 Thank you very much Satu Santala, Fintar, distinguished members of the audience. Satu indeed was a person with whom I had a lot of interaction. One of my favorite persons at the World Bank that I interacted with, Satu, thank you very much for the very, very generous introduction and also it's a pleasure for me to be back in Helsinki country that as a researcher I first actually interacted years ago and during my years at the World Bank there was a lot of interaction with Finland because among Finland must have been among two three countries with which the World Bank had the most interaction in terms of research, in terms of research grants, research money, research interests and some of the tribute for that really also goes to wider because it has become over the years such a visible and prominent player in the space of global development policy. So thank you very much for giving me the opportunity to speak to you. Every time I hear a generous introduction like Satu's, my mind drifts back to a very embarrassing generous introduction very early in my career. I had just finished my PhD when my mother wanted me to speak at a school run by an NGO that my mother liked a lot in Calcutta. So I went to give a talk there. I had just out of my graduate school the trouble started when we were entering the hall and my mother told the principal that I'm a very famous economist and then with my mother sitting in the front row the principal had no choice. He introduced me as a very famous economist and then to my complete bafflement he went on and on about that, about me, about my achievements which was zero absolutely and I gradually realized what had happened. He had forgotten my name and he was trying to kill time to remember. He could not remember. He turned to me and after that flowery introduction said, excuse me sir what is your name was one of the most embarrassing occasions. I give a very bad lecture on that occasion. Okay with that thank you very much and into the topic. This is law and economics has been an area of great interest to me for a long time. It began as a researcher with my early interest in antitrust legislation. Let me explain a little bit. Antitrust legislation is a very major topic in the US because at one level the global concern with antitrust started in around 1890 with the Sherman Act in the United States. United States played a very major role and when I used to do research in industrial organization theory antitrust law would come up in a very big way. I had a lot of interest and certain things about the way traditional law and economics is done was beginning to trouble me. Occasionally in my different papers books I mentioned about the problems with the Chicago school or the neoclassical school of law and economics but it had to languish there. Despite that interest I never had time to write and then I went into the policy world that Satu just mentioned three years in India four years at the World Bank so seven years I really had very little time for academic research but the law problem kept coming to me back to me and when I finished my term at the World Bank my first project was to plunge into this and offload the ideas that I had into a book called the Republic of Beliefs and that is what I want to talk to you about. It's a methodological work analytical methodological work but I think underlying that is a very important urging that we have to look afresh at law and economics at political economy and I feel in particular in today's world where politics is going through a very very dismal phase around the world and there is some fundamental rethinking called for it's a methodological contribution urging us to do some of that rethinking. I'm going to begin by giving you a little bit of my practical world experience where I was encountering the kind of problem which took me into the analytical question which I investigate to give you a brief history first of all of law and economics that interface I'm going to concentrate on the Chicago school the work of Gary Becker the work of Coase then the work of Calabresi who's from Yale but that 1960s work is going to be the chord I'll treat that as the traditional approach or the neoclassical approach to law and economics and then move away from that but the early thought in law and economics goes back like so many things to the Greeks in Athens there was so long so long made major contributions to in fact the interface between law and economics because there was a lot in Solon's work on trade and trade rules what kinds of goods should move freely in and out of countries what kinds of goods should be blocked from entering and even before Solon there was Lycurgus in Sparta who was thinking in terms of laws of interaction between people in trade the trouble with Lycurgus is Lycurgus did not believe that law should be written down law should be completely built into your head and then you live by that so we don't have enough of Lycurgus's laws in written form and I'm no expert in this field but while I was reading on this subject I discovered that there are some scholars who not only question the existence of Lycurgus's laws but they question the existence of Lycurgus himself so he will be put in the sidelines my focus is going to be the later works that we know much more better on which there is concrete work but I want to tell you a little bit about my interaction with law and economics as a policy maker mainly in India and some of the corruption work continued while I was at the World Bank during my time in India and there was a right to food act that was enacted but even much before that India has a scheme of giving food out to poor people subsidized food and this as soon as you look at the system and the way in which it operates in India it forces you to think about something in particular how a law impacts not just ordinary citizens but the bureaucrats the functionaries the enforcers of the law my entire methodological concern is about that we have ignored the enforcers of the law when we talk about law and economics this was being driven to me as an act as I said as an academic I had an early interest and later on in the policy world the food is an interesting example India has a system as I just said of distributing food to the poor the way it works is the following every year India announces a minimum support price for certain basic food grains this is a price at which farmers have the right to sell to the government so no one is forced to sell to the government a price is announced usually above the market price to make it attractive so farmers go and sell the food to the government government picks up a lot of wheat and rice about one third one fourth of the wheat and rice produced in India is picked up by the government it's kept in storage some of it is kept for redistribution during food shortages and price increases but some of it is released regularly to poor people and the way that release is done is poor people have cards identifying themselves as poor and now in India there is an increasing use of biometric identification but the poor go to these there are 500 000 shops all over India run by the government where cheap food below market prices given to the shopkeeper and the shopkeeper is told that when poor people come with their card below market price the price is fixed you have to give it to the poor if you look at this redistribution system you will discover that over 40 percent of the food grain collected for this kind of redistribution never reaches the poor and you can very easily see what happens many of these food ration shops get the food from the government below market price but next to that shop will be a shop being run by the by a brother a free market shop and you're allowed to run free market shops part of the food is diverted to that other shop where it's sold at the market price and profit is made by these stores whereas the rest goes to the poor who are deprived of a large part it's a fiscal burden and it's a big leakage why does it take place because the presumption in government that the bureaucrats the functionaries of the state will do the job that they are supposed to do and the leakage takes place because they turn out to be rational in ways that is not anticipated by the system and I will argue that that was indeed a problem with the traditional approach to law and economics one more encounter which for me became a very harrowing practical engagement with law and economics is immediately after I joined the government I bribery has been a problem in India and I had gone from the world of not being in the bureaucracy to inside the bureaucracy and there is one difference which strikes you when you are in the bureaucracy and senior a part of the government no one asks you for a bribe or very few if you're really cutting and dealing in big things you'll be asked for a bribe but for to get your to do your income tax returns to get your driving license they won't dare ask