No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Ten: It’s all About the Institutions! 241 INFORMAL INSTITUTIONS Formal institutions can be very important for development, but they are often dwarfed in importance by informal cultural institutions. History records many examples of western “experts” going into lesser developed countries with plans to change the formal institutions, in order to help them perform economically like western nations. Yet, without a detailed understanding of the local culture and how their informal institutions work, the so-called “expert” plans inevitably fail to work. For example, when the former U.S.S.R. dissolved, many prominent U.S. economists recommended “shock therapy” of moving quickly to market prices to replace the old command and control system of central planning. Russia had significant problems with this transition due to lack of the informal institutions that would support formal institutional changes. Let’s consider some of those informal institutions, by further reflection of the “dating game” from the previous chapter. In most cases—but certainly not all—the male is expected to initiate the invitation. And with the invitation, he is expected to pay for the date. Yes, I know this may be old-fashioned and not all dates might go this way. The point is that most will, or at least start with that expectation. For instance, if you are a male, the failure of a female to ask you out for a date does not mean that she isn’t interested in you; it just means that if she is, she is not expecting that she should signal that interest by asking you out. She will likely try to signal interest in other ways. And if you are a female and have been asked to go to the movies by a young man, you don’t normally need to know if you have the money to go—you can usually count on him to pay if he is asking you out. These rules are not constant, so they could change, but they tend to change only slowly over time. They are not written down anywhere, but are embedded in the way we behave with one another. These known but unwritten ways of relating help facilitate dating decisions. There are many similar cultural norms that facilitate market transactions. Most products or merchants offer some sort of guarantee as to suitability. Costco unconditionally takes back electronics for a period of time, which enables customers to try out the product in their home. Walmart has a money-back guarantee on most products. These guarantees tend to be spelled out so they are a bit more formal (but not a legal requirement absent their policy). This idea extends to most businesses that may not explicitly write down the details. For example, when I finished my basement a few years ago, the contractor made numerous fixes that may or may not have really been required by the strict letter of our contract. While the initial result may have worked functionally, it wasn’t quite what I wanted. We had no formal agreement as to the specifics, but he wanted to keep me happy to support future business. Likewise, I have an understanding as to what might be outside the reasonable scope of what he should do. For instance, I shouldn’t ask him to Formal institutions can be very important for development, but they are often dwarfed in importance by informal cultural institutions.