"Institutions" is a vague concept and something libertarians usually ignore. Here are some of my thoughts on the matter.

Consider tribal living before the dawn of civilization. How does cooperation occur? How does Lar prevent Gog from taking more than his fair share of the spoils of the hunt? One way is by Tit-for-Tat strategy: reward good behavior and punish bad behavior. If Gog tries to hoard the meat, Lar can retaliate through violent retribution, deterring similar future behavior. Similarly, the rest of the tribe can shun him from the benefits of communal living. If instead Gog lends some of his food when Lar is starving, Lar would be wise to do likewise in return when the fickleness of nature inflicts Gog with hard times. Beneficial relationships can result via rational self-interest. This reciprocal altruism requires institutions that are biological in the form of enough brain power for Lar to recognize that Gog is the short stocky one without hairy ears and remember that Gog was a selfish bastard during the last winter. It also requires cultural institutions in the form of social norms among the tribe to ostracize selfish bastards.

With the rise of agriculture and the rise of large aggregations of humans, the limits of reciprocal altruism were met. Beyond the monkeysphere of 150 people or so, it becomes very difficult for any one person to remember who screwed him over and who helped out in tough times. Rather than try to keep track of who is using too much of the common pasture, the idea came about to divide up the pasture and confer ownership of the pieces to individuals. Thus, private property rights were born. In this case, the institution was ideological.

With urbanization and the phenomenon of millions of people living in a the space of a few square miles, the monkeysphere is completely inadequate for dealing with others. The amount of stuff people have and the amount yet needed is best determined by prices, a function of markets. Support for markets is another ideological institution. Credit bureaus can serve as reputation providers. These institutions are entrepreneurial.

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