Economics for the Common Good

Nobel Prize-winning economist Jean Tirole’s reflections on the incentives that help define behavior that may go against collective interests within a society

 

Central Ideas: 

 

1 – Benefiting from the virtues of the market often requires moving away from laissez-faire. Economists have devoted much of their research to identifying market failures and correcting them with public policy. They are in favor of the market, but seen as a simple instrument and never as an end in itself.

2- From mediocre business administrator, the State becomes regulator. It takes on all the responsibilities where the markets are incompetent, to create true equality of opportunity, healthy competition, and environmental protection.

3 – It may occur that the price of a financial asset is not equal to its true value. One of the causes of this lag is the existence of a bubble. A bubble exists when the value of a financial asset exceeds the “fundamentals” of the asset. Low-interest rates are fertile ground for financial bubbles. 

4 – To avoid crises altogether, one would have to curb risk-taking and innovation and live in the short term instead of investing in the long term. The issue is not the complete elimination of crises, but rather a hunt for the incentives that stimulate economic agents to behave in ways that are harmful to the rest of the economy.

5 – Benefits of competition: the opening to import competition in Europe has dramatically changed organization and productivity. Renault and Peugeot Citroën have clearly increased their efficiency with respect to international best practices.

 

About the author: 

Jean Tirole was awarded the Nobel Prize in Economics (2014) and the CNRS gold medal (2007), among other distinctions. He is honorary president of the Toulouse School of Economics and president of the Institute for Advanced Study on Toulouse, and also a visiting professor at MIT. 

 

Introduction 

Defining the common good, that to which we aspire for society, requires, at least in part, a value judgment. This judgment may reflect our preferences and our degree of information. As well as our position in society. Even if we agree on the good purpose of such goals, we may evaluate differently equity, purchasing power, the environment, the place given to our work or our private life. Not to mention other dimensions, such as moral values, religion, or spirituality, about which opinions can differ profoundly. 

This book, therefore, starts from the following principle: all of us, whatever our place in society, be we politicians, business leaders, wage earners, unemployed, self-employed, graduate employees, farmers, researchers, we all react to the incentives to which we are exposed. These incentives – material or social – and our combined preferences define the behavior we adopt, behavior that may run counter to the collective interest. This is why the search for the common good largely involves building institutions that aim, as far as possible, to reconcile the individual interest and the general interest. From this perspective, the market economy is not an end in itself. It is only an instrument; and not only that, a rather imperfect instrument, if we take into account the possible divergence between the particular interest of individuals, social groups, and nations, and the general interest. 

The book unfolds around five major themes. The first concerns the relationship between society and economics as a discipline and paradigm. The second is devoted to the economist’s profession, from his daily life in research to his political involvement. Our institutions, state and market, are at the center of the third theme, which resituates them in their economic dimension. The fourth theme brings elements of reflection on four major macroeconomic challenges that are at the heart of current concerns: climate, unemployment, the euro, finance. The fifth theme covers a set of microeconomic issues that undoubtedly find less echo in the public debate, but which are essential to our daily lives and the future of our society, grouped under the heading “The Industrial Question”, include competition policy and industrial policy, the digital revolution – its new economic models and societal challenges – innovation, and sectoral regulation. 

 

ECONOMY AND SOCIETY 

For twenty years, the United States, like most countries, has used auctions to award licenses. Experience shows that auctions represent an effective means of making sure that licenses are awarded to the actors that value them most while recovering for the collective the value of the scarce resource, the spectrum. For example, the auctions of radio spectrum in the United States after 1994 provided about $60 billion to the U.S. Treasury, money that would otherwise have gone unmotivated into the wallets of private actors. The participation of economists in the design of these auctions contributed greatly in their financial success for the state.

Moreover, in the exercise of their stricto sensu defined mission, economists are not exempt from criticism. They must make efforts to build pragmatic and intuitive teaching, grounded in the modern problems of markets, business, and public decision, relying not only on a secure and simplified conceptual framework for pedagogical purposes but also on empirical observation. The teaching of obsolete economic thinking and debates between old economists, lax discourse, or, conversely, the exaggerated mathematization of teaching do not correspond to the needs of high school and university students. 

The vast majority of French people who take higher education courses specialize after the baccalaureate. An absurdity, of course: how is it possible at the age of eighteen to decide to be an economist, a sociologist, a lawyer or a doctor, when one has had no or almost no contact with the discipline? Not to mention the fact that vocations may come late. The premature specialization of students also implies that very few take an economics course. Whereas students of all disciplines should take an economics course, even if they do not return to it in the sequence. Certainly, unlike their peers entering university, students in the grandes écoles are lucky enough to be able to postpone their choices. But they represent a small minority in higher education, and their openness to new fields, including economics, usually comes very late. 

