A book explores the uncomfortable and complex relationship between law and economics.
Is it possible that bribery is pervasive in India because of the Prevention of Corruption Act? This 1988 law treats the giver, as well as the taker of bribes as equally corrupt and punishable. Does that really make sense in the modern age? Especially when even the poorest or the most honest are forced to pay “speed money” for, say, a water connection or a house ownership paper? And why would not then both parties hide the fact to avoid punishment? But clearly, only one is guiltier and must be punished for the law to work and discourage bribery? More importantly, isn’t the law becoming more effective important for the Indian economy?
Why hasn’t the law been changed yet, then?
As humans started to gather around and live together, law evolved. The existence of a reliable legal framework is important for economic theories to work, but the science and its practitioners have so far ignored how the legal framework is created and functions, and if and how it can function better. Indeed, there have been few attempts to explore and resolve the contradictions between law and economics.
Today, many developed countries (such as the US) show a high proportion of law-abiding citizens. But laws are often ignored across countries, more so in developing ones, where even governments and law enforcers aren’t particularly interested in implementing them. Why do laws work so well in some nations, since laws are nothing but some rules and commands written down on paper? Why does a bunch of words written on paper change the way people behave? More importantly, why are laws obeyed at all?
Cornell University professor Kaushik Basu, who was chief economic advisor to the Indian government during 2009-2012, explores the uncomfortable and complex relationship between law and economics in his latest book, The Republic of Beliefs: A New Approach to Law and Economics. Triggered by the seemingly intractable problems Basu grappled with as a policymaker in India, especially the rampant corruption, the book germinated as several lectures and in a policy research working paper at the World Bank in 2015, where he was chief economist from 2012-2016. In this book, Basu not only tries to answer these questions but also provides a new theoretical framework for laws to work better so that governments can craft more effective laws to achieve a fairer and more efficient society.
Why don’t we get off a cab and walk away without paying? For the law to develop roots and the rule of law to prevail, ordinary people must believe in the law and also believe that others do the same. The neoclassical model emphasises that the higher the deterrence (catching people at crime and imposing a fine/punishment), the better the compliance. However, as we have seen in India, the higher the fines, the greater the possibility of collusion and bribery, resulting in the law being rendered useless. Basu finds this a fundamental flaw in the neoclassical model and uses game theory to iron out the crinkles.
Under neoclassical theory, this would mean, in the language of game theory, that the law changes the rule of the game, and, in turn, changes the game people play. But the enforcement machinery, led by the state, is an important element in compliance, as it is this fear of action by them that makes people comply. The neoclassical approach assumes all enforcement machinery to be rational and maximising its own payoffs, that a traffic policeman will always impose fines if one is speeding because it is his job to do so.
But they don’t always. Using game theory proves how human behaviour is critical. Once you include all players in the game, especially the state and enforcement, and specify the rules, the game cannot change merely by writing a new law or amending an existing one. Basu then uses the focal point approach to establish that law is like a signpost that controls our behaviour. This is actually in the realm of philosophy, in the David Humesian sense. As Basu says, “What matters are my beliefs and my beliefs about other’s beliefs, and other’s beliefs about my beliefs.” The law uses the language of command, but really can do little more than influence the beliefs of individuals to go to a particular outcome. If you do a wrong, the officer will punish you. If not, the latter will get punished by the sergeant. And the sergeant will be punished by the police chief, who will be punished by the prime minister, etc. Ultimately, the law’s efficacy depends on all of us—our beliefs, expectations, actions, and responses. This makes so much sense that the book, although on pure theory, could be recommended reading for a junior school student.
Basu lucidly delves into the history of economic philosophy and even literature to make a very convincing claim about how the full economy game, by including the players that traditional economics left out, importantly shifts our perspective to view law as an instrument that can act as a catalyst for altering the players’ beliefs and, therefore, behaviour. These beliefs and meta-beliefs can take very long to get entrenched in society. As such, corruption and similar problems are not easy to eradicate, but the focal point approach helps us better understand why laws fail, are poorly implemented, and are often written up to contradict each other. The framework that he proposes explores, and urges others to explore, the intimate relationship between human beliefs and expectations on the one hand and the effectiveness of the law on the other.
Since his new theoretical foundation offers a more consistent and richer method of analysis and policymaking, it will help law become salient.
Basu also discusses social norms and how, despite being unwritten, they have the potential to take us to outcomes that are self-enforcing. And how corruption, when tolerated by many, can become a social norm, as many Delhites will agree. Similarly, the acceptance of law’s potential to change behaviour also makes a law legitimate. People usually do not light a cigarette in a public area not only because there is a law prohibiting it, but in their mind, they have already accorded the law legitimacy, for universal health and pollution reasons. He also delves into the role of rationality, morality, and rights of individuals as enshrined in law. Latest advances in behavioural economics complicate the issue, but also offer plenty of scope to pursue what Basu calls the “focal point approach with behavioral features.”
“In truth,” Basu writes, “the most important ingredients of a republic, including its power and might, reside in nothing more than the beliefs and expectations of ordinary people going about their daily lives and quotidian chores. It is in this sense that we are all citizens of the republic of belief.” This is the core of the book, which emphasises that a law and order system is created by what everyone believes another will do, and not, as is erroneously thought, by an exogenous source or the power of the state. In these words also lie a lot of hope and faith as, in a way, they emphasise the power of citizen’s beliefs. As people within and across nations get more and more connected, the emergence of institutions and global frameworks (such as in environment and trade) and their effectiveness will be crucial. Free markets will prove costlier without collective and legal interventions, and regulations will have to evolve and change. Contrary to Keynes’ forecast that all major economic problems would be solved by 2030, this book is an extremely timely wake-up call for theorists to investigate the contentious field of law and economics with vigour.
The author is a freelance writer