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Humane Studies Review
Volume 7, Number 1 Winter 1991/92
Institutional Bases of the Spontaneous Order: Surety and
Assurance
by Albert Loan
Bibliographic Essay
Systematically explaining the emergence of spontaneous orders by "invisible hand" processes has been,
since Adam Smith, an integral part of the research program of economics. Cooperation is shown to emerge
in a society of self-interested individuals, who spontaneously create a peaceful and productive social order
through their repeated interaction with each other, without consciously intending to do so. Since the writing
of David Hume's Treatise On Human Nature in 1740, many social theorists have elaborated on the way
rules that promote social order emerge without deliberate attempts to create them. In a community of people
who interact frequently, the principle of reciprocity serves to reinforce cooperative behavior since the
benefits of cheating are often outweighed by the cost of losing the trust and the business of other members
of the community. Even in instances where strict reciprocity does not occur, due to the number of individual
actors being large or because contacts between any two individuals are typically "one off." mechanisms can
emerge to coordinate activity on a voluntary basis. (For recent treatments of spontaneous social order theory
see Robert Axelrod, The Evolution Of Cooperation [New York: Basic Books, 1984]; Robert Sugden, The
Economics of Rights, Cooperation, and Welfare [Oxford: Basil Blackwell, 1986]; Anthony De Jasay,
Social Contract, Free Ride [New York: Oxford University Press, 1989]; and David Schmidtz, The Limits
of Government [Boulder, CO: Westview Press, 1991]. For a view of the spontaneous emergence of
arrangements for dispute settlements, see Peter Stein, Legal Institutions: The Development of Dispute
Settlements [London: Butterworths, 1984], and Legal Evolution [New York: Cambridge University Press,
1980].) These writers have sought to show how the rules on which such an order is founded, such as the
observance of property rights and the performance of promises, could result from rational self-interested
behavior, despite the apparent incentives to cheat and to "free ride."
This paper examines some historical evidence that supports this recent body of work. It examines how the
institutions of suretyship and assurance spontaneously emerged as the unintended result of self- interested
action and how they embodied the stabilizing tacit norms of trust, fellowship, and thrift, which served to
promote and preserve these institutions.
The Nature of Suretyship and Assurance
Suretyship and assurance are closely related institutions in which each member of a group assumes some
form of responsibility for the others in the group, thereby diffusing among the group the burden of risks
which might otherwise fall on a single individual. Suretyship involves members of the group assuming
some degree of responsibility for any unpaid debts, defaults on agreements, negligence, and so forth of
other members of the group. In the case of assurance members pool resources to provide for relief from a
hazard they face in common as members of that group. Both, though the precursors of the modern
institutions of insurance, are in their purest form reciprocal arrangements, whereas insurance generally
involves one party (designated in advance as the insurer) assuming some of the risk faced by another (the
insured) in exchange for a monetary premium. All three institutions operate on the principle of diffusing the
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burden of various kinds of risk, but in the case of insurance it is a specialized intermediary who manages the
diffusion of the risks and in the end takes final responsibility.
The earliest well-documented instances of suretyship in the West are traceable to forms of fellowship within
the Saxon clans of England and their tribal Germanic forbears, and to tribal Celtic society. The borh system
and frankpledge are notable examples of early forms of suretyship in medieval England, while other
instances can be found in the experience of Medieval Iceland and Celtic Ireland. There are isolated
documented examples of assurance dating back to as early as the 10th century BC in the Eastern
Mediterranean. (For a useful account of the assurance of sea voyages during this time and of marine
insurance in general see William Winter, Marine Insurance: Its Principles and Practice [New York:
McGraw-Hill, 1952].) In many cases there is considerable controversy over the origins of particular forms
of suretyship and assurance, partly because many types date back to periods for which records are very
scarce.
The rules and norms that characterized these institutions allowed them to function and survive, in one form
or another, centuries of political and social change. They owe their origin to a spontaneous informal process
reliant on custom and traditions, the functions of which were unknown to those whose welfare they
increased. What P.H.J.H. Gosden wrote with regard to assurance within the British friendly societies of the
18th and 19th centuries applies as well to other forms of mutual risk-bearing:
they do not owe their origin to parliamentary influence; nor to private benevolence; nor even to
the recommendation of men of acknowledged abilities, or professed politicians. [They]
originated among the persons on whom chiefly they were intended to operate: [these men]
foresaw how possible, and even probable, it was that they, in their turn, should ere long be
overtaken by the general calamity of the times and wisely made provision for it. (P.H.J.H.