The quality of French economists does not date from today. What is new with respect to previous generations is their mobility. Among the seven named by the IMF, five live in the United States and one (Hélène Rey) in England; and a single one (Thomas Piketty) lives in France. This is a cause for concern because, leaving aside the recognition of the quality of French education, it is a real loss of human capital for our country. Many of our most dynamic researchers, expensively trained by the state, go into exile. In our globalized world, it makes no sense to stone them for this. They are citizens of the world. It is up to us to offer them research conditions equivalent to those prevailing in the major research countries. Our ability to exist in the 21st century economy will depend on the attractiveness of our research centers, both in economics and in the other scientific domains.

But as this book aims to show, benefiting from the virtues of the market often requires moving away from laissez-faire. In fact, economists have devoted much of their research to identifying market failures and correcting them with public policy: competition law, regulation by sectorial and prudential authorities, taxation of environmental or congestion externalities, monetary policy and financial stabilization, mechanisms for the provision of tutelary goods such as education and health, income redistribution, etc. Faced with these subtleties, the vast majority of economists are, for the reasons enunciated above, in favor of the market, seen as a mere instrument and never as an end in itself.

Experts in the other social sciences (philosophers, psychologists, sociologists, lawyers and political scientists…), a large part of civil society, and most religions have a different view of the market. While recognizing its virtues, they often reproach economists for not sufficiently taking into account ethical problems and the need to establish a boundary between the market and non-market domains. 

A symptom of this perception is the planetary success of the book What Money Can’t Buy by Harvard philosophy professor Michael Sandel. To cite just a few of his examples, Sandel argues that a whole range of goods and services, such as child adoption, assisted reproduction, sexuality, drugs, military service, voting rights, pollution, or organ transplants, should not be trivialized by the market, just as friendship, admission to great universities, or the Nobel Prize should not be bought, or genes and, more broadly, the living being should not be patented.

More broadly in society, a malaise towards the market reigns, which translates well into the well-known slogan “The world is not a commodity”. 

In his book La société des inconnus. Histoire naturelle de la collectivité humaine, my colleague Paul Seabright, director of the Institute for Advanced Studies in Toulouse (Iast), analyzes these three concerns regarding the influence of the market economy. He notes that far from relying solely on the selfishness of its participants, the market also requires of them a great capacity to establish trust – and nothing is more corrosive to trust than pure selfishness. He shows how, since prehistoric times, it has been the social aspect of our human nature that has allowed us to widen the circle of our economic and social exchanges. In any case, this certainly does not make us very altruistic creatures. The market is at the same time a place of competition and collaboration, and the balance between the two is always delicate. 

A great deal of statistical work over the past twenty years has provided a more accurate picture of inequality. In particular, the relative increase in the wealth of the top 1% (the “top 1%”) has been thoroughly studied by economists, especially by Thomas Piketty and his collaborators in their analysis of wealth inequalities. The increase in the share of incomes captured by the top 1% is also noteworthy. For example, in the United States, average income grew by 17.9% between 1993 and 2012; that of the high earners (the top 1%) grew by 86.1%, while that of the remaining 99% only grew by 6.6%; the share of incomes received by the top 1% went from 10% in 1982 to 22.3% in 2012. Economists have also studied inequality as a whole because it is multiform. 

 

THE ECONOMICS RESEARCH PROFESSION  

I would like to conclude with some personal, and therefore no doubt somewhat idiosyncratic, reflections on the way ideas “enter” the design of the public policy. 

Keynes described the influence of economists thus: “All politicians unknowingly apply the recommendations of economists generally long dead and whose names they ignore.” A rather gloomy view, but not entirely far from reality… Whatever his specialty in economics, the researcher can influence the economic policy debate and business choices in two ways (there is no right model, and everyone acts according to his temperament). The first is to get personally involved; some, brimming with energy, manage this, but it is very rare for a researcher to handle his or her research and at the same time be very active in the debate.

In recent decades, data processing has rightly gained an increasing share in the economy. There are several reasons for this: the improvement of statistical techniques applied in econometrics; the development of controlled random experiment techniques, similar to those used in medicine (French MIT professor Esther Duflo is the leading expert in this field); the more systematic use of laboratory and field experiments, areas that were once secretive and are now widespread in major universities; and, finally, information technology, which on the one hand has allowed a wide and rapid dissemination of databases and, on the other, has stimulated statistical processing thanks to efficient and inexpensive programs and a calculation power infinitely greater than before. Today, Big Data is beginning to revolutionize the discipline.

