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Moral Consequences of Institutional Structure

Rodney F. Hiser
Economics Instructor
Butler County Community College
901 S. Haverhill Road
El Dorado, KS 67042



This paper argues that there is a relationship between institutional structure and moral choice. Institutional structure is seen as sets of rules that constrain people's moral choices. Moral choices are seen as choices that benefit or harm others. Institutions generate incentives that affect the benefit - cost ratio of moral choices. Changes in institutional structure result in changes in the desirability of various moral choices. This relationship makes possible a general predictability regarding people's moral choices. The author concludes that moral choice in real-world societies takes on a character that reflects their relative position on an institutional continuum.



  1. Introduction

  2. Developing a Model

  3. Moral Choice in the Private Property Order

  4. Moral Choice in the Bureau

  5. Criticisms of the Model

  6. Conclusions and Implications



I. Introduction

In this paper I argue that the prevailing institutional structure of any given social order profoundly influences the moral choices of the order's inhabitants, i.e., there is a tendency for human conduct to take on the character best able to advance personal interests and ambitions under the existing institutional structure. This phenomenon, on a superficial level, can be observed in students. Since young people do not have to provide for their own food and shelter, they have no requirement to conform to market institutions. Many, therefore, flaunt society's standards of propriety in their dress, hair style, speech etc. without repercussions. An overnight change occurs when these students take a job in order to purchase a car. Working at the local supermarket, most are clean-cut, neatly dressed, and polite. Students' differing choices may be attributed to the different institutional structures and the resulting incentive structures facing them.

I contend that this phenomenon is not restricted to students but operates in every social order however large or small, that people tend to adopt moral values because they are most beneficial to them given their institutional environment. This is not a new idea, of course, since much of the property rights literature suggests this (Alchian and Demsetz, 1973; Demsetz, 1967; Furubotn, 1972) and this idea is the mainstay of much sociology literature (e.g. Berger and Luckmann, 1966). There also is a small but growing body of economic literature (Benson, 2002; Hiser, 1999; Klein, 1998) that sees people's moral choices as endogenous to the institutional structure of society. Benson, for example, argues "that what most people (...) perceive to be moral behavior depends at least partly on the institutional setting of the relevant behavioral interaction. That is, individuals 'rationalize' their own 'selfish' behavior given the 'circumstances of time and place,' so in their own minds they are 'telling the truth,' not subject to 'blame,' 'meritorious,' and perhaps even morally superior ('the chosen people')" (Benson, 2002, p. 1).

The purpose of this paper is to attempt to give some kind of overall picture of the nature and the direction of change in people's moral choices given changes in their institutional environment. I argue that social order can be seen as an institutional continuum with minimal institutions on one end and maximum institutions on the other and that what people regard as morally acceptable behavior varies widely from one end of the spectrum to the other. I further propose that there is a kind of moral continuum that parallels the institutional continuum, and that changes along the institutional continuum result in a somewhat predictable change in people's moral choices.

II. Developing a Model

According to Douglass North (1990), "institutions are the rules of the game in a society or, more formally, are the humanly devised constraints that shape human interaction" (p. 3). It is well established that institutions generate subsequent incentives for various choices. As North firmly states, "institutions structure incentives in human exchange, whether political, social, or economic" (p. 3). In other words, "institutions define and limit the set of choices of individuals " (p. 4).

It follows from the above that if the institutional structure of a given social order changes or evolves, the inhabitants face a different institutional-benefit/cost structure, resulting in a new incentive environment. These changes tender new opportunities and vulnerabilities: Choices deemed acceptable before the change are now unacceptable; choices that were previously out of the question are now desirable. In the new incentive environment, previous choices are obsolete. To prosper, future choices must differ from those of the past. People must rethink their previously settled way of thinking about the world and relating to others.

I consider an institutional structure change to be any change in the scope or the absolute number of the functional institutions of a social order. By "functional" I mean those institutions that actually constrain people's behavior. Functional institutions may be either formal laws that are backed by state coercion or informal rules or norms that are not, but in either case, to be functional, they must be enforceable and enforced.

In any social order, there are different levels of institutions to which people must conform. In tribal societies, there are different rules for interactions between those of different tribes, generations, genders, and kinship. In modern societies, the state has its various subdivisions with its corresponding laws. More locally, people are constrained by the parochial norms of functional communities to which they belong. Using "functional" in the same sense as above, a functional community generates norms of conduct and sanctions those who do not conform to them. In modern society, people are constrained first and foremost by the laws of the state. There are times when laws and norms come into conflict, and instances when people choose to go to jail rather than break parochial norms: the Mafioso that refuses to "squeal" on his family; the "pro-lifer" that refuses to vacate the area when so instructed by police. However, in larger society these are exceptions rather than the rule. Most people, however grudgingly, adjust their behavior to the existing laws so they can get on with their lives. Perpetual law-breaking is simply too costly. Even the Mafia must take laws into account when calculating the relative cost of their various endeavors.

There are also times, as Benson (2002) has shown, when parochial norms become the law of the land through a long process of legitimization, internalization, and finally legalization. On a smaller scale, Selznick (1943; 1948) explains how informal structures in an organization lead to changes in official policy. However, these views do not alter the fact that in the short term people must abide by the laws of the land, whatever their origin, or pay huge costs. Although both formal and informal institutions can be functional, formal institutions are primary in the sense that parochial norms are constrained by the larger, formal institutional structure in which they occur. Parochial norms cannot deviate far from the laws of the land without imposing huge costs on their adherents. Furthermore, some writers (Shearmur and Klein, 1997; Taylor, 1982; Ellul, 1965; Gellner, 1988) argue that the state actually destroys parochial norms.

