‘Economics for the Common Good’

MERE group at Jean Tirole’s lecture: Reflections

A little more than a month ago Jean Tirole, the 2014 Nobel Prize winner in Economics, gave a public lecture at the University of Copenhagen. The event was hosted by the Department of Economics and Department of Food and Resource Economics, to celebrate the recent release of his book  ‘Economics for the Common Good’. Our research group was there to attend the lecture. In what follows I’ll share a few reflections on issues that caught my attention and that I consider interesting.

Jean Tirole was awarded the Nobel prize for his analysis on ‘market power and regulation’. Although not an environmental economist as such, his work covers a fair amount of energy, climate and environment related issues. His book is an attempt to show that economists, who are often absent from public debates, should not be so detached from real-world problems, and also that economics is key in helping understand the ‘common good’. The book chapters cover a wide range of topics, from the economist’s profession to institutions, and macroeconomic and industrial challenges, and are written in a way that allows for non-economists to follow easily.

Having read the book and heard Tirole’s lecture, I tend to agree with LSE’s review of the book regarding his intellectual breadth and remarkable ability to synthesize, but also that the analysis may partly suffer from some looseness. Beyond the LSE review’s criticisms focused on selected examples from the book, I see this looseness as an unavoidable challenge one takes when addressing the general public and trying to put economic theories and concepts into lay terms.

As in the book, his talk stressed the importance of building the right incentive mechanisms for getting citizens, companies and countries to improve their environmental performance. He pointed at fiscal competition as a sign of selfishness of countries. He further referred to Rawls’ concept of “the veil of ignorance” where one knows nothing about one’s own sex, race, nationality or individual tastes at the time of the policy decisions and is therefore a rational, free and moral individual, which is a lens through which people can build the rules of society in a more fair way. He explained that in reality we are all conditioned by our views or in other words we all have a biased view of what society we’d like to live in.

The Rawlsian concept helps understand how one can consider objectively or fairly how societies should operate. Continuing along the lines of Rawls’ theory, he mentioned that despite the fact that there is too much inequality, people generally disagree on the level of inequality that our society should be willing to accept; achieving consensus on this issue can bring great progress. He then referred to the model of the Soviet Union to explain that the assumptions about its ability to create equality and a better society were wrong since people were forced to do something they wouldn’t normally do, which is one of the reasons why this model did not work.

Moving on to what can be achieved through policy-making, he pointed to economists as being the ones that should promote long-term visions since politicians’ incentives are often limited to the next elections. A recurring theme in his talk was climate change policies; he rightly pointed out that markets are an instrument that often fails and therefore states should complement markets, and additionally that new markets need new institutions that state actions can enable. In this context, he also referred to the fact that simple policies are often most effective, and highlighted that nevertheless politicians do not prefer imposing higher taxes on carbon, which is a much simpler solution than other carbon reduction schemes.

In defense of the economics profession, he explained that economists get it wrong sometimes, as do many other professionals such as doctors and climate scientists, but in spite of that their role in bringing issues to the debate is important. He reflected upon his personal experience after receiving the Nobel prize; he was called upon as an expert to talk about issues far beyond his areas of research, which motivated him to write the ‘Economics for the Common Good’ book, the title of which he characterized as an oxymoron.

Then he explained that just like a doctor or a seismologist, economists are much better in finding causes rather than predicting; the unpredictability of the human factor adds significant difficulty to doing so (see Richard Thaler’s 2017 Nobel awarded work on behavioral economics). He then admitted that most academic economists have no clue about the 2008 financial crisis; given all the asymmetric information in the drivers of the crisis, researchers do not have time for such broad-scale analyses, which makes the involvement of other actors such as NGOs very important.

Tirole used vivid examples to explain another reason why economists fail: Cognitive biases. We either believe what we want to believe (motivated beliefs) or we stop at first impressions. For example, he referred to the example that people won’t wear seat belts because they feel safe, or won’t check their health simply because they feel good, and the same applies for the economy and climate (e.g beliefs that climate change is not real); in other words we think of the world as we’d like it to be.[1]

Then we also tend to look at direct and not indirect effects, while we know that policies often backfire. He used the example of rent control (capping rents) that leads to shrinking the supply of rentals, and also the initially well-intentioned policies in France for the protection of workers which ended up leaving the labor exposed and leading to many short-term jobs. He also used the example of reselling rhino horns and ivory in Africa, a highly debated example among environmentalists and resource economists. He mentioned that NGOs can put pressure on the price by reselling those valuable commodities, which leads to a lower price and therefore fewer incentives for poachers; this, however entails the risk of changing the social norms in ways that make trade of horns and ivory socially acceptable.

One of the most striking parts of his talk for me was when he explained that the term ‘Green Growth’ makes no sense at all, a view that I certainly share myself. Using this term is a way of rejecting the cost of being green or else doing nothing to mitigate the effects of e.g. climate change. That itself points to the fact that we may not care enough about future generations and that even if we do, free riding is a large barrier (which is why collective pledges do not work; see the failures in climate change negotiations). Tirole framed this in the context of a ‘Degrowth’ question. He mentioned that, although most economists would point to a carbon price as the right instrument, in reality it is hard to have a uniform price. Firms need incentives to invest in mitigation measures and poor countries are the ones that need those measures the most since they have the higher growth potential. Those countries therefore need their own incentives and some type of green fund to compensate them could be the right instrument. Tirole was also very straightforward in saying that we should not be afraid to sacrifice some percentage of our growth for climate change mitigation.

Tirole’s lecture was followed by questions from the audience. I left the room impressed by his ability to elaborate on such a diverse range of issues and respond to all types of broad questions.

Overall, I enjoyed his talk and enjoyed even more reflecting upon the issues his work addresses with my colleagues at the MERE group.

[1] Tirole also used the example of Brexit in this context and referred to the fact that there’s no evidence that the UK would be better by leaving the European Union.