you if you're senior in the government but if you're outside the government in these everyday life you are asked for bribes and since I had moved from outside the government to inside the government and it was not a lifetime of being in government I was actually aware of the problem of bribery and there was something in the Indian law which troubled me and I felt that is one reason why bribery is so rampant the prevention of corruption act 1988 is the main law that tries to control this kind of corruption and the law has a provision I won't go into the details there are exceptions and all that but for all practical purposes the Indian law says that in cases of bribery the bribe giver and the bribe taker are equally criminally liable so if the bribery case is proved both will go to jail both will have to pay a fine etc this was troubling me for one there was a moral side to it but that's not the interesting one the moral side is that many of the bribes that ordinary citizens are asked to pay are not for anything illegal that they are asking for you've gone for a driving test you drove perfectly before giving you the license you're told give me some cash and I'll give you the license I call those harassment bribes a bribe which is a pure harassment but an analytical idea very elementary game theory struck me and I was quite excited by that you know in India after a bribery takes place and there is investigation you never get evidence that the bribery had taken place and the reason is not hard to see when a bureaucrat asks you for a bribe you get very angry but after you've paid the bribe your interest and the bribe taker's interest are completely unified you will collude to hide the fact that you've paid a bribe and it seemed that if you can change amend India's law and I had just joined government I was naive to think these amendments can take place very easily I thought if you can amend the Indian law and make it for harassment bribes the bribe giver should be completely free not punished at all the bribe taker punished and maybe punished double so giving a harassment bribe is not legal it's a legal activity taking the bribe is illegal it seemed like such a good idea that I wrote up the paper and posted it on the Ministry of Finance website if I had been in government a bit longer I never would have done that but I was new I thought it's a brilliant idea we should post it everyone should see and there was absolute chaos because there were newspaper op-eds television criticisms and there was questions raised by members of parliament to the prime minister saying that I should be asked to leave the government after such an immoral idea being posted on the website and I actually remember one very tense evening a very popular television show in Delhi phoned me up Barkha Dutt who's a very well known television personality asking me if I will come on television to debate and explain my idea and if anyone has watched Indian television debates you'll know that it is just one hour of screaming and shouting on the screen I was feeling I'm ready for that and I did want to explain that my idea was not immoral and in fact it'll bring down bribery because once you know that the bribe giver will get up and give evidence against you you will be hesitant to take the bribe that was my idea that make it legal to give harassment bribes then the bribe taker will not take knowing that in the next period you will go and tell so I thought I will go about explaining this but I remember that evening I thought I'm giving so much grief to the government that I phoned the prime minister prime minister Dr Manmohan Singh's residence and I said I need to talk to the prime minister 10 minutes later they called back and the prime minister came on the line and I told the prime minister that I hate to bring you in on this but I am feeling very tempted to go on a television debate and explain my idea but since I know members of parliament have written criticizing my idea I wanted to see if you are fine with my debating and trying to explain it the prime minister's reaction to me was a very satisfying reaction in a very curious way his first remark was I have seen about your idea in newspapers and indeed people have written to me I have to say I don't agree with it but the aim the purpose of an advisor is to bring ideas to the table to discuss to debate so feel completely free to talk about it and discuss I had felt very good because after that I remember in a G20 meeting when we were talking the economic advisors people in emerging economies were saying that there are very few emerging economies where you'll be given space like that to discuss an idea which is contrary to what the prime minister would support but bring it in public space and debate so actually though I was disappointed that my idea was not getting ground I felt elated that there was that space for debate and discussion I but the time was going completely on policymaking there are some policy makers here who will know so I had no time to write it's only when I returned to academics that I began writing there's a brief thing called Moscow airport 1992 I don't know if I'll have time to get back to that but that will remain let me move on that was one bribery incident if I have time I'll come back to that later on the food grain I have some data I just wanted to show you the leakage that takes place on food grain in India the food that gets diverted and the food that reaches households and you will see that in 2007 844 percent of the food was getting diverted was not reaching the household that's what I was talking about earlier now the for the next thing switch off don't begin to read but let me just explain I want to tell you and this is really the only equation that will come in in the talk the same thing will be repeated on the next page and then nothing more but I want to explain that to you because I want to give you the gist of the traditional approach to law and economics the so-called what I'm calling the Chicago school approach and don't make a mistake for a moment I think Gaddy Becker's work made a huge contribution it got us thinking but I think underlying that there is also a very very deep very simple flaw once your attention is drawn to it it's obvious that there is a very deep flaw which is troublesome again as a background I should tell you that what gets me into this is in India you would face very often the criticism and praise that the Indian law is very good on paper but so often the law is not implemented it just sits there gathering dust ordinary citizens look away from the law as if the law is not there the police look away from the law as if the law is not there it's collectively ignored why are some laws collectively ignored why are some laws enforced the traditional approach gives you no insight into that or flawed insights into that the approach I will outline will begin to give you insights into that but here is the Chicago school which I want to explain very very briefly so start with an entrepreneur who's considering a coal mining venture and in the beginning there is no law in the country for or against coal mining you're allowed to do it's up to you how will you decide standard cost benefit analysis you calculate how much revenue you will generate for yourself through the mining you will get this much coal you'll sell it for this price you'll earn this much what will be the cost of the mining you'll have to buy machines you'll have to get laborers the cost is c the revenue is r r minus c is your profit if that is positive you will do coal mining if that is negative less than or equal to zero I assume you will not do coal mining decision taken now bring in a law a new law is enacted in this country which says that coal mining is illegal you can't do mining anymore it pollutes or whatever be the reason the law says you can't do mining as a consequence of the law what happens is now if you are caught mining you'll be charged a fine of f dollars and let's say there is a probability p that you will be caught so in addition to all these calculations what you have to do is over and above the cost of mining you'll have to account for the possibly fine that you'll have to pay and then you'll see is it worthwhile for me to do mining or not and that calculation which is the gist of gary becker's approach it's the following a new law is enacted I just told you declaring mining illegal if caught the probability of caught being caught is p you'll be fined f dollars the venture is now worthwhile if profit which is r minus c minus the possible fine that you'll have to pay which is p multiplied by f if that is greater than zero it's worth it there's so much profit in it that you're willing to take the small risk of being caught and being fined but if r minus c minus pf is less than or equal to zero then you will not do mining that's the gist of the gary becker's approach to crime and punishment famous paper in the 1960s and