On Custom in the Economy
Oxford Clarendon Press, 1998, 1-8
Writing about custom makes me feel like a fish reasoning how water rules the life of fish. It is a staggering task.
Custom is ubiquitous in all spheres of life. It shapes habits and convictions, sways emotions and cognitions, and influences motivation and action. Through all these channels, custom pervades social and economic interaction. The many individual effects of custom diffuse and interact throughout the social system. This renders it difficult to isolate single causal chains. Moreover, custom affects motivation, conviction, and behaviour in such a perfectly ‘natural’ way that the customary undergirdings of social and economic processes appear hardly discernible, and sometimes even invisible. In spite of this imperspicuity, custom exerts, in Alfred Marshall’s words, a ‘deep and controlling influence over the history of the world.’ 
Custom eases economic and social interaction in some dimensions while constraining it in others. The advantages of custom for social coordination have been stressed by sociologists in observing that ‘effective norms can constitute a powerful form of social capital’.  By way of contrast, economists depict the ‘yoke of custom’ as ‘hindering the method of production and the character of producers from developing themselves freely’.  These observations point to important aspects of custom. A deeper understanding,
1. Marshall (1890: 465).
2. Coleman (1990: 311).
3.Marshall (1890: 73, 465).
however, requires an analysis of how customs form, and how they affect behaviour.
This book proposes a theory of custom which centres on individual cognition, emotion, and action. In this, the theory deviates from prevailing approaches which identify customs with routines that are maintained because of their competitive or instrumental advantage. Such an instrumentalist conception falls short of rendering important non-instrumental aspects of custom comprehensible. It is, of course, sensible to drive on the right-hand side of the road if everybody else does the same. The spread of right-hand driving, so induced, may render right-hand driving customary. This is the easy case. The argument will not explain why people stick to certain rules which are individually costly to observe, like keeping promises, respecting property, or giving gratuities. Such behaviours are maintained by custom. They provide the foundation for all kinds of social and economic institutions. The problem of customary rule obedience requires more than simple instrumental arguments like those accounting for the custom of right-hand driving.
The theory of custom pursued in this book emphasizes the motivational force that arises from the individual’s striving for coherence and justification. Custom is portrayed as emerging from the individual’s desire to align behaviour, conviction, and emotion tightly with one another. Individuals have a preference for patterned behaviour, for acting according to their convictions, and for forming their convictions in accordance with what they are experiencing. The alignment of behaviour, conviction, and emotion is engendered by processes taking place in the human mind.
These psychological processes - termed ‘clarification’ processes - are not confined to cognition but structure psychological organization through and through. Pattern recognition, which is largely automatic, can be interpreted in terms of clarification processes. Similarly, routine and habit build on spontaneously perceived regularities which escape our regular deliberation. The emotional dispositions that stabilize routine and habit are engendered by a desire to integrate habit, emotion, and conviction. The
phenomenon of custom arises from the intermeshing of behavioural, emotional, and cognitive elements. All this is epitomized in the ‘clarity’ view which will be developed as the argument unfolds.
Custom is a fundamental constituent of culture, but the subsequent chapters will not take such a broad perspective. Rather, the theory will be developed by building on everyday experience. It is, however, appropriate to sketch the underlying position regarding some important background issues before entering the main argument.
Viewed in very broad terms, current social theory is dominated by two opposing views concerning the interrelation between culture and economics. One of them, the ‘economistic’ view, conceives culture as an epiphenomenon generated by more fundamental processes of economic and evolutionary competition; the other, the ‘culturalist’ or ‘post-modernist’ approach, posits that social reality is, in any society, a thoroughly social construct - the economic sphere is portrayed as being determined by culture, rather than as determining culture.
The theory of custom proposed here deviates from economistic and culturalist conceptions in denying exclusive superiority either to cultural processes or to functional and competitive considerations alone. Both cultural and economic phenomena are conceived as epiphenomena brought about by the way in which humans think, feel, and act. Customs arise from these psychological regularities in the process of social interaction. Rather than postulating an autonomy of either economic or social processes vis-à-vis the individual, as entailed by culturalist or economistic views, the question is raised of how such autonomy may emerge from interaction. This problem is analysed with regard to the formation of custom.
In one sense the approach is individualistic, because it takes the
individual as the unit of analysis. In another sense it is not, because it does not deny the reality and (partial) autonomy of groups, customs, and other collective phenomena, and does not assume that the individuals remain unaffected by social processes. Rather, the approach seeks to explain how collective phenomena may attain autonomy up to the point of controlling and even enslaving the very individuals who generated these collective phenomena by their interaction.
Further, the theoretical perspective pursued here deviates from currently prevailing positions regarding questions of ethics. In spite of their antagonism, economistic and culturalist conceptions share the conviction that ethical valuations are basically arbitrary and culture-specific, whereas the present approach suggests a quite different stance. Economistic interpretations reduce social values to individual preferences. These are taken as givens, or as having been brought about by blind evolutionary processes without any moral connotation. In brief, social valuations are taken as arbitrary. The same position flows directly from a culturalist perspective, where everything is conceived as being culturally determined. Both strands of thought depict ethical values as valid only within a given culture. More fundamental ethical judgements (like those concerning human rights) may emerge from universal consensus and cross-cultural agreement, but no further and deeper foundation is available.
