External Institutions

External Institutions and the Protection Function of Government

External institutions are designed, imposed and enforced from above by a political authority. They are nearly always formal in that an authority is identified to enforce sanctions in organized ways.

Protective government is concerned with designing, imposing, monitoring and enforcing external institutions. It normally supports the internal institutions of civil society and makes the fostering of an order of actions the primary concern of public policy.

External institutions often work in open-ended, abstract ways—for example, private laws apply to an indeterminate number of individuals and cases.

External institutions have normative effects on the behavior of the members of society, in particular if they are in harmony with prevailing internal institutions and values.

Political Action to Design and Enforce Rules

External institutions differ from internal ones Opens in new window in that they are designed and imposed on a community by an agent with a political will and the power to coerce, who stands above the community as such.

Such agents may claim legitimacy for the role by tradition and inheritance, conquest and force, or because the community elected them.

External institutions always imply some form of top-down hierarchy. By contrast, internal institutions Opens in new window are applied horizontally, among equals. The sanctions for violating external institutions are nearly always formal and are often backed by the use of force.

In many societies, governments have been given the monopoly on the use of force, which they exercise through the police, the courts and the prison system.

In modern democratic societies, governments try to control the ‘violence professionals’ by non-violent means, namely through formal rules and financial controls.

Thus, the defining characteristic of an external rule is that it is designed and imposed and the sanction is in the hands of some body outside the community.

We can distinguish various types of external institutions as to their content and target:

1.   External Rules of Conduct

External rules of conduct are intended to constrain the actions of citizens in ways similar to internal rules.

They consist of universal, prohibitive rules and are contained in the civil, commercial and criminal codes of most countries (Hayek, 1973, pp. 131-139).

2.   Purpose-Specific Directives

Purpose-specific directives are a second type of external rule. They aimed at particular purposes or outcomes; they do not apply universally.

An example is the rule that citizens must deliver a certain percentage of their income to the state in the form of income tax.

Specific directives instruct public or private agents to bring about predetermined outcomes. Some such institutions Opens in new window may be contained in statute law, but in many countries they are found in by-laws based on more general enabling legislation. Such institutions Opens in new window place high requirements on the knowledge of officials because they are prescriptive.

3.   Procedural Rules

External institutions can also be procedural or meta rules, which target the various agents of government, instructing them how to behave and what not to do (administrative law).

Procedural rules are needed for the administration of government to facilitate the internal coordination of the various agents of government. They are contained in public and administrative law and form an important part of most constitutions and bodies of laws.

Legislation frames many of these procedural rules, but—different from private law—they are directed not at the citizens but the agents of government. Many of these institutions may be aimed at keeping the system of rules inherently compatible.

Procedural rules can be of great importance to giving effect to the external rules of conduct. For example, the rules that protect the citizens from police violence in general terms will require precise procedural instructions to police officers how to carry out their duties in specific situations, reducing their information and decision-making tasks. Rules of engagement of soldiers instruct them what and what not to do in the heat of battle.

Internal institutions Opens in new window order most of the conduct of the citizens. Yet, despite the great effectiveness of internal rules in most circumstances, all complex societies have also adopted external institutions.

This is so because internal institutions Opens in new window in complex mass societies cannot eliminate all acts of opportunism Opens in new window.

One reason for this is that people frequently interact with strangers whom they will never meet again, so that many informal sanctions (such as tit-for-tat, ostracism and damage to one’s reputation) are ineffective in preventing opportunistic behavior. As there is also more likelihood of prisoners’ dilemmas Opens in new window, formal rules are useful to support cooperative behavior (behaviour).

External institutions have come relatively late in human history. It seems no coincidence that the invention of agriculture and animal husbandry—which necessitated respected private property rights in land, animals and the yields from these activities—was soon followed by the emergence of lawgivers, judges and formal government.

Although external institutions depend on political decision processes and governments, this does not mean that government officials invent the institutions Opens in new window.

Often, government agencies have only codified and compiled pre-existing customs and laws. This was the case with the great lawmakers of Antiquity.

Codification means that existing internal rules are formally written down in ways that make them visible and unambiguous, for example by engraving the laws on stone walls as in ancient Assyria, Egypt and India, or the formal promulgation of the laws of Israel by Moses in the form of the Ten Commandments Opens in new window.

In the Roman Republic, the praetors, who were elected law makers and law enforcers, gradually produced a body of codified laws, which originally evolved much like modern Anglo-Saxon case law now does. In this context, it is also interesting to note the ancient Germanic concept of Volksrecht, the law which is owned by the people. The ruler only protects and nurtures it.

The famous medieval law code of eleventh century Catalonia was called usatges (usages), hinting at the origin of the code in internal customs. At least in Western civilization, public authority is the guardian of the external institutions, but it is there to serve everyone.

External institutions may also come about by formal political processes, such as when chosen delegates make a constitution or pass legislation; they may also come about by administrative action, for example when governments decree certain regulations on the basis of some more general enabling legislation.

In some countries, judges who offer new interpretations of existing laws also shape external institutions. In Anglo-Saxon countries, with its common law tradition, such ‘judge-made law’ has long been the norm, but in more recent times has been supplemented by parliamentary legislation.

Time and again, history has shown that external institutions normally depend, for their effectiveness and durability, on how well they are in harmony with the internal institutions of society and that the evolution of new rules depends on previous rule sets—that is, ‘stickiness’ (metis - Boettke, 2001; Pejovich, 2003; Boettke et al., 2008).

This empirical fact has, for example, been demonstrated by the emergence and durability of Law Merchant in international trade and by the experience of the transition of post-Soviet economies and the economic development of different nations.