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The Republic of Beliefs: A New Approach to Law and Economics
A leading economist offers a radically new approach to the economic analysis of the law
In The Republic of Beliefs , Kaushik Basu, one of the world's leading economists, argues that the traditional economic analysis of the law has significant flaws and has failed to answer certain critical questions satisfactorily. Why are good laws drafted but never implemented? When laws are unenforced, is it a failure of the law or the enforcers? And, most important, considering that laws are simply words on paper, why are they effective? Basu offers a provocative alternative for how the relationship between economics and real-world law enforcement can be understood.
Basu summarizes standard, neoclassical law and economics before looking at the weaknesses underlying the discipline. Bringing modern game theory to bear, he develops a "focal point" approach, modeling not just the self-interested actions of the citizens who must follow laws but also the functionaries of the state―the politicians, judges, and bureaucrats―enforcing them. He demonstrates the connections between social norms and the law and shows how well-conceived ideas can change and benefit human behavior. For example, bribe givers and takers will collude when they are treated equally under the law. And in food support programs, vouchers should be given directly to the poor to prevent shop owners from selling subsidized rations on the open market. Basu provides a new paradigm for the ways that law and economics interact―a framework applicable to both less-developed countries and the developed world.
Highlighting the limits and capacities of law and economics, The Republic of Beliefs proposes a fresh way of thinking that will enable more effective laws and a fairer society.
In The Republic of Beliefs , Kaushik Basu, one of the world's leading economists, argues that the traditional economic analysis of the law has significant flaws and has failed to answer certain critical questions satisfactorily. Why are good laws drafted but never implemented? When laws are unenforced, is it a failure of the law or the enforcers? And, most important, considering that laws are simply words on paper, why are they effective? Basu offers a provocative alternative for how the relationship between economics and real-world law enforcement can be understood.
Basu summarizes standard, neoclassical law and economics before looking at the weaknesses underlying the discipline. Bringing modern game theory to bear, he develops a "focal point" approach, modeling not just the self-interested actions of the citizens who must follow laws but also the functionaries of the state―the politicians, judges, and bureaucrats―enforcing them. He demonstrates the connections between social norms and the law and shows how well-conceived ideas can change and benefit human behavior. For example, bribe givers and takers will collude when they are treated equally under the law. And in food support programs, vouchers should be given directly to the poor to prevent shop owners from selling subsidized rations on the open market. Basu provides a new paradigm for the ways that law and economics interact―a framework applicable to both less-developed countries and the developed world.
Highlighting the limits and capacities of law and economics, The Republic of Beliefs proposes a fresh way of thinking that will enable more effective laws and a fairer society.
264 pages, Hardcover
Published June 12, 2018
40 people are currently reading
539 people want to read
About the author
Kaushik Basu
73 books59 followersKaushik Basu (born 9 January 1952) is an Indian economist who is currently the Chief Economic Adviser to the Government of India and is also the C. Marks Professor of International Studies and Professor of Economics and, till recently, he was Chairman of the Department of Economics and Director, Center for Analytic Economics at Cornell University.
He is Editor of Social Choice and Welfare, Associate Editor of Japanese Economic Review and is on the Board of Editors of the World Bank Economic Review. In 2008, the Government of India awarded him the Padma Bhushan, one of the country's highest civil honors.
He is Editor of Social Choice and Welfare, Associate Editor of Japanese Economic Review and is on the Board of Editors of the World Bank Economic Review. In 2008, the Government of India awarded him the Padma Bhushan, one of the country's highest civil honors.
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Displaying 1 - 13 of 13 reviews
October 23, 2018
Whatever little economics I have studied, the primary reason why I have enjoyed it so much is that it combines the logical rigour and discipline of a science, with the real-world scope of a social study. And while most social studies, to varying degrees, do a more-or-less admirable job of describing the world, it is economics that attempt to understand why the world is the way it is.
But my primary complaint about all academics, particularly when they seek to engage with public policy, is that they are too abstract. Speaking from their ivory towers, far too much of their commentary is irrelevant, or hopelessly naive.
This is where "The Republic of Beliefs" makes a departure - it is in this book, more than his previous one, that Kaushik Basu establishes that he is indeed an "economist in the real world".
The book starts off with a discussion on one of the shortcomings of neoclassical economic analysis: namely that all actors are not necessarily rational.
