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CHAPTER 1

Introduction

1.1 Practice and Discipline

Economists and legal scholars have had an abiding interest in the question of why so many laws languish unimplemented. But an even more intriguing and philosophically troubling question is its obverse. Why are so many laws so effective, being both enforced by the functionaries of the state and obeyed by the citizens? After all, a law is nothing but some words on paper. Once one pauses to think, it is indeed puzzling why merely putting some "ink on paper" should change human behavior, why a new speed limit law recorded in a book should prompt drivers to drive more slowly, and the traffic warden to run after the few who do not, in order to ticket them.

Traditional law and economics dealt with these questions by avoiding asking them. The purpose of this book is to take on this conundrum of ink on paper triggering action frontally. In the chapters that follow I spell out and explain the enigma, and then go on to provide a resolution. This forces us to question and in turn reject the standard approach and replace it with a richer and more compelling way of doing law and economics. The new approach, rooted in game-theoretic methods, can vastly enrich our understanding of both why so many laws are effective and why so many laws remain unimplemented, gathering dust. Given the importance of law and economics for a range of practical areas, from competition and collusion, trade and exchange, labor and regulation to climate change and conflict management, the dividend from doing this right can be large. This monograph contributes to this critical space that straddles economics and law, and is thus vital for understanding development and peace, and, equally, stagnation and conflict.

The hinterland between different disciplines in the social sciences is usually a rather barren space. Despite proclamations to the contrary, multidisciplinary research remains sparse, its success hindered by differences in method and ideology, and a touch of obstinacy.

The confluence of law and economics stands out in this arid landscape. Ever since the field came into its own in the 1960s, with the writings of legal scholars and economists showing recognition of the existence of and even need for one another, the discipline of law and economics has been gaining in prominence. The need for this field was so obvious and immense that it did not brook the standard hindrances to interdisciplinary research. Laws are being created and implemented all the time; one does not have to be an economist or a legal scholar to see that a poorly designed law can bring economic activity to a halt or that a well-crafted law can surge it forward. For this reason the confluence of law and economics was an active arena of engagement even before the field had a name. In the United States, for instance, concern about collusion among business groups dates back to the late nineteenth century. The Sherman Antitrust Act in 1890 and later the Clayton Antitrust Act of 1914 and the Robinson-Patman Act of 1936 were landmarks in the use of the law to regulate market competition and deter collusion.

As so often happens, practice was ahead of precept. While there was no subject called law and economics then, small principles were being discovered and acted upon by policymakers and practitioners. It was, for instance, soon realized by American lawmakers and political leaders that while curbing collusion was good for the American consumer, it handicapped US firms in the global space. In competing against producers in other nations and selling to citizens of other nations, it may be useful to enable your firms to collude, fix prices, and otherwise violate domestic-market antitrustprotections. This gave rise to the Webb-Pomerene Act of 1918, which exempted firms from the provisions of laws that ban collusion, as long as they could show that the bulk of their products were being sold abroad. Japan would later learn from this and create exemptions to its Antimonopoly Law, exempting export cartels from some provisions.

The realization of the power of the law to affect markets was in evidence when, soon after the defeat of Japan in the Second World War, the Allied Forces quickly imposed a carefully designed antitrust law on Japan. This was the so-called Antimonopoly Law 1947. Japan would later modify it to reinvigorate its corporations.

Not quite as directly as with the American experience but nevertheless with important implications for everyday life, the practice of law and economics goes much further back into history. Human beings were writing down laws pretty soon after they learned to write anything. The most celebrated early inscription was the Code of Hammurabi. Written in Akkadian, the language of Babylon, these laws were developed and etched on stone during the reign of the sixth king of Babylon, Hammurabi, who died in 1750 BCE. Ideas in this code survive today, such as the importance of evidence and the rights of the accused. It also gave us some of our popular codes of revenge, the best-known being "an eye for an eye." The codes survived, but not without contestation. It is believed that it was Gandhi who warned us, nearly four thousand years later, "an eye for an eye will make the world blind."

Indeed, it is possible to argue that the idea of law existed even before we invented writing. This took the form of conventions passed on by word of mouth. And some would argue that, in this broad sense, law predates humans (see discussion in Hadfield, 2016). Laboratory experiments show that capuchin monkeys give evidence of a sense of fairness and, by extension, the propensity to punish those who play unfairly. In the present book, however, I stay away from such a broad, all-encompassing notion of law.