this is as I'm telling you there are it's making a contribution because it is immediately forcing you to think in very concrete terms about these the challenge of crime and punishment and you're already beginning to get some fascinating insights in this see the government to stop corruption r and c that's the profit that the person will earn r minus c the government controls the probability of catching you by putting out police jeeps etc going around serving and the size of the fine f p and f are the two variables that the government uses to control crime all you want to do is raise p and f sufficiently so that r minus c minus p multiplied by f becomes negative it's not worthwhile pf is so big that i'm not going to go around mining you can do it by raising p or raising f and there was a lot of early discussion which the chicago school's approach drew your attention to that there are two instruments for controlling corruption raise the probability of catching someone or raise the fine soon it was realized that raising the size of the fine is much cheaper than raising the probability of catching someone probability of catching someone you need lots of jeeps lots of police lots of personnel going around serving so why not raise f keep p very low if caught you'll be find a massive amount that runs into other problems that in poor countries even the poor in rich countries will very often have a limited liability effectively in place beyond the point i'm not in a position to pay that fine i'm too poor so you can't control it just by raising f so lots of interesting things came up there's one important assumption which i remember when i first encountered these models as a student at lsc it never even struck me that there is one moral assumption which has been slipped in by the chicago school which gives it a lot of power a fine in the chicago school approach is no different from a fee if the government said that you can do mining but you'll have to pay a fee of f dollars that and a fine of f dollars are identical it's the money that you pay but are they really identical when there is a new speed limit law saying you can't drive faster than 100 kilometers per hour and if you do so we will impose a fine on you do we treat the fine as a price is it the same as the government announcing that everyone is free and allowed to drive above 100 kilometers per hour but you'll have to pay a fee of this much money when you do so or when you're found out doing so point is in our heads that is not the case we usually think of a fine and a fee in different terms but right now i don't want to go into that route i want to remain neoclassical in that approach that a fine is an amount of money that goes out of your pocket whether that's a fee or a fine you don't distinguish so that i will remain with gary becker on this and as i said this approach did give rise to a lot of very concrete and i think very useful thinking but also flaws which meant that in the end we could not understand why laws are imposed are enforced in some countries and not enforced and overlooked by everyone and there is one assumption that has gotten to the chicago school approach which to me is an is a contradiction two contradictory assumptions are underlying the chicago school approach to explain this and this is the core of my criticism which leads to the alternate approach just allow me to elaborate a little bit that the traditional approach to law and economics is when a new law comes in it's like the game that we are playing in life that game has changed in particular payoffs have changed from the same action we get different payoffs and that's the reason why we behave differently forget about this coal mining case take the driving case it's a very simple case earlier let us say we used to drive when going from here to turku we are driving we would drive at 120 kilometers per hour but now when a new law comes in saying that you are not allowed to drive above 100 kilometers per hour let us say that people actually cut down their driving speed what's the calculation the chicago school will tell you the calculation is very easy if caught you'll have to pay a huge fine and that we don't want to do that's why we drop our driving speed so why are we behaving differently with the new law because the payoff function as we call it in the game theory has changed from the same act of driving earlier i would have got a certain payoff the delight of reaching early my destination slight risk of a skid etc but now over and above all that there is the payoff of a fine that i have to pay so that changes the payoff from the act of driving fast and because the payoff has changed the game has changed the game that we are playing and if the game has changed it's not surprising that we will behave differently the question that had troubled me when i used to work on antitrust law is the following what is the law in the end the law is nothing but a couple of words written down on paper according to the new law you're not allowed to drive faster that's ink on paper and the question does arise the game that we are playing in life the payoffs that we get from our different activities why will that change because someone wrote something down on paper why will people's payoffs from driving fast change because something was written on paper the only way to explain that is it changes because the police are expected to go after you and catch you but of course that raises another question why will the police go after you and try to catch you just because a few words are written down on paper the chicago school was getting out of this problem by making an implicit assumption i don't think they were even aware of that in thinking of the game of life they were treating the police the judge the magistrate as saintly characters who will automatically do what the law asks them to do so remember in gary becker's model you never get a mention of the police going after you the judge giving a sentence because they are working automatically behind the scenes ordinary citizens are ruthless utility maximizers the enforcers of the law are either robotic creatures or saintly creatures who do what they are supposed to do but that is an inconsistency two sets of people being described completely differently if you take the chicago school all the way and treat the police the judge the prime minister the minister everyone as individuals with whatever they are maximizing maximizing that and write the full game with all of them as players indeed the law is just some ink on paper the game does not change after you drive fast if the police says well i won't go after this person and the head of the police department says that i will not punish the police person who does not enforce the law and the judge says i will not punish the head of the police department if everyone looks the other way then it is as if the law does not exist on paper and in a lot of emerging economies developing countries that is indeed the case the law is there on paper and not enforced and a very similar line as i take in my paper is taken by a mail art george mail art steve morris and andy postal rate and they give lots of examples from american law which is there on paper but no one enforces that everyone looks the other way so there are laws that people collectively look the other way and that raises the very very big question why are some laws enforced i am going to skip over i'm not going to go into the prisoners dilemma at all i'm going to leave you over there on the power point and explain why the law could be making a difference if the law now here is the other side of the question if it is true that law is nothing but some sentences written down on paper and that can't change the game that we are playing the question does arise after all laws do make a difference in finland if you bring in a new speed limit law it's almost without doubt it'll change the speed at which people are driving in the roads how come the law does make a difference if it is just some ink on paper there seems to be just only one way out to explain this the law makes a difference because after a law is enacted we change our beliefs about one another's beliefs and behavior so the law has nothing more in bricks and mortar and concrete than our beliefs about one another it's what i believe the other bus the police will do and the police believes what the judge will do to the police and it's our collective beliefs which can change when a new law comes in and that's the only way in which the law influences behavior it sounds extremely vacuous but it can be made concrete it can be put to use the reason i felt emboldened by this is because my favorite philosopher in the middle of the 18th century took a very very simple similar line and took a similar line in a somewhat inchoate way because he didn't have the modern methodology of economics of game theory to write it more concretely this is david hume david hume in his essay