Gosden, Self-Help: Voluntary Associations in the 19th Century [London: Batsford Press,
1973, p. 91])
The earliest examples of suretyship are connected with the enforcement of customs and laws. In many
societies, laws have existed and been enforced in the absence of anything which we would call a state, by
purely voluntary action. In Anglo-Saxon England there existed a well developed system of customary law.
(For an excellent discussion see Bruce Benson, The Enterprise of Law [San Francisco: Pacific Research
Institute for Public Policy, 1990, pp. 21-30].) Similar and even more elaborate systems of surety and
customary, non-state law flourished in Iceland and Celtic Ireland. (For these, see Jesse L. Byock, Medieval
Iceland [Berkeley, CA: University of California Press, 1988]; William I. Miller, Bloodtaking and
Peacemaking: Feud, Law and Society in Saga Iceland [Chicago: University of Chicago Press, 1990]; and
D. A. Binchy, ed., Studies in Early Irish Law [Dublin: Irish Universities Press, 1936].) Enforcement in all
of these cases was informal and primarily governed by custom, rather than by a state.
The dominant type of "peace-surety" in pre-Norman England was the borh. Borh was an institution for
"securing peace observance among the lower classes," and was regarded at the time to be "the base of
social order." (William Alfred Morris, The Frankpledge System [New York: Longmans, Green & Co.,
1910, p. 25]. This is an extensive and rigorous historical treatment of the borh system and its later
development into frankpledge. Other accounts can be found in T.F.T. Plucknett, A Concise History of the
Common Law, 5th ed. [Boston, MA: Brown, Little & Co., 1956, pp. 628-32], and Helen Maud Cam, The
Hundred And The Hundred Rolls [London: Methuen, 1930].) The borh system was a voluntary form of
peace surety and lasted until the Norman conquest of 1066. In its earliest form, it consisted of a group of
twelve neighbors, often, though not always, members of the same clan or kin-group. It provided that if an
individual committed a crime, disturbed the peace, or was delinquent on a debt, there was a group of
individuals (the borh) who would share the burden of tracking, capturing and bringing that delinquent
person to justice.
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An individual's borh also served as a kind of credit reference and guarantee by vouching for his integrity
and agreeing to make recompense in his stead if the situation required. The members who stood as borh
were able to bear such risks for two reasons. First, the burden was dispersed among them and second, the
frequency of contact and the voluntary nature of the bond helped deter actions in violation of custom.
Kinsmen or neighbors were not under obligation to agree to stand as surety for an individual whose
reputation they questioned, which made the maintenance of one's reputation of paramount importance and
further restrained dishonest or criminal behavior.
It is true that some form of suretyship was required by the crown at various times in medieval English
history, but there was usually no stipulation as to the form of organization to be employed for ensuring
accountability among the people. More importantly, since "social relations were maintained only with
people who shared surety protection," there were strong incentives to engage in these voluntary associations
even without the mandate of the crown. (Leonard Liggio, "The Transportation of Criminals: A Brief
Political Economic History," in Randy E. Barnett and John Hagel III, eds., Assessing The Criminal:
Restitution, Retribution, and The Legal Process [Cambridge, MA: Ballinger Press, 1977, pp. 273-94]) The
importance of reputation and good character were essential for the establishment of credit and to secure
prospective partnerships for negotiations and exchange.
Because others in the group provided insurance (credit) for all members...they would not accept or keep
someone who was not of good character. Consequently, members of a surety organization could disclaim
someone who committed an egregious wrong, providing strong incentives to abide by the law...In effect,
everyone who wanted to participate in and benefit from the social order was bonded. (Benson, 1990, p. 23)
It is clear from this that the borh system was sustained by self-interested behavior, but to show how it was in
an individual's interest to participate in the institution once it was established is not the same thing as
providing an invisible-hand type explanation of how the practice first emerged. Such accounts must go
beyond a merely functional explanation of the institution to identification of the process by which it became
established. The challenge in identifying how a practice such as that of borh was initiated lies in the fact,
well known since the time of Hobbes, that in the absence of an established convention of mutual
cooperation it appears that cooperative behavior (such as willingness to stand as surety for a family member)
is not self-reinforcing and could not gain a foothold in society. This conclusion derives from the observance
that, regardless of whether others behave cooperatively or not, an individual may gain an advantage for
himself by cheating on a cooperative arrangement or by not participating in one while gaining the benefits.
The claimed result is the irony of the well-known "prisoners' dilemma" game in which the players rationally
choose not to cooperate with each other even though this outcome is less beneficial than mutual
cooperation.