In contrast, the position adopted here is universalist. Cultural phenomena, including ethical convictions, are conceived as flowing from fundamental cognitive, emotional, and behavioural dispositions of human beings. These dispositions are shared across cultures and are themselves independent of culture. Ethical convictions, therefore, are not arbitrary tastes, but are systematically linked to the prevailing world-view. The ‘social construction of reality’ which brought about a given world-view is not an erratic process, but is shaped by experience and the laws that govern our thinking. The non-arbitrariness of ethical judgements is entailed by the non-arbitrariness of human nature and the non-arbitrariness of culture.
The broad topics of cultural and ethical relativism and of culturalism versus economism do not, however, provide the central characters of the subsequent account, and the discussion will not elaborate them any further. The broad issues have been mentioned only in order to sketch the background and set the stage for an argument that portrays the formation of custom commencing from everyday settings. However, the appendices at the end of the book offer some additional material on individualism and on cultural and ethical relativism.
The first four chapters elaborate on the nature of custom. Custom is depicted as comprising habitual, cognitive, and emotional aspects. These aspects may be conceived as distinct components, but in practice they are closely interlinked. It is argued that market transactions must rely on customary entitlements and obligations. Such entitlements and obligations form the bedrock of property and exchange. Furthermore, it is explained that customs may change smoothly or abruptly in several dimensions.
The idea of adaptive custom is then advanced in Chapter 5. The view follows Alfred Marshall’s exposition of custom. Custom is portrayed as an inertial force adapting tardily to new circumstances. While very helpful in elucidating various changes in custom, the adaptive view falls short of accounting for some important characteristics of custom such as its rigidity and partial autonomy. Hence Chapters 6-10 develop the ‘clarity’ view of custom. Customary regularities relate to rule perception and learning. The motivational force of custom is conceived as emerging from a preference for regularity and a desire for coherence that tie cognition, emotion, and action together. The force of custom, as well as its rigidity and partial autonomy, derive from this contextual reinforcement.
The second part of the book applies this proposed view of
custom to the theory of property, the theory of the law, and the theory of the firm and the market.
The argument on property follows David Hume’s theory of property closely. Property is portrayed as grounded in the same traits of human motivation that shape custom, but the particular forms that property takes emerge from social and economic interaction. The motivational and functional aspects of property are largely running in parallel, mutually reinforcing each other. This parallelism resembles the interplay of theme and counterpoint in a piece of music. Each voice supports the other, but sometimes the interplay occasions dissonance and tension. Similarly, and upon certain occasions, motivational and functional requirements point in different directions. This gives rise to conflict and may occasion severe inefficiencies. The ‘counterpoint’ argument complements the modern theory of property rights in several ways. It accounts for the persistent inefficiencies that withstand evolutionary pressure and helps to constrain the set of institutional solutions that compete at a time, thus sharpening ideas about institutional competition.
The approach can be generalized to many aspects of jurisprudence. It offers a fresh view of the antagonism between natural and positive law by delineating the way in which psychological and instrumental demands interact. The law is depicted as a kind of systematized custom that aligns behavioural patterns with perceived regularities and thus influences behaviour in the same way as custom. While older legal theorizing stressed the ‘organic’ nature of legal evolution, modern evolutionary thinking emphasizes almost exclusively external functional and instrumental aspects. The clarity view emphasizes the ‘counterpoint’ pattern: both internal ‘organic’ and external instrumental forces work together in shaping the law
The firm provides another realm in which the workings of custom can be studied. Firms can be envisaged as islands of specialized customs emerging in the market. Competition weeds out inefficient organizational forms and inefficient customary formations. In this way, custom is confined to those tasks where
it is superior to other forms of coordination. In a competitive environment, the sluggishness of custom thus establishes limits to integration and to the size of the firm. Further, the clarity view offers new vistas of the firm by focusing not so much on single and separate organizational features as on the pervasive coherence and internal balance of the entire set of routines, control structures, and firm-specific norms.
Custom serves to organize the division of labour within the firm and in society at large. In this, direct coordination by custom provides an alternative to market coordination, which rests more indirectly on custom. While Adam Smith maintains that it is the size of the market that limits the division of labour, the clarity view entails that the nature of the task delimits the division of labour in another important way. Certain tasks - like writing a block of computer code, or a piece of music - cannot usefully be subdivided any further, irrespective of the size of the market. This suggests a fundamental reformulation of Smith’s theorem, and a new view about how the division of labour is organized within firms and across the market.
Thus, the forces of custom surface, in various ways and at various places. They provide the foundation for many economic and social institutions. The concluding chapter stresses the overall pattern of the workings of custom, its pervasiveness, and the way in which it influences social evolution.
A book such as this may be compared to a building. A building is erected by combining various materials in certain ways, and a book is composed of arguments and observations. In both cases, the product is characterized mainly by the overall structure of its composition, somewhat independently of the materials used. The architectural idea embodied in the building could have been realized by using other materials instead of those actually used - other types of stones and mortar, for instance. Similarly, a book
develops a thesis which could be explained by using other building blocks - other arguments, observations, or examples. Just as the design of a building is not reducible to the materials used, and is even somewhat independent of these materials, the main message of this book rests in the overall vision it seeks to communicate.