What follows is a masterful application of game theory to the understanding of how law and social behaviour operate. The range of subjects that have been analyzed is remarkable, ranging from something as natural as determining why fines & penalties work (or do not work), to something as surprising as how discrimination propagates. The clarity with which the author has wedded theory with the challenges of reality is very impressive.
Two of the ideas that I found most impressive were: one, the idea that ours - like all others' - is a republic of "beliefs". Making law by simply putting ink on paper makes a difference because of that belief; two, the state, and it's actors, are also "rational" (or irrational) actors, who would either seek to increase their payoff, or would be subject to the same emotive responses as other players, instead of being robotic entities.
There are also several conceptual ideas that are fascinating. Law has to attain a degree of "salience" before it becomes effect; actors can act in a particular "law-abiding" manner even in the absence of a law; the actions of actors are influenced by the presence of "focal points", and so on.
That is not to say that I agree with all that the author has presented. My chief point of disagreement has been where the author has said that the penalties for an "unlawful" action can be imposed even in the absence of the law. I am yet to comprehend how the penalty-imposing entity can do so, unless granted sanction by the law.
This book ends on a profound note. The author addresses the "loose ends" that were left in the monolouge, and after indicating that the purpose of theory is to beget action, points to the direction ahead.
All-in-all, this is a deeply fascinating & enriching book. It is not an easy, mindless read - because it will make you stop and think. But it is definitely worth the effort.
But my primary complaint about all academics, particularly when they seek to engage with public policy, is that they are too abstract. Speaking from their ivory towers, far too much of their commentary is irrelevant, or hopelessly naive.
This is where "The Republic of Beliefs" makes a departure - it is in this book, more than his previous one, that Kaushik Basu establishes that he is indeed an "economist in the real world".
The book starts off with a discussion on one of the shortcomings of neoclassical economic analysis: namely that all actors are not necessarily rational.
What follows is a masterful application of game theory to the understanding of how law and social behaviour operate. The range of subjects that have been analyzed is remarkable, ranging from something as natural as determining why fines & penalties work (or do not work), to something as surprising as how discrimination propagates. The clarity with which the author has wedded theory with the challenges of reality is very impressive.
Two of the ideas that I found most impressive were: one, the idea that ours - like all others' - is a republic of "beliefs". Making law by simply putting ink on paper makes a difference because of that belief; two, the state, and it's actors, are also "rational" (or irrational) actors, who would either seek to increase their payoff, or would be subject to the same emotive responses as other players, instead of being robotic entities.
There are also several conceptual ideas that are fascinating. Law has to attain a degree of "salience" before it becomes effect; actors can act in a particular "law-abiding" manner even in the absence of a law; the actions of actors are influenced by the presence of "focal points", and so on.
That is not to say that I agree with all that the author has presented. My chief point of disagreement has been where the author has said that the penalties for an "unlawful" action can be imposed even in the absence of the law. I am yet to comprehend how the penalty-imposing entity can do so, unless granted sanction by the law.
This book ends on a profound note. The author addresses the "loose ends" that were left in the monolouge, and after indicating that the purpose of theory is to beget action, points to the direction ahead.
All-in-all, this is a deeply fascinating & enriching book. It is not an easy, mindless read - because it will make you stop and think. But it is definitely worth the effort.
June 2, 2019
The Republic of Beliefs has one big idea I had never thought about before and lots of fascinating small ideas and asides spread throughout. The big idea is law and economics as traditionally conceived is incomplete because it does not explain why anyone follows the law. Kaushik Basu argues this is akin to partial equilibrium analysis that treats the sovereign as exogenous .
Basu endogenizes the sovereign by broadening out game theory to a "game of life" that encompasses not just the payoffs to the traditional players but also to the authorities, like the police, judges, and heads of government. If the law is not an equilibrium then it will not be enforced by the police/judges/heads of government. So laws do not create new equilibria but serve as focal points that shift people's beliefs so that they all shift to another equilibrium. Think, for example, driving below 60 miles per hour. If you try to create laws that are not compatible with people's incentives, they will not be obeyed and instead you'll get rampant corruption and authorities looking the other way.