on government and even before that 1739 treaties on human nature broods about in passages very beautifully i can't say this so nicely that how come the dictator or the leader of a country is so powerful it can't be because of that person's muscle and physical power what can a single individual do in the end the power of that person comes from nothing else but one another's beliefs about what we will do to one another that is what gives power to a dictator and at one level there is this philosophical background of david hume and i think hume really is very close to that but he did doesn't have the wherewithal of modern theory which i'm going to bring into this just now but also if you read kafka and kafka's trial which is the invisible hand going sour it is not adamswith's benevolent invisible hand it's an invisible hand which is oppressive but where is it coming from everyone the enforcers of the law who come and arrest joseph k it's not clear that they are getting orders from anywhere in fact it remains a mystery that it's such a powerful force in society oppressing individuals where it comes from is not clear and it's a very troubling trial to me is one of the most troubling pieces of literature that it is an invisible hand at work it's one another's beliefs that make us behave in a certain way and kafka himself must have been very troubled by having written the trial because it was never published in his lifetime it was in 1925 one year after this death that his friend max broad published it and it's telling the same story but hume as an analytical philosopher is giving you some of the analytics of this but this can be made concrete and i'm going to try to persuade you that it can be made concrete the line i'm taking there is a small group of people who take similar line i just mentioned that economists uh george melott steve morris andy postulate there are legal scholars like cast sunstein eric posner um richard macadams who take similar views and i'm going to give it now a more concrete shape with a little bit of very very elementary game theory and the game theory that i will use is a two liner it's this game called the squares game and i'll show you the power of just belief nothing will be changed about the rule of this game but i'll change something about your belief about other people's beliefs and behavior is going to change this game is played as follows there are 16 squares each of you will have to assume it's a two player game each of you will have to choose a square if you choose the same square you get hundred dollars if you choose different squares you get nothing so in this game you're desperate to choose what the other person chooses if i literally give you this and ask you to choose a square i've done this in classrooms it'll be all over the place people choose the corners do get chosen people hope that there will be uh sort of others will choose that but it's all over the corners have a little bit more people don't manage to coordinate this game the squares game is a very very simple game so once again because i'm going to just add something to that you choose a square and once you've chosen the square i'll open it up if you and the other person choose the same square you get hundred dollars otherwise you get nothing i won't change the game but the board i'm going to change because i didn't have a better board it's a bad board because one of those squares has a gold color but please ignore that it's nothing but a little bit of paint on a square uh now you have to choose a square and after you've chosen the square if both of you choose the same square you'll get hundred dollars each if you choose different squares you will get nothing if you play this game virtually everyone will choose the golden square that little bit of painting on the square which does not change the game changes behavior and i do believe that in the end the law even dictatorships no matter how oppressive they look and i will talk a little bit about an old topic of mine later but slav havel's work where he takes from tafta his fellow countryman and develops it some of the worst forms of power are nothing but one another's belief about one another's behavior and that's what locks us in into situation that's the secret of successful laws that's also the secret of dreadful dictatorships and i should also point out that there are lots of practical uses that the focal point are already being put to made in real life applied one of the best examples is when i had first encountered and that time there was no discussion of focal points i was not even aware airports when you try to meet someone often it happens if you haven't specified exactly where you will meet that person you're looking around for your friend and not finding that person this was solved in airports i first saw it in he throw but i don't know where it first happened in the middle of somewhere you just put up a sign saying meeting point that is nothing it doesn't change the game you're meeting someone you can go anywhere to meet that person but having that sign there is like having that gold painted square you know that the other person knows that you will go there and wait for that person under the meeting point sign and it works life is full of that and i think much more on that than we believe and the discipline of law and economics is indeed an example of that and now comes the question why are laws better implemented and worse implemented i have lots of concrete examples but i won't have time really to go into that let me keep it just to analytics i will come back to this in a moment there are many reasons why laws are enforced well and not enforced well one is you must collectively know that the law is trying to get you to coordinate behavior so a law abiding society is nothing but a society that has learned to recognize one another's beliefs you can go through life where you're not a law abiding society because your belief is so deeply entrenched that others do not enforce the no one everyone looks away from the law that you don't enforce that law there's this beautiful quotation attributed to sorry sorry sorry beautiful quotation attributed to gordon brown um gordon brown is supposed to have said in establishing the rule of law the first five centuries are always the hardest so it takes a very long time this is by the way it's we've never discovered whether gordon brown actually said it or not we haven't seen a quote by him but it's such a beautiful quote that it needs only a little bit of rationality on the part of gordon brown not to get up and say that i didn't say it so he has kept quiet on that we don't know whether he actually said it or not now so first of all we must recognize our collective beliefs number two if the law is trying to push you to outcomes which are not an equilibrium such a law will not be followed if the laws are so numerous that you will have to violate the law that also becomes a reason why violating laws become a norm and many emerging economies laws are so complex and laws are so all-encompassing that in the end you violate laws and that becomes a part of life there is by the way a subtle political economy over here that you must keep in mind because of my interest in developing countries emerging economies this troubles me many countries it is in the interest of political leaders to have such complicated laws that everyone violates some law and this is a risk that china faces a risk that india faces that brazil faces when the law is so complicated that everyone violates a law it gives the leader a huge power after you declare that i'm going to go on a no corruption campaign catch people who are violating the law you immediately get a choice of who you catch if everyone is violating some law you can catch your friends you can catch your enemies you can catch newspapers that criticize you because everyone has indeed violated some law and of course if you are politically a bit savvy you realize that catching your friends first will mean you'll be out of power in no time so even if you're serious to start with the president or the prime minister that i want to banish corruption in a country where everyone is forced to violate some law trivial law that becomes an instrument as to who you go after you go after your opposition and what began as a genuine anti-corruption move becomes an instrument for oppression of the press of the media of democracy and we do see this around the world it makes a folly of what the law is and in addition it does a lot of damage to democracy and then something very concrete over here another reason why some laws don't laws very often do not get enforced have to do with multiple focal points you see a focal point is very very effective if there is only one focal point if you try to create more you will run into difficulties and i can show you the example of this suppose a norm develops that everyone chooses the gold box and you do in the game you win and you