The institutional economics of "The Lord of the Rings" (Part 1 of 5)
This is based on the first fifth part of the "Fellowship of the Ring:"
The Hobbits practice democracy: They vote and chose "a Thain," ("[w]ho acted as a military leader in times of emergencies). There is still some respect for a king in Fornost, but remains mainly symbolic -- probably similar to current England and Spain.
The Rules of The Shire are of "free will," they were considered ancient and just. Note that there is not a formal constitution, the rules remain informal, they are common knowledge for the Hobbits.
The only real official was a Mayor, elected every seven years. His only duty was to preside at banquets.
Before Frodo leaves The Shire towards Rivendelle day a day life was an ordered business.
The Shirriffs (the police) enforced the law. They were only twelve of them in The Shire, which suggest a low level of crime. Hobbits were very peaceful.
Only the richest and the poorest hobbits maintain old customs during Bilbo's time, such as living underground. There is socioeconomic heterogeneity, and most likely a market system.
Property rights are well defined. For example Bilbo Baggins owns his house, the Bag End.
"In dealing with Hobbits it is important to know who is related to whom." This is an informal rule for outsiders that want to do business with Hobbits. Genealogy is important.
Rules are followed in interactions between different peoples, for example Bilbo Baggins and Gollum followed some rules when playing the riddle.
The laws of inheritance are well defined, for example, seven signatures appeared in Bilbo's will.
Obviously there is good and evil. The forces of the dark side are clear, for example "[a]fter ages alone in the dark Gollum's heart was black, and treachery was in it."
One of the temptation is getting and using the ring (Gollum killed to get it). Gandalf tells Frodo "don't use the ring." The dark power rules the rings and they will destroy eventually everyone who uses the rings. Even Gandalf can be tempted to use it.