Robert Sugden and Robert Axelrod utilize game theory to point out, in the tradition of David Hume, that
the uncooperative equilibrium that would seem to preclude institutions such as suretyship need not obtain in
a situation where individuals expect to interact with each other repeatedly. In such a case, the short-run
benefits of avoiding the cost of cooperating must be weighed by "the shadow of the future," the expectation
that noncooperation may result in retaliation in future interactions, while cooperation may foster similar
behavior in others. Sugden reasons that even in a world where most individuals obstinately refuse to
cooperate, if the expectation of future interactions is high a growing minority may find that a strategy of
"Tit-for-Tat," which bravely initiates cooperation while retaliating against defection, can result in a
successful convention of cooperation. Axelrod likewise illustrates how a "cooperative cluster" of as little as
two individuals following a Tit-for-Tat strategy may grow in number and establish a general convention of
cooperation even in a community initially composed of unconditional non-cooperators. Hayek, in a recent
work, argues that communities which develop voluntarist means of coordinating actions and regulating
behavior will be more successful than others which, for one reason or another, fail to do so. (F. A. Hayek,
The Fatal Conceit [London: Routledge, 1988]) This implies that Axelrod's model of the emergence of
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cooperative clusters or communities may be tied into an evolutionary model of historical development.
Moreover, work by Brubaker, Goldin and, most recently, Schmidtz suggests ways in which cooperation
can arise even when strict interpretation of the prisoners' dilemma would suggest that no individual has any
strong incentive to cooperate with others to supply some collective good. (Kenneth S. Goldin, "Equal
Access vs Selective Access: A Critique of Public Goods Theory," and Earl R. Brubaker, "Free Ride, Free
Revelation, or Golden Rule?", both in Tyler Cowen, ed., The Theory of Market Failure [Fairfax, VA:
George Mason University Press, 1988, pp. 69-92 & 93-110]; Schmidtz 1991, passim but particularly pp.
92-111) When individuals know that a good will not be provided unless they cooperate, the incentive to do
so may be strong enough to lead to such cooperation, even when not everyone in the group goes along.
One crucial factor is the capacity to create a mechanism to exclude non-cooperators and, even more
important, punish defectors. (A key argument here is that of Goldin, that most goods can be made
exclusionary, i.e. non-public, hence the key decision is whether or not to supply the good on an
exclusionary or open basis.)
Civil peace within a community, such as was maintained by the borh system, is the classic example of a
collective good being provided through voluntary action. A community would collectively bind themselves,
usually by oath, to live together in peace and punish malefactors. In one of the most dramatic examples, the
formation of urban communes in medieval France and Italy, this was symbolized by the erection of walls
which separated the cooperating community from the outside non- participants. Another example was the
movement for the "Peace of God" and "Truce of God" in northern Europe during the twelfth century,
where large numbers of lords and cities would collectively bind themselves not to war against each other
and to cooperate in punishing anyone who reneged on the agreement. Institutions such as outlawry and
excommunication evolved to enforce these "conditional assurance contracts," as Schmidtz terms them.
(Schmidtz, 1991, pp. 66-79. For historical examples of this kind of process see Henri Pirenne, Medieval
Cities [Princeton, NJ: Princeton University Press, 1925], Charles Petit-Dutaillis, Les Communes Francaises
[Paris: Albin Michel, 1947]; W. F. Butler, The Lombard Communes [New York: Haskell House, 1969
repr. of 1906 ed.]; and, for the "Peace of God" movement, Harold Berman, Law and Revolution: The
Formation Of The Western Legal Tradition [Cambridge, MA: Harvard University Press, 1983].)
Anthony de Jasay goes further and argues that even when there are free riders on the public good supplied
by others' free cooperation, it may still be in the interests of the cooperators to supply the good and carry the
free riders -- to be "suckers" in the usual terminology. Again, the key factors are the knowledge of the
actors that the good will not be supplied at all in the absence of their cooperating, the existence of a
mechanism to ensure that it will be supplied if a given number cooperate, and some means of identifying the
cooperators.
These theoretical treatments of the process by which cooperation, conventions or institutions emerge
spontaneously are perfectly compatible with the historical treatments of the borh system, which emphasize
the role played by reciprocity and the importance of ties such as kinship and geography which would
guarantee frequent interaction. The Icelandic example shows how surety and other cooperative relations
could evolve and sustain themselves even where the individuals involved were not necessarily connected by
kinship ties or geographical contiguity.
