilateral cheating, neither will a

rational player be induced to select defection strategies as a merely defensive

tactic. Automatic reciprocity mechanisms thus guarantee a shift toward

optimizing cooperation. As pointed out by Parisi (1997), ancient customs of

retaliation, based on conceptions of symmetry and punitive balance, provide an

intriguing 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 of

the 1969 Vienna Convention, which articulates an established custom of

reciprocity, creates a mirror-image mechanism in the case of unilateral

reservations in the process of treaty ratification: ‘A reservation established with

regard to another party ... modifies those provisions to the same extent for that

other party in its relations with the reserving state.’ The effects of this

automatic reciprocity mechanism are similar to a tit-for-tat strategy without the

need for active retaliation by states: whenever a treaty is modified unilaterally

in favour of one state, the result will be as if all the other states had introduced

an identical reservation against the reserving state. By imposing a symmetry

constraint on the parties’ choices, this rule offers a possible solution to

prisoner’s dilemma problems.

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

conflict situations characterized by a prisoner’s dilemma structure (in both

symmetric and asymmetric cases), alone it is incapable of correcting other

strategic problems. When a conflict occurs along the diagonal possibilities of

the game (such that the obtainable equilibria are already characterized by

symmetric strategies), a reciprocity constraint will not eliminate the divergence

of interests between the players and will not affect the results of the game. The

dynamic process of norm formation may unveil the existence of a ‘tilt point’

beyond which emerging beliefs become stable and self-sustaining. In light of

reciprocal constraints undertaken by other members of the community,

individuals who frequently exchange roles in their social interactions have

incentives to constrain their behaviour to conform to socially optimal norms of

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conduct. Buchanan (1975) insightfully anticipated this result, suggesting that

an even stronger logic explains the emergence of cooperation in situations of

induced reciprocity. In both cases, the non-idealistic and self-interested

behaviour 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 and

exchange of individual members of a group. As in a contractarian setting, the

reality of customary law formation relies on a voluntary process through which

members of a community develop rules that govern their social interaction by

voluntarily adhering to emerging behavioural standards. In this setting,

Harsanyi (1955) suggests that optimal social norms are those that would

emerge through the interaction of individual actors in a social setting with

impersonal preferences. The impersonality requirement for individual

preferences is satisfied if the decision makers have an equal chance of finding

themselves in any one of the initial social positions and they rationally choose

a set of rules to maximize their expected welfare. Rawls (1971) employs

Harsanyi’s model of stochastic ignorance in his theory of justice. However, the

Rawlsian ‘veil of ignorance’ introduces an element of risk aversion in the

choice between alternative states of the world, thus altering the outcome

achievable under Harsanyi’s original model, with a bias toward equal

distribution (that is, with results that approximate the Nash criterion of social

welfare). Further analysis of the spontaneous formation of norms and principles

of morality can be found in Sen (1979), Ullmann-Margalit (1977) and Gauthier

(1986).

Legal theorists and practitioners have addressed a similar issue when

considering the requirements of opinio iuris. In attempting to solve one of the

problems associated with the notion of opinio iuris, namely the troublesome

problem of circularity, legal scholars (notably, D’Amato, 1971) have considered

the crucial issue of timing of belief and action in the formation of customary

rules. The traditional approach emphasizes the awkward notion that individuals

must believe that a practice is already law before it can become law. This

approach basically requires the existence of a mistake for the emergence of a

custom: the belief that an undertaken practice was required by law, when

instead, it was not. Obviously, this approach has its flaws. Placing such reliance

on systematic mistakes, the theory fails to explain how customary rules can

emerge and evolve overtime in cases where individuals have full knowledge of

the state of the law.

In this context, legal theorists have proposed to look past the notions of

opinio 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 that

have been expressed prior to the emergence of a conflict.

Here, it is interesting to point out a strong similarity between the legal and

the economic models. Articulations that are made prior to the unveiling of

conflicting contingencies can be analogized to rules chosen under a Harsanyian

veil of uncertainty. States and individuals will have an incentive to articulate

and endorse norms that maximize their expected welfare. Given some degree

of uncertainty as to the future course of events, the emerging rules will be such

as to maximize the expected welfare of the community at large. Conversely,

rules that are articulated after an outburst of conflict may be strategically

biased. Once the future is disclosed to them, parties will tend to articulate rules

that maximize their actual welfare, rather than the expected welfare to be

derived from an uncertain future. Thus, ex ante norms should be given greater

weight in the adjudication process.