get hundred dollars each there may be a few people who misunderstand that choose some other point that's the convention and now let us say i declare a new rule i say that the square marked green should be i get up on the podium and say everyone should choose that that way you will all get the same square and you will make money will that work it's not very clear because you you're not trying to take my word for it you're trying to guess what others will do if you're all used to choosing the golden square and get the hundred dollars after the new rule is declared you will begin to wonder will others also switch to green or will they stay with gold and in fact after you declared this new target green actually the game behavior in the game may worsen because coordination can break down some people going for the gold some people going for the green there are examples in economics where that's not the explanation that people are giving but i feel beneath the surface that is indeed the explanation and here is an example in india the british in 1819 in the bombay deccan were very very troubled by india's credit markets the usury practices there was a lot of defaulting people would give money and then the repayment would not take place also there was a lot of forced repayment you've gone completely broke you're beaten up and you're forced to repay so the credit market did not work well rachel cranton and anand swami have a very lovely paper in um journal of development economics where they get a lot of historical documents and then they study what the british the british brought in civil courts and a unified law for how people should behave in the credit market and they wanted to see how effective the law was and what they discovered was actually the law made things worse somehow the credit market was malfunctioning after that for about the 20 years that they studied and they gave a whole lot of reasons that it was not well drafted it was not complete the law had problems but i have another explanation in the absence of the law people still had rules and the rules were like that golden square people had learned that that is what others will expect for me this is how i will behave those norms were in place when the law comes in it's like another focal point in the game saying change your behaviors this is what we expect of you if you have two focal points the chance of the focal points achieving much goes down and initially what you're seeing when you bring the rule of law in a society where the local norms the social norms are very strong you get malfunctioning taking place of behavior because the law actually breaks down the coordination even if it was poor coordination there was some coordination and that breaks down once you bring in the new law and in a lot of societies with the end of the colonial period when you are bringing in laws that the in fact your colonial rulers left behind you're getting a conflict between existing norms and new laws that have been brought into society and people begin to violate the law and very often that indeed becomes the violation becomes the norm i want to just give you a few real-life examples of the power of beliefs in guiding one another's behavior and then tell you a little bit about where the agenda is once you treat the law as nothing more than something that changes the belief of the police the prime minister the magistrate and ordinary citizens and that's the only way in which a law becomes effective that approach where do you take how do you make it richer and make it practical i'll talk a little bit about the future but i want to give you a little bit by way of examples in life the first which was for me got me into the subject in a big way was vatslav havel's a work which drew me into this subject and that time i did not have any interest in game theory so i did not do any game theoretic formalization but my new book the republic of beliefs has vatslav havel being written up formally as a game and it shows that actually the idea that havel talks about the idea that was there in david hume can be given very very formal structure and the idea that havel talks about was is interesting i first encountered this when this was just after i had become an economist teaching in delhi school i was visiting amartya sen in oxford and at a dinner i sat next to steven luke steven luke had written a very beautiful book called power the third dimension and he started chatting and he asked me about vatslav havel about whom i knew nothing i have to say at that time he said if you're interested in political power then there is a document i can give you which is something that havel wrote when under imprisonment and it has been smuggled out of czechoslovakia and luke steven luke was writing an introduction luke was writing an introduction to that piece it's called the power of the powerless and havel wrote most of it when he was in his um um um rural home in rade czech i may be mispronouncing that he used to write that with a tower just outside his house where these people at the tower kept 24 hours of him under observation and it was havel's philosophy that in the end the person who is observing is like vatslav havel just another citizen because the observer believes that someone else is observing whether the observer is observing the observer does his job so havel was actually very kind to the observer okay is occasionally inviting him to come and have tea with him in his home in that setting he writes this description of an oppressive dictatorship and the more you think about it all dictatorships are rooted in this and havel's question is the following people ordinary green grocers who put up sign boards declaring loyalty to the oppressive dictatorship are they really loyal to the dictatorship and havel's answer is no they are not loyal they are pretending loyalty why are they pretending loyalty because they are worried if they don't put up a poster and pretend loyalty then party bosses and others bureaucrats will begin to harass this person for not being loyal to this dreadful dictatorship we know that people very often do that you pretend loyalty because you're scared but havel goes on to ask the second layer question which is a much deeper question why will those party bosses why will those state functionaries harass someone if that person is found to be disloyal how else is the answer is the same that person believes that if i don't harass someone who is visibly disloyal others will harass me and so in the end we begin to mimic a sense of loyalty and he says you can be caught from the precedent to the ordinary citizens all mimicking because we are scared of each other and it gets you into this trap dictatorships are nothing but a trap where we believe one another and we are scared of one another and we begin to behave in a certain way and it has nothing to do yes he's talking of that time of what came from Russia oppression in Czechoslovakia but this can happen in any country the fascinating example of this in a complete free society is the McCarthy period in the united states McCarthyism starts in 1950 senator McCarthy goes to a women's republican club in Wheeling Virginia and pulls out a sheet of paper from his pocket and says that I have a list here of 205 communist sympathizers or communists and un-American people who are a part of the state department and we have to go after these people this movement gradually picks up we know that there were absolutely top scientists music composers filmmakers who are all being described as un-American communist sympathizers and charged of being un-American and communists point is McCarthyism took place without the law being changed at all no law was brought in for the McCarthy period but people started behaving in a certain fashion which shows in the end what a law does the absence of a law can do if you all expect one another to behave in a certain way and the McCarthy period is a great example when someone is charged of being a communist sympathizer and un-American and that person is in the film industry with you you know that person very well you think that's a complete false charge if you get up and say that no that's a false charge that person is not un-American others will not and say oh I see you're covering up for that person you are also un-American and you get locked into one another's belief and so the few people who are being arrested and troubled no one gets up no one gets up and says that no you're doing that wrongly because it's a collective belief that you are trapped into and that is once again the belief that at times can be put to very good uses like the law and at times it becomes a belief that traps you and I feel there are periods in India the emergency period 1975 to 77 I had colleagues at the Delhi School of Economics and elsewhere that remained loyal to the that period that period and the emergency and the dictatorship that came for a two-year period but it was there I feel