Some remarks on the place of psychological and social elements in a theory of custom

American Journal of Economics and Sociology, The, April, 2002 by Matthias Klaes

Matthias Klaes *

Ekkehart Schlicht's On Custom in the Economy (OCE) represents an ambitious assault on one of the most notorious problems of social theory. It not only emphasizes the relevance of custom in our attempts to understand the economy, it also advances this argument within an ingenious attempt to throw some light on the phenomenon of custom itself. OCE is a demanding work to read. It does justice to the fundamental nature of its subject matter by cutting across the disciplinary boundaries that so artificially parcel off the subject matter of the social sciences. The following brief remarks cannot aim to address head on the deep and involved issues raised by Schlicht. Instead, I will restrict myself to exploring an intriguing interdisciplinary overlap between certain aspects of OCE and recent discussions of Ludwig Wittgenstein's famous account of rule following.

Let me begin by revisiting one of the recurring thought experiments to be found in OCE: the example of the taxi ride. Imagine an individual arriving in an unfamiliar town, entering a taxi, and telling the driver where to go. Upon completion of the journey the driver points to the meter, the passenger pays the required amount, gets out of the car, and both individuals carry on with their respective business. Schlicht uses this episode to serve as a typical instance of anonymous, non-repeated exchange that cannot readily be accommodated in a framework where homo oeconomicus (HOE) seeks her self-interest with guile. He argues that such a framework fails to explain why either party honors the initial contract.

Ex ante, both sides may agree to the deal. But what prevents the passenger from leaving the taxi without paying? Conversely, assume that the money has just been handed over by the passenger. What prevents the taxi driver from pretending that payment is still due, pointing to the amount displayed by the meter? The only way out seems to consist in allowing for some mechanism of contract enforcement. The problem with this solution to the ex post bilateral bargaining problem resides in the dilemma that conceding either party any means of enforcement to render the other compliant will offer this same party the opportunity to defect on its part. If the passenger pays under the impression of the driver's biceps and pecs instead of leaving the car right away, the driver should use his physical advantage to extort a second payment. Similarly, if the driver's fear of the passenger's angry response or threat of legal action prevents him from demanding payment twice, this same response or threat could be used by the pa ssenger in the first place to claim that payment had been made already.

It turns out that from the perspective of HOE, there is no straightforward solution to the bilateral bargaining problem. Put differently and in more general terms, the mechanism stipulated by Goase (1960, 1981) to yield a solution to the problem cannot be relied upon if there is a danger of opportunistic exploitation (cf. Schlicht 1996). Nevertheless, in our daily life we witness countless successfully completed "taxi ride" transactions of the type described above. To accommodate this conflicting piece of evidence, either the assumption of HOE must be dropped, or other explanatory resources have to be mobilized to contain its adverse effects.

Schlicht (OCE: 30) opts for the first alternative. He questions the psychological makeup of HOE, suggesting that in practice an underlying threat of moralistic aggression provides an effective enforcement mechanism of "taxi ride" transactions. Individuals are prepared to act aggressively to defend their subjectively perceived entitlements irrespective of the cost-benefit assessment of such aggression. This solves the bargaining problem: If both parties expect the trait of moralistic aggression in their counterpart, compliance becomes less costly than defection. Note however that this solution is a purely individualistic one. The bargaining problem becomes solved by making some additional features of the individuals' psychological makeup part of common knowledge. (1)

How credible is the physical threat of the taxi driver's biceps? There certainly are reported cases of passengers simply leaving the car without paying after having arrived at the destination. Typically, however, the driver, instead of resorting to physical means of enforcing payment, would alert his colleagues and the police of the incident, with the perpetrator thus being stopped shortly afterward. (2) The existing institutional context seems to have provided a sufficient deterrent for the passenger to honor the initial contract. Similarly, the legal system could be plausibly argued to enforce compliance on the part of the driver. If a "double payment" case went to court, and both parties issued conflicting statements, the judge would decide on the basis of internal consistency and plausibility of the statements. If there turned out to be an accumulation of similar cases on his record, the driver's credibility would he seriously undermined. In addition, any conviction would endanger the continuation of his taxi license. Again, the institutional context of the taxi ride transaction seems to provide a sufficient deterrent against expost opportunism of the driver.