The Economic Consequences of Legal Behavior

Apr 6 , 2024
By Kaushik Basu

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Many thriving societies, such as Germany and Japan, adhere closely to the letter of the law. However, as the United States has done throughout its history, allowing for a certain degree of latitude for individual interpretation can foster creativity, enhance efficiency, and stimulate economic growth.

The way people navigate traffic can tell us a lot about their respective cultures. Recently, while walking to my office in midtown Manhattan, I stopped at a red light when an elderly woman with a walking stick caught my attention as she cautiously looked both left and right. When she saw that no car was close enough to hit her – assuming they adhered to New York’s speed-limit laws – she gave me a puzzled look and crossed the street. I felt a bit foolish.

Such an incident would be unthinkable in Japan. Years ago, on the first night of a weeklong visit to Tokyo, my young, jet-lagged children, who had lived only in India and the United States, were amazed by the law-abiding Japanese. Peering out of our apartment window at midnight, they observed a man standing alone at a crosswalk. Even with no cars in sight, he waited patiently for the light to turn green.

While these normative differences may seem trivial, societal attitudes toward the law can significantly affect a country’s economic performance. Whereas the New Yorker’s actions could be interpreted as aligning with the spirit of the law, the Tokyo pedestrian adhered to its letter.

A system that emphasises the spirit of the law gives individuals discretionary power, leading to potential misuse or abuse. When individuals have latitude to decide how to behave, they might, for example, choose to disrupt traffic. This is evident in the streets of New York and, to a greater extent, in my hometown of Kolkata (formerly Calcutta). While the city is gradually adopting the Western model, during my youth Kolkata was a pedestrian’s paradise, where crossing the street required no more than a simple hand gesture.

It is crucial to understand the strengths and weaknesses of both systems.

Japan’s remarkable transformation from a low-income economy to one of the world’s richest countries can be partly attributed to its law-abiding culture. Adherence to the letter of the law fosters better organisation, which fuels economic growth and overall development. Consider, for example, an orchestra. Without a conductor to guide them, the musicians onstage may still make music, but it would not be the Salzburg Opera.

The same is true for many other aspects of daily life.

In a 2002 paper I co-authored with Jorgen Weibull, we argued that punctuality is not a genetic trait but a behaviour cultivated through coordination. Sticking to a fixed schedule becomes valuable when everyone is expected to do so. It is reminiscent of the stag hunt game described by Jean-Jacques Rousseau in his "Discourse on Inequality," in which two hunters could kill a stag by cooperating but only a hare if they go it alone.

Contemporary Japan is known for its meticulous punctuality culture. What is overlooked is that, barely 100 years ago, Japan was known for its sloppiness with respect to time. Japan’s ascent coincided with the normative transformation from tardiness to punctuality.

Sociologists have emphasised the crucial role of social and institutional embeddedness in driving economic development. Simply put, in addition to its trade, fiscal, and monetary policies, Japan’s remarkable rise over the past century has been facilitated by a social transformation which enabled its economy to grow at an unprecedented rate.

Nevertheless, the New York model, where individuals are given leeway to interpret the law, has its merits. After all, pedestrian traffic lights are designed to facilitate smooth traffic flow and occasionally allow pedestrians to cross. When the road is empty, ignoring the red light does not run counter to the law’s purpose. It facilitates what economists call a Pareto improvement, whereby some people are better off without hurting anybody else’s well-being.

While enacting laws that accommodate every individual’s unique circumstances and preferences is not feasible, leaving laws open to some degree of individual interpretation can encourage creativity and enhance efficiency. This approach, which cultivates a culture conducive to technological and artistic innovation, has enabled the United States to become the world’s growth engine and magnet for talent.

To be sure, attempting to bring about a normative transition from adherence to the letter of the law to realising its spirit could backfire, producing cacophony in the proverbial orchestra pit. Economists and legal scholars can play a crucial role in facilitating such a shift while mitigating potential risks. This cannot be achieved through precise policy prescription – that would be self-contradictory. The key to achieving this is in the realm of ideas that John Maynard Keynes emphasised. We need to be aware of the two distinct modes of law enforcement, and, despite the risks, the surprising advantages of moving from following the letter of the law to the spirit.

As the British conductor Charles Hazlewood observed, individual musicians need to follow the conductor’s instructions for good music. Great music, however, relies on “trust” and “personal freedom for the orchestra members.” They need space for judgment and creativity.

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PUBLISHED ON Apr 06,2024 [ VOL 25 , NO 1249]

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