In light of these views, that parochial norms are constrained by formal institutions and that formal institutions of the state tend to replace parochial norms, I consider formal institutions as primary and, therefore, consider a change in institutional structure to be a change, either an increase or decrease, in the scope or the absolute number of formal institutions of a social order. If a social order increases the scope or the absolute number of laws beyond those that secure property rights, it moves itself away from the minimum institutions end of the institutional continuum and toward the maximum institution end.

A change in the formal institutional structure of a social order is realized by its inhabitants as a change in the security of private property rights. If people were in a Hobbesian state of nature, then the formulation of formal laws to protect life and property would increase property-rights security. Once property rights are secure within practical limits, what role is left for additional laws? They can only mandate that people must do something with their property that they would prefer not to do or that they must refrain from doing something that they would prefer to do. In other words, there is an inverse relationship between the implementation of new laws and private property rights security. Once private property rights are secure, adding new laws reduces property rights security. We see, then, that along our institutional continuum, property rights become increasingly less secure as a social order moves toward the maximum-institutions end of the continuum, i.e., as a social order increases the scope or absolute number of laws.

Because of the relation between property rights and people's freedom to associate with others, a change in the formal institutional structure of a social order is also realized by its inhabitants as a change in the amount of free association in which they are allowed to engage. Free association does not exist in the absence of formal law. In tribal cultures, for example, tribal norms and traditions are primary and govern intratribal interactions. Intertribal interaction is minimal because of extensive transactions costs. Free association only exists when a social order embraces private property rights that are protected by formal law. Now people are free to interact with whom they please, and they posses the "don't play" option, a term adopted from Tullock (1997, 25), if they are not treated by others as they feel they should be. As the scope or the absolute number of laws increases beyond those necessary to secure private property rights, people's freedom to associate becomes increasingly constrained. Laws that prevent people from exchanging goods and services that they would prefer to exchange or from engaging in interactions that they would prefer to engage in reduce free association. We can see now that along our institutional continuum, not only do property rights become increasingly less secure as a social order moves toward the maximum-institutions end of the of the continuum, but free association increasingly becomes more constrained as well.

So far, our continuum model looks as shown in Figure 1. The extremes of this institutional continuum are each well-known models of society for which there are huge literatures. From here on I call them by their appropriate names: "private property order" and "bureau."

Basic Model

FIGURE 1: Basic Model

The private property order model springs from classical liberal writers such as John Locke, Adam Smith, Edmund Burke, Frederic Bastiat, Alexis de Tocqueville, Lord Acton, and more recently, Ludwig von Mises, Friedrich Hayek, and Henry Hazlitt. According to classical liberalism, the private property order is a society in which human relations are ordered by spontaneous processes that are the result of people's actions within limited areas of concern and responsibility. These limited areas are identified and delineated by private property rights and are protected from trespass by the state. The state is constrained by the Rule of Law, which assures that government is bound in all its actions by fixed rules.

The bureau model was first developed by Max Weber (1958) and has since been qualified by a legion of other writers including Ludwig von Mises (1983), Anthony Downs (1964), Francis Rourke (1984), and Philip Selznick (1943; 1948). Presenting a composite view of the above writers, the bureau is both an economy that lacks market prices and a social structure fraught with incentives and opportunities for deception. The incentives for deception spring from the bureau's internal tension between the formal structure and the informal structure. When the formal structure -- a la Weber, a hierarchy of graded authority with fixed jurisdictional areas, where management is based on written documents, expert training, and general rules -- does not meet the social and personal needs of the bureau's occupants, the informal structure, ala Selznick, works to undermine the official structure and implement more user-friendly policies.

I use the term "bureau" rather than the more common "bureaucracy" because it engenders a clearer mental image of the model that I am constructing and, hence, more readily facilitates analysis. Weber (1958, p. 196) calls a fixed jurisdictional area an "office," hence, the imagery. We only need imagine a small office that contains three people and a file cabinet. The file cabinet contains official documents that specify that person A is the superordinate, that persons B and C are subordinates, what all are officially to do, and how they are to do it. In such a context, it is easy to visualize the formal structure, various informal structures, and the tensions between them. We can see person A consulting the official file and then issuing orders to B and C. We can see persons B and C becoming uncomfortable with the arduous task and conspiring to alter the officially decreed output level, thereby gaining discretionary time and resources. A bureau is transformed into a bureaucracy when persons A, B and C's functions are carried out by "offices" rather than individuals. Now we have offices commanding and reporting to offices. A bureau might be thought of as a fractal of bureaucracy, having similar internal relations but on a miniature scale.

The private property order and the bureau form an institutional continuum with voluntary association on one end and coercion on the other. In economic terms, this translates to no central planning vs. total central planning. This distinction, explained by Friedrich Hayek (1984, p. 366) as that between "spontaneous order" and "organization," rests on the absence or presence of common purpose. A spontaneous order has no common purpose. Its members are free to pursue their own purposes within their limited areas of concern, which are delineated by property rights. In contrast, an organization has a common purpose, an overall design, and a central authority that commands individuals to adjust their actions to meet the requirements of an overall design.

According to Hayek (1948, p. 4), these two opposed forms of social order are the practical outcomes of two opposed strains of individualism. The British school, known as the "anti-rationalists" due to its emphasis on nonrational, spontaneous processes, is the philosophical foundation for the private property order. The Cartesian school or "rationalists" view of individualism with its emphasis on design and man's perfect or perfectible rationality is the philosophical basis for the bureau. Figure 2 incorporates the views of the above writers. To become more familiar with these models and to make them more useful for analysis, let us go inside them and look around a bit.

Expanded Model

FIGURE 2: Expanded Model

The private property order and the bureau models can be used to model both society at large and sub-groups with in society. For example, the society of pre-progressive-era American society was predominantly that of a private property order, i.e., society was, for the most part, spontaneously formed with no common purpose, along the lines of free association. Within American society then and now, one can identify sub-groups, some of which exhibit spontaneous order and others that are consciously designed. The former are commonly called "communities," or less commonly, "organic communities" as the literature often refers to them. (e.g. Tonnies, 1957). Communities are spontaneously ordered along the lines of free association. They are, therefore, fractals of the larger private property order society of which they are apart, i.e., they have the same social order but on a smaller scale.

