Do people know Kaushik Basu's theory of law as focal point? Pen-l favorite Herb Gintis likes the idea as developed in Basu's Beyond The Invisible Hand (here is Gintis' comment from amazon.com):
"Basu's second point is that laws are focal points that coordinate human behavior, and they are nothing more than that. This is a very deep point, and seems counter-intuitive. For instance, suppose a law is passed limited the speed on a certain road to 65 mph. Then a motorist will obey the law because a police officer might otherwise issue him a costly citation. But why will the police officer do this? He does so because, in turn, he will be punished by his captain if he does not issue speeding tickets. But why with the captain punish him? He does so because... and so on down the line. Basu's point is that if we remove the law, no single individual has an incentive to change his behavior, given that the others maintain their behavior. The law creates what game theorists call a Nash equilibrium, and is a focal point in the sense of Thomas Schelling. The central implications of law as focal point are twofold. The first is obvious: if a law does not create a Nash equilibrium, then it will not be followed. In other words, laws must always include the appropriate incentives for the law to be effective. This is of course well known but widely violated, especially by corrupt and oppressive governments. The second implication is that "if a law...can cripple an economy...then the same can happen even in the absence of such a law." (69) In other words, pathological social practices can just as much be responsible for dysfunctional economies as perverse laws and official bureaucracy. This is a brilliant argument, but Basu's formulation leaves out precisely the moral content of laws. Horace famously noted that laws are futile unless they conform to the moral precepts of the citizenry. We might also add that laws themselves can create a moral force where there was none, individuals conforming to the law not only because it is in their material interest to do so, but also because they consider the law as expression a moral truth that they are willing to embrace. I do not think that this emendation of Basu's principle undermines his second point, but it does undermine the first. If laws reinforce our personal morality, they need not be all Nash equilibria of the game, because we are willing to sacrifice to conform to the law. Of course, once we admit social preferences, such laws become Nash equilibria in larger games in which preferences and the rules of the game interact. Such is life. There is a second major problem with Basu's argument--one with which must surely agree. If we withdraw the law, no single agent will change if all the others maintain their previous behavior. However, expectations might very well change. If the 55 mph speed limit law were recinded, the motorist might believe that the policeman has no longer any reason to give him a ticket, because he knows that the policeman will believe that his superior will not repremand him for not giving speeding tickets. How does the policeman know this? He uses the same reasoning as the motorist. In short, unless we believe all agents have strong beliefs that expectations will not change, when the law is rescinded, behavior will undergo a quick and perhaps radical transformation. Of course, the above reasoning is really a critique of the whole notion that social norms merely "pick out" Nash equilibria. This is a common notion, comforting to methodological individualists, but quite problematic, if not simply wrong."
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