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The economic consequences of legal behaviour

A system that emphasises the spirit of the law gives individuals discretionary power, leading to potential misuse or abuse

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 must admit, 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 towards 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 organization, 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 Jörgen Weibull, we argued that punctuality is not a genetic trait but a behavior 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 fastidious culture of punctuality. What is overlooked is that, barely a hundred years ago, Japan was known for its sloppiness with respect to time. Japan’s ascent coincided with 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 the smooth flow of traffic 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 refer to as 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 realizing 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 in fact be self-contradictory. The key to achieving this is in the realm of ideas that John Maynard Keynes emphasized. 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, for good music you need individual musicians to follow the conductor’s instructions exactly. Great music, however, relies on “trust” and “personal freedom for the members of the orchestra.” They need space for judgement and creativity. — Project Syndicate

Kaushik Basu, a former chief economist of the World Bank and chief economic adviser to the Government of India, is Professor of Economics at Cornell University and a non-resident senior fellow at the Brookings Institution.