Consciously designed sub-groups in the private property order are called "organizations." Organizations are designed around a specific purpose such as earning a profit, advancing a political agenda, implementing the functions of the state, fulfilling members' spiritual needs, etc. Organizations are sub-groups with internal social orders different than that of the private property order society of which they are a part. They are discrete instances of the bureau model occurring, in varying degrees of formality, within the larger private-property order society. Because of free association, organizations can choose their members according to established standards and can reject "undesirables," thereby conferring what Shearmur and Klein (1997, p. 37) call "seals of approval" on their members. Churches, service and fraternal organization, chambers of commerce, professional associations, and youth groups all confer seals of approval on their members.

Because formal law protects free association in the private property order, inhabitants have the "don't play" option at all levels, i.e., they are able to exit communities, organizations and even society at large. This places severe constraints on these groups' power to influence individuals and each other. In regard to for-profit organizations, the "don't play" option manifests itself in managers firing subordinates that do not contribute to profits, and in consumers and investors withholding their patronage from firms that make unacceptable products or conduct business in an unacceptable manner. People who exercise the "don't play" option with regard to nonprofit organizations don't support them either socially or financially.

A bureau society has many of the characteristics of the former Soviet Union. It is hierarchically structured with fixed jurisdictional areas where management is based on written documents, expert training, and specific rules. Spontaneous order is replaced with total planning, and total planning precludes free association. Without free association, inhabitants lack the "don't play" option, i.e., they may not exit society nor the organizations to which they are assigned. Nor can they withhold financial support from organizations with which they are displeased. All human interaction is specified by decree and is aimed at the joint attainment of a common purpose as set forth by the supreme authority. The bureau has many formal sub-groups, all of which are organizational fractals of the bureau society itself. They are hierarchically structured nonprofit organizations charged with the attainment of various aspects of the supreme authorities plan. They cannot confer seals of approval in the same sense as in the private property order because membership is at the pleasure of the supreme authority.

Spontaneously ordered communities ordered by free association also exist within the bureau model, but only in its informal structure. Association that occurs in these communities is illegal since it is not specified by law and must therefore be done surreptitiously. Such association amounts to stealing time and resources from the supreme authority. It diverts resources intended for the advancement of the supreme authority's purpose toward the fulfillment of the personal and social needs of the model's inhabitants. These underground associations move goods and services to where the inhabitants want them rather than where the law specifies.

In both types of society, then, there exist communities and organizations. In the private property order, both communities and organizations are legal, and because of free association, members may exit them or society at large if they do not meet their needs. In the bureau, there are legal organizations and illegal communities. Members may exit communities but not organizations since they are specified by law.

III. Moral Choice in the Private Property Order

We now look at the literature that discusses differing moral consequences of these two models. Starting with the private property order, the need to make a living under conditions of volunteerism and free association requires that people conduct themselves in a manner acceptable to their trading partners. This phenomenon has come to be known as the "doux-commerce thesis." It is the idea that in a market setting, gentle manners, polish, and cordiality are the result of self-interest. Many political theorists have stressed the importance of the doux-commerce thesis including Montesquieu, Smith, Hume, Condorcet, and Thomas Paine.

Adam Smith notes that the Dutch, who are the most commercial nation in the world, "are also the most faithful to their word," and, he says, this relationship holds in regard to the English and the Scottish who are respectively less commercial and less faithful to their word. Smith says that honesty is not attributable to national character but is reducible to self-interest. As Smith puts it, "When a person makes perhaps 20 contracts in a day, he cannot gain so much by endeavouring to impose on his neighbours, as the very appearance of a cheat would make him lose." In other words, dealers are afraid of losing their reputation in the eyes of those with whom they have repeated dealings. Smith concludes that "whenever commerce is introduced into any country, probity and punctuality always accompany it" (1997, p. 17).

Tullock (1997) works out Smith's insight in light of modern game theory. In a five-sided, single-play game where players must choose between "cooperate" and "defect," all players chose the "defect" response, resulting in a prisoners' dilemma. However, when the game was played repeatedly and players were allowed to form groups and communicate freely, all players chose the "cooperate" response. Tullock argues that their change in response is due to the reputation effect. "Anyone who chose to defect in any given game would, in essence, put himself in a situation where it would be extremely difficult for him to get partners for any future game" (p. 23). He adds that the reason that the prisoners' dilemma disappears under repeated plays is "simply that people voluntarily choose their own partners" (pp. 23-24). The ability to choose one's playing partner, says Tullock, adds a "don't play" option to the above two-strategy game. The "don't play" option raises the expected cost of cheating. Thus, he concludes, "a reputation for being 'sound' is a valuable asset, and we should expect people to make every effort to get it" (p. 25).

Marc Ryser (1997) shows how the Japanese banking system uses Tullock's "don't play" strategy to reduce bad checks and default rates on promissory notes. Firms that issue bad paper are reported to the central clearinghouse by both the issuer's bank and the collection bank of the person who received the check. The central clearinghouse publishes the names of defaulters in newspapers and forbids its member banks from doing business with them, effectively shutting down these firms (pp. 227-228).

Avner Greif's (1997) study of eleventh-century Maghribi traders attests to the power of the "don't play" option to constrain moral choice when people have the opportunity and the desire for repeated dealings. Interregional trade by these Jewish traders required the hiring of agents to do business in distant markets. The Maghribi traders minimized the agency problem inherent in this relationship by organizing agency relations within an economic institution that Greif refers to as a "coalition" (p. 148). Coalition members agreed to hire only from within the coalition and to pay their agents higher wages than what could be received as nonmembers. Members also agreed to never employ agents who had previously cheated while in the employ of coalition members. Furthermore, agents caught cheating could be cheated by other coalition members with impunity. The coalition held relatives responsible for members' debts, thus preventing older agents from cheating near life's end. It was also the duty of members to provide each other with information about markets, prices, and the actions of fellow members. This "gossip" information, as Merry (1997) illustrates in a different context, was the condition that enabled members to form consensus and impose sanctions.

