Jean Tirole is no run-of-the-mill economist. He has made formidable contributions to public economics, game theory, industrial organisation theory, the analysis of financial markets, and related fields. In 2014, he won the Nobel Prize in Economics. More importantly, he is a principled scholar driven by the belief that economics can help to “make the world a better place”, as he puts it. In this book, he writes with great clarity and honesty about the essential ideas of economics, the role of economists in society, and a wide range of policy issues.
The book is divided into five parts. The first two, focused on economics and economists respectively, essentially discuss the nature of the discipline, its main insights, and the microcosm of the economics profession. Tirole shares enlightening thoughts on many ethical issues, such as the moral limits of the market and the dilemmas of an academic economist who is also seen as a public intellectual. Mind you, there are some unfortunate gaps. The chapter on “the everyday life of a researcher”, for instance, contains nothing of the sort, and delves instead into methodological issues. One gets the impression of a workaholic, absorbed in his theories. Hopefully, the impression is deceptive.
The third part deals with the institutional framework of a modern economy. Tirole argues that the state and the market are complementary, contrary to the “sterile dualism of state and market” that often pervades public discourse. The state has much to do in correcting market failures, bringing private incentives in line with the public interest, and addressing economic inequality. Subject to that, economic decisions are best left to private individuals and firms, not least to make the best possible use of decentralised information. This “classical liberal approach”, as Tirole calls it, has its limits: the state has responsibilities beyond the correction of market failures (preventing caste discrimination is one example), and much economic life happens outside both state and market (voluntary cooperation, for instance, works wonders in many contexts). Nevertheless, this approach is quite productive within its limits.
The fourth part focuses on selected macroeconomic challenges: mainly climate change, labour-market policy, the future of the European project, and financial regulation. Elsewhere in the book, Tirole comes across as the proverbial “two-handed economist”, who sees a counter-argument in every argument. On these critical challenges, however, he takes sides. For instance, he strongly advocates a single price for carbon across the world, whether it is achieved by a carbon tax or tradeable emission permits. On labour markets, he castigates some of France’s irrational regulations (if you think that Indian labour markets are badly regulated, go to Paris), and argues for protecting workers rather than jobs.
The last part of the book discusses policy issues connected with recent technological developments such as digitisation, robots and artificial intelligence. Some of these developments present enormous challenges, related for instance to effective regulation, intellectual property rights, data protection, and the future of employment. Tirole’s arguments have much relevance to India, where these issues have barely entered public discourse, though some of them are now receiving attention in the context of the debate on Aadhaar.
The book makes a great job of extending the traditional boundaries of economic reasoning, building on a vast amount of recent research in fields such as behavioural economics, game theory and industrial organisation. Homo economicus, the glorified moron who is unable to distinguish between rationality and self-interest, is not in command anymore. Tirole discusses other possible motivations, common departures from rationality, and the influence of social norms on human behaviour. With these and other recent advances, economics is a more versatile discipline than ever — very little, it seems, is beyond its analytical powers.
Tirole, like many economists, is conscious of these powers and considers it his duty to educate the public. Could it be, however, that economists themselves have much to learn? Consider for instance the issue of financial markets, and specifically, the financial crisis of 2008. Tirole convincingly argues that “the 2008 crisis had its origin in the failure of regulatory institutions”. The question remains — how come economists went along with the binge of financial deregulation that led to the crisis? How many of them spoke or wrote against it? Did they investigate how the state-corporate nexus ensured that “profits were privatised, losses nationalised”, as the author puts it? Does the economic profession’s tendency to be soft on corporate power have something to do with the fact that economists often benefit from it, say in the form of grants, prizes, consultancies, data, junkets, banquets and such? That is precisely what their own mode of reasoning would predict. Tirole briefly acknowledges that conflicts of interest obscured the judgement of “a few economists” in these matters, but that sounds a little lame. The fact is that the profession has been missing in action, big time.
Despite some loose ends, this book is an invaluable assessment of the state of economics today and how it can contribute to the common good. It can serve both as an introduction to the discipline for non-economists, and as a sort of refresher course for economists. Along with that, it presents an insightful and appealing view of the role of economists in society, or at least their possible role. If you think of economics as a dismal science, this book is a must. Besides, it is a pleasure to read. The author is visiting professor at the Department of Economics, Ranchi University