The origins of law and the question of what law is and why people abide by it are matters that have long been debated. Much of this discourse was fueled by the enormously influential debate for and against "legal positivism" (see Kelsen, 1945; Hart, 1961; Raz, 1980), which was in turn a response to Austin (1832), who argued that "a proposition of law is true within a particular political society if it correctly reports the past command of some person or group occupying the position of sovereign in that society. [Austin] defined a sovereign as some person or group whose commands are habitually obeyed and who is not in the habit of obeying anyone else" (Dworkin, 1986, p. 33, my italics). But why such commands are obeyed and how the sovereign can get away without obeying anyone else (to the limited extent that these are true) were poorly explained by not just Austin but also later legal scholars and philosophers.

While Austin and Hart were both legal positivists, Hart distanced himself from Austin's view of law as "command" to the idea of law as "rules," thereby suggesting that they may not need enforcement by a sovereign or a higher authority. There is an element of obligation naturally built in. Underlying this notion of law is an innate sense of justice and fairness.

For the purpose of this book it is not necessary to have a formal definition of law (and anyway one does not exist). It is often the case that it is possible to talk about a discipline and develop it further without having a formal definition for it. The same is true here. It is enough to note that the law consists of rules of legitimate behavior in a society, and a law-abiding society or a society where the rule of law prevails is one where members of society abide by the law. I do not assume that the law innately possesses qualities of fairness and justice. In this discourse it is just as possible to have an unfair law and an oppressive law, as a noble law and a just law. In fact, what I hope to achieve in this book is to show that some of the early debates and contentions were not necessary. Once we have developed the new approach to law, rooted in game theory, we will see that some of the debates may have been spurious, grounded in methodological flaws, and constrained by a limited vocabulary. With the rise of modern game theory, we are able to create concepts and terms that facilitate debate and remove some of the controversies that flourished because of the linguistic coarseness of discourse. It is not always appreciated that a large part of the advance of science is predicated on the granularity of grammar and vocabulary.

The new approach will give us an understanding of how a society becomes law-abiding. Gordon Brown, former British prime minister, is believed to have said (World Bank, 2017, p. 95), "In establishing the rule of law, the first five centuries are always the hardest." Gordon Brown's observation is often treated as a joke, but it is not. It makes the important point 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. This is a matter that will be important for my thesis.

By way of digression, I may remark that, while the above quote is commonly attributed to Gordon Brown, there seems to be no actual record of his saying it. The only reason to believe he did is that he has not contested the attribution. But then again, put yourself in his shoes. If such a memorable quote were attributed to you, it is not clear that you would go out of your way to challenge the attribution.

Returning to the question of origins, the law, as we know it today, took concrete form in ancient Greece. Solon in Athens and Lycurgus in Sparta are often viewed as "founders of Western legal and political thought" (Hockett, 2009, p. 14). Solon, born in Athens in 638 BCE, became chief magistrate, when the city-state was in dis-array. He played a role in creating one court for all citizens but, more importantly from the perspective of this book, he paid attention to laws that made economic life possible, encouraging specialization and exchange, and taking explicit positions on trade, allowing commerce for some commodities but banning it for others, showing that not just international trade but even protectionism has a long history.

Solon's counterpart in Sparta was Lycurgus, often treated as the founder of the Spartan Constitution, the Rhetra. To him are attributed ideas and rules concerning social equality and even wealth redistribution. When he rose to power, wealth had become extremely unequal and, it is said, he set about devising rules to equalize landholdings. Among these important economic rules, he also slipped in some idiosyncratic ones such as the need for men to eat in public in large groups. The trouble with getting into much detail about Lycurgus is that he believed that laws ought not to be written down but held mentally as a code to abide by. An inevitable consequence of this is that many have questioned the existence of Lycurgus's laws; and, to make matters worse, some historians have questioned the existence of Lycurgus.

1.2 The Emergence of "Law and Economics"

The emergence of the discipline of law and economics, luckily, does not give rise to such existential questions. There is reasonable consensus that the birth occurred in the 1960s, marked by some iconic papers, most prominently those by Coase (1960), Calabresi (1961), and Becker (1968), even though the roots of the discipline go much further back. Within years it was evident that this was a hugely influential discipline. As Sunstein (2016, p. 53) recently observed, "The field of 'law and economics' has revolutionized legal thinking. It may well count as the most influential intellectual development in law in the last one hundred years. It has also had a major impact on how regulators in the United States, Europe, and elsewhere deal with anti-trust, environmental protection, highway safety, health care, nuclear power and workers' rights." It is easy to go on and draw attention to the power of law and economics in many other areas, from shaping regulation relating to finance and banking, to fiscal policy and laws to regulate the fiscal deficit. It is clearly a subject that deserves attention.