Benson (1997) details the existence of honest relations in commerce on an even larger scale with the evolution of the Law Merchant, the body of rules, customs, and practices that rose spontaneously between the eleventh through the fifteenth century and formed the basis of modern Western mercantile law.

Albert Hirschman's quote of Samuel Ricard sums up "doux-commerce thesis." very nicely:

Commerce attaches [men] one to another through mutual utility. Through commerce the moral and physical passions are superseded by interest...Commerce has a special character which distinguishes it from all other professions. It affects the feelings of men so strongly that it makes him who was proud and haughty suddenly turn supple, bending and serviceable. Through commerce, man learns to deliberate, to be honest, to acquire manners, to be prudent and reserved in both talk and action. Sensing the necessity to be wise and honest in order to succeed, he flees vice, or at least his demeanor exhibits decency and seriousness so as not to arouse any adverse judgement [sic] on the part of present and future acquaintances; he would not dare make a spectacle of himself for fear of damaging his credit standing and thus society may well avoid a scandal which it might otherwise have to deplore (Hirschman, 1982, p. 1465).

Ricard argues, as Hirschman points out, that commerce is a "powerful moralizing agent which brings many nonmaterial improvements to society even though a bit of hypocrisy may have to be accepted into the bargain" (1982, p. 1465).

Commerce-engendered values are often referred to as "bourgeois" values, a term associated with the middle class and used by John Locke to refer to his "ideal" man. Locke's bourgeois man is of humble origin and has overcome the deficiencies of his birth by using his ability. He is self-directed, self-disciplined, and prudent in judgment. He is a creature of enlightened self-interest, and is the moral equal of other men with the natural rights of life, liberty, and property (Wood, 1983, pp. 124-135).

Maria Ossowska (1970) selects Benjamin Franklin as the incarnation of the bourgeois morality in America and Daniel Defoe in England. These are writers, she says, that "propagated as positive the slogans and values that were depreciated by their critics" (p. 160). Ossowska cites Max Weber's contention that Franklin was "the apostle of the ideal of a man worthy of credit" (p. 162). To gain such a reputation one must be punctual, avoid waste, be always at work, and avoid the tavern. Franklin's thirteen principles for living the perfect life are: temperance, silence, order, resolution, frugality, industry, sincerity, justice, moderation, cleanliness, tranquillity, chastity, and humility. Ossowska notes that Franklin admitted that in regard to the last two "he did not arrive at complete success" (p. 162).

McCloskey attributes the development of bourgeois virtue, in large part, to the overall necessity and pervasiveness of talking and persuasion in commercial relations:

One must establish a relationship of trust with someone in order to persuade him. Ethos, the character that a speaker claims, is the master argument. So the world of the bourgeoisie is jammed with institutions for making relationships and declaring character, from credit bureaus to business schools (1994, p. 186) .

Though not normally thought of as a commerce engendered value, "charity" may also be included on the list of bourgeois virtues. Smith explains in the first sentence of his Theory of Moral Sentiments, that where there is no coercion, some people will naturally be inclined to be benefactors to others:

How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it (p. 3).

Smith identifies "sympathy" as the source of people's "fellow-feeling" for the misery of others. Through their imagination, people feel, in varying degrees, the misery of others and are thereby excited to relieve it. Their charity reduces not only the misery of others but their own discomfort as well (p. 4). Charity inspires gratitude in the receivers and excites reciprocal feelings and gestures of repayment. As Smith explains,

We are delighted to find a person who values us as we value ourselves, and distinguishes us from the rest of mankind, with an attention not unlike that with which we distinguish ourselves. To maintain in him these agreeable and flattering sentiments, is one of the chief ends proposed by the returns we are disposed to make to him (1969, p. 138).

Reciprocal gestures of gratitude, by reinforcing the "propriety" of helping others, increases the tendencies for generosity both in the benefactor and in those who observed the gratitude. Thus is formed a circle of mutually reinforcing generosity and gratitude, and as McCloskey agrees, charity becomes a predominant virtue of bourgeois morality.

More than the peasant or aristocrat, the bourgeois gives to the poor -- as in the ghettos of Eastern Europe or in the small towns of America. Acts of charity follow the bourgeois norm of reciprocity (1994, p. 187).

McCloskey also hints at the thesis of this paper when she describes how moral choice is constrained in Small Town, America.

A reputation for fair dealing is necessary for a roofer whose trade is limited to a town with a population of fifty thousand. One bad roof and he is finished in Iowa City, and so he practices virtue with care. By now he would not put on a bad roof even if he could get away with it, and he behaves like a growing child internalizing virtues once forced on him (McClosky, 1994, p. 182).

Urban anthropologist Jane Jacobs (1992) says that morality divides itself naturally into two moral "syndromes" because humans have only two distinct ways of making a living: taking and trading (51-53). She calls her two syndromes "commercial" and "guardian," after the segments of society engaged in these functions (23-24). The bourgeois virtues of the private property order are nearly identical with her commercial syndrome virtues, and as we shall see, her guardian syndrome virtues are similar to those of the bureau.

IV. Moral Choice in the Bureau

By pointing out that the bureau must prohibit economic transactions that do not advance its overall plan, Thomas Sowell (1980) lays the groundwork for understanding the institutional structure and, hence, the incentive environment of the bureau end of our continuum:

An imposed social pattern that leaves many unrealized economic gains to be made from mutually beneficial transactions must devote much political power to prevent these transactions from taking place, and must pay the cost not only economically and in loss of freedom, but in a demoralization of the social fabric as duplicity and/or corruption becomes a way of life (p. 330).

