This post originally appeared here; I've updated it slightly and posted it here as a follow-up to this post.

David Friedman has a fascinating book on alternative legal systems. One chapter focuses on prison law - not the nominal rules, but the rules enforced by prisoners themselves.

The unofficial legal system of California prisoners is particularly interesting because it underwent a phase change sometime after the 1960’s.

Prior to the 1960’s, prisoners ran on a decentralized code of conduct - various unwritten rules roughly amounting to “mind your own business and don’t cheat anyone”. Prisoners who kept to the code were afforded some respect by their fellow inmates. Prisoners who violated the code were ostracized, making them fair game for the more predatory inmates. There was no formal enforcement; the code was essentially a reputation system.

Sometime after the 1960’s, that changed. During the code era, California’s total prison population was only about 5000, with about 1000 inmates in a typical prison. That’s quite a bit more than Dunbar’s number, but still low enough for a reputation system to work through second-order connections. By 1970, California’s prison population had ballooned past 25000; today it is over 170000. The number of prisons also grew, but not nearly as quickly as the population, and today’s prisoners frequently move across prisons anyway. In short, a decentralized reputation system became untenable. There were too many other inmates to keep track of.

As the reputation system collapsed, a new legal institution grew to fill the void: prison gangs. Under the gang system, each inmate is expected to affiliate with a gang (though most are not formal gang members). The gang will explain the rules, often in written form, and enforce them on their own affiliates. When conflict arises between affiliates of different gangs, the gang leaders negotiate settlement, with gang leaders enforcing punishments on their own affiliates. (Gang leaders are strongly motivated to avoid gang-level conflicts.) Rather than needing to track reputation of everyone individually, inmates need only pay attention to gangs at a group level.
Of course, inmates need some way to tell who is affiliated with each gang - thus the rise of racial segregation in prison. During the code era, prisoners tended to associate by race and culture, but there was no overt racial hostility and no hard rules against associating across race. But today’s prison gangs are highly racially segregated, making it easy to recognize the gang affiliation of individual inmates. They claim territory in prisons - showers or ball courts - and enforce their claims, resulting in hard racial segregation.

The change from a small, low-connection prison population to a large, high-connection population was the root cause. That change drove a transition from a decentralized, reputation-based system to prison gangs. This, in turn, involved two further transitions. First, a transition from decentralized, informal unwritten rules to formal written rules with centralized enforcement. Second, a transition from individual to group-level identity, in this case manifesting as racial segregation.

Generalization

This is hardly unique to prisons. The pattern is universal among human institutions. In small groups, everybody knows everybody. Rules are informal, identity is individual. But as groups grow:

• Rules become formal, written, and centrally enforced
• Identity becomes group-based.

Consider companies. I work at a ten-person company. Everyone in the office knows everyone else by name, and everyone has some idea of what everyone else is working on. We have nominal job titles, but everybody works on whatever needs doing. Our performance review process is to occasionally raise the topic in weekly one-on-one meetings.

Go to a thousand or ten thousand person company, and job titles play a much stronger role in who does what. People don’t know everyone, so they identify others by department or role. They understand what a developer or a manager does, rather than understanding what John or Allan does. Identity becomes group-based. At the same time, hierarchy and bureaucracy are formalized.

The key parameter here is number of interactions between each pair of people (you should click that link, it's really cool). In small groups, each pair of people has many interactions, so people get to know each other. In large groups, there are many one-off interactions between strangers. Without past interactions to fall back on, people need other ways to figure out how to interact with each other. One solution is formal rules, which give guidance on interactions with anyone. Another solution is group-based identity - if I know how to interact with lawyers at work in general, then I don’t need to know each individual lawyer.

In this regard, prisons and companies are just microcosms of society in general.

Society

At some point over the past couple hundred years, society underwent a transition similar to that of the California prison system.

In 1800, people were mostly farmers, living in small towns. The local population was within an order of magnitude of Dunbar’s number, and generally small enough to rely on reputation for day-to-day dealings.

