From libertarian Wendy McElroy at the Laissez Faire Books, (bold original)
What is an institution?
An institution is any stable and widely-accepted mechanism for achieving social and political goals. Traditional institutions of society include the family, court systems, the free market, and churches. Institutions generally evolve over time to reflect the history and dynamics of a culture. For example, the institution of common law evolved on a grassroots level to meet the demand for justice by average people. Equally, the institutions of money and the market arose to satisfy human need and desire for goods.
As those needs and desires change, so do the institutions. Sometimes the change occurs due to conscious human design. Trial by a jury of one’s peers, for example, was a procedure consciously designed to maximize the justice of verdicts. This court procedure weathered the test of time well enough to now be viewed as a cornerstone of Western jurisprudence. When institutions are responsive and grassroots in nature, they become such a natural part of human progress that they change in a spontaneous manner, as in the continuing evolution of language. Like the free market, they strongly encourage peaceful interaction because that is what benefits the vast majority of people.
The political system is the institution upon which libertarians focus. They commonly observe that politics ‘institutionalizes corruption’; political structures and procedures encourage bad results like the personal malfeasance of elected figures. A large reason for the corruption is that the political system is not responsive, not grassroots. As a static institution, it serves the embedded interests of an elite class rather than the dynamic ones of the average person. (The elite class consists of politicians and those with political pull.) What libertarians call ‘corruption’ is what the elites call ‘profit’. They have consciously sculpted the institution to increase their profits through such procedures as non-transparency.
In a sense, the embedded corruption of politics is good news for libertarians because it spotlights a basic truth about institutions. They can promote liberty or statism depending upon their structure, procedures and the embedded incentives. The Founding Fathers knew this. For example, they attempted to limit the government by constructing a tripartite system of checks and balances designed to prevent the centralization of power. The Bill of Rights created incentives toward liberty by laying down societal ground rules to be upheld by the Supreme Court. (Whether the best intentions of the Founding Fathers were doomed to defeat by the inherent nature of politics is debatable.)
The specific structures and procedures of any institution will determine the results it produces. As long as the procedures are followed, the motives of those participating in the institution are irrelevant. Elsewhere, I offered the example of a man who works in a candy factory with the intention of producing canned tuna. As long as he follows the workplace rules and procedures, however, he will produce candy. A police officer may want to promote libertarian justice but as long as he enforces the laws of a totalitarian state, he will produce injustice.
Equally, as long as everyone respects the rules of the free market, it will function as a mechanism of peace and prosperity even if some of its participants are ill intentioned human beings. You may buy goods from a man whom you would never allow into your home; he can detest your religion or skin color even as money peacefully changes hands. As long as the rules of the free market are observed, freedom itself is served.
The burning question now becomes: how do we construct institutions that encourage liberty?Conclusion
There are two answers on how to construct freedom-oriented institutions. The first: do not to construct them at all. Allow them to evolve through the spontaneous interaction of individuals pursuing their own self-interest. This is how free markets function, families are created, free speech rings out… Many institutions require merely to be unobstructed.
But other institutions require some design beyond the “anything that is peaceful” rule. For example, a court system requires procedures of justice such as “innocent until proven guilty.” And, so, the second answer to designing institutions is: do so in as minimal a manner as possible and only to promote individual rights.
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