This is to say that when the state prohibits mutually beneficial transactions, people will often engage in them anyway but do so surreptitiously. This point is underscored by the saying, "Income tax laws have made liars out of all of us." People feel that they have a moral right to engage in certain acts that are prohibited by law. For example, land-use laws run counter to the moral necessities of private property rights. Under such circumstances, people use duplicity to break the law and do so with moral rectitude. That is, they believe that the law of the land has diverged from a higher law of morality. As Martin Luther King Jr.'s 1963 "Letter from Birmingham City Jail" shows, this divergence was instrumental in fomenting the 1960's civil rights movement:

There are just and there are unjust laws...A just law is a man-made code that squares with the moral law or the law of God. An unjust law is a code that is out of harmony with the moral law. To put it in the terms of Saint Thomas Aquinas, an unjust law is a human law that is not rooted in eternal and natural law (p. 17).

More than one hundred years before King's "Letter," Frederick Bastiat (1950) made the same point by arguing that "when law and morality contradict each other, the citizen has the cruel alternative of either losing his moral sense or losing his respect for the law (p. 12).

Relating King's and Bastiat's insights to the bureau, formal rules or laws of the bureau may prohibit conduct that bureau inhabitants feel they have a moral right to engage in and may allow conduct that they feel is wrong. In the first case, people are tempted to ignore the rule and follow their conscience. In the second case, people are tempted to ignore their conscience and indulge in what the rule allows. In both cases, as Bastiat pointed out, people tend to lose the "distinction between justice and injustice " (p. 12).

Robert Jackall (1979) argues this point in a different context and on a smaller scale. He argues that bureaucracy in organizations engenders a "rational/technical ethos" because of its emphasis on calculated achievement and its disdain of moral issues that threaten the calculated achievement of goals. In this environment, all issues become practical ones. The bottom line, says Jackall, is that "all the elements of functional rationality which mark bureaucracy -- goal-orientation, calculated planning to achieve those goals, and abstracted language -- make the institution an effective administrative tool, but they also 'invite' erosion of moral consciousness." (p. 54).

Tullock (1965) argues that the erosion of moral consciousness is actually an aid to those in a bureaucracy who aspire to advance. According to his argument, once people decide upon the best way to reach the top, they must then decide if this way is consistent with their moral values. If not, they must choose between their values and being advanced as rapidly as possible. "Thus, and apparently paradoxically, the more important moral considerations are to a man trying to rise in a hierarchy, the more likely is that hierarchy to select for higher leadership people who have relatively little concern for moral matters" (p. 22).

There is a considerable literature regarding the distortion of information in the bureau. This literature recognizes that people can benefit themselves by distorting information that is submitted to a central authority for use in policy formation. This phenomenon was first brought to our attention by Hayek's (1948) "particular information" argument. Since then a number of writers have developed the idea. Anthony Downs (1964) argues that because of differences in knowledge among the various levels of the hierarchy, "officials can engage in considerable distortions without too great a risk of being detected" (p. 11-12). Altheide and Johnson (1980) argue that bureaus falsify the official paperwork constituting their files; official reports are distorted with the tacit permission of bureau members and for the purpose of creating the impression that the bureau is complying with institutional expectations when it really is not. This gives bureau members discretionary time and resources that were, according to official reports, used for official purposes. (p. 23-31). Official reports should therefore, they say, be viewed as an "organizational product with practical consequences..." Many social scientists do not view them as such and "too readily use official reports for their own research" (p. 36), thereby compounding the distortion problem.

Planning authorities also distort information. As Hayek (1972) argues, the need to rationalize its official policy forces the planning authority "to construct theories, i.e., assertions about the connections between facts, which then become an integral part of the governing doctrine" (156). In this process, the truth of theories becomes relative to whether it advances or hinders people's acceptance of the overall social plan. Such theories "are destructive of all morals because they undermine one of the foundations of all morals: the sense of and the respect for truth" (p. 155).

We can get an idea about the scope of deception in the bureau, viewed on a national scale, by Boulding's (1971) contention that "there is a great deal of evidence that almost all organizational structures tend to produce false images in the decision-maker, and that the larger and more authoritarian the organization, the better the chance that its top decision-makers will be operating in purely imaginary worlds" (p. 30). More specifically stated, "in our country the lie has become not just a moral category but a pillar of the State" (Solzhenitsyn, 1974).

The policy formation process is rife with what Kingdon (1995) calls "policy entrepreneurs" (p. 204) and what North (1981) more broadly defines as "intellectual entrepreneurs" (pp. 51-54). These are, in different contexts, people who lie or use other forms of deception in an effort to attain federal grants or favorable legislation in the policy-making process, creating a drag on the policy process that Milgrom and Roberts (1990) call "influence costs" (p. 86). For example, Robert P. Liburdy, a cell biologist at the Lawrence Berkeley Laboratory in Berkeley, an arm of the Energy Department, was found to have published two papers in which he eliminated data that did not support his conclusion that there is a link between electromagnetic radiation and cancer. "Federal officials say his misrepresentations helped him win $3.3 million in grants from the National Institutes of Health, the Department of Energy and the Department of Defense to investigate a link between electric power and cancer " (Fairbanks Daily News Miner, July 24, 1999).

Even more brazen, a report published by the American Association of University Women (AAUW), How Schools Shortchange Girls, concluded that girls are victimized because schools are biased toward boys' learning needs. Reviewing the study, after encountering deliberate roadblocks to her obtaining the original data, Judith Kleinfeld (1998) found that the AAUW's report is based on a selective review of the study and that data contrary to the report's message was omitted from their media kit. Kleinfeld concludes that

The charge that schools shortchange girls is false political propaganda. In their zeal to advance the interests of women, the American Association of University Women and other advocacy groups have distorted the achievements of women and the experience of girls and boys in schools. (p. 30).

