Jason Furman's Reviews > THE REPUBLIC OF BELIEFS [Hardcover] Basu, Kaushik

The Republic of Beliefs has one big idea I had never thought about before and lots of fascinating small ideas and asides spread throughout. The big idea is law and economics as traditionally conceived is incomplete because it does not explain why anyone follows the law. Kaushik Basu argues this is akin to partial equilibrium analysis that treats the sovereign as exogenous .

Basu endogenizes the sovereign by broadening out game theory to a "game of life" that encompasses not just the payoffs to the traditional players but also to the authorities, like the police, judges, and heads of government. If the law is not an equilibrium then it will not be enforced by the police/judges/heads of government. So laws do not create new equilibria but serve as focal points that shift people's beliefs so that they all shift to another equilibrium. Think, for example, driving below 60 miles per hour. If you try to create laws that are not compatible with people's incentives, they will not be obeyed and instead you'll get rampant corruption and authorities looking the other way.

That's the big idea. It is not particularly relevant for many of the questions in law and economics, for example how to do antitrust or regulation in the United States, because it is reasonable to take the enforcement of those rules as given. It seems incredibly relevant in the context of a developing country like India to understand under what circumstances laws are and are not followed, since this may matter just as much as the substance of any law.

Basu conveys many of these points with relatively simple game theory, often taking familiar two player games--like the prisoner's dilemma--and adding a third player who represents the authorities and can affect the payoffs of the first two players. This allows him to explore the difference between laws and norms.

One challenge with the framework, is that multiple equilibria do not readily answer the question of which equilibrium is chosen. Kaushik Basu argues that "for the law to develop roots and the rule of law to prevail requires ordinary people to believe in the law; and to believe that others believe in the law. Such beliefs and meta beliefs can take very long to get entrenched in society." But he cannot fully explain how and why this does and does not work. Maybe because such an answer does not exist.

Most of the analysis assumes rational agents with fixed, exogenous payoffs. In part this serves an analytical purpose of showing that Basu's critique of the incompleteness of law and economics does not rely on challenging the standard assumption of rationality. In part Basu seems to think this assumption generates reasonable results. But he does eventually introduce behavioral considerations, like people liking to follow the law and having preferences that are shaped by the law itself.

Overall, The Republic of Beliefs is a creative, thoughtful and learned book that draws on economics, law, political philosophy, moral philosophy, and more to form a new basis for law and economics and understanding political authority more broadly that is intellectually interesting, potentially relevant in a developing country context, but not (as the author himself would agree) relevant to many of the narrower policy questions faced by advanced economies.