When children play games they often make up the rules as they go. This can work with patient participants but often leads to an argument that overtakes the game. A parent or teacher may need to come in and act as referee to calm the situation.
As kids get older they begin to play games with more formal rules; hide and seek, capture the flag, soccer. Even here kids often don’t agree on the rules and argument may consume much of the game time. Kids will debate about how much time they have to hide, where the boundaries are, the amount of physical contact acceptable, and penalties for infringing on the rules.
Like in child’s play, everyone responds to rules; rules of a game being played, or rules in the game of life. Of course, not everyone abides by the rules. Economists sometimes call the rules of the game of life institutions. Institutions are the rules that define the incentives we respond to and, hence our actions. These rules include those set and enforced by government -- such as property rights, regulations, and laws – and cultural and social norms.
Enforcement of some rules can help lower the costs of cooperation. A referee on the soccer field has power to reduce disagreement so play can continue. Similarly, government has coercive power to enforce laws.
Well designed laws can enhance cooperation and actually increase personal freedoms. Traffic lights, for example, reduce chaos on the roads so drivers can more quickly and safely reach their destination. Well specified property rights are another example. When government protects rights to property it lowers the cost of property negotiation (buy/sell or lease agreements, for example) and encourages productive activity. Well specified property rights make owners accountable for their actions; they are liable for harm done to others and have exclusive rights to any value added, but also bear the burden of a decrease in value. As a result, property owners tend to choose actions that enhance prosperity, unless regulated otherwise.
This brings us to a defining question: When does the coercion of government outweigh the benefits? In the game of soccer the referee is trained to allow play to continue if it is to the advantage of the harmed party, rather than stop play to penalize the infringement. The point is to continue play. It is a hard call by a referee. Government agents tend to have an even harder time determining when the rules help or hinder progress.
To better understand human behavior pay attention to the rules of the game. Changing the rules will change behavior.