Rarely do such shenanigans get exposed. The ease with which people can be fooled by playing to their biases, i.e., telling them what they want or expect to hear, was demonstrated by NYU physics professor Alan Sokal's (1996) outrageous, tongue-in-cheek article disingenuously submitted and subsequently published in Social Text. Sokal's experiment is a model example of the agency relation inherent in what Hiser (1999) calls the "information relation" (p. 15). Sokal's opportunity for deception, like all others in the bureau, exists, as Downs (1964) and Hiser (2000) argue, because the bureau cannot solve the monitoring problem.

A list of bureau virtues would certainly include a number of those in Jacobs' (1992) "guardian syndrome," the most obvious being "respect hierarchy," "deceive for the sake of the task," and "dispense largesse"(pp. 23-24). These virtues, embraced for their effectiveness at obtaining benefits, are hardly what we commonly refer to as virtues. Evan so, the charge of pragmatically chosen virtues could be leveled against the private property order as well. After all, market participants choose honesty because it gets them trading partners; however, market virtues are those that are able support social order and production, while those of the bureau break down social order and reduce production as producers focus on favor seeking.

We must allow, however, another possibility regarding the virtues inherent in the bureau: Perhaps bureau members do not recognize their virtues for what they are. To accept the above arguments regarding the bureau is not necessarily to conclude that the bureau is filled with liars. People are liars if what they tell us is contrary to what they believe, but if people believe their falsehoods, such people are sincere and honest -- but deluded. Delusion of this nature is possible on a grand scale because of what Klein (1998, p. 65) calls "belief plasticity," which allows people, as Benson (2002) argues, to rationalize the norms that support the activities or social relations in which they wish to engage. Payne (1991) actually documents belief plasticity in members of Congress, showing that a steady stream of one-sided information instills the "presumption of governmental efficacy" and the "philanthropic fallacy," which is the belief that taxes have no adverse affect on the economy and that government spending is therefore a philanthropic gesture.

V. Criticisms of the Model

According to this analysis, moral choice in the real world takes on a character that reflects a social order's relative position on the institutional continuum. As societies move along the continuum, they lose characteristics of the model they are moving away from and acquire characteristics of the model they are approaching. A society, whose institutional structure fell midpoint on the continuum, would increase the prevalence of the bourgeois virtues by reducing the absolute number or the scope of its formal laws. Increasing the number of or scope of its laws would result in greater levels of lying and deception.

The literature is quite clear about moral choice in the extreme type models, but critics of my conclusions may argue that it cannot be assumed that there is a linear continuum between these extreme type models, that lying and deception may reach unmanageable proportions only very near the bureau model. If so, most real-world social orders, fitting safely between the extremes, sail in smooth waters while only totalitarian systems need be concerned. This criticism is severely weakened by observing the results of relaxing the private-property-order model just enough to include conditions in the present-day U.S. Bennet and DiLorenzo (1992) have documented, almost to the point of tedium, instances of information distortion, deception, and propaganda by the American federal government. We also see that the requirements for Tullock's reputation effect are already considerably diminished: Americans are restricted from "repeated dealings" by antitrust laws, land use and zoning laws, license requirements, drug prescription laws, and laws against victimless crimes like prostitution, drug trade, gambling etc; Americans are denied the "don't play" option with respect to minorities, homosexuals, the handicapped, AIDS victims, and are severely restricted from exercising it in education because of compulsory attendance laws. Furthermore, organizations are restricted in their ability to confer Shearmur and Klein's "seals of approval" by laws that prevent them from discriminating against "undesirables" on the basis of age, race, handicap status, or sexual preference, e.g., the New Jersey Supreme Court ruling that prevents Boy Scouts of America from excluding gays.

Present conditions in America also frustrate the maintenance of community, the repository of local values and norms. According to Merry's study on gossip (1997), there are four requirements for a functional community, which distill into "isolation," "economic dependency," "community consensus," and "common moral values" (69 -- 70). In present day America, isolation is diminished by public education, compulsory attendance, and anti-discriminatory laws; economic interdependence is decreased by economic planning, bureaucratization of the market, and by welfare entitlements; consensus and sanction by local groups is replaced by government backed standards of interaction, such as those inherent in anti-discriminatory laws; similar values become less similar as people compete to get government favors.

Critics may see the Enron scandal as evidence that market checks on moral choice are ineffective, thereby throwing doubt on the existence of bourgeois virtues and a moral continuum all together. Actually, the Enron scandal can be seen as both evidence that lying and deceit do not bunch around the bureau model, which confirms my continuum argument, and evidence that market checks on moral choice are indeed effective. To grasp this, we must start inside the private property order and work our way out.

In keeping with the distinction made earlier, for-profit corporations within the private property order constitute a consciously designed organization with an internal social order different from that of the spontaneously ordered society of which they are a part. Though corporations have a hierarchical internal structure, they are not plagued by the destructive moral choices of the bureau. "No private enterprise, whatever its size, can ever become bureaucratic as long as it is entirely and solely operated on a profit basis" (Mises, 1985, p. 103). The internal workings of for-profit firms, as Mises (1983) points out, can be monitored by looking at their balance sheets (p. 33), and they can be sanctioned by customers and stockholders exercising their "don't play" option. Enron's demise is a dramatic example of Mises's argument and the effectiveness of the "don't play" option. Many of the moral choices of the bureau were present in the Enron corporation: deception, lying, cover-up, steeling, fraudulent accounting practices etc.; however, long-run necessity for books to balance and a wary fund manager exposed these practices, and market participants' "don't play" option put Enron out of existence.

