Civility assists a frictionless society but works best without coercive force

Another way of expressing this idea is to say that civility has a significant role to play in lowering "transaction costs". Economist Wolfgang Kasper explains that transaction costs are "the petty frictions in the humdrum business of daily life, the efforts and risks of learning and co-ordinating daily pursuits".

Civility facilitates exchanges between individuals, particularly strangers, because it creates a clear set of rules of interaction between them and therefore establishes a high degree of predictability. This reduces friction and potential conflict, and expands "social capital". A spirit of mutual cooperation and "give-and-take" enables us to get more done more efficiently than when people have to be monitored, regulated or coerced.

Civility is what stands between us and the increasing use of coercion by the state. John Rawls argues that if "liberties are left unrestricted they collide with one another". This is true by definition, for different individuals will always want and desire different and incompatible things and their unfettered pursuit of their own objectives will inevitably bring them into conflict.

The question, therefore, is how (as well as how far) individual liberties are to be restricted or restrained. In the end, this will either be done by external political agencies of the state, or it will be achieved through enlightened self-regulation of individuals. As Edmund Burke recognised back in 1791: "Men are qualified for civil liberty in exact proportion to their own disposition to put moral chains upon their own appetites".

In liberal-democratic capitalist societies, individuals may pursue their own self-interest through two spheres of power: the market economy and the political system. Both offer ways of aggregating individual interests into collectively-binding outcomes but, as Friedrich Hayek explained, the market is in principle much more flexible and responsive than even the most democratic and participatory of governments. This is because markets transmit and register millions of people's changing preferences every minute of every day through shifting price signals.

For a market system to work, the pursuit of naked self-interest has to be limited. All players must respect the rules, and all need to act respectfully towards each other and to recognise the obligations they incur to one another. As the wave of corporate collapses and stockmarket losses following the disclosure of the Enron fraud in the US demonstrated, unrestrained use of market power can lead to levels of fraud and exploitation that can threaten the prosperity and functioning of the whole capitalist system. Francis Fukuyama argues this is why trust is important for the functioning of markets. As traders on the London Stock Exchange used to claim with pride, "My word is my bond".

The market system is of course subject to formal controls and regulation, but markets work best when regulation is internalised. Each time some new abuse of power occurs, formal controls are increased and external regulations are tightened. Over time, individual autonomy is eaten away and the scope for enterprise and innovation gets whittled down as bureaucratic power extends to cover ever-increasing areas of activity.

The same applies in other aspects of life as well. For example, in June 2002 the Victorian Government acted to curb what the press has begun to call "Ugly Parent Syndrome" - the increasing use of bad language and even physical aggression displayed by parents watching their children participating in junior sporting events. The state government announced that it was introducing an official code of practice, which parents would be required to endorse as a condition of their children taking part in sporting events in the state. On one level, we might wish to applaud the Victorian Premier for taking action to maintain public standards of civility - but there is clear cause for concern when norms of civility erode to a point where formal rules have to be imposed by governmental authority.

Liberals have always been skeptical about the use of government control and regulation to resolve social problems. But the ever-rising tide of legislation and regulation in both economy and society can only be stemmed if individuals recognise and understand the need to restrain their own behaviour. The decline of civility does not only mean that life becomes less pleasant and more boorish; it also means that individual liberties themselves get threatened as the shadow of state power falls over an ever-wider range of public activities.