After about the year 960 Iceland was divided into thirty-nine chieftaincies, each headed by a chieftain or
godi (plural godar). Each godi had authority over a thing. This was an association of individuals or
households who voluntarily chose to be bound to a particular godi. Among its many other functions, the
thing acted as an instrument of collective surety, in the same way as the borh. It was also the main agency
for settling legal disputes, seen purely as private affairs between individuals. The chieftaincies were grouped
into thirteen varthings. The meetings of things and varthings were judicial assemblies at which disputes
were heard and settled, with serious matters held over to the collective meeting of all the godar at the annual
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althing. The thing was not a geographical entity; at the local level the thingmen of various godar were
intermingled with no clear geographical base for any one thing. Also, things did not necessarily correlate
with kin-groups. Although in the beginning things were primarily composed of kin-groups, they later
expanded to include members without kin relations. (Byock, 1988, pp. 55-76, 108-36; Miller, 1990, chs 6-
8, pp. 179- 300)
The Icelandic case also shows the importance of another factor: the use of representation or fictive collective
individuals in reducing the number of those who must decide to collaborate to an optimum level. There
being only thirty-nine godar made the decision to outlaw any defector easier to arrive at. Other examples of
this were the leagues of cities which were a feature of the middle ages, the most notable being the Hanseatic
League. Here the number of individual merchants and operatives bound by the collective agreements of the
league (to mutual peace, collective security, and common commercial law) was very large, but the actual
entities making up the league were a manageable number of cities. This also demonstrates the point that,
contrary to much ignorant or malicious comment, voluntary social organization of this kind is compatible
with large, complex societies, and not found only in "face-to- face," "tribal" communities. In fact, as Hayek
and others have argued, in the "great" or "extended" society of modernity, free and voluntary cooperation
becomes more, not less, important. Voluntary cooperation through these kinds of networks and institutions
is what enables use to be made of the great mass of tacit knowledge scattered throughout the population, so
making modern society possible and more social than its "primitive" forbears. (Hayek, 1988, passim but
especially pp. 15-19)
Moreover, such systems are also adaptable to changing political and demographic conditions. The Anglo-
Saxon borh is a good example of this. With time, it came to be based less and less on actual (as opposed to
fictive) kin ties, if indeed this had ever been dominant. Benson argues that the borh system came to lose its
family character because of the increased mobility of the population, which caused kinship reciprocity to
break down while making reciprocity among friends and neighbors of the same church or vil more
significant (1990, p. 23). Maitland, by contrast, argued that the system had never been purely, or even
primarily, kin based. (Sir Frederick Pollock & Frederic William Maitland, History Of English Law To The
Time Of Edward I, 3rd ed. [Cambridge: Cambridge University Press, 1968, pp. 568-71]) Either way, borh
was sufficiently robust as an institution to cope with great social change.
The Replacement of Borh by the Frankpledge System
The Anglo-Norman scheme of suretyship called frankpledge is sometimes confused with the borh practices
from before the Norman conquest. Like borh, frankpledge involved a group of men pledging or bonding an
individual, although the groups established for suretyship under frankpledge were the groups of ten known
in medieval society as the tithing, not necessarily friends or relatives. Although similar in purpose and in
many particulars, there were two crucial differences between borh and frankpledge: first, frankpledge seems
mainly to have been an institution imposed by the crown; secondly, whereas an individual could decline to
stand as surety in another's borh on the basis of knowledge of that person's character, those who stood as
suretyship under frankpledge had no choice in the matter. Morris notes that:
Between the voluntary pledging of a man by his neighbours in 1030...and the duty, in 1115, of
every man in a tithing to serve for every other man in the tithing without right of refusal or
withdrawal, no matter what the character of the associates, is a break that can be explained only
by governmental action of a deliberate and rigorous nature....(p. 29-30)
This change was significant. The effectiveness of the borh system had been due to everyone's knowing that
the likelihood of receiving suretyship from his neighbors depended on his own actions and reputation. The
elimination of the element of choice and the replacement of kinship and friendship relations as the basis of
suretyship with an arbitrary group decided by the authorities eviscerated suretyship by removing the crucial
voluntary element. The borh system had developed spontaneously, largely the result of voluntary
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intercourse and probably a considerable amount of trial and error over a century and a half of Anglo-Saxon
legal history. It was both adapted and adaptable to the changing demography and political environment of
medieval England. Frankpledge, on the other hand, was imposed by William I for reasons of expediency
and greed. Frankpledge was intended "to invoke a more stringent borh system" (Morris, p. 31), and also
served the purpose over the eleventh and twelfth centuries of diverting compensation into fines paid to the
crown, so swelling the King's revenue. By supplanting a voluntary system, dependent on a composite of
tacit rules of trust which had developed spontaneously over centuries and had proved to be beneficial and
progressive, with a compulsory arrangement, essential elements which made borh an effective surety system
were lost. Benson recounts how under the Normans voluntary participation in the maintenance of civil
peace declined and had to be replaced by the extension of more authoritarian methods of keeping the peace,
such as the introduction of local sheriffs with broad powers of law enforcement. The "shadow of the future"
which had reinforced voluntary participation in the maintenance of order was diminished under
frankpledge. Thus, frankpledge could not function in the way that borh had, since it drastically reduced the
role of reputation that had been at the heart of the Saxon legal system.
