Governor Erkki Liikanen
Bank of Finland
Book review published in Helsingin Sanomat on 4 January 2018
JEAN TIROLE: Economics for the Common Good, Princeton University Press 2017
Jean Tirole became Nobel laureate in 2014. Tirole has told that the prize changed his life in one respect. Until then, he had engaged in discussions with researchers and also with policymakers, but suddenly he found himself being stopped in the street by people who wanted to know what economic research is and how it can promote well-being. People were asking whether economics could resolve the great challenges of our times.
This prompted Tirole to leave the academic ivory tower and write a book on how economic research can serve in resolving pressing problems and in gaining a better understanding of the world we live in. The result is an impressive book in which he presents a wide range of questions and provides answers from the perspective of economics – in an easily readable form. Jean Tirole has exceptional qualifications for the task. On the one hand, he has published a remarkable amount of research literature, and on the other he is a modest person who also appreciates the work of others. The book contains over 500 pages, but each of its 17 chapters can be read independently.
Jean Tirole emphasises that economics is a science of the means, not of the aims. Common objectives of society rely largely on values. Therefore, the mandate to define these objectives is created by democratic elections. Economics, in turn, can provide an input when the goal is to find tools for meeting the objectives at the lowest possible cost. Economic research can also be of significance when it contributes with the analysis of the multifaceted economic problems to laying a foundation for decision-making.
What is the role of the market for economists? Tirole stresses that the market is an instrument, not an end in itself. He describes situations in which the market fails. This happens when buyers have insufficient information about products or when consumers only think about their immediate gratification or make decisions involving higher costs than their payment capacity. Market failures also occur if an economic actor has too significant market power. If the market functions properly it can improve efficiency, but there is no reason to assume that it will deliver equity.
This is why both the state and the market are needed. They are complementary – not substitutes for another. The state cannot ensure a decent life for its citizens without a market. The market, in turn, needs the state to guarantee that the judicial system operates smoothly and that market failures are addressed.
Increasing competition with regulatory decisions has brought considerable advantages to consumers. An example: during my term in the European Commission, we drew on Jean Tirole’s research work and expertise when we proposed the unbundling of the local loop in 2000. Broadband prices declined rapidly and most households gained access to broadband. This was an important step in the development of the information society.
The book also describes the most recent advances in economics, which relate to information theory and game theory. Tirole has also published several well-known articles with Bengt Holmström who was awarded the Nobel Prize in 2016 for his research in information economics.
Tirole writes a lot about incentives. Incentives affect the behaviour of firms and individuals. However, a financial incentive does not always lead to the intended results. As an example, Tirole refers to blood donation: when people started to get a financial reward from donating blood, the number of donors plummeted. Donors were not motivated by money but instead by the possibility to contribute to the common good.
Jean Tirole’s Economics for the Common Good is one of the most important economics books of the year. It is valuable to policymakers, since it proves that economics has produced many tools that can be used in finding the best possible solutions.
The book also sends an important message to economists, that they should bring their important contribution to the societal debate by sharing the results of their research. Economists may have their own personal views on values, but objectives based on values of society must be left to the democratic process.