1.1.1 The Meaning of Regulation by Custom and Morality

To discuss the meaning of regulation by custom and morality and its past and present roles, one must start with the question of resource allocation.

People often ask what it is that economics studies, and why we should study economics. Different schools may supply different answers, but none can get away from this thought: Economics is about allocation of resources and the study of economics is the study of how to use limited resources in the most rational and efficient ways, so as to increase the overall wealth of society and make it increasingly affluent. Some scholars would go further: The study of economics is in order to use resources rationally and allocate them efficiently, so as to increase the wealth of society and make income or wealth distribution fairer and fairer. In short, economics is a science of resource allocation and its mechanisms.

In the discipline of economics two standpoints on resource allocation have formed. The first holds: Resources can be allocated rationally and efficiently by means of market mechanism, and resource allocation theory is no more than a theory of spontaneous regulation by market on economy. The second considers: The market mechanism has many limitations in resource allocation, such as low utilization rate, irrational allocation, unbalanced income distribution, etc., and therefore the market mechanism should be replaced or at least rectified through regulation by government (or regulation by plan). Between these two attitudes, many other different viewpoints exist, such as: Equal importance should be attached to the two means of regulation; either regulation by market should play the major role and regulation by government the auxiliary role; or vice versa. In general, current study on resource allocation mechanism shows the existence of the two means is universally accepted and the only disagreement is on their relative weighting in resource allocation.

Regulation by market and regulation by government are two distinct modes of resource allocation. But in fact, ever since the appearance of markets and governments, neither of the two modes has been the only one at work in social and economic life. In a market economy, a more realistic view is: Market plays a basic role in resource allocation and regulation by government a high-level role. Both modes exert influence on social and economic activities. Wherever there are trading activities, the market mechanism is at work. Wherever there is government, there is government supervision or guidance, be it direct or indirect, on trading activities so that they remain in line with government aims and within the boundaries it defines. In this sense, regulation by market as a basic mode can be called "primary regulation" and government regulation, as a high-level mode, "secondary regulation."

Now we want to ask: Are there only the two means of regulation in social and economic life? Is there another, a third type of regulation? And if so, what is it?

As previously stated, the terms regulation by market and regulation by government both indicate the mechanism by which resources are allocated, namely, the resource allocation rules by which social and economic life operates. Without a market there could be no regulation by market and without government, no regulation by government. However, human beings have been on Earth for hundreds of thousands of years whereas market appeared only several millennia ago and government even later, so how did human society and its economy run and how were resources allocated in the long period before regulation by market and by government were established? Is it possible that another means of regulation was there to allocate resources? If not, how could human society have survived till today?

Barter, a type of transaction, first appeared among tribes, and can be regarded as an embryonic form of spontaneous regulation by market. At that time, predating both states and governments, there were no concepts of government management or regulation of resource allocation. Then we may enquire: In the long period before the appearance of barter or within tribes after inter-tribal dealing emerged, given that there was no market force or government force, what was it that controlled resource allocation between people or between tribes? It could only be force of custom or morality. Factors of custom and morality constitute a cultural tradition that is universally accepted and followed by people and through which they handle and adjust their interpersonal relations. Under the influence of this cultural tradition, people's behavior becomes more orderly and conforming. Even in remote antiquity this was the case. For example, the way of tribal members conducting their production activities, the division of labor, the obligations and rights of the members, etc., were and could only be regulated by custom and morality. It is the same with the way they distribute the means of subsistence among tribal members and the way they distribute food, especially when it was in shortage. If the members violated the tradition, if their behaviors were not normalized or if resource allocation was in disorder, it would be a disaster for the tribe, causing its inner instability and ruining its conventions.

In light of this, regulation that relies on the force of custom or morality―a regulation beyond market and government―can be called "the third regulation." Since production factors are provided and employed according to custom, and production outputs are distributed on this basis too, it can undoubtedly be called "regulation by custom." Custom comes from tradition and group identification, the foundation of which is moral belief and principle. Since custom is supported by morality, regulation by custom is inseparable from regulation by morality. Hence, they can be compounded under the term regulation by custom and morality.

In his work A Theory of Economic History , the British economist John Hicks used the term "customary economy" and considered it the earliest model of non-market economy. He pointed out that "the economy of a neolithic or early mediaeval village, as well as of the tribal communities which have survived until lately in many parts of the world, was not organized by its Ruler (if such existed); it was based upon a corpus of tradition. By that tradition individual function was prescribed, and continued to be prescribed."

