Similar considerations apply across a spectrum of other social arrangements, particularly those involving long and large individual investments of efforts for prospective personal and social benefits. Property rights introduce rigidities into the use of vast amounts of many resources — by excluding all but the legal owner(s) from a serious voice in most of the decisions made about the disposition of the resources — on the assumption that such losses as are occasioned by this rigidity are more than offset by the gains in prospective behavior by people acting under these guarantees.

Someone who is going to work for many years to have his own home wants some fairly rigid assurance that the house will in fact belong to him — that he cannot be dispossessed by someone who is physically stronger, better armed, or more ruthless, or who is deemed more “worthy” by political authorities. Rigid assurances are needed that changing fashions, mores, and power relationships will not suddenly deprive him of his property, his children, or his life. Informal relationships which flourish in a society do so within the protection of formal laws on property ownership, kidnapping, murder, and other basic matters on which people want rigidity rather than continuously negotiable or modifiable relationships.

Formalized and rigidified decision-making processes (or frameworks for processes) are not only social investments in certain behavior patterns; they are direct consumer goods as well. Peace of mind and a sense of independence and dignity are immediate psychic dividends from operating under known rules, applicable to all, rather than being personally assessed and controlled by other individuals. Informal decision-making processes flourish only where such assessment and control are in the hands of those biased in favor of the individual concerned — e.g., family, friends, and lovers. Similar informal processes in the hands of strangers might be intolerable. In short, the comparison is not solely between two different kinds of institutional processes — formal vs. informal — but between two different kinds of processes engaged in by two different kinds of people.

ECONOMIC INSTITUTIONS

Economic decisions may be made through informal processes or through structured organizations. If the lawn needs mowing, the homeowner may do it himself, tell his son to do it, pay his son to do it, pay another individual to do it, or contract with a lawn-care firm to do it. Similarly he may grow his own vegetables, buy them from a local farmer, or from a store, or buy them already prepared at a restaurant. The theoretical spectrum, ranging from the most informal to the most formal decision-making processes, is far greater than is likely to be encountered in the real world. Why this is so is worth analyzing in order to understand the peculiar advantages and disadvantages of more formal and less formal economic processes.

Theoretically, the various components which typically make up a product could all be bought separately and assembled either by the consumer or by other persons hired by him to perform that service on a one-time basis as needed — the way he hires a plumber or electrician when he needs their services. There is no inherent need for a firm to exist to sell him a finished product. By the same token, there is no need for workers to be employed by such a firm. Theoretically, they could sell their services directly to those who want them, as plumbers, doctors, and shoe shine boys ordinarily do.

For some products and to some extent, there is much consumer assembly of finished products. Stereo systems often contain amplifiers, speakers, turntables and tape decks, each made by a different manufacturer and assembled with knowledge purchased from the publisher of a do-it-yourself book. A whole pre-assembled stereo system may also be purchased at most department stores. A similar range exists among cameras. The view camera used by professional photographers is usually sold as a camera body with no lens or shutter, and with nothing to hold the film. All these essential components are typically available in a wide variety of types and brands, all of which are to be assembled by the photographer into a functioning camera. At the other end of the spectrum is the “Instamatic” camera with all these components preselected, preassembled, and preset for a specific focusing distance, lens opening and shutter speed selected by the manufacturer, who is in effect selling a “package” that includes not only physical items but also the application of elementary knowledge of picture taking settings.