Behavioral economics. As in every scientific discipline, research is a process of co-creation through debates with colleagues, seminars, conferences, and publications. These debates are intense. Indeed, the essence of research is to turn its attention to poorly understood phenomena, about which differences of opinion are likely to be more manifest. The dominant currents change according to the strength of the theories and the feedbacks of experiments. Thus, behavioral economics was relatively secretive 25 or 30 years ago. A few research centers, such as Caltech or Carnegie Mellon, pertinently bet on this neglected discipline. Since then, behavioral economics is part of the mainstream, and major universities have experimental laboratories and researchers dedicated to it. 

As in the physical sciences or engineering, mathematics intervenes at two levels: theoretical modeling and empirical validation. There can be no strong controversy about the need to use econometrics (statistics applied to economics) to analyze data. A prerequisite for the decision is the identification of causalities. A correlation and causality are two different objects; the humorist Coluche was amused by this: “When you are sick, you should not go to the hospital; the probability of dying in a hospital bed is ten times higher than in a bed at home,” complete nonsense, even taking hospital illnesses into account. We say that there is a correlation, but not causation, in this. (Otherwise we would have to suppress hospitals). And only an empirical strategy grounded in econometrics will allow us to identify a causal impact and thus generate economic decision recommendations. 

Game theory. Modern microeconomics is based on the theory of games – which represents and predicts the strategies of actors with their own objectives and in a situation of interdependence – and the theory of information – which explains the strategic use of privileged information by these same actors. 

The theory of games allows us to conceptualize the strategy choices made by the actors in situations where their interests diverge. As such, the theory of games has as its object not only economics, but the social sciences as a whole, and applies equally to politics, law, sociology, and even (as we shall see later) psychology. It was first developed by mathematicians: the Frenchman Émile Borel in 1921 and the Americans John Neumann (in a paper published in 1928, then in a book written by Oskar Morgenstern and published in 1944) and John Nash (in a paper published in 1950). More recent developments are almost always motivated by applications in the social sciences, and are largely authored by economists (although some of these developments are also by biologists or mathematicians. 

Specificity of the social sciences and humanities is the importance of expectations, and in particular of understanding how the agent’s environment will evolve and react to his decisions; to know how to play the game, an actor must anticipate what other actors will do. These expectations are rational if the actor understands well the incentives of others and their strategy, at least, “on average.” 

 

THE INSTITUTIONAL FRAMEWORK OF THE ECONOMY 

The organization of society traditionally (and implicitly) rests on two pillars: 

• The invisible hand of the competitive market, described in 1776 by Adam Smith in The Wealth of Nations, will exploit the pursuit of self-interest for economic efficiency. The idea is that the price of a good or service, which results from the confrontation of supply and demand, embeds a lot of information about preferences: the propensity to pay of buyers and the costs of sellers. In effect, a deal will only go through if what the buyer is willing to pay exceeds the asking price; likewise, the seller will only agree to sell if the price he receives exceeds his cost of production. Putting these two observations side by side, the buyer will only buy if he is willing to pay more than his purchase costs society, that is, the cost of the seller’s production. Conversely, in a competitive market, buyers and sellers are too small to manipulate the price, and in the market equilibrium, the price is such that demand at that price equals supply at that price; all “exchange gains” are realized. Therefore, this results in an efficient allocation of resources in society.
• The state corrects the (numerous) market failures we have just listed. It holds economic actors accountable and is responsible for solidarity. One of the clearest advocates of this idea is the English economist Arthur Pigou (Keynes’s teacher at Cambridge), who in 1920 introduced the “polluter pays” principle in his book The Economics of Welfare.

The works of Smith and Pigou, taken together, are the foundation of shareholder value and liberalism, but of a shareholder value and liberalism quite different from the traditional meaning of these terms in France, which tend to identify them with the absence of state intervention and with the struggle for survival of individuals. 

The conception of the state has changed. Formerly a provider of jobs, through civil service, and former producer of goods and services, through public companies, the state in its modern form establishes the rules of the game and intervenes to mitigate market failures, not to replace them. 

From a mediocre business administrator, it becomes regulator. It takes on all its responsibilities where markets are incompetent, to create true equality of opportunity, healthy competition, a financial system that is not dependent on bailouts with public money, an environmentally responsible economy, solidarity in the sphere of health insurance, in the protection of uninformed employees (job security, the right to quality education), etc. When it works, it is agile and creative. 