Suretyship and the Growth of International Trade
The social function that suretyship served is illuminated by a look at the cultural and commercial history of
Europe as a whole. By the twelfth century, networks of trade were being extended deeper into England and
the continent from commercial centers in Northern Italy and coastal cities on the Mediterranean. The
uncertainties associated with international commerce during this time were considerable. Not the least of
those were risks relating to the trustworthiness or prudence of prospective transactors. These were often
high because of the tenuous and infrequent nature of trade in the more isolated regions of Europe. An
examination of the emergence of suretyship within the context of expanding medieval markets is especially
important. It is even more interesting when viewed in light of the argument that the expansion of the groups
within which people interact and the resulting decrease in the frequency of interaction between individuals
endangers social stability. It is a significant point that the problem of increasing anonymity is not new to
modern civilization, and that history provides examples of how it has been effectively dealt with by
practices such as suretyship.
The extension of markets into previously isolated inland regions of France and Britain during the 11th and
12th centuries often took the form of periodic fairs for which merchants traveled great distances to sell their
merchandise. These fairs were invaluable institutions for coordinating trade between people from distant
parts of Europe and beyond. The famous fairs of Champagne, which ran almost continually, alternating in
one of four towns of that region, attracted merchants from all parts of the Western world during the twelfth
and thirteenth centuries. As a result, they became "a sort of clearing house for merchandise and currency
exchanges between the Mediterranean and the North Sea basin." (Robert Lopez and Irving Raymond,
Medieval Trade in the Mediterranean World [New York: Columbia University Press, 1990 repr of 1955
ed., p. 80]. This is a very thorough documentation of medieval trading practices. Ellen Moore's The Fairs of
Medieval England [Toronto: Pontifical Institute of Medieval Studies, 1985] examines these practices as they
occurred in England.)
The success of the medieval fairs is not hard to understand, and the function they served is of interest for
understanding the further development of mutual risk-sharing practices. To appreciate the role played by
such practices, it is useful to examine how the fairs came to be in the first place. In the absence of efficient
communication, large towns, and well developed permanent commercial establishments in these regions,
there was a tremendous amount of uncertainty associated with trade, especially international trade. The
prospects of buyers and sellers meeting were low and difficult to ascertain, credit arrangements were
extremely risky, and the problem of differing currencies was serious -- all of this since the scope and
frequency of personal interactions between transactors were severely limited. In this context, the actions of
the merchants exemplify Sugden's arguments about cooperative clusters. Merchants must have attempted to
seek out locations that were central and accessible, and recognized as such by other merchants as well as the
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local population. Small groups of merchants who converged on a particular place and time in this attempt
would have done well to agree to return again at a specified time and to announce this to other merchants
and to the locals. Such groupings would consolidate and grow as word of the time and place of their
meeting spread both locally and internationally. As the same merchants (or their agents) returned again and
again and the amount of trade grew sufficiently to lead to convergence on certain standards of trade and
currency exchange, the uncertainty of trade in these regions was greatly reduced, and transactions that were
too costly or risky to be undertaken before were now regular occurrences.
The fairs made it possible for commercial relationships between individuals to develop, for reputations to be
established and for accepted practices for assuring performance of contract to evolve. Most notably, they led
to the emergence of the Law Merchant, a transnational system of customary law enforced by informal
courts of Piepowder (from pieds poudres, or dusty feet), which first appeared at the Champagne fairs and
soon spread all over Europe, becoming more systematic as they did so. (For accounts of the Law Merchant
and its origins, see Wyndham Anstis Bewes, The Romance Of The Law Merchant [London: Sweet &
Maxwell, 1986 reprint of 1923 ed.]; William Mitchell, An Essay On The Early History Of The Law
Merchant [New York: B. Franklin, 1969 reprint of 1904 ed.]; and L. E. Trakman, The Law Merchant
[Littleton, CO: F. B. Rothman, 1983].) The spontaneous appearance of the Law Merchant and its surety
mechanisms is particularly interesting as an instance where such an institution evolved despite the lack of
repeated contacts between players, showing that anonymity does not necessarily lead to a crippling
"prisoners' dilemma." (For a discussion of this point see Paul R. Milgrom, Douglass C. North, and Barry R.
Weingast, "The Role of Institutions in the Revival of Trade: The Law Merchant, Private Judges, and the
Champagne Fairs," in Economics and Politics, Vol. 2, 1990, pp. 1-25.)
