Smith explains the meaning of “society” and “institution,” and he discusses the distinction between designed and undesigned institutions.

George H. Smith was formerly Senior Research Fellow for the Institute for Humane Studies, a lecturer on American History for Cato Summer Seminars, and Executive Editor of Knowledge Products. Smith’s fourth and most recent book, The System of Liberty, was published by Cambridge University Press in 2013.

In Theories of the State (1987), Andrew Vincent refers to “the classical liberal distinction between the political and social spheres or the public and the private.” Similarly, in Locke, Rousseau, and the Idea of Consent (1978), Jules Steinberg writes:

The liberal idea of society, in contrast to the state, involves the notion of a realm of voluntary interaction where individuals may incur moral obligations and commitments to one another based upon genuine relationships of individual consent. The state, being distinct from society, is not defined as the realm of consent, but instead is considered to be a sphere of compulsion and coercion necessary to the ordered functioning of a society based upon free and voluntary individual relationships.

In Part 1, I distinguished between this meaning of “society” (the sphere of voluntary interaction) and its broader meaning.

To avoid confusion, it should be noted that this idea of “society” differs from its more general meaning, which includes all kinds of sustained interaction, whether voluntary or coercive. This inclusive meaning of “society” refers to the overall pattern of social order and to all institutions within that order. Government, from this comprehensive perspective, is one social institution among many.

This is the general sense in which I shall use “society” and “social” throughout this essay; only later will I return to the more specialized meaning commonly used by classical liberals and libertarians, who have frequently differentiated between “society” and “state.” If some readers are annoyed by my switch, I can only plead the perils of common usage, which is often ambiguous. As John Locke pointed out centuries ago, philosophy normally uses the ordinary language of civil discourse, and such language frequently fails to meet the standards of precision required by philosophy. There is no satisfactory solution to this problem except to specify what we mean by a word in a particular context. Thus, in the context of the present essay, by “society” or “social” I mean all forms of human interaction and institutions, both voluntary and coercive.

Social interaction, according to Georg Simmel, denotes “a reciprocity of effects.” My actions must influence your actions, and vice versa, before we can be said to constitute a society. Max Weber (Economy and Society, English translation, 1978) elaborated on this theme as follows:

Sociology (in the sense in which this highly ambiguous word is used here) is a science concerning itself with the interpretive understanding of social action and thereby with a causal explanation of its course and consequences. We shall speak of “action” insofar as the acting individual attaches a subjective meaning to his behavior – be it overt or covert, omission or acquiescence. Action is “social” insofar as its subjective meaning takes account of the behavior of others and is thereby oriented in its course.

This general approach, which attempts to explain the social world from the subjective viewpoint of the participants, is known as the interpretive school of sociology. In addition to Simmel and Weber, prominent representatives of the interpretive school include Wilhelm Dilthey, Edmund Husserl, Alfred Schutz, and – two names familiar to modern libertarians – Ludwig von Mises and Friedrich Hayek.

The basic problem for sociology is not deciding what to do with social phenomena after we find them but in finding those phenomena in the first place. If Galileo failed to convince some theologians because they refused to look through his telescope, at least the moons of Jupiter existed as physical objects in the first place, there to be seen by other observers. But this is not true of social phenomena, such as society and state. These are institutions, mental constructs, not physical things. We do not see institutions with the eyes; we comprehend them with the mind. As Hayek put it in his important book The Counter‐​Revolution of Science (1952): “Society as we know it is, as it were, built up from the concepts and ideas held by the people; and social phenomena can be recognized by us and have meaning to us only as they are reflected in the minds of men.”

Essential to our notion of a society is the concept of an institution. A society consists of more than an unconnected aggregate of individuals; a society requires at least one institution. In the broadest sense, an institution is a routine pattern of social interaction – a social habit, so to speak – that has meaning for the participants. For example, if two strangers customarily shake hands upon first meeting, then we may refer to the institution of handshaking. If Crusoe and Friday inhabit the same island but never come into contact, then they do not constitute a society. Nor is it enough if they occasionally exchange glances; random interaction is not sufficient. Only if Crusoe and Friday interact frequently enough to create routine patterns may we properly speak of them as constituting a society. A society, to repeat, presupposes at least one institution. To quote Arnold Toynbee:

Without institutions, societies could not exist. Indeed, societies themselves are simply institutions of the highest order – institutions, that is, which comprehend without being comprehended by others. The study of societies and the study of institutional relations are one and the same thing.