it's very similar not that they believed in it but you have got into a trap that you can't get out of where do we go from here where do we take this further forward what we do need to build in once you recognize that the Chicago school approach where you take half the population as optimizers going after something and the rest as robotic enforcers once you drop that and treat all human beings as similarly modeled with similar objectives you get another more complicated approach it's almost a bit like moving from partial equilibrium analysis to general equilibrium analysis harder to do because everyone is a player everyone's motivation is there harder to write up models but actually you can do that I have written up models where you take everyone as a part of the game and the law begins to play a role but the next step ought to be bring in a bit more realism about human motivation so first of all you must not treat two sets of human beings as totally different as the Chicago school did that is wrong but once you treat human beings as across the board similar you have to allow for human psychology human foibles and a lot of behavioral economics does that towards the end of the book I talk about bringing behavioral economics into law and economics it's a tentative approach I want to give you Fin another 10 minutes is Satu another 10 minutes is okay yeah so I can give you some examples of once you begin to bring human psychology into the picture how does the whole exercise of law and economics change I don't have final answers these are speculative discussions but I think it is important to bring in because to get to a richer analysis you do need what I call is the focal point approach to law which is the name of the kind of approach I'm describing but it should be a focal point approach to law with behavioral features where you are treating human beings more realistically than what we traditionally do in economics and that's what I want to touch about recently a little bit of my recent interest over here behavioral economics is basically incorporating psychology into human behavior systematic irrationalities and one particular thing which I have ever since I've started thinking about it I'm more and more gripped that it is an important idea created targets in life we have lots of targets and objectives that get created during the course of life and the power of that I will come to in a moment but that the human mind is susceptible to being deluded is extremely important and I've just taken one picture from the world development report mind society and behavior which to me illustrates this just very very beautifully this one I found it totally baffling let me explain this for one moment this sort of checkerboard has one square marked a can you see the a is it yeah and one marked b that a and b the two squares which square is a darker shade a I mean there may be a few people who see it otherwise but a is just very very distinctly darker I treat myself as rational so I keep focusing and saying that I must see this very clearly but it's amazing they are identical a and b our eyes pick up the surrounding area what I'm going to do next is take this because this is by the way was done by Edward Adelson at MIT developed this what I'm going to do and I needed a research assistant to do that is to remove everything else from the board accepting the squares a and b they are identical but as soon as you have the surrounding pictures your mind finds it almost impossible to shake that off you see them differently this is just plain simple perception and you can see therefore that when it comes to rationality when it comes to rational choice we must be making lots of systematic mistakes and in those mistakes often lie despair and there can often be hope in those mistakes is that there can be individuals who decide that certain kinds of behavior are just moral I will not behave otherwise because that's the right way to behave these traits as they develop in society you begin to get better behavior better kinds of coordination becomes possible as these traits come into play but where do these where do these traits come from how come they are with us we don't know enough because this is already new in economics what interests me is created targets created target is in standard economics we start by saying that we all like apples oranges shirts and houses you draw indifference curves and you do maximization firms and entrepreneurs like profits and you like profits because you want to buy those things and that's why you maximize profits but once you look around life a bit dispassionately you'll see hundreds and thousands of human behavior where you're not going after guns and butter and shoes and clothes but you're still struggling and trying to do going after that target one very good example is on a flat surface use three bars to put up two vertically and one horizontally so you get a gate like area and get another one at a gate like area at the other end put a ball in the middle and gradually get people trying to one group of people to put a ball through that that gate and another group trying to put a ball through this gate it's called soccer or football after sometime these people are willing to get hurt falling down trying to get the ball in through that goalpost and another group trying to get it through this goalpost and that becomes an obsession they are not doing this to win money then to buy more guns and butter that itself is their target and not only that when different groups begin to do that people become supporters someone supports Manchester United someone supports Arsenal and you're then desperate for Manchester United to win and our other group is desperate for Arsenal to win and you don't want Manchester United to win because that'll give you more clothes you'll be better off that is your target you just want Manchester United to win Ravi Kanpur yesterday was saying that that's been his mindset for a long time for Manchester United to win now when if we bring it into real life many supporters of Donald Trump we try to say that are they making a mistake that by bringing Trump and they think that they'll be better off they'll be more benefits for the poor how do you explain that I feel that's the wrong way to look at it supporting Trump for many has become exactly like supporting Manchester United nothing else matters but you want your team to win you don't want the other side to win and I feel this is just very very powerful when your identity so totally you're just cheering you don't say that oh the Manchester United player kicked the ball in this manner from now on I'm switching over to Arsenal you don't say that you are completely tied up with that target and that's what has happened in politics now with the extreme right and the extreme left what very often happens is that becomes the team you're supporting and you're not supporting that for anything else that is your created objective and you're going after that and life is full of that a lot of patriotism where you're willing to give up your life a lot of things whether you call it good or bad lot of human motivation you can actually get people energized about that being the target some of the most successful corporate leaders don't give you financial benefits but gradually motivate you that running this corporate this corporation getting it to be the top corporation is your objective it is your supporting Manchester United and it's a very cheap policy once you get that mindset in place because these people are working very very hard to get that done and indeed in even in governments you can put this to good use if the government servants those who are distributing the cheap food those who are doing all these jobs they are told that take pride in that that is what you're supposed to do that's possible and we have to understand why in some societies you manage to inculcate those values why in other societies you don't manage to inculcate values this standard view that bureaucrats increase their salaries and they will behave better yes there may be some cases where that is the case but I'll tell you in a lot of developing countries I've I've worked in one salaries are pretty decent for bureaucrats it's not that they are trying to make up for that by taking the bribe it is they don't take enough pride in the work that they do and that plays a very very important role and you do want to bring that enmeshed into today's world I'm going to just talk a little bit about globalization and the problems that that is causing and then stop with that because I do want to take in some questions and answers globalization is I think at the base of a lot of the problem that we are seeing in the world today the world politics has turned nasty in a quiet way it's not war but it is beneath the surface it's just boiling across the world and I feel one of the reasons for that is globalization the people coming together and some of the