This transition, however, requires a return to fundamental questions (what is the state for?) and a change in mentalities. Civil servants, instead of being “at the service of the state” – an unfortunate expression that completely loses sight of the purpose of public affairs – must be “at the service of the citizen. The idea of the planning state, which originated in the Vichy regime and was taken up again after the war, must give way to the referee state. 

 

THE GREAT MACROECONOMIC CHALLENGES 

Holding countries accountable. Applying an emission mechanism is relatively easy when it is countries and not economic agents that are responsible for national GHG [greenhouse gas] emissions. Indeed, it is possible to calculate a nation’s anthropogenic CO2 emissions from a carbon accounting bias by taking production and imports and subtracting exports and stock changes. Carbon sinks linked to forests and agriculture can already be observed by satellite. 

Experimental programs by NASA and ESA to measure global CO2 emissions at the scale of individual countries are promising for the long term. It is easier for the international community to monitor CO2 emissions by country rather than measuring them at the point source level; and, as is the case for current new cap-and-make mechanisms, economic actors (in this case countries) that have a deficit of quotas at the end of the year will have to purchase additional quotas, while countries with a surplus of quotas could either surrender them or save them for a future use. 

The No. 1 priority of the negotiations should be an agreement in principle on a universal carbon price compatible with the 1.5°C-2°C goal. Promises to differentiate prices according to countries not only open a Pandora’s box, but are ultimately not environmentally friendly. The increase in emissions will come from emerging and poor countries, and underpricing carbon in these countries will not allow us to reach the 1.5°C-2°C goal – not least because high carbon prices in developed countries will encourage GHG-emitting production to move to countries with a low carbon price, thus undoing the efforts made in rich countries. 

The employer knows whether a job is profitable; profitable in the broadest sense, of course, because the employer can accept to lose money momentarily on a job, or on a production unit, due to a circumstantial drop in demand, and yet profit in the long run by keeping that job. The employer thus holds the necessary elements of employment management. But one must also wonder about the impact of his choice (between job retention or layoff) on the stakeholders. 

There are at least two of them in such circumstances. The first stakeholder is the employee, concerned with keeping his job or quitting. This employee may suffer a financial cost, linked to the loss of salary, as well as a psychological cost (for example the loss of the social fabric provided by his or her work in the company or family tensions). This externality created by dismissal, from the employee’s point of view, is entitled to two forms of compensation: the company pays his severance pay; and unemployment insurance ensures him an alternative income, as well as eventual further training. 

The second stakeholder, often forgotten in the debate, is the social system, and in particular unemployment insurance. A layoff creates the need for unemployment benefits, training costs, the costs of running the government employment agency, and possibly even the costs associated with subsidized employment… 

European construction. In a continent tormented by fratricidal wars, the construction of Europe had awakened immense hope. A guarantee of liberties, of the circulation of citizens, goods, services, and capital, it was destined to prevent protectionism. A guarantee of solidarity, it was to neutralize national egoisms and help poor regions to develop thanks to structural funds. Later, it corresponded to a much less explicit desire by some countries to delegate to a third party, the European Commission, the task of modernizing the economy through reforms, such as opening up to competition, that the political class thought necessary but did not dare to demand at the national level. 

The supporters of the euro saw this as a step on the road to more cohesive European integration. They thought of the European Union and then the euro as the first steps toward a truly federative Europe, either because of the progressive construction of a consensus for a more cohesive integration, or because it would be difficult to go back and, “if it is to be done, it is better to go all the way. This integration has not happened so far and, unfortunately, everything indicates that it will not happen in the near future. For such integration must be based on a much broader abandonment of sovereignty than that of today, itself built on mutual trust, a willingness to share risks, and a feeling of solidarity, things that cannot be decreed and are only weakly present in the European area. Today, it must be acknowledged, there is disenchantment with the construction of Europe in general and the euro in particular (sometimes with mixed feelings, as in the southern European countries, whose populations mostly prefer to remain in the eurozone). 

Financial crises, not only 2008 ones, raise the question of a possible irrationality of financial markets and their participants. Numerous studies, some old and some more recent are no stranger to this questioning: rapid fluctuations in the prices of stocks, commodities, and fixed income products, sudden freezes in previously very active financial markets, real estate and stock market bubbles, volatility of exchange rates or sovereign spreads, or bankruptcies of large financial institutions. In light of these studies, is it possible to base an economic analysis of finance on a presumption of the rationality of the actors in the financial markets? 

