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The following is a passage from Bruce Benson's The Enterprise of Law, available from Laissez Faire Books.
Extracted by Mark Sulkowski
Law can imposed from above by some coercive authority, such as a king, a legislature, or a supreme court, or law can develop "from the ground" as customs and practice evolve. Law imposed from the top — authoritarian law — typically requires the support of a powerful minority; law developed from the bottom up — customary law — requires widespread acceptance. Hayek explained that many issues of law are not
whether the parties have abused anybody's will, but whether their actions have conformed to expectations which other parties had reasonably formed because they corresponded to the practices on which the everyday conduct of the members of the group was based. The significance of customs here is that they give rise to expectations that guide people's actions, and what will be regarded as binding will therefore be those practices that everybody counts on being observed and which thereby condition the success of most activities.
Customary law is recognized, not because it is backed by the power of some strong individual or institution, but because each individual recognizes the benefits of behaving in accordance with other individuals' expectations, _given_ that others also behave as he expects. Alternatively, if a minority coercively imposes law from above, then that law will require much more force to maintain social order than is required when law develops from the bottom through mutual recognition and acceptance.
Reciprocities are the basic source both of the recognition of duty to obey law and of law enforcement in a customary law system. That is, individuals must "exchange" recognition of certain behavioral rules for their mutual benefit. Fuller suggested three conditions that make a duty clear and acceptable to those affected:
First, the relationship of reciprocity out of which the duty arises must result from a voluntary agreement between the parties immediately affected; they themselves "create" the duty. Second, the reciprocal performances of the parties must in some sense be equal in value. ... We cannot here speak of an exact identity, for it makes no sense at all to exchange, say, a book or idea in return for exactly the same book or idea. The bond of reciprocity unites men, not simply in spite of their differences but because of their differences. ... Third, the relationships within the society must be sufficiently fluid so that the same duty you owe me today, I may owe you tomorrow — in other words, the relationship of duty must in theory and in practice be reversible.
Because the source of recognition of customary law is reciprocity, private property rights and the rights of individuals are likely to constitute the most important primary rules of conduct in such legal systems. After all, voluntary recognition of laws and participation in their enforcement is likely to arise only when substantial benefits from doing so can be internalized by each individual. Punishment is frequently the threat that induces recognition of law imposed from above, but incentives must be largely positive when customary law prevails. Individuals must expect to gain as much or more than the costs they bear from voluntary involvement in the legal system. Protection of personal property and individual rights is a very attractive benefit.
Under customary law, offenses are treated as torts (private wrongs or injuries) rather than crimes (offenses against the state or the "society"). A potential action by one person has to affect someone else before any question of legality can arise; any action that does not, such as what a person does alone or in voluntary cooperation with someone else but in a manner that clearly harms no one, is not likely to become the subject of a rule of conduct under customary law. Fuller proposed that "customary law" might best be described as a "language of interaction." Facilitating interaction can only be accomplished with recognition of clear (although not necessarily written) codes of conduct enforced through reciprocally acceptable, well established adjudication arrangements accompanied by effective legal sanctions.
James Buchanan asked, if government is dismantled “how do rights re-emerge and come to command respect? How do 'laws' emerge that carry with them general respect for their 'legitimacy'?” He contended that collective action would be necessary to devise a “social contract” or “constitution” to define rights and to establish the institutions to enforce those rights. But collective action can be achieved through individual agreements, with useful rules spreading to other members of a group. Demsetz explained that property rights will be defined when the benefits of doing so cover the costs of defining and enforcing such rights. Such benefits may become evident because a dispute arises, implying that existing rules do not adequately cover some new situation. The parties involved must expect the benefits from resolving the dispute (e.g., avoiding a violent confrontation), and of establishing a new rule, to outweigh the cost of resolving the dispute and enforcing the resulting judgment, or they would not take it to the adjudication system.
Dispute resolution can be a major source of legal change since an adjudicator will often make more precise those rules about which differences of opinion exist, and even supply new rules because no generally recognized rules cover a new situation. If the relevant group accepts the ruling it becomes part of customary law, but not because it is coercively imposed on a group by some authority backing the court. Thus, good rules that facilitate interaction tend to be selected over time, while bad decisions are ignored.
Dispute resolution is not the only source of legal evolution under customary law. Individuals may observe others behaving in a particular way in a new situation and adopt similar behavior themselves, recognizing the benefit of avoiding confrontation. Institutions for enforcement similarly evolve due to recognition of reciprocal benefits.
Consider the development of dispute resolution procedures. No state- like coercive authority exists in a customary system to force disputants into a court. Because rules of customary law are in the nature of torts, the aggrieved party must pursue prosecution. Under such circumstances, individuals have strong reciprocal incentives to form mutual support groups for legal matters. The makeup of such groups may reflect family (as it frequently did in primitive societies), religion (as in some primitive groups), geographic proximity (as in Anglo-Saxon England), functional similarity (as with commercial law), or contractual arrangements (e.g., as in medieval Ireland and in medieval Iceland). The group members are obligated to aid any other member in a valid dispute, given that the member has fulfilled his obligations in the past. Thus, ability to obtain support in a dispute depends on reciprocal loyalty.
Should a dispute arise, reciprocal support groups give individuals a position of strength. This does not necessarily mean, however, that disputes are settled by warfare between groups. Violence is a costly means of solving a dispute: if the accuser and his support group attack the accused, the accused's group is obliged to avenge the attack. Consequently, arrangements and procedures for non-violent dispute resolution should evolve very quickly in customary law systems.
The impetus for accepting adjudication in a customary legal system (as well as in an authoritarian system) is the omnipresent threat of force, but use of such force is certainly not likely to be the norm. Rather, an agreement between the parties must be negotiated. Frequently, a mutually acceptable arbitrator or mediator is chosen to consider the dispute, but this individual (or group) will have no vested authority to impose a solution on disputants. The ruling, therefore, must be acceptable to the groups to which both parties in the dispute belong. The only real power an arbitrator or mediator holds under such a system is that of persuasion.
If the accused offender is found guilty, the "punishment" tends to be economic in nature: restitution in the form of a fine or indemnity to be paid to the plaintiff. Liability, intent, the value of the damages, and the status of the offended person all may be considered in determining the indemnity. Every invasion of person or property is generally valued in terms of property.
A judgment under customary law is typically enforceable because of an effective threat of total ostracism by the community (e.g., the primitive tribe, the merchant community). Reciprocities between the groups, recognizing the high cost of refusal to accept good judgments, takes those who refuse such a judgment outside their support group and they become outcasts or "outlaws." The adjudicated solutions tend to be accepted due to fear of this severe boycott sanction.
Carl Menger proposed that the origin, formation, and ultimate process of all social institutions (including law) is essentially the same as the spontaneous order Adam Smith described for markets. Markets coordinate interactions, as does customary law. Both develop as they do because the actions they are intended to coordinate are performed more effectively under one system or process than another. The more effective institutional arrangement replaces the less effective one.
The evolutionary process is not one of deliberate design. In the case of primitive societies, for example, early kinship or neighborhood groups were effective social arrangements for internalizing reciprocal legal benefits — as well as other benefits arising out of cooperative production, defense, religious practices, and so on — _relative_ to previously existing arrangements. Others saw some of those benefits and either joined existing groups or copied their successful characteristics and formed new groups. Neither the members of the earliest groups nor those who followed had to understand what particular aspect of the contract actually facilitated interactions that led to an improved social order...
The Enterprise of Law: Justice Without the State by Bruce Benson. pp 12-15