Custom and rules

American Journal of Economics and Sociology, The,  April, 2002  by Roger Koppl

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ROGER KOPPL *

I

Introduction

CUSTOM IS WHAT WE ARE USED TO. We like what we are used to. Thus, custom is one of J. S. Mill's "two determining agencies" of economic affairs. Schlicht examines why we like what we are used to and why it matters for economics. The latter is the important part; a clever theory of custom that yields no applied economics would be of little interest to us. It would be a bit like a performance of the world-record-holder in standing on one leg: one cannot help admiring the performance, but it remains only a curiosity. Admirably, Schlicht is no leg-stander. He applies his theory to real questions of property, law, organization and the division of labor. It is therefore worth considering the theoretical structure supporting his applied economics.

Schlicht's discussion of piece rates is a good example of his applied work. Typical piece rates seem too low; by the logic of standard theory, they are set at suboptimal levels. Standard economics implies that the rate offered per piece will equal the marginal revenue product of a piece. Any contractual provisions governing the time to produce each piece are at best superfluous. In reality, piece rates are less than marginal revenue product, and they are complemented by standards of productivity. The worker is expected to meet a benchmark number of pieces per period. Schlicht shows that the seeming suboptimality in piece rates probably reflects the operation of custom in the economy and, crucially, in the minds of economic agents. Actually existing piece rates, with their accompanying standard productivity levels, are set to be "fair." They serve thereby to establish the perceived rights and obligations of worker and employer. If they serve their function properly, workers will strive to be productive. The po int is not the money, but satisfying the legitimate obligations and meeting the legitimate standards created by the piece-rate system. A virtuous circle may emerge in which rising average productivity invites mutual emulation among workers, whose improved efforts push average productivity up further, which leads to more energetic emulation, and so on. The piece rate system as actually practiced produces desirable customs in the workplace.

Schlicht's explanation of piece rates is good applied economics and solves an existing puzzle in the economics literature. It explains a contractual practice within firms and both prices and outputs in parts of the labor market. It also illustrates the potential that a well-crafted theory of custom may have for the conduct of "real" economics. Thus, as I have said, it is worth considering the theory supporting such applied work. As is the commentator's right, I will restrict myself to a few points of criticism and will not attempt an overall assessment. Nor will I provide an outline of the theory, as that would be unnecessary in this symposium. My points of criticism do not identify any crucial flaws that would, supposedly, bring down the whole edifice. The search for such flaws is a silly business and very unpleasant. My criticisms are offered, instead, in the hope that they might help us get even more fruit from Schlicht's ideas than we already have reason to hope for.

II

Rules are Objective

THE TWIN NOTIONS OF RULES AND RULE PREFERENCE are pillars of Schlicht's system: Chapter 7 is devoted to "Rules and Schemata," while Chapter 8 is devoted to "Rule Preference." It is not surprising that this should be the case. Rule following is the leading candidate to replace utility maximization. Besides, if custom is what we are used to an economics informed by custom would have to represent agents as acting within old grooves. Thus, we expect an economics with custom to be an economics of rule-following agents.

The notion of rule preference is natural, too. Why do we stick to the old grooves? One answer is bounded rationality: we are not clever enough to forsake habit. Another is rule preference: we like the old grooves because they are the old grooves. Although Schlicht gives the second answer, he views rule preference as "a manifestation of a desire for clarity" (p. 118). Thus, it seems fair to say that Schlicht (rightly, I believe) combines the two answers. Because Nature gave us a bounded rationality, she wisely endowed us with a preference for the old grooves.

I am happy with the notion that rules are important, but I think I may complain about Schlicht's treatment of them. Schlicht makes the presence of a rule an entirely psychological affair. He correctly notes that his psychological view does not imply that rules lack objectivity. "Rules may, indeed, be conceived as entirely objective in the sense of being brought about by universal human tendencies" (p. 193). I fully accept the logic of this remark. But he says explicitly, "rules cannot be defined in any 'objective' sense, if 'objective' is held to imply independence from cognitive processes" (p. 193). I think there is a way to identify a rule that is "objective" in the relevant sense.