Yet there have been problems that we have encountered in applying the lessons of law and economics that should have alerted us to all not being well. One of the biggest challenges lies in the implementation of the law. A perennial problem faced by a host of economies, especially emerging and developing ones, is that the law is often not implemented. In India, for instance, where the law is quite sophisticated, thanks to the country's post-independence intellectual ardor as well as its colonial history and even precolonial experience (see Roy and Swamy, 2016), a common refrain is that the law is impeccable on paper but more often than not poorly implemented. There is almost a collective looking away from the law.

The other related challenge is that of corruption. The ubiquity of corruption in many developing economies and also some advanced ones is not just distressing for civic life, but also leads to perverse and damaging economic outcomes. But what is corruption? It can take many forms but, in the final analysis, it is a form of violation of the law, perpetrated either individually or in cahoots with state officials and enforcers of the law, as happens in cases of bribery. What is it that makes some laws tick and others get violated and corrupted? The standard discipline of law and economics is unable to give a satisfactory answer.

The failure to understand corruption and, as a consequence, our ineptness in curbing it, is one of the big failures of law and economics. The chinks in the standard model were visible from the observation that those entrusted with enforcing the law are often lax or susceptible to bribery, which led to the philosophically troubling question: "Who will police the police?" This immediately leads to perplexing questions about the role of higher and higher levels of authority within the state. Quite independently of the discipline of law and economics, the economics of corruption has become a large subject today, and this book will have much to say on this once the building blocks of a new law and economics are in place.

1.3 Institutions and the Enforcers of Law

A critical counterpart of modern law is the enforcement machinery — the police, the judges, the courts. Indeed, we often draw a distinction between the law and social norms by the presence or absence of these institutions and agents of enforcement. Social norms, it is believed, are enforced without a formal machinery, whereas the modern state is a critical counterpart of the concept of law. It is the state that gives law its authority.

Some readers may perceive some of my skepticism in my use of qualifiers like "it is believed," and they will be right. These are matters that I will return to at some length. Indeed, doubts on this score were sowed in my mind by the writings of some anthropologists, who showed how sophisticated some of these social norms were and how formal their enforcement was in some so-called primitive societies such as the Barotse of Northern Rhodesia (Gluckman, 1955; see also discussion in Hadfield, 2016).

Remaining within the confines of traditional thought, it is worth emphasizing that this presence or absence of a machinery to enforce the law has been central in discussions of international law. At one level, it is indeed true that in the domain of intercountry relationships, international trade conflicts, and currency wars, we do not have the same kind of enforcers as a conflict within a nation has. There is the International Court of Justice at The Hague, but its ability to enforce codes and laws is open to question. We have tried to mimic the courts and justice systems at the global level by creating various global institutions, but their reach is limited. For this reason, nations have frequently taken it upon themselves to create institutions to penalize global norm violations. America's Helms-Burton Act of 1996 is a good example of this. The United States wanted to isolate Cuba (and thereby hurt its economy) and so created a law not just to ostracize Cuba but to punish even other nations that traded with and invested in Cuba. This was a form of taking the law into one's own hand but also an attempt to create a global jurisdiction that does not exist.

International organizations, such as the International Labour Organization (ILO), World Trade Organization (WTO), and the Bretton Woods institutions, have often been created to deal explicitly with this concern, to bring a modicum of law to bear on labor practices and international trade customs and even to manage global monetary and fiscal policies. The success of these initiatives continues to be debated, but it is clear to all that there is a dearth of globally enforced law in our rapidly globalizing world. The need for this became apparent soon after long-distance sea travel became common, starting from the end of the fifteenth century with the landings of Christopher Columbus in America in 1492 and of Vasco da Gama in India in 1498. Skirmishes in the seas heightened thereafter, the most celebrated being the seizure of the Portuguese vessel Santa Catarina by the Dutch in the Strait of Singapore, in the early morning hours of February 25, 1603. The lawyer called upon to defend the Dutch seizure was Huig de Groot or, as he came to be better known as, Grotius. This case led to Grotius's engagement, in 1604, with the need to codify international law and his commentary on the subject, which may well be viewed as the genesis of our intellectual engagement with international law.

(Continues…)

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Excerpted from "The Republic of Beliefs"
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