"Silent trade" and the supposed continuum between OIE and NIE.

Author:Dolfsma, Wilfred
Position:Original Institutional Economics - New Institutional Economics

The Carthaginians say also this that there is a place in Libya, and People living in it, beyond the Pillars of Heracles. When they, the Carthaginians, come there and disembark their cargo, they range it along the seashore and go back again to their boats and light a smoke signal. The natives, as soon as they see the smoke, come down to the shore and then deposit gold to pay for the merchandise and retreat again, away from the goods. The Carthaginians disembark and look; if they think that the price deposited is fair for the merchandise, they take it up and go home again. If not, they go back to their boats and sit there. The natives approach and bring gold in addition to what they have put there already, until such time as the Carthaginians are persuaded to accept what is offered. They say that thus neither party is ill-used; for the Carthaginians do not take the gold until they have the worth of their merchandise, nor do the natives touch the merchandise until the Carthaginians have taken the gold.

Herodotus 440 BC, book IV, [section] 196

[In] the social No-Man's Land between societies, trade in [these] scarcities will often be embedded in ritual and familisticlike institutions.

Heider 1969, 469

Original Institutional Economics (OIE) and New Institutional Economics (NIE) have differing positions on a number of issues. There is an ongoing discussion about the question whether these positions are categorically different (Hodgson 1988), are part of the same continuum (Rutherford 1994; 1995), and may even be reconciled (Groenewegen, Kerstholt and Nagelkerke 1995; Schmid 2004).

These discussions tend to focus on methodological points of contention, and often draw heavily on the history of economic thought. In this paper we take a slightly different approach by analyzing the phenomenon of "Silent Trade" (ST). While our paper has theoretical and methodological implications, our basis primarily is economic history. We thus take issue primarily with economic historian North, and not so much with Williamson.

ST is an ephemeral phenomenon that is referred to intermittently in the economic history literature (see Basu, Jones and Schlicht 1987). Reference to Karl Polanyi's Dahomey and the Slave Trade (1966) is brought in as supportive evidence at times, but he too relies heavily on the Greek chronicler Herodotus. The theoretical possibility of silent trade and its supposed existence seem a central tenet for mainstream economics and NIE in particular, as Section 2 argues. Section 3 reviews the literature on ST and concludes that it has not existed in its pure form. Given that Searle (2005) has argued that language is the fundamental institution, our argument has implications for how economics explains how "trade expands beyond the village," as Section 3 argues, as well as for the way in which OIE and NIE relate to each other. Communication, thus, is not a fringe phenomenon, but rather a sine qua non for trade or exchange (Boulding 1981; McCloskey and Klamer 1995). Section 4 presents an empirically sound and theoretically more plausible account for how "trade [did] expand[s] beyond the village." This is the model of gift exchange, common in a family and village setting.

Silent Trade, NIE, and OIE

Douglass North has been persistent in neglecting the stages in economic development beyond that within a single village to a fully fledged economic system: "gradually, trade expands beyond the village: first to the region, perhaps as a bazaar-like economy; then to longer distances, through particular caravan or shipping routes; and eventually to much of the world ... from local autarky to specialization and division of labor" (North 1991, 98-9; see also North 1955). While North denies that these steps are inevitable, or that growth is necessarily entailed, he does neglect the issue of how these steps are actually taken. One of the early steps in the sequence will in this view have been ST. The possibility and effectiveness of ST is assumed, not only for expositional convenience, but also as a matter of theoretical consistency (cf. Ankerloo & Palermo 2004; Williamson, Hodgson and Gindis 2007). Basu, Jones and Schlicht (1987, 11), explicitly state that ST in its pure form exists, in line with good NIE practice claiming it is socially optimal (see also North 1977, 715).

Silent trade is trade between two parties "without the help of middleman but also without speaking to one another, or coming face to face or even within sight of each other" (De Moraes Farias 1974, 9). Only a bare minimum of what Denzau and North (1994) call "reasonably convergent (shared) mental models" between the trading partners from different societies exists. There is no prior intensive or mediated contact at hand. (1) The trade, as described most famously by Herodotus, takes place in the course of gradual adjustments of quantities arrived by at alternating moves by the trading parties. At every alternate move the goods have to be left unguarded in a place accessible to the other party. The exchange is performed without immediate interaction by means of language or gesticulation. There is only signaling of the offering of exchange goods. Herodotus writes about the use of smoke, and De Moraes Farias (1974, 11) and Bovill (1929, 29) about traders beating drums to inform locals that they have arrived to exchange goods.

NIE holds, of course, that prices of goods and services are the result of impersonal forces of supply and demand, in a setting where agency does not play a role. In a competitive market structure prices are parameters. Competitive pressure will force individual players to hold similar beliefs and respond similarly to changing circumstances. Communication does not play any role: the responses are...

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