Tirole on Economics for the Common Good
By David Henderson
In 2014, French economist Jean Tirole, chairman of the Toulouse School of Economics and the Institute for Advanced Study in Toulouse, won the Nobel Prize in Economics. Although he is well known within the increasingly technical economics profession, Tirole is not well known to non-economists. This 500-plus-page tome is an effort to change that. Written for a general audience, it covers a wide range of issues, including those on which he has published professionally and those on which he has not but still has much to say. The topics include the effects of free trade, French unemployment, the role of the state, financial bubbles, the Greek economic crisis, and regulation of industries.
It’s hard to generalize about Tirole’s views. On the one hand, he understands the powerful role of incentives, understands why free trade is good for a country, thinks through the unintended consequences of legislation and regulation, and understands that the political system is filled with perverse incentives. On the other hand, he favors some highly intrusive regulations in the labor market, has too much confidence in the ability of economists and governments to improve on free markets, misunderstands how to judge the tightness or looseness of monetary policy, misstates the nature of externalities, and doesn’t seem to understand adverse selection in insurance markets.
These are the opening two paragraphs from David R. Henderson, “A Mixed Bag,” Regulation, Winter 2017/2018. His book is titled Economics for the Common Good. Here’s the whole review. (Scroll way down, almost to the end.)
Three paragraphs on some of my favorite parts of the book:
To illustrate how thinking about incentives and unintended consequences can help inform good policy, Tirole considers a hypothetical case in which a nongovernmental organization (NGO) “confiscates ivory from traffickers who kill endangered elephants for their tusks.” The NGO can either destroy the ivory or sell it. Tirole points out that most people would advocate destroying the ivory. But he urges the reader to think further. Destroying the ivory means that the supply of ivory is lower than otherwise, making the price higher than otherwise. How does a higher price affect the incentives of poachers? That’s right: it causes them to kill more elephants. Another example, which many economics professors use in class, is the perverse effects of price ceilings. Not only do they cause shortages, but also, as a result of these shortages, people line up to purchase the scarce provisions and thus waste time in queues. The time spent in queues wipes out the financial gain to consumers from the lower price, while also hurting the suppliers. No one wins and wealth is destroyed.
Tirole, like most economists, is strongly pro-free trade. He argues that French consumers gain from freer trade in two ways: free trade exposes French monopolies and oligopolies to competition; and goods imported from low-wage countries are cheaper. On the former, Tirole notes, “Renault and Peugeot-Citroen sharply increased their efficiency” in response to car imports from Japan. He estimates that the monthly gain from free trade per French household is between 100 and 300 Euros. That translates to an annual gain per household ranging from $1,400 to $4,200.
Incidentally, when economists refer to economics as “the dismal science,” they almost always get the origin of that term wrong. Tirole gets it right. He explains that Thomas Carlyle, in an 1849 publication calling for bringing back slavery, called economics the dismal science because the economists of the time strongly opposed slavery. The economists who dominated in 1849, although Tirole doesn’t mention this, were strongly pro-free market.
I wrote the Wall Street Journal piece on him, published the day after he won.