Nor was the Law Merchant the only institution to evolve from the fairs. In the fairs of medieval England,
rules were established that further reduced the uncertainty of itinerant trading by extending the liability for
repayment of debts to any merchant within the guild of which the original borrower was a member. The
guilds were local voluntary associations whose members practiced the same trade. Craft and merchant
guilds served to set standards of workmanship, rules of the business, terms for apprenticeship, and
conventions for adjudicating disputes. By providing suretyship among members, the guilds converted costly
international disputes into more manageable disputes within the local guilds and reduced the scope for
defaulting on agreements. The custom of mutual liability for debts among members of the guilds was
advantageous because frequent interaction, reciprocity, and bonds of fellowship between members greatly
reduced the gains that could be had from defaulting on a trading obligation. Membership in a merchant
guild was very valuable since it communicated one's trustworthiness to other merchants. Members were
thus discouraged from taking actions that might endanger their continued acceptance within the guild. (See
Antony Black, Guilds and Civil Society [Ithaca, NY: Cornell University Press, 1984].)
The importance of mutual accountability for promoting trade in England was demonstrated by the
contraction of trade that occurred after 1275, when the First Statute of Westminster legally abolished the
practice. By 1283, Edward I was dismayed
...because merchants who in the past have lent their substance to various people are
impoverished because there was no speedy law provided by which they could readily recover
their debts on the day fixed for payment, and for that reason many merchants are put off from
coming to this land with their merchandise to the detriment of the merchants and of the whole
kingdom. (Moore, p. 120)
Before continuing, it is important to take notice of the social dynamics underlying this historical account.
The search for new profit opportunities led entrepreneurs in the established European centers of commerce
to try to expand their trade into the hinterland of the continent. A new market institution evolved -- the fair,
which made this expansion possible by establishing a process of expanding trade geographically. Yet, the
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physical distance and cultural differences that separated merchants gave rise to problems of accountability.
The problem was that the expansion of the groups within which people interacted diluted the influence of
reciprocity. The response was twofold: first, the extended, expanded trade was preserved by returning the
function of deterring dereliction to smaller, localized social units that could bring reciprocity and fellowship
to bear on their members. The second response was the emergence of impersonal voluntaristic institutions
such as the Law Merchant which, like modern credit bureaus, transmitted and pooled information about
individual merchants, making it available to their fellows even when they seldom met face-to-face.
Contemporary institutions such as credit card companies and bureaus are in fact excellent examples of
private solutions to apparently insuperable public good problems, occurring in a system marked by
anonymity and ephemeral contact: again this demonstrates that such solutions are not purely a feature of
"primitive" societies. (For an excellent discussion of the theoretical problems involved in credit, and the
appearance of the credit bureau as a solution, both historically and in modern society, see Daniel B. Klein,
"Cooperation Through Collective Enforcement: A Game-Theoretic Model of Credit Bureaus," forthcoming
in the Journal of Economics and Politics.)
Two complementary forms of institutions, then, tend to emerge together and reinforce each other. On the
one hand are institutions (like media of exchange, standard forms of contract, and fairs) which are
comprised of conventions that guide people's expectations for the coordination of their plans. On the other
hand are institutions (like courts, credit bureaus, police, and in the present context, guilds), which reinforce
cooperative rules of conduct typically susceptible to breakdown due to shirking or free riding. As
development of the former coordinating institutions fosters the extension or dispersion of markets, they
create the need and incentive for reinforcing institutions that bring problems of accountability back to a level
where reciprocity and fellowship are effective and enable individuals meeting for the first -- and maybe only
-- time to discover each other's past records.
One important conclusion to be drawn from the history of the extension of commerce in Europe and of
suretyship in England is that voluntary risk-shifting institutions such as suretyship serve the overall order of
society in ways that reach beyond what we normally think of when we speak of "the reduction of
uncertainty." Most notably, they allow for both the extension of the market order and improved social
stability. Contrary to the arguments of some historians, such institutions do not imply a holistic or collectivist
view of identity. Rather, they enable individuals to pursue their own ends more effectively by acting
cooperatively with others. As one author puts it, "The crucial point about both guilds and communes was
that here individuation and association went hand in hand ... One achieved liberty by belonging to this
group." (Antony Black, 1984, p. 65, emphasis original)
The Emergence of Assurance: British Friendly Societies
The roots of the friendly-society sort of mutual assurance against the risks of illness, accident or other
disability appear to be closely connected with earlier institutions of suretyship, although they served a
different purpose. While suretyship arrangements operated primarily by reducing the risks imposed on those
who would trade with members of the group, assurance served to cope with the risks faced by the group
members themselves. The history of these assurance institutions bears out the fact that spontaneous ordering
processes like those identified as the source of voluntary suretyship can explain the existence of assurance
institutions as well. By the 16th century, the power of the guilds in England had grown so great that they
were seen as a threat to the rule of the crown and the government undertook to suppress them. But as the
guilds declined, a new form of fellowship arose to replace them. The "friendly societies," as they were
called, were voluntary associations of working men organized "to meet their social and convivial needs as
well as to insure against the hazard of sickness and death." (P.H.J.H. Gosden, Self-Help: Voluntary
Associations in the 19th Century [London: Batsford Press, 1973, p. vii]. See also Gosden's The Friendly
Societies in England 1815-75 [New York: Augustus M. Kelley, 1967]; two works by William H.