That's the big idea. It is not particularly relevant for many of the questions in law and economics, for example how to do antitrust or regulation in the United States, because it is reasonable to take the enforcement of those rules as given. It seems incredibly relevant in the context of a developing country like India to understand under what circumstances laws are and are not followed, since this may matter just as much as the substance of any law.
Basu conveys many of these points with relatively simple game theory, often taking familiar two player games--like the prisoner's dilemma--and adding a third player who represents the authorities and can affect the payoffs of the first two players. This allows him to explore the difference between laws and norms.
One challenge with the framework, is that multiple equilibria do not readily answer the question of which equilibrium is chosen. Kaushik Basu argues that "for the law to develop roots and the rule of law to prevail requires ordinary people to believe in the law; and to believe that others believe in the law. Such beliefs and meta beliefs can take very long to get entrenched in society." But he cannot fully explain how and why this does and does not work. Maybe because such an answer does not exist.
Most of the analysis assumes rational agents with fixed, exogenous payoffs. In part this serves an analytical purpose of showing that Basu's critique of the incompleteness of law and economics does not rely on challenging the standard assumption of rationality. In part Basu seems to think this assumption generates reasonable results. But he does eventually introduce behavioral considerations, like people liking to follow the law and having preferences that are shaped by the law itself.
Overall, The Republic of Beliefs is a creative, thoughtful and learned book that draws on economics, law, political philosophy, moral philosophy, and more to form a new basis for law and economics and understanding political authority more broadly that is intellectually interesting, potentially relevant in a developing country context, but not (as the author himself would agree) relevant to many of the narrower policy questions faced by advanced economies.
Basu endogenizes the sovereign by broadening out game theory to a "game of life" that encompasses not just the payoffs to the traditional players but also to the authorities, like the police, judges, and heads of government. If the law is not an equilibrium then it will not be enforced by the police/judges/heads of government. So laws do not create new equilibria but serve as focal points that shift people's beliefs so that they all shift to another equilibrium. Think, for example, driving below 60 miles per hour. If you try to create laws that are not compatible with people's incentives, they will not be obeyed and instead you'll get rampant corruption and authorities looking the other way.
That's the big idea. It is not particularly relevant for many of the questions in law and economics, for example how to do antitrust or regulation in the United States, because it is reasonable to take the enforcement of those rules as given. It seems incredibly relevant in the context of a developing country like India to understand under what circumstances laws are and are not followed, since this may matter just as much as the substance of any law.
Basu conveys many of these points with relatively simple game theory, often taking familiar two player games--like the prisoner's dilemma--and adding a third player who represents the authorities and can affect the payoffs of the first two players. This allows him to explore the difference between laws and norms.
One challenge with the framework, is that multiple equilibria do not readily answer the question of which equilibrium is chosen. Kaushik Basu argues that "for the law to develop roots and the rule of law to prevail requires ordinary people to believe in the law; and to believe that others believe in the law. Such beliefs and meta beliefs can take very long to get entrenched in society." But he cannot fully explain how and why this does and does not work. Maybe because such an answer does not exist.
Most of the analysis assumes rational agents with fixed, exogenous payoffs. In part this serves an analytical purpose of showing that Basu's critique of the incompleteness of law and economics does not rely on challenging the standard assumption of rationality. In part Basu seems to think this assumption generates reasonable results. But he does eventually introduce behavioral considerations, like people liking to follow the law and having preferences that are shaped by the law itself.
Overall, The Republic of Beliefs is a creative, thoughtful and learned book that draws on economics, law, political philosophy, moral philosophy, and more to form a new basis for law and economics and understanding political authority more broadly that is intellectually interesting, potentially relevant in a developing country context, but not (as the author himself would agree) relevant to many of the narrower policy questions faced by advanced economies.
February 12, 2019
"Economics is the only embarrassing discipline which needs proof that humans are not rational"
The central point of this book is that there are a lot of factors that make a law effective. A law is mere words on paper. There are other economics factors (mostly behavioral) that make laws stick in a society. .
Societies have many equilibrium's. If everyone is punctual it makes sense for you to be punctual. If everyone around you is not punctual, it is in fact better for you to not be always late. Society has two equilibriums (Nash Equilibrium) here - everyone is punctual or everyone is late. Its the focal points that make one preferred over the others. If people who are late get ostracized in a society, then everyone is punctual. Out of the two equilibriums through norms / customs / laws we set the focal point to the one that is desirable.