This notion of society puts to rest many of the misleading objections to methodological individualism, according to which all social phenomena can ultimately be explained in terms of the actions and interactions of individual human beings. Methodological individualism does not mean that only the individual human being is real or that social phenomena do not exist. It says only that the individual is able to think, feel, and act. We can impute thoughts, purposes, and values only to the singular human being; when we apply such terms to “society” we enter the domain of metaphor. However, this does not mean that “society” is not “real” or cannot be said to “exist” in some fashion. Many things exist that cannot think, act, or feel.

A society, as I said, is more than an aggregate of individuals. A society of ten people is more than a mere group of ten people; a society consists of those people and their institutional relationships. If by “a society of ten” we mean those ten plus their patterned interactions, then the “society of ten” may be said to exist, not apart from the ten who comprise it, but in addition to those ten, separately considered.

Institutions are not only the result of sociation (to use Georg Simmel’s term for the process of social interaction); they also make possible additional and more complex types of sociation. Institutions generate reasonable expectations about the behavior of others, especially those strangers about whom we have no personal knowledge. If I extend a hand to a stranger and he reciprocates by shaking my hand, this conventional behavior will have meaning for both of us, insofar as it indicates good will. I am more likely to enter into a bisociation with that person than I am with a stranger who curtly refuses to shake my hand. True, a stranger who eagerly shakes my hand may be attempting to deceive me; he may wish to draw me into a coercive relationship. Nevertheless, social conventions – a type of institution – typically serve the purpose of facilitating voluntary relationships among the members of a society.

Our expectations often become more certain when we deal with a designed institution—an organization, such as a bank or other business firm. When I go to an established bank to deposit money into a checking account, I anticipate, with a high degree of probability, that my money will be available to withdraw when I want it. Of course, my expectation may not be fulfilled if the bank is insolvent or engages in fraud, but any uncertainty here is not owing to the fact that the bank personnel are strangers to me. My confidence resides in the institution, especially if it has a good reputation, not in the strangers who work for that institution. I don’t need to know the personal details of each bank teller I deal with. All I need to know is their role in that institution – a role that is anonymous (from my perspective), since it could be filled by virtually anyone. This is certainly a far cry from asking a random stranger to hold my money and return it when I ask. Here the personal characteristics of the stranger, who is not affiliated with an institution, would be extremely important; but since he is, by definition, a stranger, I do not know the relevant characteristics and therefore have no reasonable basis to predict how he will act in the future. (For a detailed discussion of the nature and function of institutions, I highly recommend Peter L. Berger and Thomas Luckmann, The Social Construction of Reality: A Treatise in the Sociology of Knowledge, 1966.)

Earlier I mentioned designed institutions, such as banks and other organizations. More important for the social sciences, especially economics, are undesigned institutions – or spontaneous orders, as they are often called. These undesigned institutions were extensively discussed by luminaries of the Scottish Enlightenment – most notably by Adam Smith, who used the metaphor of an invisible hand to explain the gradual evolution of money and other economic institutions. In 1763 another Scot, Adam Ferguson, said that such institutions are “the result of human action, but not the execution of any human design.”

If Adam Smith may be called the premier theorist of spontaneous order during the eighteenth century, the nineteenth‐​century holder of that title would be Herbert Spencer, and for the twentieth century, F.A. Hayek.

The key question regarding spontaneous institutions was posed by Carl Menger, founder of the Austrian School of economics: “How can it be that institutions which serve the common welfare and are extremely significant for its development come into being without a common will directed toward establishing them?” Indeed, if all institutions were deliberately designed, there would be little for sociology and economics to explain; this is why Menger called spontaneous orders “the most noteworthy problem of the social sciences.” As Karl Popper put it, an “action which proceeds precisely according to intention does not create a problem for social science.” Similarly, Hayek wrote:

The problems which [the social sciences] try to answer arise only insofar as the conscious actions of many men produce undesigned results, insofar as regularities are observed which are not the result of anybody’s design. If social phenomena showed no order except insofar as they were consciously designed, there would indeed be no room for theoretical sciences of society and there would be, as is often argued, only problems of psychology. It is only insofar as some sort of order arises as a result of individual action but without being designed by any individual that a problem is raised which demands a theoretical explanation.

As we shall see in subsequent essays, the distinction between designed and undesigned institutions is crucial if we are to understand some significant differences between voluntary and coercive institutions. Although a free society will contain many designed institutions, such as business firms, the overall social order resulting from voluntary interaction will be spontaneous. In contrast, a planned society dominated by the coercive institutions of a state will stifle spontaneous developments and thereby retard innovations, creativity, and social progress.