However, the magnitude of this fraudulent activity and the host of corporate indictments that followed in Enron's wake may give pause as to the day-to-day effectiveness of market checks on moral choice, but these corporate scandals did not occur in a private property order. They occurred in today's American economy, which is decidedly interventionist. Government intervention, as Mises (1985) explains, requires a firm to "pay heed to political prejudices and sensibilities of all kinds in order to avoid being continually harassed by various organs of the state." In so doing, "it soon finds that it is no longer in a position to base its calculations on the solid ground of profit and loss" (p. 103). The result is that firms increasingly take on the characteristics of the bureau. As Mises explains,

These and other considerations foreign to the profit-seeking principle of entrepreneurial management come to play an ever increasing role in the conduct of business, while the part played by precise calculation and cost accounting concomitantly dwindles in significance, and private enterprise begins increasingly to adopt the mode of management of public enterprises, with their elaborate apparatus of formally prescribed rules and regulations. In a word, it becomes bureaucratized (p. 104).

An organization like Enron would continue to exist in the bureau even with its excesses. An "Enron" in a bureau society is necessarily a nonprofit organization and therefore does not have a balance sheet. There are no wary fund managers in the bureau trying to maximize profits and minimize losses. There are only officials in charge of implementing the supreme authority's taxing and spending plan. Furthermore, the "customers" of a bureau "Enron" do not have the "don't play" option. In the unlikely event that "Enron's" excesses were exposed, patrons have no recourse to force the organization to change its behavior.

VI. Conclusions and Implications

I conclude that institutional structures of real world societies profoundly affect the moral choices that occur within those societies, that increasing the absolute number or scope of a society's formal laws, beyond those that protect property rights, increases the bureaucratization of that society and strengthens incentives for deception. I further conclude that government regulations are laws beyond those necessary to protect private property rights and, hence, increase the absolute number, or in the case of an existing regulation that has been strengthened or expanded, the scope of formal laws. Government regulation can be seen as piecemeal transformation of spontaneous market organization into bureaucratic rule following, a process which increasingly subjects citizens to the bureau model incentive environment for formulating moral choice. These conclusions illuminate a seldom recognized opportunity cost of government regulation: increasing disrespect for the law, lying and deception, value relativism, and generally deteriorating ethical standards of overall society. I use the term "government regulation" in its most general sense, which includes taxation, government ownership of property, public schools, legal constraints on business activity, and all forms of economic and social policy implementation, such as monetary control, land use restrictions, income redistribution, and anti-discrimination laws.

I conclude by discussing three implications of the above conclusions. These implications are that increasing government regulation tends to (1) break down social cooperation, (2) cause the ruination of science, and (3) lower society's overall material standard of living.

Breakdown of social cooperation

Social cooperation is based on trust, which in turn is based on honesty. We saw that under bureaucratic conditions people have a tendency to dissemble and deceive to get benefits; people lose their moral sense of and respect for the law; people tend to adopt instrumental values and lie to influence the policy of the bureau. We saw that bureaus themselves lie in the form of falsified official reports to get discretionary time and resources, and that central authorities lie to get subordinates and constituents to cooperate in the implementation of policy.

The implication that government regulation breaks down social cooperation is supported by Taylor (1976), who argues that in regard to the provision of public goods "the more the state intervenes in such situations, the more 'necessary' becomes, because positive altruism and voluntary cooperative behavior atrophy in the presence of the state and grow in its absence" (p. 134). Further support for this implication is found in Kaplar and Maines's(1995) argument that government regulation of the media stifles the development of ethical codes in journalism by substituting government ethics for private ethics (p. 34), and by presenting barriers to the development of technologies capable of creating an environment more hospitable to the practice of ethical journalism (pp. 75-76).

Social cooperation is further broken down when government regulation interferes with community formation. This is supported by a number of writers. Taylor (1982) argues that the state destroys the main social controls that primitive societies and peasant communities use to maintain social order (p. 133). Gellner (1988), leaning heavily on Ibn Khaldun's study of Moslem pastoral societies in northern Africa, argues that "it is precisely anarchy which engenders trust or, if you want to use another name, which engenders social cohesion. It is effective government which destroys trust" (p. 143).

As increasing regulation more tightly constrains people's choices, state propaganda must play an increasing role in mollifying their increasing discontent. This gives the state a vested interest in the dissolution of existing communities because, as Ellul (1965) explains, the effectiveness of propaganda depends on the extent to which the state can break down spontaneous communities. He explains that families, villages, and parishes "are organic and having a well-structured material, spiritual, and emotional life, they are not easily penetrated by propaganda" (p. 91). Breaking down these groups results in a society comprised of individuals in isolation from parochial social norms. This is the social condition that Durkheim (1984) and many subsequent writers refers to as "anomie" (p. 304).

Shearmur and Klein see anomie among students of public schools. They argue that the coerced homogenization of public schools, "stamps out social differentiation and personal individuality, which are important preventatives to personal frustration, envy , intolerance and open hostility" (p. 41). The absence of functional communities within the public school system could explain increasing incidences of students striking out violently against fellow students such as at Columbine High School in the spring of 1999. It may also explain increased violence in the workplace, commonly referred to as "going postal." Perhaps a more accurate term for both areas of violence might be "going bureaucratic."

School and workplace violence extrapolated to a global scale have implications for the drive to globalize the world economy. To the extent that globalization is managed by various governments' policies, citizens must adjust their actions to conform to government policy. This may result in increased internal tensions that spill over into international conflicts. It seems likely, in accordance with this analysis, that managed globalization may result in international skirmishes if not war.