The book uses a lot of game theory and in spite of it is very approachable to a novice. The central theme being laws need to be well designed for them to be effective. This book though academic was refreshing. Its a short book, would make an intriguing video lecture.
He explains using game theory - why ordinary people follow a tyrannical government. This was delicious. He explained how a small force of foreign colonists could establish control over large populations of Asia and Africa. It was because it did not make sense for any individual actors to revolt or mutiny.
The central point of this book is that there are a lot of factors that make a law effective. A law is mere words on paper. There are other economics factors (mostly behavioral) that make laws stick in a society. .
Societies have many equilibrium's. If everyone is punctual it makes sense for you to be punctual. If everyone around you is not punctual, it is in fact better for you to not be always late. Society has two equilibriums (Nash Equilibrium) here - everyone is punctual or everyone is late. Its the focal points that make one preferred over the others. If people who are late get ostracized in a society, then everyone is punctual. Out of the two equilibriums through norms / customs / laws we set the focal point to the one that is desirable.
The book uses a lot of game theory and in spite of it is very approachable to a novice. The central theme being laws need to be well designed for them to be effective. This book though academic was refreshing. Its a short book, would make an intriguing video lecture.
He explains using game theory - why ordinary people follow a tyrannical government. This was delicious. He explained how a small force of foreign colonists could establish control over large populations of Asia and Africa. It was because it did not make sense for any individual actors to revolt or mutiny.
September 21, 2019
What makes a law effective? Why some laws get followed and some get nowhere? It’s exciting when thinkers tackle big questions. Kaushik Basu in The Republic of Beliefs attempts to answer such by building a “game of life” game theoretic model in which the citizens, the law enforcers, the policymakers, and the courts are all actors. He introduces the focal point approach in which the law acts as a guide post that helps these actors to coordinate to meet the intent of the law (or to reach the equilibrium).
The book highlights the important role of our beliefs in making a law work. Each of us is living in a republic built on beliefs. Takes me back to the main point of Yuval Noah Harrari’s Sapiens: the humans’ ability to create and believe in stories got us to where we are. We tell ourselves stories in order to live, writes Joan Didion.
It reads almost like a textbook, so many concepts I need to grasp, so pauses are essential. Though I appreciate that Basu has made it as compact as possible given the complexity of the topic - it only has 200 pages sans the bibliography. I liked how Basu builds on his central idea, relaxing assumptions one by one, introducing social norms in the model, and later on, introducing behavioral economics features.
It was an intellectual feast. I am inspired to dig deeper into this intersection of law and economics, especially when I’m living in a developing country, like India, where following laws is not always the norm, where laws have unintended repercussions.
For now, thank you, Professor Basu.
The book highlights the important role of our beliefs in making a law work. Each of us is living in a republic built on beliefs. Takes me back to the main point of Yuval Noah Harrari’s Sapiens: the humans’ ability to create and believe in stories got us to where we are. We tell ourselves stories in order to live, writes Joan Didion.
It reads almost like a textbook, so many concepts I need to grasp, so pauses are essential. Though I appreciate that Basu has made it as compact as possible given the complexity of the topic - it only has 200 pages sans the bibliography. I liked how Basu builds on his central idea, relaxing assumptions one by one, introducing social norms in the model, and later on, introducing behavioral economics features.
It was an intellectual feast. I am inspired to dig deeper into this intersection of law and economics, especially when I’m living in a developing country, like India, where following laws is not always the norm, where laws have unintended repercussions.
For now, thank you, Professor Basu.
August 13, 2020
Quite an exceptional book. Inspiring overall, though admittedly tedious at times. Despite the theory, I found it exciting how law and economics can explain a lot about ourselves and our societies. I feel as if basic truths of our realities are explained with our understanding of economics, and how the latter can be used to improve our lives with law. But more importantly, I find the book's call for a global application of law and economics to help people in the more horrendous situation of today's world, and our subsequent generations of people, towards a future that is more morally equal — that is, people living under a collective belief of cooperation of mutual respect. This will be a terribly difficult goal to achieve, but as Basu says, it is more of a question of survival than a mere difficulty. And as history has continued showing us, we humans constantly adapt anyways just to be able to survive. We may fail no doubt, but already having the ability to adapt in our biology is sobering enough as to make me hopeful for the future. Whatever hardships come our way, I hope that we at least survive for a better existence in our harsh reality we call life.
