A Nobel laureate explains why we get the bad economic policies we deserve (Quartz)

A Nobel laureate explains why we get the bad economic policies we deserve

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Protests against UK government budgets in 2015

Over the past decade, reams of research by economists has been devoted to investigating why they failed to foresee the financial crisis, among other things economics has recently gotten wrong. This soul-searching has produced new theories, models, and policies, but it hasn’t fully repaired the reputation of the field. As time passes and the effects of the crisis fade, people still find it hard to trust economists.

The latest effort to improve public opinion of economics comes from Jean Tirole, winner of the Nobel prize in economics in 2014. The Frenchman’s latest book, Economics for the Common Good (Princeton University Press), is a 560-page manifesto on how the profession can get back on track.

The timing of the book—published in English this month after its original release in French last year—is pertinent. The relationship between economics and politics is starting to unravel. Over the past year, many have sought to explain Brexit, the election of Donald Trump, and the rise of far-right and far-left politics in Europe using economic arguments. But it’s becoming clear that economics alone does not explain the situation. If the questions at the root of public life are no longer answered by the famous political dictum, “It’s the economy, stupid,” where does that leave economists?

Amid a general backlash against “elites,” economists must prove their worth. Tirole starts by trying to demystify what they actually do. He then addresses the challenges the field should be tackling, from inequality and climate change to labor market policies and the future of Europe.

He also isn’t afraid to turn the tables. “We get the economic policies we deserve,” he writes. “And as long as a lack of economic understanding prevails among the general public, making good policy choices will take a lot of political courage.” This concern shared by the Bank of England’s chief economist, Andy Haldane, who recently said the UK suffers from “twin deficits” in public understanding and trust in economics (paywall).

Tirole’s book is ultimately a defense of economics, although it acknowledges that it needs to reconnect with other social sciences like psychology, anthropology, history, and political science. This is something Tirole encourages as chairman of the Institute for Advanced Study in Toulouse, where experts from a wide range of disciplines work together.

Quartz spoke with Tirole in London about what goes wrong when we believe what we want to believe at the expense of good economics. The conversation has been edited and condensed.

Quartz: This book is a big departure from your previous work on industrial organization, regulation, and finance. Why write it?

Tirole: I’ve been involved in public policy for a long time but I’d never engaged directly with the public. The tipping point was the Nobel prize. You become a public intellectual whether you want to or not.

An ex-post rationalization is also populism. It’s useful to communicate with experts and governments, but if the wider audience don’t get it because they don’t have enough of an academic education, it’s very hard for politicians to get the right policies through. And politicians are like everybody else, they react to their own incentives, such as an election.

Do you think enough economists do enough to make their work more accessible to the public?

There are economists who do that, but economists also react to their incentives. The main things for them are the judgment of peers, quality of research, and quality of teaching. Doing wider audience work is like a distraction. That doesn’t mean that we can’t do better.

The Nobel prize meant you reached the pinnacle of peer recognition, so that must free you up to write about other things.

Getting the Nobel prize is wonderful, but at the same time it’s a bit dangerous. I talk about the Nobel syndrome and I feel that myself.

What is “Nobel syndrome”?

The Nobel syndrome is when you are being asked about many things you have no expertise in. You have your common sense and what you learn from colleagues but there’s always a gray zone where you don’t know if you should answer or not. People expect because you won the Nobel prize that you know everything, but the truth is we don’t.

The relationship between economics and politics has been particularly messy lately. Economic arguments don’t seem to be informing better policies.

Well, first we have to make sure people respect intellectuals. For that, the intellectuals have to do the right thing. Then, you have to limit frustrations. People who voted for Trump, or Brexit, or Le Pen and Mélenchon in France are by and large very concerned about their future with robots, with rising debts, with inequality and unemployment. We have neglected some people, the losers of globalization, and we have a society that’s more and more unequal. It might get worse, unfortunately, with new technology.

When people are afraid or upset, they also tend to dismiss their current governments and the experts. They want a big change, which is often supplied by populists who offer fairytales and the wrong policies. People are trying to grab something that will give them hope.

Is it getting any better?

No, we are not moving in the right direction.

You argue that the state has changed from a provider to more of a regulator. But as politics becomes more polarized, support has risen for heavier state intervention by the likes of Jeremy Corbyn in the UK, Bernie Sanders in the US, and Jean-Luc Mélenchon in France.

It also applies to the National Front in France [a far-right party], which has a similar economic program. People see the market as this anonymous entity that is running their life. Governments have a role to play, but not what they think. They want someone to rescue them and they think the government is going to protect their job. I am for a welfare state but, for example, not the way it works now in France. You want to protect workers; you don’t want to protect jobs.

So how can inequality be tackled more effectively?

There is the issue of inequality within a country but there’s the issue of inequality across countries. We need incentives to innovate and we need entrepreneurs. The five largest market caps in the world are two-sided market platforms created by just a few people. If in continental Europe we don’t succeed in keeping our talent, then the jobs won’t be created here and that’s going to increase inequality. It’s a nice thing to redistribute, but there needs to be something to redistribute.

Inequality is also linked to climate change. Is there enough thinking about how we can address this?

No, there are not enough resources devoted both in terms of pollution and R&D. It’s not going to be a solution either to exonerate developing countries from a carbon price because most of the pollution will come from China, Brazil, India and so on… and maybe the US if Trump continues as he is. The only solution, and it’s not an easy solution, is to transfer money to those countries and then they have to be accountable for their pollution. Collective promises, like the ones made in Copenhagen and Paris, never happen.

Are people ready to admit that solutions will be hard?

The phrase you always hear is green growth. Green growth is about believing what we want to believe. I would love to have green growth but if we could have higher rates of growth, more purchasing power and be greener at the same time, we would be doing it already or we are completely stupid. No, we have to accept that we have to incur costs to be clean.

Lastly, let’s talk about Europe. A lot of Europeans seem to want more integration and more sovereignty at the same time.

Again, that’s about people believing what they want to believe.

What can Europe do to get out of its current situation, caught between two ideals?

Europe is not a federation, in the way the US can be or many countries can be, because we don’t have a shared budget, a common debt, common unemployment insurance, or common deposit insurance. Europe would need systematic transfers and currently it’d be from the north to the south.

You also need to have some common laws. In Europe we have centralized banking supervision, so in principle we could have common deposit insurance because we have the same rules of the game for banks in Spain, Italy, Germany, etc.

But for unemployment insurance we don’t have the same rules. We have labor market policies and education, but the unemployment rate varies from below 5% to 15-20%. A common unemployment insurance would make that more in sync. I’m not saying we should make people unemployed just for fun, but still we have lobbies that resist change. Whether you resist the lobbies depends on whether you will pay yourself or whether it will be shared with the others. In order to move towards a common budget and debt, we need to have common rules of the game.

Is this likely?

I’m pessimistic. If you look at the populist movement—but not just populists— they always offer more sovereignty. If you look at the broader scale, it’s ridiculous. The French are going to defend against Germans and vice versa. But as a narrative it works, and the trend is towards more sovereignty and less federalism.

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November 30, 2017 at 02:31AM