… is from page 246 of Steve Pejovich’s excellent article “Law, Tradition, and the Transition in Eastern Europe,” which appeared in the Fall 1997 issue of the Independent Review:
How formal and informal rules interrelate substantially determines transaction costs in society. I call this proposition the interaction thesis. If formal rules are in harmony with informal rules, the incentives they create will tend to reinforce each other. A harmonious interaction of formal and informal rules reduces the transaction costs of maintaining and protecting the rules of the social game and frees resources for the production of wealth. When formal rules conflict with informal rules, however, their respective incentives will tend to raise the transaction costs of maintaining and enforcing the prevailing institutions and therefore to reduce the production of wealth in the community.
