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Wednesday, June 10, 2009

Financial Community Norms

Bill Easterly:

Rulers, communities, and revolution, by Bill Easterly: ...Some have had a simplistic view of institutions in development as deriving only from top-down formal rules and laws. ...[M]uch research indicates otherwise.

First, formal rules that are incompatible with community norms often have no effect (this extends to things like trying to have registered land titles when the local community already has customary allocation of land rights, research on paper land titles in Africa confirms they have little effect on anything).

Second, if the rulers are especially oppressive they could enforce the incompatible formal rules by force, which would make communities worse off. But in a free society, the community can resist the rulers, which is part of the benefit of a free society.

Third, most rules we live by in a free society are more the product of community norms than they are of formal laws. (Fancy version: Rules emerge out of complex social interactions in a spontaneous order.) This is a good thing, as it makes the rules more responsive to local circumstances and needs. Down with arbitrary rules, up with community norms.

There's a lesson here for regulation. It's not enough to change the rules. If the culture doesn't change to support those rules, the rules won't be effective. The current crisis wasn't just because we had ineffective regulation and all we have to do now to fix things is to change the rules of the game. Attitudes must change as well.

So having just said "I don't really buy the explanation that an erosion of culture played a big role in the crisis," something I stand by with respect to the "post-modernism" argument at dispute in that post, I think there is a sense in which culture must change. If you believe that an invisible hand guides self-interest to maximize societies interests, always and everywhere except for a set with measure zero, then you can also convince yourself that whatever greedy, self-interested action that you take is meritorious in some larger sense. But without the proper social guidance as a check on those actions, that is not the case at all. Some of those checks are formal rules and regulations, but the institutions and community norms that exist are every bit as important.

So yes, we need new regulation, but the financial community also needs to establish new norms, and people who step outside of those norms must be socially ostracized in whatever sense is required in those markets. Rules and regulations are not enough by themselves, community attitudes must change as well.

Will attitudes change enough? It seems like there's been some change, for now at least, though not everyone would agree with that, and we won't really know until the financial sector gets back on its feet -- there's no guarantee that whatever change in attitudes that has occurred will persist. I have my doubts that it will.

    Posted by on Wednesday, June 10, 2009 at 01:17 AM in Economics, Financial System, Regulation | Permalink  TrackBack (0)  Comments (25)

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