This predicament seems to be contradicted by the empirical and anecdotal

evidence on commercial customary law. Bernstein (1996) examines customary

rules that have developed in various modern commercial trades. Her findings

seem to indicate that in the adjudication of business disputes, commercial

tribunals tend to enforce customary rules that are quite different from the

business norms spontaneously followed by the parties in the course of their

relationship. Rather, customary rules develop around practices developed

during the conflictual phase of a relationship. In this setting, Bernstein

distinguishes between relationship norms and end-of-the-game norms. When

adjudicating a case, courts are faced with parties who have reached the end

point in their relationship. The end-of-the-game norms of the conflictual phase

thus tend to be enforced, while the cooperative norms developed in the course

of their relationship remain outside the domain of adjudication.

C. The Failures of Customary Law

According to the popular paradigms of economic analysis, decentralized market

processes have a comparative advantage over centralized allocative

mechanisms in the creation of efficient equilibria. Customary law formation

can be analogized to a decentralized decision making process, with a

comparative advantage over centralized processes in the creation of efficient

rules.

Customary rules are generally accepted by the community, with a larger

share of rules followed spontaneously by the community and a consequent

reduction in law enforcement costs. In the decentralized dynamic of

spontaneous law, individual decision makers directly perceive the costs and

benefits of alternative rules, and reveal their preferences by supporting or

612 Spontaneous Emergence of Law: Customary Law 9500

opposing their formation. The formative process of customary law proceeds

through a purely inductive accounting of subjective preferences. Through his

own action, each individual contributes to the creation of law. The emerging

rule thus embodies the aggregate effects of independent choices by various

individuals that participate in its formation. This inductive process allows

individuals to reveal their preferences through their own action, without the

interface of third-party decision makers.

The analogy between customary rules and spontaneous market equilibria,

however, calls for an assessment of the potential insufficiencies of the

spontaneous processes of law formation. I will proceed by setting out some

hypotheses for failure and discussing their potential scope of application in the

area of customary law. The literature in this area is relatively thin and much

work still needs to be done to develop a coherent theory of spontaneous law.

7. Path Dependence and the Idiosyncracies of Customary Law

Norms and conventions vary from place to place. Any theory about the

efficiency of spontaneous law should explain the diversity of norms and

conventions across time and space. In my view, there are two primary ways to

provide such an explanation.

The first is to look for idiosyncratic environmental or institutional factors

which might attribute to the diversity of observed rules. If the underlying social,

economic, or historical realities are found to be different from one another,

different norms or conventions should be expected. Rules, norms and

conventions develop in response to exogenous shocks through a natural process

of selection and evolution. This ‘survival of the fittest’ explanation would

suggest that whatever exists in equilibrium is efficient, given the current state

of affairs. This belief, borrowed from Darwinian evolutionism, is pervasive in

the law and economics literature and, when applied to spontaneous law, risks

becoming a tautological profession of faith. Ironically, we should note that the

originators of such a claim, socio-biologists, have now widely refuted its

validity.

The second way to reconcile the efficiency claim to the observed diversity

of spontaneous rules is to consider the role of path dependence in the evolution

of norms and conventions. Following Roe (1996) and his definition of path

dependence in law, evolution toward efficiency may be seen as taking place

with some random component. Random historical and natural events (the

random element of chaos theory) determine the choice of the initial path. This

may be the case particularly where initial choices are made under imperfect

information. Evolution then continues toward efficiency along different paths,

with results that are influenced and constrained by the initial random

conditions.

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If we agree that path dependence has something to do with the emergence

and evolution of customary law, we should follow this logic to its conclusion,

revisiting the very foundations of the efficiency claim. The main question is

whether path dependence could ever lead to inefficient results. According to

current research (Roe, 1996), path dependence may lead to inefficient

equilibria. Once a community has developed its norms and conventions, the

costs of changing them may outweight the benefits. Less efficient rules may

persist if the transition to more efficient alternatives is costly. Thus, if one

allows for some randomness and path dependence, norms and conventions,

although driven by an evolution-toward-efficiency dynamic, may stabilize

around points of local, rather than global, maximization. Our history, in this

sense, constrains our present choices. We may wish we had developed more

efficient customs and institutions, but it would be foolish now to attempt to

change them. The claim of efficiency of spontaneous law thus becomes a

relative one vis-à-vis the other sources of law. The point then becomes that of

weighing the relative advantages of spontaneous law-making against the

attributes of engineered legislation, taking full account of the pervasive public

choice and information problems underlying such alternatives.

8. Rational Abstention and Norm Manipulation

A public choice analysis of customary law should consider the vulnerability of

norms and customs to the pressure of special interest groups. This line of

analysis - relatively undeveloped in the current literature - should search for

parallels between the legislative process and the dynamic of norm formation.

In that setting, the opportunity for collective beliefs and customs to be

manipulated by special interest groups should be analyzed. Any claim that

customary sources are superior to proper legislation will have to rest on a solid

understanding of the relative sensibility of each source to possible political

failures.

