So property rights, and courts to enforce contracts and adjudicate competing claims are examples of some of the social institutions required to support a market economy. But there are other, and for my purposes more interesting, social institutions which constrain our collective actions, both now and in the future. In particular, it is on the need to constrain our future collective decisions on which I shall focus this evening. Such constraints are necessary to support the willingness to make transactions. For example, if people believe that there is a high probability that investment made today will be confiscated by the government in the future, they are not likely to make that investment. It would be beneficial if we could constrain ourselves not to confiscate in future. Constitutions can be rewritten, property rights revoked, and revolutions have been known to occur, illustrating the point that, as a society, we can never commit future generations – or even our future selves – to collective decisions. There is no way of enforcing that commitment. But we can try to find ways of making it more or less credible that we will, collectively, act in a way that is conducive to our long-run prosperity. So one of the most important ingredients of a successful market economy is the set of institutions that constrain our future collective behaviour. Such institutions have cultural and political roots, but they have economic effects.
Now I too share the privilege of speaking in the Kirk where Gordon Brown’s father used to preach to the people of Kirkcaldy. Double trouble, you might think. I am particularly mindful of the controversy which Greenspan’s lecture stirred in the world of Smith scholars: “an unseemly battle is being fought over the soul of Adam Smith”, as one remarked. It is a sign of the resurgence of interest in Adam Smith that at almost every point on the political spectrum one can find people who claim Smith as their own. But, in a lecture in 1926 to commemorate the 150th anniversary of the publication of The Wealth of Nations, the economist Jacob Viner wrote, “Traces of every conceivable sort of doctrine are to be found in that most catholic book, and an economist must have peculiar theories indeed who cannot quote from the Wealth of Nations to support his special purposes”. 2 My intention today is certainly not to propose “peculiar theories”, but to examine the importance of social institutions in a market economy. Self-interest explains many economic decisions. But a market economy also requires social institutions. 3 They represent collective agreements about how to constrain our actions. Some social institutions constrain our individual actions. For example, a market economy cannot flourish in a world of anarchy in which we suspect that everyone else will cheat. If I lend you money it is in both our interests that there be some mechanism by which repayment can be enforced.