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.
The specific point being made is about the transition away from Soviet stupidity in Eastern Europe. But we think it can be applied to that difference between the Common Law and the more centralised and bureaucratic Roman Law idea. Yes, sure, the difference has blurred over the centuries and the distinction is less important than it once was. And yet in these days of EU directives and regulations we think it still worth making the point.
The system as a whole will work very much better if the law is simply the codification of what people already largely do. Rather than the imposition of what some bureaucrat thinks people ought to do and against those already established patterns of behaviour.
And do note the importance of transactions costs here: they are purely deadweight costs, costs which diminish our collective wealth by their very existence. Reducing them is a prime aim of whatever legal and or institutional arrangements we make.
This is distinct from our general desire for there to be less law, less direction from the centre. Whatever direction there is needs to go with the grain of the extant society, not against it.