June 15, 2020
Why are good laws drafted but never implemented? When laws are unenforced, is it a failure of the law or the enforcers? Considering laws are simply words on paper, why are some of them effective? The author offers and alternative perspective on the relationship between economics and real-world law enforcement after highlighting the weaknesses in traditional neo-classical economic analysis of the law. Bringing modern game theory to bear, he develops an approach modeling actions of citizens as well as state functionaries and demonstrates connections between social norms and law. Great and fresh perspective and was great reading. However, brings his theoretical approach to bear and quite a bit of technical analysis and jargon used even though the conclusions and the model are simple to comprehend.
May 27, 2025
Was expecting how economics effecting law making as content. But end up reading and economic theory. Basu in short , trying to explain how to commute in the rain. He weighs the philosophical dilemma whether to go out or not. To carry an umbrella or raincoat. Concludes taking an umbrella and a polythene bag to avoid dripping as the best option. Meanwhile, a new umbrella cloth with water repellent technology is already developed.
The suggestion of good coupon to counter the public distribution system was highlighted in many places as the optimum solution. when a similar method is tried to give fuel through fuel cards for fisherman, it ended up in black market. better way was to adopt bio metric to public distribution which limited unhealthy practices and been effective ever since. economist, trying to avoid problems and batting a blind eye to technology, doesn't really not Bullseye.
The suggestion of good coupon to counter the public distribution system was highlighted in many places as the optimum solution. when a similar method is tried to give fuel through fuel cards for fisherman, it ended up in black market. better way was to adopt bio metric to public distribution which limited unhealthy practices and been effective ever since. economist, trying to avoid problems and batting a blind eye to technology, doesn't really not Bullseye.
February 16, 2023
The Republic of Beliefs is a book about economics and lawmakers written by a leading economist. So why would I list it in the fintech category? Because fintechs rise and fall to a large part by the regulation that is drafted and implemented. PSD2 and other open banking mandates around the world have levelled the playing field in finance and triggered the rise of challengers in the first place. At the same time new requirements for licenses, for example, can tip the scales back to the incumbents.
Understanding the interplay between politicians, judges, bureaucrats, citizens, and businesses will let you better recognize early which regulation is coming and how to influence it.
Understanding the interplay between politicians, judges, bureaucrats, citizens, and businesses will let you better recognize early which regulation is coming and how to influence it.
June 29, 2020
He uses an example that quotes from Duflo's epic paper on women representation in Indian local bodies. He gets it wrong. I hate him, but I love his work!
May 28, 2024
This is almost a textbook, but one of the most insightful on the inter-dependency of law and economics. Great to refer to for building out thoughts and theses.
October 13, 2025
One of the best L&E books I've ever read. A non-nonsense, realistic approximation to law and economics. Truly excellent!
October 7, 2020
Basu has a really insightful take on the role that laws play in society. The opening of the book breaks down the flaws in traditional neoclassical/game theoretic approaches to set up his argument about the republic of beliefs and laws as focal points. Honestly, whether you agree with all of Basu's assumptions and conclusions or not, this book will definitely force you to reconsider traditional understanding of law and economics. In my opinion, the law as a focal point is a really useful conception that has broad implications for a wide range of topics (some of which taken up explicitly in this book, some not) such as climate change and discrimination.
If there was one thing lacking, I think it was that there could have been more attention devoted to understanding the power of those who get to act as focal players and make initial moves that establish focal points. However, the book is still an excellent theoretical contribution and if anything the omission of power just gives the reader an opportunity to form ideas of their own!
If there was one thing lacking, I think it was that there could have been more attention devoted to understanding the power of those who get to act as focal players and make initial moves that establish focal points. However, the book is still an excellent theoretical contribution and if anything the omission of power just gives the reader an opportunity to form ideas of their own!
March 15, 2024
A brilliant book by a great scholar. My ranking is moderate in praise because of deep editorial failure. The subject of the book would have benefited from trying to reach a very wide, lay audience - what a great contribution that would have been to the Republic of Beliefs. But the editors/author made a strange decision to pepper the writing with the author's pseudo-mathematical models that could have been placed in an appendix at the end of the book.
Displaying 1 - 13 of 13 reviews