Beveridge, Voluntary Action [London: George Allen & Unwin, 1948], and, with A. F. Wells, The
Evidence for Voluntary Action [London: George Allen & Unwin, 1949]; and two older works: Samuel
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Smiles, Self Help [London: J. Murray, 1958], and Frederick Eden, The State Of The Poor [London: J.
Davis, 1797]. These make up the classic literature on friendly societies. For more recent work, see David G.
Green, Working Class Patients And The Medical Establishment: Self-Help in Britain from the Mid-
nineteenth Century to 1948 [New York: St. Martins Press, 1985], and the same author's Mutual Aid or
Welfare State: Australia's Friendly Societies [Sydney, NSW: Allen & Unwin, 1984]; and Ian R. Christie,
Stress and Stability in Late Eighteenth Century Britain [New York: Oxford University Press, 1984, ch. 4].
In the American context, see David Beito, "Mutual Aid for Social Welfare: The Case of American Fraternal
Societies," in Critical Review, Vol. 4, No. 4, 1991, pp. 709-36.)
There is disagreement over whether direct historical connections may be drawn between the friendly
societies and the merchant and craft guilds that came before them, but, as F. H. Eden observed, there is
an extraordinary coincidence between the rude simplicity which pervades the ordinances of
[some of] the Saxon Guilds, and some of the modern friendly Societies. (Eden, 1797, p. 590)
Unlike the merchant and craft guilds, however, their membership was not dominated by any one trade, but
was comprised of men of all trades and work backgrounds. The friendly societies charged their members
regular subscriptions so that the pooled funds could be used for the relief of members who were
unemployed or who, because of illness, injury, old age or other misfortune, could not support themselves or
their families. (The wide occupational spread of the membership was of great assistance here: as each
occupation tended to have its own trade cycle it was unlikely, barring a major catastrophe, that all or a
majority of the societies' members would be unemployed at any one time.) These societies were numerous
and large during the 18th and 19th centuries. Eden estimated in 1801 that there were about 7,200 societies
with a total of 648,000 members (Eden, 1797, p. 7). By the end of the 19th century, the number enrolled in
the great "Affiliated Orders" such as the Oddfellows, Druids, and Forresters ran to several million (Gosden,
1967).
By the late 19th century, most friendly societies supplied not only financial relief to those whose
circumstances required it, but offered treatment by a medical practitioner when needed (Gosden, 1973, p.
112). In Britain, the societies were able to provide the full range of medical services, since by pooling their
resources they were able to build and run dispensaries and to retain a panel of doctors on a permanent basis.
Because the societies exercised customer control over the doctors, they were able to keep down medical
prices to an affordable level, as well as control the service provided by the medical practitioners and so
check the cartelizing tendencies of the organized medical profession (Green, 1985, passim).
Early self-help groups were not, as one might expect, politically collectivist in their organization or intent.
Rather, they were fiercely individualistic and resisted all external attempts to regulate them. These
organizations, priding themselves on their autonomy, consciously fostered among their members the ethics
of self-reliance, prudence, and frugality. Unlike the compulsory insurance schemes of later years, friendly
societies were not established for the purpose of the redistribution of wealth. (Black, 1984, pp. 177-81;
Gosden, 1973, p. 10; Hayek, 1960, p. 287-89)
Like the guilds that were their historical predecessors, the friendly societies were viable because their rules
and organization assured close and frequent contact between members, offering the maximum scope for
reciprocity and the development of reputations. The development of affiliated orders provided a mechanism
for transmitting information about a person's character and reputation to those who did not know them
directly. In much the same way that reciprocal and reputational dynamics discouraged guild members from
defaulting on loans or failing to perform contracts, they counteracted the temptation of individuals in a
mutual-aid situation to free-ride on the contributions of others in the group. Ties of fellowship were
strengthened by the fact that the friendly societies organized not just for the purpose of mutual indemnity but
as centers of conviviality and friendship, just as their name implied. This factor was usually overlooked by
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Parliament, which on some occasions tried to copy the success formula of the friendly societies when
establishing compulsory mutual aid societies for various groups of citizens. In reference to a 1792 Act of
Parliament, which attempted to set up a compulsory mutual society for the relief of skippers and keelmen
employed in the coal trade on the river Wear, Eden claimed that "one of the most important functions of
local friendly societies, for which the Act obviously made no provision...was to bring men together to spend
a convivial hour with their neighbours...." (Gosden, 1973, p. 8) Like other legislative forays of this sort, this
mandatory society was unsuccessful, apparently because it was seen as a tax on the workers and not as a
vehicle for social intercourse (Eden, 1797, pp. 614-615).
