In theory, according to Thomas Hobbes, there is a state of nature where men are wolves to men. Thus there is a need for an absolute ruler who would command and protect men against men. I find that hard to believe even though it provides an interesting theoritical framework for analysis of institutions. Why?
Say you have two individuals who respectively produce corn and wheat, each of them are tired of eating only corn and wheat. So they should be trading. However, a very simple gains matrix could show that one individuals could gain more by stealing than by trading, so the rational decision for both would be to avoid entering transaction with others. But, life goes on even if the corn farmer kills the wheat farmer who does not know how to make wheat after he consumed all the wheat he stole from his victim. So the guy is stuck with corn for the rest of his life. In a sense, there is an incentive to create trust at the very least as an institution if you want to gain more in the future by keeping the guy alive and gaining his trust so that the trade can be fair and just. So at least, at the beggining there is a need for some form of “informal institution” that allows everyone to actually trade. Several cases of communities in “lawless” (formal law) societies have actually formed primitive systems that mimic the effects of rule of law through reputation and trust, the neolithical villages could be a good representation of such a thing. Even nomadic tribes had incentives not to kill each other off.
So here is the question I wonder, if individuals make institutions to allow them to gain from trade, the emergence of markets is simultaneously linked with the emergence of institutions that allow for fairness and justice (thus the birth of ethics and morality). As soon as exchange becomes happens, there are incentives to ensure that everyone will be honest and will not cheat. Can it be that the Hobbesian state of Nature could never exist and that markets breed morality?
