Jean Tirole on Economics for the Common Good

When Jean Tirole won the 2014 Nobel Prize in Economics, he suddenly found himself being stopped in the street by complete strangers and asked to comment on issues of the day, no matter how distant from his own areas of research. His transformation from academic economist to public intellectual prompted him to reflect further on the role economists and their discipline play in society. The result is Economics for the Common Good, a passionate manifesto for a world in which economics, far from being a “dismal science,” is a positive force for the common good.

What inspired you to write this book, and what did you learn in the process?

I wanted to show how economics can open a window to the world. I have long taken part in policymaking, conversing with private and public decision-makers, but as yet I had never engaged with the wider public.  After receiving the Nobel Prize I was regularly asked by people I met in the street or as I gave talks to explain to a broader audience the nature of economic research and what it contributes to our well-being. Not as a commentator on each and every topic, but simply to share with the public how scientific knowledge can guide economic policies and help us understand the world we (will) live in. I tried to write a book that is intelligible for any intellectually curious reader even with no or slight knowledge of economics. The book is divided into 17 stand-alone chapters so the reader can pick and choose.

Can you talk a bit about the value of making economic ideas comprehensible to a general audience?

Repeatedly blaming politicians for flawed policies won’t get us very far. Like us all, they respond to the incentives they face, in their case the hope of being (re)elected. Very rarely do they go against majoritarian public opinion. So we, citizens, get the policies we deserve. And as I explain in the book, our understanding of economic phenomena is obfuscated by various cognitive biases; we are dependent on rules of thumb and narratives, and we often believe what we want to believe, see what we want to see. Economics acts as a deciphering key, although it of course has its own shortcomings.

In the book you talk about economics for the common good. What exactly is “the common good?”

Economics for the Common Good is an ambition: to help our institutions serve general interest by studying those situations in which individual motives conflict with the interests of society, in order to suggest policies that align social and private interests. The invisible and the visible hands—the market and the State—are mutually complementary; to function well a market economy needs an efficient State to correct its failures. But sometimes the State does not work for the Common Good; for example, many countries are leaving their children substantial levels of unfunded public debt, unemployment, a degraded educational system, inequality, and a lack of preparation for the digital upheaval that our societies are on the brink of encountering. And the world does little to contain climate change. The book therefore pays particular attention to what is going wrong with governments and how this can be remedied to promote the Common Good.

Why do economists have a reputation as “scaremongers?”

I have already mentioned our cognitive biases. Economics is accessible, but can be counterintuitive if one stops at first impressions. Accordingly, and as I illustrate in the book though housing, labor market, climate and other public policies, the road to economic hell is often paved with good intentions. Public policies—the reflection of the electorate’s beliefs—too often ignore side effects. Contrary to general opinion, these side effects are usually borne by third parties rather than the beneficiaries of the policies. Economists, when pointing to the indirect harm on mostly invisible victims (e.g. those who don’t find a job or decent housing, or the taxpayers), are often accused of lacking empathy for the intended and very visible beneficiaries.

Economists may also be the bearers of bad news; while the classical economics representation of a society of purely self-interested individuals is a mediocre description of reality (the book details how morality is privately and socially constructed), when economists mention the need for incentives they trigger anxiety and resistance; we would all rather live in a world of honest, hardworking and empathic citizens. To my mind, the whole point of economics is to design policies and institutions that work towards reaching this different world, where individuals spontaneously operate for the Common Good.

Economics has come under sharp attack, especially since the 2008 financial crisis. Is it a science?

Economists’ judgment may be impaired by financial conflicts of interest, political friendships, or ambitions to be a publicly recognized intellectual. But we must also be humble and accept that as a science, economics is an inexact one. Like any science, it is built on to-and-fro between theory, which provides a lens to the world and allows us to understand observations and describe their implications, and empirical work, which measures the importance of effects and helps question the theory: lab experiments need fieldwork, econometrics, big data. But our knowledge is imperfect; good data may be unavailable, theories may oversimplify, and behavioral patterns and self-fulfilling phenomena (such as bank runs or bubbles) may complicate the analysis. Overall, an economist will generally feel more comfortable analyzing past events and proposing future policies rather than forecasting. A characteristic that is incidentally shared by doctors and seismologists, who detect environments that are conducive to a heart attack or an earthquake and provide useful recommendations, and at the same time may be hard-pressed to predict the exact timing of the event or even whether the latter will occur at all.

TiroleJean Tirole, the winner of the 2014 Nobel Prize in Economics, has been described as one of the most influential economists of our time. He is chairman of the Toulouse School of Economics and of the Institute for Advanced Study in Toulouse and a visiting professor at the Massachusetts Institute of Technology. His many books include The Theory of Corporate Finance and Financial Crises, Liquidity, and the International Monetary System.