Eden was convinced that the state should not attempt to regulate friendly societies, for if it did
so 'the inclination of the labouring classes to enter them will be greatly damped, if not entirely
repressed." In this he was entirely accurate in his observations, for in the next century even that
mild form of state protection offered by registration was to be found objectionable by many
members and even in the later 19th century, the Chief Registrar believed that there were
probably as many members of unregistered as of registered societies.' (Gosden, p. 10)
This evidence appears to highlight the importance not only of the frequency of association, but its voluntary
nature for the nurturing of reciprocity and friendship.
The parallel between the character of the social rules involved in assurance and in suretyship is clear. Each
harnesses the influence of reciprocity and reputation to reinforce cooperative behavior. Each strengthens the
function that trust serves in social relations by maintaining close interaction among individuals through
practices based on fellowship. Not surprisingly, explanations of the emergence of assurance have been
made along very similar lines to those discussed for suretyship. Sugden provides an invisible hand
explanation of the development of mutual aid societies which runs exactly parallel to the process he
identified for the establishment of cooperative conventions in the prisoners' dilemma game. (See Sugden,
1986, ch. 7 for this discussion.)
Conclusion
Suretyship and assurance may seem dry, narrow topics, of interest only to the specialist. In fact, as this
paper demonstrates, they are basic institutions for any liberal order, and their study can cast light on many
questions of vital import to those interested in understanding and promoting the classical liberal ideal of a
free society. The voluntary cooperation of individuals through these institutions has played a crucial role in
the historical development of free societies. In the economic arena, they have been essential to the
expansion of trade and the economic empowerment of individuals through greater wealth and a more
flexible and productive economy. They have often been central to the maintenance of social peace and civil
order. They have been the mechanism for protecting individuals and communities against hazards through
the provision of a wide range of benefits and services, from unemployment insurance through old age
provision to health care.
Moreover, all of this was done on a voluntary basis, without any resort to coercion or forced redistribution
of resources. The historical evidence presented here should force us all to reexamine many common
presumptions: that such "services" as law and police can only be provided by the state, that social welfare is
best provided by some form of forced redistribution, and that voluntary cooperation in civil society labors
under the burden of a crippling prisoners' dilemma.
All of this means that much of our currently accepted social and economic theory is contradicted by the
facts of history. Consequently, there is a wealth of areas open to the eager iconoclast, for anyone who
wishes to demonstrate that the idols of the modern academy have feet of clay. In economics and game
theory, there is clearly a need for work which takes into account the actual historical experience, rather than
trying to force it into the discredited model of classical public goods theory. We need in particular more
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work along the lines of that of Schmidtz, Klein, and some of the contributors to the Cowen volume. This
work should seek to explain the precise mechanisms and dynamics involved in voluntary cooperation. One
important question is that of the role and impact of technology; another, that of whether there may be an
optimum number of participants for the formation of such voluntarist institutions as those described here.
History and sociology also have many opportunities for contribution. The former needs to do more work on
the many historical instances of voluntary cooperation, most of which are relatively untouched by modern
scholars. For example, there are almost no modern studies of friendly societies and mutual aid, in contrast to
the enormous number of studies of state welfare and its history. Sociologists can explain how institutions
such as suretyship interact with other social institutions and practices, and how the internal dynamics of
societies can sustain or undermine voluntarist institutions.
All of this also has practical application to today's situation. Voluntary institutions such as surety and
assurance embody norms of reciprocity, trust, honesty, fellowship, and thrift without which no stable social
order is possible. The evidence shows that when these norms are articulated and expressed through
voluntary action, they are enhanced and strengthened to everyone's benefit. Attempts to mimic the invisible-
hand process that has generated them will not only fail; they will actively undermine and destroy these
norms. Theory and empirical research combine to suggest four things: first, that such norms and institutions
are needed for the successful functioning of any society; second, that the more complex the social order, the
greater the need for them; third, that such institutions may appear spontaneously but cannot be deliberately
created; finally, that much state action will undermine or destroy these norms and institutions, with
potentially catastrophic effect.
Albert Loan is a graduate student in Economics at George Mason University.
Copyright 1992 by the Institute for Humane Studies.
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