It is now admitted that the assumption of rationality is only a starting point for the analysis of financial markets and that the conceptual framework must be enriched to provide a good understanding of the observed phenomena. The frontier has been abolished in favor of a more sophisticated view of the functioning of financial markets based on financial bubbles, agency theory, financial panics, behavioral economics, and frictions in financial markets – five avenues that have been the subject of diverse research over the past decades and that call for some comment. 

The efficiency hypothesis of financial markets necessarily has some truth to it: bad news concerning a company (a court conviction, the discovery of a technical flaw, the loss of a market or a key leader) leads to a loss of its stock market value unless this news was fully anticipated and thus already incorporated in the asset price. The value of our house increases when the construction of a subway line passing nearby is announced and decreases when a land-use plan foresees habitat densification. 

Bubble in the piece. On the other hand, it can happen that the price of a financial asset is not equal to its true value. The first cause of this lag is the existence of a bubble. A bubble exists when the value of a financial asset exceeds the asset’s “fundamentals,” that is, the present value of the dividends, interest, or rents it will provide today and in the future. 

Financial Crisis of 2008. Nobody, not even economists, could have imagined on that August 9, 2007, the date of the first intervention by the Federal Reserve, the American central bank, and the European Central Bank (ECB), that entire sectors of the banking system would be rescued by the states, that the five largest investment banks would disappear as such (Lehman and Bear Stearns simply disappeared, Merrill Lynch was bought by Bank of America, Goldman Sachs and Morgan Stanley survived, but asked to become regulated retail banks in order to receive bailouts); that extraordinary commercial franchises like Citigroup, Royal Bank of Scotland and L’Union des Banques Suisses were to go under after taking unwise risks; that an insurance company and two real estate loan guarantors were to mobilize $350 billion from the U.S. state; that the latter would commit 50% of America’s GDP shortly afterwards; that American and European governments would directly lend large sums to industry; and that central banks would use unconventional monetary policies and go far beyond their mandate, bringing us into a period of extremely low interest rates and propping up the states and the financial system. 

Crises usually find their origin in the permissiveness of the fat-cow periods. The United States, which was at the origin of the crisis, experienced in the 2000s an influx of money in search of investment. On the one hand, the US central bank’s (the Federal Reserve) maintenance of abnormally low-interest rates (1% at certain periods for the short rate) for several years in the early 2000s provided very cheap liquidity. Combined with the desire of investors to find yields above the low market interest rates, this monetary policy fueled the housing bubble. 

We can take at least two legacies from the [2008] crisis: the low-interest rates and the search for new regulations. 

The first inheritance was supposed to be temporary. Very quickly, when the crisis broke out, the American, European, and British central banks lowered their rates to near-zero levels, in other words, to negative levels if you take inflation into account (that is, in real, not nominal terms); Japan, for its part, has had an interest rate below 1 percent since the mid-1990s, and today equal to zero. In 2016, it was predicted that they will stay close to 0 for a long time to come in Japan and Europe, while the United States is beginning to raise them quite cautiously. 

Low-interest rates, however necessary they may be in a crisis, have costs. 

First, they induce a massive financial transfer from savers to borrowers. In fact, this is exactly the effect sought when one aspires to rescue a banking system that is doing badly. However, they go beyond the intended effect. Falling interest rates increase the price of assets such as real estate or stocks (future income on these assets is revalued relative to the yields offered by the bond market), thus implying a redistribution of wealth: the holders of these assets receive more when they sell them. 

Low-interest rates are a breeding ground for financial bubbles. As we saw in the previous chapter, the latter tend to develop in such low-interest rate environments. 

To avoid crises altogether, one would have to curb risk-taking and innovation and live in the short term instead of investing in the longer term, which is riskier because it is more uncertain.  The issue, therefore, is not the complete elimination of crises, but rather a hunt for the incentives that encourage economic agents to adopt behaviors that are harmful to the rest of the economy. This requires in particular limiting the “externalities” exerted by the financial system on savers or taxpayers. 

 

THE INDUSTRIAL ISSUE 

One area in which lobbies are particularly influential concerns restrictions, or even bans, on competition. It is natural for established companies – from shareholders to employees – to want to put the brakes on newcomers or to obtain financial compensation from the state if they lose their market reserve. No doubt it is less natural for the state to accede to their requests. Still, politicians are not always in favor of competition, either because they want to give guarantees to lobbies seeking protection from competition, or because they feel competition is a brake on their action and political power. 