clue lies in people with different models and different expectations coming together does cause a kind of conflict being upset with globalization is globalization good or bad I find that debate actually a completely moribund debate a pointless debate globalization is not being done by anyone individually being deliberately brought into place globalization is the outcome of innovation and technology little bits of improvements in technology taking place over a long period of time globalization is a bit like gravity you don't have a debate on is gravity good for us or is gravity bad for us you can't have that debate it's a completely useless debate because gravity will be there anyway likewise you do not spend too much time about how to do away with gravity it may be possible in some ways but it's too expensive too difficult globalization is a bit like that it's a part of life we have to live with it what problem is it causing I feel it is bringing people together at times through electronic groups you're talking to people across the board in the country at times through just the flow of people you are seeing a conflict in styles and conflict in styles is very very difficult when you say that allow people to practice different religions and I firmly believe in that you should give individuals the full freedom to practice their own religions including atheism if you want to believe in that and want to practice that that's your personal belief but you can also see that if you different groups of people come together with some fundamental differences you will have to try to sort them out and an example is suppose on one island people drive cars and they've developed a very good convention you drive on the left everyone drives on the left there are virtually no accidents it's all smooth there's another island where the convention develops you drive on the right everyone drives on the right very few accidents to take place now both these sets of people move to a common island one set is used to driving on the left other set is used to driving on the right you will have to adopt one rule in this society and that can cause a huge amount of conflict I feel we have to face up to the fact that as the world comes together people of different kinds come together there will be these conflicts of norms that they were used to but you've come into a pool where the norms a whole lot of people follow other norms I feel we have to sit down we have to talk and we have to think in terms of norms of society at a global level the way to do this is think of certain minimum global constitution Stephen Brair the one time supreme court judge assistant supreme court judge in the beautiful book talks about statutist provisions in Italy in the 14th century little bits of conflict that would take place when a roman citizen goes to Florence and has a fight where there's some roman law and the law of Florence comes into conflict you have statutes to deal with those kinds of problems that's happening in the world in a big way we need to have to me a minimum global agreement that we have to go by a couple of rules which are common rules beyond that we have to then develop these rules it's going to be hard I'm not 100 sure that we will manage that if we don't manage then civilization as we know will probably come to an end after all there are big civilizations in history which have come to an end because they did not manage to deal with many of the problems that they confronted but we are probably the first creatures on earth unlike the dinosaur the dinosaur was about to perish but the dinosaur had no ability to analyze their own predicament we are dinosaurs who have the ability to analyze our own predicament and so we should say that these traits of ours that are leading to greater and greater conflict are traits that we have to sit down work together and we don't want to go towards extinction we want to develop rules that we collectively live together globalization is taking place at a pace where we are coming together faster than we had anticipated and these rules and laws that we live by within individual societies are coming into conflict and coming into conflict in all kinds of very very complex ways by people moving in and out of places to electronic linkages we have to work on that and the belief that there is a leader who can impose that which is the original Hobbesian view Leviathan does it is false Hobbes was making the same mistake that the neoclassical approach to law and economics makes thinking that there are some people who are the ultimate guardians in the end it is all on our hands in our hands it is to do with our beliefs and we have to sit down work together to develop certain minimum codes of behavior from where we can start out once again and since in the end life is nothing but just a collectivity of beliefs beliefs about one another which influences our behavior that is where we have to understand the modality of that and work towards using that better to develop collective global rules thank you very much thank you very much in your theory of mutually reinforcing beliefs how do you explain then that laws change if individuals do not stop or choose to stop believing in them say can you repeat that once again how do laws change if individuals choose not to stop believing in them one of the reasons this is the Gordon Brown quote if you live in a society where the belief has come in whatever is the new law that's the one that you follow once that is in place that's a collective belief as long as the law is taking you towards a behavior that is a consistent behavior that kicks in very quickly but if you live in a society where you've learned to ignore the law then when a law is announced it's a part of your belief so it's not very clear that that's going to happen so the understanding of that is not that you put in more policemen to go after that because someone needs to police the policeman as well which is in fact David Hume has exact descriptions of that the problem of policing the police so there are no guarantees that it'll come in but to understand that in the end it is these beliefs that will do it instead of bringing in a greater bureaucracy a heavier hand of the bureaucracy to enforce behavior is the starting point the but for the people at the back you may want to use the mic yeah in what sense if any is your idea of collective beliefs that lead to the acceptance of laws or observance of laws different from Adam Smith's ideas of social norms that actually make market economies work a second aside that I cannot resist on Gary Becker at the Chicago school because apart from misunderstanding human behavior or questions of morality it has no sense of history because just a quarter of a century earlier you had prohibition in Chicago and yet that law was not observed by anyone police judges mayors governments so isn't that the absence of history in the Chicago school a major analytical flaw yeah Deepak I'm glad you asked about norms and law in fact a large part of my work discusses the two and the line I take you may not be surprised after the full lecture is fundamentally there is no difference between the two a norm is my expectation of if I don't do something how others will react and others will react because their expectation of how others will react and the law though that is not widely recognized that's the line I'm taking in the end the law is the same it is that the other person will react is called a functionary of the state in norm usually the only differences and I do go into this is we have a label for the ones whose behavior makes me behave well it's a functionary of the state it's the police what the police will do in the norm it is what a cousin of mine will do towards me that makes me behave in a certain way but the cousin's behavior and the police's behavior is in the end it's the same the police would behave in that way because the police are worried about the head of the police department how that person will treat the police so in the end it's the same but in one set it is the functionaries of the state who you you're looking at in another case you're looking at others but it's the same and there are cases like India's caste norms are almost like a law I mean it's just oppressive for individuals it comes down on you and the line that George Akerlof had taken that there are many of the caste law caste behavior in India which no one wants to follow but everyone is in a trap I behave in this way because someone else is watching me someone else's behaves in that way because that person is being watched by someone else and that's the same so in the end it is similar and the norms the way norms are understood is the way that laws have to be understood and I have a discussion of one particular norm which I've talked about a lot and written about a lot is the punctuality norm is it's to do with one another's expectations of behavior and that can be modeled very beautifully