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

customary law generates very interesting results. Unlike legislation in a

representative democracy, customary law rests on the widespread consensus of

all individuals affected by the rule. If principal-agent problems are likely to

arise in a political world characterized by rational ignorance and rational

abstention 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 emerging

practice.

Imperfect information, however, may induce voluntary acquiescence - or

even active concurrence - to an undesirable practice. Economic models of

cascade or bandwagon behaviour have shown how inferior paths can be

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followed by individuals who rely on previous choices undertaken by other

subjects, and value such observed choices as signals of revealed preference.

Economic models have shown that, when information is incomplete, excessive

weight can be attached to the signal generated by others. Others’ choices may

be followed even when the agent’s own perception conflicts with the content of

the observed signal. In this way, a biased or mistaken first-mover can generate

a 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 spontaneous

sources of law in light of the possible manipulation of collective beliefs through

biased leadership. If information is imperfect, the input of politically biased

first-movers may generate undesirable norms. These norms may persist because

of the weight attached to the choices of our predecessors. Thus, once generated,

wrong beliefs may become stable and widespread in any community of

imperfect decision makers.

9. Collective Action Problems in Customary Legal Regimes

Another potential weakness of customary law is revealed by the application of

a collective action framework to the study of the formation and enforcement of

customary rules. We can start the analysis by observing that legal rules and law

enforcement are public goods. In the case of customary rules, collective action

problems may thus arise at two distinct stages: first, in the formative process

of customary rules; and second, in the enforcement of the emerged customs.

The process of a custom formation relies on the spontaneous and

widespread acceptance of a given rule by the members of a group. Individuals

often face a private cost when complying with the precepts of the rule, and they

generally derive a benefit because of the compliance of others with existing

rules. Thus, the formation of customary law can be affected by a public good

problem. When discussing the conditions under which customary rules can

effectively develop, I illustrated the analysis with a game-theoretic framework.

The public good problem considered here is in many respects similar to the

strategic tension that we have examined in the context of customary law

formation. If individuals face a private cost and generate a public benefit

through norm creation, there will be a suboptimal amount of norms created

through spontaneous processes. Any individual would like others to observe a

higher level of norm compliance than he or she observed. The resulting level

of norm compliance would thus be suboptimal. Collective action problems in

the formation of customary rules have traditionally been corrected by norms

which sanctioned opportunistic double standards, and by metarules imposing

reciprocity 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 the

sanction of one time retaliation by defection in a prisoner’s dilemma setting;

and Witt (1986) who discusses enforcement by costly retaliation and other

punishment not depending on repeat interactions.

More serious collective action problems emerge in the enforcement of

spontaneous norms. If the enforcement of norms is left to the private initiative

of individual members of the group, a large number of cases will be

characterized by a suboptimal level of enforcement. Punishing violators of a

norm creates a public good because of the special and general deterrent effect

of 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 the

private marginal cost of enforcement equals its private marginal benefit. This

equilibrium obviously diverges from the social optimum, where enforcement

would be carried out until the marginal cost equals the social, rather than

private, marginal benefit.

This consideration explains why the customs of ancient societies recognized

and sanctioned only a limited category of wrongs. Generally speaking, only

those wrongs that had a well-identified victim were likely to be addressed

through a system of private law enforcement. For the system of private law

enforcement to function properly, it was necessary for the victim or his clan to

have a strong interest in carrying out the punishment. This also explains why

other categories of wrong with a broader class of victims tend to emerge during

more advanced stages of legal development, when law enforcement is delegated

to a central authority.

In sum, collective action problems may be pervasive in the enforcement of

customary rules, with a consequential risk that enforcement will be suboptimal.

This conclusion suggests that the decentralized process of law formation may

be successfully coupled with a centralized mechanism of law enforcement. In

this way, the advantages that customary sources have in gathering diffuse

information will be available, free from the collective action problems that

typically affect decentralized processes of law enforcement.

10. Adjudicating Social Norms

According to the theory of spontaneous law, customary law has a comparative

advantage over the other institutional sources. The intellectual basis of this

claim is related to the proposition that any social arrangement that is

voluntarily entered upon by rationally self-interested parties is beneficial to

society as a whole.

The inductive process which underlies spontaneous law builds upon the role

of 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 have

emerged under competitive conditions (that is, so long as there is an implicit

cost for indulging in inefficient equilibria) without Pareto-relevant externalities,

we may be able to draw plausible conclusions regarding the desirability of

emerging customs. It is in this latter sense that custom may reclaim full dignity

as a source of law. The evolutionary and game-theoretic appraisals of the lawmaking

process have shed new light on the normative foundations of

spontaneous law, but they require an appropriate analysis of the incentive

structure 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 may

emerge as social norms recognized by the community to be obligatory. Once

emerged, customary rules generate the expectations of the other members of

society and those expectations in turn demand judicial enforcement. In some

instances, peer pressure and spontaneous processes of norm internalization will

support their enforcement.