Today, that is not the case [citation needed].

Just as in prisons and companies, we should expect this change to drive two kinds of transitions:

• A transition from informal, decentralized rules to formal, written, centrally-enforced rules.
• A transition from individual to group-level identity.

This can explain an awful lot of the ways in which society has changed over the past couple hundred years, as well as how specific social institutions evolve over time.
To take just a few examples…

• Regulation. As people have more one-off interactions, reputation becomes less tenable, and we should expect formal regulation to grow. Conversely, regulations are routinely ignored among people who know each other.
• Litigation. Again, with more one-off interactions, we should expect people to rely more on formal litigation and less on informal settlement. Conversely, people who interact frequently rarely sue each other - and when they do, it’s expected to mess up the relationship.
• Professional licensing. Without reputation, people need some way to signal that they are safe to hire. We should expect licensing to increase as pairwise interactions decrease.
• Credentialism. This is just a generalization of licensing. As reputation fails, we should expect people to rely more heavily on formal credentials - “you are your degree” and so forth.
• Stereotyping. Without past interactions with a particular person, we should expect people to generalize based on superficially “similar” people. This could be anything from the usual culprits (race, ethnicity, age) to job roles (actuaries, lawyers) to consumption signals (iphone, converse, fancy suit).
• Tribalism. From nationalism to sports fans to identity politics, an increasing prevalence of group-level identity means an increasing prevalence of tribal behavior. In particular, I'd expect that social media outlets with more one-off or low-count interactions are characterized by more extreme tribalism.
• Standards for impersonal interactions. “Professionalism” at work is a good example.

I’ve focused mostly on negative examples here, but it’s not all bad - even some of these examples have upsides. When California’s prisons moved from an informal code to prison gangs, the homicide rate dropped like a rock; the gangs hate prison lockdowns, so they go to great lengths to prevent homicides. Of course, gangs have lots of downsides too. The point which generalizes is this: bodies with centralized power have their own incentives, and outcomes will be “good” to exactly the extent that the incentives of the centralized power align with everybody else’ incentives and desires.

Consider credentialism, for example. It’s not all bad - to the extent that we now hire based on degree rather than nepotism, it’s probably a step up. But on the other hand, colleges themselves have less than ideal incentives. Even setting aside colleges’ incentives, the whole credential system shoehorns people into one-size-fits-all solutions; a brilliant patent clerk would have a much more difficult time making a name in physics today than a hundred years ago.

Takeaway

Of course, all of these examples share one critical positive feature: they scale. That’s the whole reason things changed in the first place - we needed systems which could scale up beyond personal relationships and reputation.

This brings us to the takeaway: what should you do if you want to change these things? Perhaps you want a society with less credentialism, regulation, stereotyping, tribalism, etc. Maybe you like some of these things but not others. Regardless, surely there’s something somewhere on that list you’re less than happy about.
The first takeaway is that these are not primarily political issues. The changes were driven by technology and economics, which created a broader social graph with fewer repeated interactions. Political action is unlikely to reverse any of these changes; the equilibrium has shifted, and any policy change would be fighting gravity. Even if employers were outlawed from making hiring decisions based on college degree, they’d find some work-around which amounted to the same thing. Even if the entire federal register disappeared overnight, de-facto industry regulatory bodies would pop up. And so forth.

So if we want to e.g. reduce regulation, we should first focus on the underlying socioeconomic problem: fewer interactions. A world of Amazon and Walmart, where every consumer faces decisions between a million different products, is inevitably a world where consumers do not know producers very well. There’s just too many products and companies to keep track of the reputation of each. To reduce regulation, first focus on solving that problem, scalably. Think amazon reviews - it’s an imperfect system, but it’s far more flexible and efficient than formal regulation, and it scales.

Now for the real problem: online reviews are literally the only example I could come up with where technology offers a way to scale-up reputation-based systems, and maybe someday roll back centralized control structures or group identities. How can we solve these sorts of problems more generally? Please comment if you have ideas.