how I do identical sets of people one set is very punctual the other set is not punctual at all fundamentally they are identical they've just hit upon that focal point one group and the other group has not so very similar now the history and this is yes that is a lacking in the Chicago school but I'm a bit generous about that because that's lacking in sort of across the board in economics and to me the focal point approach is one link between historical approaches and the contemporary behavior of human beings that's the analytical tool that links it up because one thing I remember very beautifully is when Thomas Shelling discussed a focal point and said the you and your friend have decided to meet in New York and you haven't fixed a place as to where you will meet and but you fixed the time at 12 o'clock where will you go and wait for your friend and apparently New Yorkers disproportionate number would go to Grand Central those days and wait over there I remember in India in Delhi School of Economics people who have never come to the US I had given this question in class it was Empire State Building where they were all going so people sort of collective common history which we carry in our heads have a huge influence on our behavior and yes the first of all is to make room for the fact that these beliefs play a role and then you begin to link it up one reason why economists go very light on this is economists like to and we are in this we know we want to then give it a formal structure and there was a belief that history is very difficult to capture in a formal structure I believe that actually if you are not obsessed with writing differential equations analytically there's a lot of scope for bringing history into our analysis thank you thank you very much my name is Tony Obin from Ghana I was just wondering how you explain resistance to enforcement I mean when there's a collective resistance to enforcement a law has been made government want to to enforce it but there's a collective resistance and oftentimes the resistors succeed yeah this is a very difficult question and Havel's essay not surprisingly goes into this if you are all in a trap you're being oppressed and you're in a bad equilibrium why shouldn't you collectively resist this force on you the question of course is you can see why it's difficult is that even if all of you realize that all of you are being oppressed by the regime the first person who gets up to say that why don't we all get up and protest and break out of it that person is likely to be caught and harassed by others for fear that if you don't put down someone who's trying to cause this resistance you will have a breakdown usually resistances happen when you have a few irrational people who are willing to take disproportionate cost on themselves but stand up and say that look this foolishness must not continue Gandhi is an example of an irrational individual who gets up and says that look no matter what happens to me this is it you want to put an end to that Nelson Mandela is an irrational person in the end very often the resistance originates from a few irrational human beings who irrational in the in the sense of economics I'm using it who are willing to stand up and if you are standing up for a cause where a lot has built up then usually these uprisings happen with a critical change so for a long time everyone mimics loyalty and then it suddenly breaks down dramatically there is a very very beautiful early book I had read about Kapustchinsky's book about Hiles Salasi that loyalty to Hiles Salasi was total and Kapustchinsky is just describing it there's nothing more analytical than after the fall of Salasi people who are completely loyal to Salasi seemed like they were loving their job immediately vanished and disappeared and they started showing their other preferences so very often loyalty which looks like ironclad could have broken down beneath the surface you need a few people to lead that where that comes from or do we always have to rely rely on a few irrational people maybe so but I feel also just having the clarity that you can get into equilibrium of everyone mimicking loyalty with no one being loyal just these understandings very often give us some ways to think in terms of how we get out of that but I don't have an easy solution how you do that resistance moves there's a couple of hands there at the back I can see. Andrea Cornia from the University of Florence thank you very much for this very interesting lecture I wonder if you looked into the issue of formal and informal legal norms when in most countries I mean if you take the economic area for instance there are written norms people should abide to them I mean and this is the focus of your own lecture but these norms are often misplaced and you do find that the society develops norms which are actually much more efficient and fair and so the question is that who produces the norm the parliament the parliament from a political economic perspective reflects the interest of the elites quite often and in this case society reacts in a way coming up with the norms which are more reasonable so which one which one should be followed in this case and the last example now in Florence I live in Florence there are many means in medieval sorry sorry is renaissance now I mean and there are many many narrow street one way is the reign of one-way street now people bathe in this way if another car comes in the opposite direction they protest and they call the police if mop heads does the same the same but if a bike comes in the opposite direction and it tries to stay on their thing this I mean the public behavior is that you should try to accommodate this person this is against the law but people they find it is much more useful because I mean otherwise this poor cyclist should should go around the city to go from one place to another so so what is the the interaction between formal and informal norms because man why should I obey formal norm that basically is wrong it seems that you started I'll say the norms are the laws are good sometimes they're not sure Andrea thank you very much since my work is a methodological one first of all the thing underlying that before I get into this is at a very very fundamental level informal laws and formal laws are the same that is the line that I'm taking in the end it is our expectations of other people's behavior their beliefs which make us behave in a certain way that's true of informal laws that's true of formal laws and we indeed know I mean there are cases anthropological writings I'm thinking of Max Gluckman on the Barotse examples where informal laws actually can look very much like formal laws because they are just so well enforced and Indian caste laws they are breaking down now but historically they look very much like formal laws so beneath the surface there is indeed this commonness that in the end it's not someone at the top who does it that was the Hobbesian mistake that has come down to us till today in the end it is we even formal laws it is nothing but that in one case there are the functionaries of the state involved but the functionaries of the state are also individuals who are going about their chores that needs to be recognized and then you analyze formal laws and informal laws it's interesting I also crossing the road in United States I very often notice that the kind of example you're giving how people make sort of rational corrections to the law one difference between crossing the road in Japan and crossing the road in United States is pedestrian crossings are respected but in Japan they are respected even when there is no car nowhere on site you wait till the light changes in the United States I treat it as a rational violation of the law that if you're saying no car nowhere you just walk a bit briskly across but if there is a car it's sort of treat it as a yield sign rather than as a stop sign is the way pedestrians do some of those actually ideally you want a world where the laws are there but society becomes so sophisticated that they violate the laws just in the way in which it's optimal to do so which is difficult to write down how do you get to that I don't know but again you want to get there in the end we have to analyze formal laws by using the same instruments that we used to analyze informal laws that is the line that I'm taking and how does it become stronger in one country there's history involved we will probably never get to full answers of that but the belief that it is top down it's the government bureaucracy which does it I think has done us a lot of harm in understanding the implementation of the law and it does did frustrate me in India when I worked as a policymaker to see so many laws so widely being violated and every time you see that you think of bringing in one more layer of bureaucracy to go after that but that becomes useless because there's a fundamental misunderstanding of what enforces the law