Do laws matter? How do they matter? When do laws work? Why should a law work just because it is written on a piece of paper?
Kaushik Basu explores these questions in his 2018 book The Republic of Beliefs: A New Approach to Law and Economics. He utilizes game theory to answer the questions. Basu is an economist with wide experience in public policy.
From the very start, he is skeptical of the power of the law as understood through Hobbesian lens. He largely rejects the idea that laws function primarily through the threat of force. In place of coercion, he places beliefs firmly at the center of the answers, with possibility of coercion working only to modify beliefs. We are governed more by beliefs, and less by coercion.
To convince his readers, he lays out the basics of game theory. Luckily for most of us, he does not write down too many formulae. In doing so, he avoids turning a good chunk of the book into a dense game theory textbook. Charts are aplenty to deliver the same messages mathematical formulae would. All I am saying here is that the book is quite readable.
The point of the crash course (or review for those familiar game theory) is to ease readers into the idea of focal points, a concept imported from psychology (was it? I am unclear here). Within the context of game theory, focal points are a subset of equilibria as understood in economics. It’s a signpost to coordinate responses. Once all prerequisites in place, Basu delivers his central thesis: laws work to push society towards a preferred equilibrium, out of many equilibria.
Laws alone do not create equilibrium. A law that forces society towards a non-equilibrium outcome will suffer from serious ineffectiveness. That ineffectiveness translates into frequent violations as rules are ignored, or circumvented via corrupt ways.
This is an important point to be learned by policymakers. I write so because I see lawmakers more often than not prefer non-equilibrium outcomes and propose complicated policy to address problems arising from such non-equilibrium. So complicated, that their proposals end up creating bigger problems (wink wink: chicken prices and palm oil subsidies in Malaysia).
Perhaps, this idea can be better explain through the problem of smuggling. Political commentators and even ministers (BN, PH, PN or whatever) have blamed the smuggling of something (cigarette, rice, gasoline, anything) on imperfect enforcement. And so, their solution is to put more money into greater enforcement. But the primary problem is not enforcement—though weak enforcement itself creates beliefs regarding (in)credibility of laws (but I will skip that part and encourage you to read the book for deeper treatment). It is about the law itself, which attempts to move society to a non-equilibrium outcome. And that non-equilibrium leads to corruption.
The prime problem, typically, lies in demand itself. Here, I believe Basu would claim, to fight smuggling, preference or behavior itself has to change. And behavior depends on beliefs.
More specific to Malaysian context, I think this is where attempt at ‘generational end-game’ for smoking will likely do more at curbing future tobacco smuggling than any ‘greater enforcement’ initiative would. There will be no cigarette to smuggle if people do not like smoking in the first place.
I think that (focal points) is the greatest insight from the book. But there are other points of interest.
One is the history of law and economics. The author goes back to Hobbes and Hume, but I am more interested in his treatment of modern history when Basu writes about neoclassical understanding of laws as provided by Gary Becker. Basu criticizes the modern economics approach towards law by stating a typical neoclassical model ignores the interest of law enforcers and other agents of the state (that include functionaries like judges and prime ministers). He zeroes in on the inconsistency of neoclassical understanding of law: citizens are assumed to be rational agents, but agents of the state taken as robots obeying everything they are told to do. In that way, neoclassical economists working on the intersection of economics and laws regularly sidestep the problem of corruption. Basu suggests, agents of the state should be considered as rational too, and their obedience should not be taken for granted. In that way, economists can tackle corruption problem more directly.
Despite his criticism of the neoclassical approach, Basu does not call for a complete culling of the school. Rather, he wants to improve those models by expanding it in a meaningful way. Indeed, the way he writes the book, it feels like a pioneering work built up on neoclassical approach.