According to Hicks, in "customary economy," people are "not much disturbed in their ancient ways by external pressures. Their economy can function, with every member performing his allotted task, including the decision-making which is left to him within his allotted circle; overriding decisions from the 'centre' will scarcely ever have to be made." Such "customary economy" is self-adjusting for maintaining a balanced state. As Hicks wrote, "once such a system has attained an equilibrium, it can continue for long ages without the need for reorganization—without the need for new decisions of an organizational character. The ordinary emergencies, such as harvest failures or attacks by the 'usual' enemies would not require new decisions; ways of dealing with them could be incorporated within the traditional rules. So long as this equilibrium persisted, there might even be no need for an organ by which ultimate authority could be exercised." Without doubt, the "customary economy" described by Hicks was an economy regulated by force of custom and morality only.

But does it follow that, with the emergence of markets and governments and regulation by them, regulation by custom and morality disappeared? Far from it: Actually, the later emerged market and government regulations are a partial substitute for the long existing custom and morality regulation, and a restricting power on the influencing scope of the latter as well. The diminished importance and influence of regulation by custom and morality does not imply its total disappearance. Indeed, in areas where regulation by market and government cannot reach, it still plays a major role. For example, there are places outside the reach of government—remote mountain villages, isolated islands, wilderness areas—but there are people living, working and multiplying there. It is regulation by custom and morality that enables them to continue living and producing there.

We come to a preliminary conclusion: Before the appearance of regulation by market and government and in places where market and government factors cannot reach, regulation by custom and morality is the only form of regulation that works.

1.1.2 Co-existence of the Three Modes of Regulation

Since the appearance of markets and governments, there have been occasions when regulation by custom and morality comes into play together with the other two modes, thereby creating a situation of the three types of regulation co-existing and co-functioning.

A typical example is the social and economic life of medieval cities in Western Europe.

In Western Europe, since the 10th century or so, some old cities in decline experienced a revival. New houses were built on the ruins of the old city, forming new neighborhoods, or industrial and commercial districts emerged along the old city boundaries and gradually became an integral part of the city. More importantly, a group of new cities appeared. Different from the ancient cities in Western Europe both in political and economic terms, these revived or new medieval cities came into being and developed as something different from serfdom and as places of refuge and resettlement for escaped serfs. Many of those serfs became craftsmen and their organizations were called guilds. Members of a guild, or guild-masters, were owners of manual workshops. They sold their products and bought raw materials in the market, so their behaviors were regulated by the market. The administration of the city, or the municipal government, formulated a series of rules for the market and the production and operation of the workshops in terms of product price, operating hours, borrowing and lending rates, etc. This was regulation by government in action.

The guilds also had their own rules. For example, they set a ceiling on the number of journeymen and apprentices in each workshop. And each workshop had very limited number of journeymen and apprentices and the ceiling was not allowed to be broken. In some cities, guilds even made it a rule that each guild-master could have only one workshop. In some cities, guilds also set restrictions on production equipment in each workshop, such as the number of ovens in bakeries, the number of looms in textile workshops and so on. Some guilds forbade opening underground workshops, or covertly producing on equipment hidden in other people's houses. All facilities should be for self-use only and hiring was not allowed. Some guilds set limits on family members involved in production. For example, only sons, brothers and nephews of an owner were allowed to participate in production and no further relatives could be included. To do otherwise was considered covert hiring and an obvious violation of the rules. All rules and restrictions were set by the guilds to safeguard the stability of their trade at a period when the cities of medieval Western Europe were in their initial stage of development. By this means, no manual workshop would expand to a size large enough to threaten other workshops. The rules set by the guilds were based on traditions accepted by all members, and therefore they belong neither to regulation by market nor to regulation by government, but to regulation based on the power of custom and morality. In those medieval cities, regulation by custom and morality co-existed with regulation by market and government, all of them playing a role.

Another example of such co-existence is found in the activities of some farming communities in modern Western countries. With the maturity of the market, farmers likewise subjected their producing activities to regulation by market, such as what crops to plant, what livestock to raise and at what price to sell their products, etc. Any fluctuation in market price would influence the production and operation of farming households. Price changes, surplus and shortage of farm products are matters of concern to government; when necessary it takes different measures to regulate the market so as to ensure a certain amount of income for each farming household and that the prices of agricultural products are kept at a certain level. Besides regulation by market and government, farmers also set up their own organizations, with the aim of protecting their own interests, minimizing losses caused by market fluctuation or resisting government measures injurious to their development, etc. Once joined in such organizations, farmers should obey relevant rules and the organizations should protect the rights of all members whilst restricting their behaviors. This can be classified as regulation by custom and morality. Therefore, farmers' social and economic activities in modern Western countries exist in the context of the three types of regulation.

On those occasions when the three co-exist and function together, the relative strength of the role played by regulation by custom and morality is not necessarily determined by that of regulation by market or regulation by government. Actually, their relationship is too complicated to be summed up with the formula "A is stronger and B weaker or vice versa." Of course, we do often see occasions when regulation by market and government appears weak, regulation by custom and morality becomes stronger to compensate. Here are two illustrative examples.

