Instincts and Institutions: the Rise of the Market

How did cooperation emerge in large-scale, fluid societies? Standard theories based on direct and indirect reciprocity between self-regarding agents cannot explain the high level of impersonal exchange observed in developed market economies. Drawing upon recent research from across the behavioral sciences, we attribute the emergence of cooperation in early trade to an evolved characteristic of human psychology which makes revenge sweet: people are willing to pay a price to punish those who betray their trust. Once cooperative expectations became fixed, institutions such as the law merchant and ethnic trading networks, as well as certain ‘bourgeois virtues,’ helped sustain and extend trade during the Medieval period. Our argument continues the tradition begun by F.A. Hayek in The Sensory Order (1952), by providing an integrated explanation for the rise of the market based upon the coevolution of human psychology, culture and institutions. In our conclusion we revisit Hayek’s (Hayek 1976, 1978, 1988) analysis of the conflict between our instincts and the institutions that have created the market order.