The legal system may further this process by recognizing and enforcing

welfare-maximizing social norms. In this regard, Cooter (1994a) argues that

legal recognition and enforcement should consequently be denied in the case

of non-cooperative practices, under a test that amounts to a structural analysis

of the social incentives that generated the norm. He further argues that in the

process of common law adjudication, a distinction must necessarily be made

between cooperative norms and non-cooperative practices. Courts are not

specialized in the adjudication of most norms. They must therefore resort to a

structural approach, first inquiring into the incentives underlying the social

structure that generated the norms, rather than attempting to weigh their costs

and benefits directly.

11. Local Information and Evolutionary Traps

When the private incentives of the parties diverge from the collective good and

the parties cannot enter into binding and enforceable social contracts,

inefficient social interactions may follow. These situations may generate

suboptimal Nash equilibria as the benefit pursued by each individual player is

insufficient to compensate for the harm suffered by the other players. While at

times benefitting a few members of the group, strategies of this kind may result

in a net social loss for the collectivity. Generally considered undesirable, they

may be condemned from the other members of the group. In this way, rules that

are expected to harm the aggregate wellbeing of the community will not be

supported by a belief of social necessity. By discouraging the adoption of

9500 Spontaneous Emergence of Law: Customary Law 617

socially suboptimal strategies, the group ethic may serve to destabilize

undesirable stalls in the evolutionary process. Therefore, those societies that

foster a strong group ethic will maintain a comparative advantage over others.

Whenever the societies operate in an intergroup environment marked by strong

competition, competing societies will adopt the norms of societies with the

comparatively 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 global

maximization (Hirshleifer, 1982). Figure 1 illustrates a possible scenario for an

evolutionary trap, where, even in the absence of any strategic interaction

between individuals, global maximization is facilitated by the existence of

norms.

Whenever the non-convexity of individual preferences does not permit a

progressive shift from B to A without a utility loss, the point of local

maximization B may be characterized as a behavioural trap. In these situations,

individuals face a ‘no pain, no gain’ dilemma. Individuals are at a point of

local

maximization and - because of imperfect knowledge or perhaps inertia in their

consumption or behavioural habits - are unlikely to shift to a different

optimizing point without external incentives. Imperfect information, in this

context, implies that individuals may have complete information about where

they are, but not necessarily about where they are going - such that the

preferences that are revealed through the observed choices of the parties may

not be used as an absolute proxy for individual optimization.

Figure 1 The Utility-Enhancing Norm

618 Spontaneous Emergence of Law: Customary Law 9500

When this type of evolutionary stall persists in a group, social norms of

acceptable behaviour may emerge (Levy, 1988). Those who depart from these

norms may be subjected to sanctions (condemnation).

Individuals, perhaps even the large majority of individuals in society, may

be trapped in behaviour B due to incomplete (ly known) preferences over neverexperienced

alternatives. It would then be utility enhancing for society (or other

members within the group who have obtained information over the alternative

states of the world) to influence the consumption choices of other individuals

by stigmatization or punishment, in order to lead the individual out of his or

her trap. Such stigmatization - one may observe: paternalistic in nature - may

well evolve spontaneously in societies because it makes individuals and society

as a whole better off. In an evolutionary setting, societies that developed such

norms - be them social, ethical, or moral in nature - will enjoy a comparative

advantage over other societies.

Despite the general economic motion which views constraints as ‘bads’ for

optimization problems, Figure 1 thus shows the possibility of a

utility-enhancing constraint capable of correcting a suboptimal equilibrium

obtained in a point of local maximization along a non-convex preference set.

Within a local optimization setup, moral constraints may supply information

not otherwise revealed by the local surface. Together with social norms and

group standards, moral constraints transmit the accumulated wisdom of past

experience to individual decision makers. In this framework, norms of

tradition, morality, and group ethics do not conflict in any general way with the

economic paradigms of efficiency and optimization. Evolution assures that

practices which are socially inferior (in the sense that they do not make a

cost-justified contribution to human wellbeing) are less frequently adopted

because they are labelled as immoral, socially inappropriate, or ethically wrong.

Of course, evolutionary processes are never completed, and their task is only

stochastically accomplished. Still, the strong correlation between activities and

institutions that are efficient, and the community’s moral approval of them,

should not be underestimated. Many activities that are generally considered

immoral (for example, stealing, cheating, lying, and so on) are also inefficient

in that they dissipate human wealth. While counterexamples exist in which

‘morally condemned’ behaviour actually contributes to overall human welfare,

social norms and moral principles of the type described above should be

considered ‘rules of thumb’ principles of conduct for individuals who operate

in a world of imperfect information and limited cognitive competence (see,

Heiner, 1983; Frank, 1987; Parisi, 1995).

9500 Spontaneous Emergence of Law: Customary Law 619

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