Ruination of science

In the policy formation process, every point of view, every study, research project, survey, and scientific discipline, is potentially political ammunition for policy entrepreneurs in their fight for favorable legislation. Using the sciences to get political favors in the policy formation process ultimately results in the socialization of the sciences, i.e., they assume a politically acceptable version of themselves. Rourke (1984) explains that, "through their role as bureaucratic advisers, professionally trained economists and natural scientists obtain influence in the policy process that they would never otherwise enjoy." Also, the wisdom of presidential decisions, "is greatly enhanced in the eyes of the electorate when it appears that these decisions rest on the best professional advice the White House has been able to obtain" (p. 23). In this environment, advisors have an incentive to abuse their sciences in order to make them render "scientific" confirmation of their superior's policy biases. As Hayek (1972) argued earlier, the need to rationalize its official position forces the planning authority, "to construct theories, i.e., assertions about the connections between facts, which then become an integral part of the governing doctrine" (p. 156). There is leeway to do this in the choice of theories, data, and quantification techniques. And, as Rourke points out, the use of quantitative techniques in the policy process, "may arm error with the seeming support of scientifically established fact, giving ill-advised policies greater credence. When this occurs, the finely honed rationalizing instruments of managerial science can become dispensers of irrationality measured out with mathematical precision" (p. 175).

The next step in the socialization of the sciences is a mutual self-deception in which advisors began believing their own lies and the president deludes himself into believing that he is not being lied to. Rue (1994, p. 146) explains how self-deception is actually beneficial to liars in their efforts to deceive others. In the context above, advisors become more persuasive when they believe their own lies, and the president is more confident in his policies if he believes he is not being lied to. At this point self-deception becomes mutual delusion, and the sciences can be used instrumentally and politically with everyone's consent. It takes only a minor feat of extrapolation to visualize this scenario in varying degrees between all bureau officials and their subordinates at all levels of bureaucracy. Arendt (1972) documents the paramount role that delusion in the U.S. government's bureaucracy played in the defeat of the U.S. military in the Vietnam. Also, Marxist writer Alan Wolfe (1977, p. 276), in his description of conditions of "late capitalism" but what in our context is "bureau relations," expounds on the pervasiveness of delusion under bureaucratic conditions.

The end result is mutual self-delusion on a national scale. Moral choice in the incentive environment engendered by bureau relations results in people using the sciences to support their deluded contentions as well as to deceive others. This view is supported in an unintended way by Jacobs' (1992, p. 45-47) argument that science is supported only by the commercial syndrome.

Reduced standard of living

The result of bureaucratization is an overall reduced standard of living. As a social order's sciences become socialized, it loses touch with reality, and its ability to conceive of and produce economic goods decreases. Concomitantly, a social order's inhabitants become less willing to produce goods and services as their property rights to them become less secure. This, as Alchian and Demsetz (1973) argue, occurs as regulation of goods and services, and the production of them, transfers subtle "partitions" of the total "bundle" of "use rights" and "exclusion rights" from property owners to the state, transforming private property rights into communal rights. This process converts more valuable rights (private) into less valuable rights (communal). "Taking" from the common reestablishes the more valuable private property rights. Under these circumstances, rational people try to regain private rights over goods and services, i.e., they engage in lobbying and other forms of favor-seeking. And thus, the nature of competition has been change from competing in the production of goods and services to competing for government favors. This amounts to a change from innovation and production to passing around existing goods, to a change from a positive-sum to a zero-sum economic environment. As Rourke (1984) reminds us, "it is clear that most policy issues have a zero-sum quality -- gains by some groups will have to be offset by losses for others" (p. 151-152).

Living standards are further reduced as increased lying and deception requires people to retreat from more-exposed to less-exposed social relations of production. That is to say, society must reduce its overall divisions of labor because of reduced trust. As division of labor becomes less intense, people must increasingly devote their conscious mind-space to categories that were previously the specialty of those now-precluded divisions of labor. People now divide their total amount of time and energy between more categories of knowledge. In other words, bureaucratization tends to make society knowledge-poor. As compared to the private property order, the bureau can only make use of a smaller set of total information, and its social organization must become less complex. This contention is supported by Hayek's (1948) argument concerning particular knowledge, and Mises's (1990) calculation argument.

In a combined sense, the above implications are reminiscent of Jacobs' (1992) "Law of Intractable Systemic Corruption." She argues that, "any significant breach of a syndrome's integrity -- usually by adopting an inappropriate function -- causes some normal virtues to convert automatically to vices, and still others to bend and break for necessary expedience" (p. 132). She gives the example of the World Bank bestowing largesse in the form of loans to third world countries, which then use the loans for ostentation and largesse as local subsidies to keep the political waters smooth. In other words, banks that are a commercial venture, got involved in an activity on a large scale that is only appropriate to the guardian syndrome. Why such a large scale? Because the normal commercial virtues of competition, industriousness, and efficiency made matters worse. These virtues became vices when used in the pursuit of bestowing largess. (p. 132). Under such circumstances she says, "self-organizing systems become self-disorganizing." (p. 133).

Suggestions for further research

The whole area of how people acquire values is relatively undiscovered by economists and yet is an important area for further economic investigation. Economists do not have theories to explain the effects on people's values and hence the social effects of the policies that they recommend. In his Structure and Change, North recommends that such an investigation become a part of economic theory, and he certainly approached this question in his minimal-changes-in-the-terms-of-exchange condition for ideology (p. 50). The writers cited in this paper have also made inroads in to this area, but there is still plenty of room for more research.

My analysis suggests three areas for further research. First, it shows an oversight in the economics of information. The conventional view, that information is a public good, causes theorists to focus on quantity rather that quality of information. Their theories, which justify the role of government in bringing about an optimal amount of information, implicitly assume that the content of information is not affected by the institutional structure in which it is produced. Second, my analysis suggests a weakness in the perfect competition model, which implies that government intervention can improve the nature of competition. My analysis suggests that government intervention increasingly leads firms to use their particular information to compete for government favors, which can hardly be seen as an improvement. Finally, a very general recommendation is that of bringing together three large and disparate literatures, that of community, the state, and regulation of the economy. Community springs primarily from the sociology literature, while the state is traditionally the subject of political philosophy, and regulation is found primarily in economics. As nearly as I can tell, these literatures rest comfortably each within its disciplinary cocoon with little interaction among them. Yet, it seems to me that they have important implications for each other, and that they could each benefit by accounting for the ideas of the other.


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