One: In history, in areas newly developed by immigrant communities, since regulation by market or government did not then function, resource allocation had to depend on regulation by custom and morality. In the early period of the Protestant migrants developing North America, it was regulation by custom and morality that filled the gap caused by the absence of regulation by market and government. The former element was strong and the latter weak.

China's history affords many similar examples. In the period of the Southern and Northern Dynasties, in the last years of the Tang and in the Five Dynasties and Ten Kingdoms period, waves of people living in the Central Plains area migrated south and congregated in areas such as Fujian and Guangdong, where families settled down, establishing new villages, preserving their old cultural traditions while starting up new undertakings. In such places, no adequate regulation by market or by government existed, so regulation by custom and morality dominated the social and economic life of the migrants. From this we can see how great the vitality is of cultural tradition formed under the influence of custom and morality. Thanks to the power beyond market and government, namely the power of custom and morality, those immigrants managed to overcome a multitude of difficulties in the turmoil of war, migrating with their families and establishing a new homeland in the remote South.

Two: After the appearance of markets and governments, there were many occasions of great unrest, such as invasion by ethic peoples, peasant uprisings, feudal separatist rule, wars between warlords, etc. A folk adage goes, "take shelter in the towns at times of minor unrest and in the villages during major upheaval." In the former case, country folks were likely to take refuge in towns, since these were guarded by soldiers and people were safer there, a proof that regulation by government still worked in towns and that social and economic order was maintained. At times of major upheaval, townspeople were likely to flee to the countryside, to remote villages or mountain areas in particular, since towns, usually being places of military and strategic importance and therefore fiercely contested, faced the risk of siege and running out of water and food. Even government forces could not maintain normal order, so people had to flee to the countryside, putting as much distance as possible between themselves and the towns. At such times of great upheaval, trade was suspended, and regulation by market could not function. With government paralyzed, regulation by government failed too. However, in remote villages or mountain areas far from the towns, there were still residents living and working. So how did such communities and economy run? How were resources allocated? All these depended on a regulating force beyond market or government; namely, the force of custom and morality, which, in times of great upheaval, helped to keep social and economic order and enable people to live, survive and multiply. This illustrates the increase in strength of regulation by custom and morality with the weakening of regulation by market and government.

Nevertheless, as previously stated, the three types of regulation relate with each other in a complicated way. There are situations where A is strong and B weak or where A is weak and B strong. But there are also situations where both are strong or weak. For example, in situations where the market is immature and the market mechanism imperfect, the role of regulation by market in resource allocation will be restricted; at the same time, if the government fails to set certain rules or fails to enforce them seriously or allows rule-infringement to go unchecked, it means regulation by government in resource allocation is weak. When regulation by market and government are both weak, one cannot generalize on whether the role of regulation by custom and morality is weak or strong. The answer requires analysis of the specific situation.

One should point out that a custom is something that most people accept and follow, and a moral is a belief, a principle for treating oneself and others and conducting oneself in society. For regulation by custom and morality to play an important role in social and economic life, a precondition would be the majority's endorsing and following the custom and their belief in and support of certain morals and principles. In situations where regulation by market and government are both weak, if the majority in society do not accept a custom formed by tradition or do not totally endorse it, they cannot be said to follow it; if the majority in society lack a certain moral belief or do not adhere to a certain moral principle, then the role of regulation by custom and morality will be insignificant. Here we have a situation where all three types of regulation are weak, social and economic life is bound to fall into chaos, resource allocation will be disorderly and inefficient. On the contrary, in occasions when both market and government regulations are weak, as long as people accept and follow their traditional habit, embrace and stick to certain moral belief and principles, the role of custom and morality regulation will be significant and fill the gap caused by the weakness of the other two regulations. An example of this is the experience of migrant societies in Chinese history.

This shows that the strength or weakness of regulation by custom and morality is not necessarily directly linked to that of regulation by market or government: it very much depends on the degree of people's subjective effort, on how important they deem such regulation and how actively they exercise it in their life.

Similarly, at times when regulation by market can fully play its role, when government seriously exercises its responsibility for high-level regulation, the strength of regulation by custom and morality will depend on specific situations. With the emergence of markets and governments, once their regulating functions began to come into effect, the scope of regulation by custom and morality shrank, and regulation by market and government replaced it in many areas. Importantly, however, the shrinking of scope is not the same thing as a diminution in strength. In the larger context where regulation by market and government fully play their due roles, provided people regard regulation by custom and morality as important and ensure that it plays its role, its influence will be both striking and beneficial. In short, human effort is a decisive factor. This will be discussed in detail in the following chapters. XJbeSpht1Qptr3jMMzN284EXXSeeJ0Kv2q67QbWh3nrzVjgVTY4xhb0zunWHWXgN