Friction-Free Economies Why is it necessary to turn to a cultural characteristic like spontaneous sociability to explain the existence of large-scale corporations in an economy, or prosperity more generally? Wasn't the modern system of contract and commercial law invented precisely to get around the need for business associates to trust one another as family members do? Advanced industrialized societies have created comprehensive legal frameworks for economic organization and a wide variety of juridical forms, from individual proprietorships to large, publicly traded multinational enterprises. Most economists would add rational individual self-interest to this stew to explain how modern organizations arise. Don't businesses based on strong family ties and unstated moral obligations degenerate into nepotism, cronyism, and generally bad business decision making? Indeed, isn't the very essence of modern economic life the replacement of informal moral obligations with formal, transparent legal ones?1 The answer to these questions is that although property rights and other modern economic institutions were necessary for the creation of modern businesses, we are often unaware that the latter rest on a bedrock of social and cultural habits that are too often taken for granted. Modern institutions are a necessary but not a sufficient condition for modern prosperity and the social well-being that it undergirds; they have to be combined with certain traditional social and ethical habits if they are to work properly. Contracts allow strangers with no basis for trust to work with one another, but the process works far more efficiently when the trust exists. Legal forms like joint-stock companies may allow unrelated people to collaborate, but how easily they do so depends on their cooperativeness when dealing with nonkin.