One last example: protection from international competition. In the early 1990s, the French automobile industry was lagging far behind its competitors, particularly the Japanese. Costs were high and quality inferior. But competitive pressure was being imitated. The opening to import competition in Europe dramatically changed organization and productivity. Renault and Peugeot Citroën then sharply increased their efficiency with respect to international best practices. 

Industrial policy. In the domain of university research, the best scientists are mobilized to prioritize projects and establish a ranking that cannot be questioned for political reasons; it is the principle of peer review. For example, the National Science Foundation and the National Institute of Health function as autonomous agencies, respecting the opinions of experts. The same is true of the European Research Council, which was established in 2007 and has achieved an excellent reputation for competence and impartiality. Always in the field of research, teaching, or innovation, in 2011, major funding and other initiatives of excellence made use of panels of experts residing mostly abroad and this in order to reduce conflicts of interest; an innovation in the French stronghold… 

Platforms, guardians of the digital economy. Your Visa card, the family Playstation, Google Chrome, the instant messaging app WhatsApp, and the real estate agency on the corner of your street certainly have more in common than you might think. They all refer to the “two-sided marketplace” model, i.e. a marketplace where an intermediary (and its owner, Visa, Sony, Google, Facebook, real estate agency) allows sellers and buyers to interact. These “platforms” bring together diverse communities of users who seek to interact with each other: for example, gamers and game developers in the case of the video game industry; operating system users (Windows, Android, Linux, your Mac’s OS X or your iPhone’s iOS) and application developers in the operating system domain; users and advertisers in the case of search engines or media; bank card holders and merchants in the case of payment card transactions. 

Waged vs. self-employed work. Are we heading toward a generalization of the status of the self-employed worker and the disappearance of the wage system, as many observers predict? I don’t know; I would rather bet on a progressive slide toward more self-employed work, but by no means on the disappearance of the wage regime. Growth in the share of self-employment, as new technologies facilitate the interaction between self-employed workers and clients. More importantly, at low cost, they generate and make available individual reputations. 

But technology can sometimes have the opposite effect and stimulate the wage regime. George Baker and Thomas Hubbard give the following example. Many truck drivers in the United States are self-employed, which has a number of drawbacks: The driver owns his own truck, which represents a substantial investment. His savings are then invested in the same industry as his labor force, which exposes the truck driver to considerable risk: In the event of a temporary or lasting recession, the income from his labor and the resale value of the vehicle fall together. 

Common sense, according to which an individual’s savings should not be invested in the industry in which he works, is disregarded. Finally, a self-employed driver must personally take care of repairs and eventually pay for the instant unavailability of his vehicle. All these mishaps can be avoided with a wage regime. Digitalization itself here can boost wages: the trucking company can now own the trucks and monitor the driver’s driving style more easily thanks to the emergence of onboard computing.  

Quadruple retirement. Inspired by economic theory, a fourfold reform has been created over the last thirty years, characterized by: 

Increased efficiency incentives for natural monopolies, with the introduction of mechanisms for sharing efficiency gains with the operator (and, in Europe, privatization). For example, the use of price caps that impose an upper limit on the “average price” of the regulated firm’s services and let the firm retain its profit as long as the restriction is respected has become widespread. 

Rebalancing of tariffs (between individuals and companies, between subscriptions, local and long-distance communications, etc.). This rebalancing was desirable because covering fixed costs with significant surcharges on services with very elastic demand led to very inefficient underconsumption and slowed the introduction of innovative services. 

Opening to competition certain segments of activity that do not have the characteristics of a natural monopoly, through licensing conditions to new entrants, on the one hand, and regulating the conditions of their access to the bottlenecks of the incumbent operator, on the other. The market being an important incentive, the importance of competition on the dynamism of the company, be it public or private, cannot be overstated. 

And finally, the transfer of regulation to independent authorities. The conception of the role of the state has evolved. The producer state has become the regulator state. Under pressure from stakeholders and facing a loose budget constraint (a company’s deficits swelling the overall budget or public debt or being covered by higher tariffs paid by users), publicly controlled companies generally do not produce quality services at low cost. 

While economics has guided the reforms that have urged natural monopolies to reduce their costs and adopt welfare-promoting pricing, allowed us to understand how to introduce competition in these sectors without dogmatism, and shown that public service and competition are perfectly compatible, there is still much work to be done and much to learn. For the common good. 

 

Review: Rogério H. Jönck 

Photos: reproduction and Visual Stories || Micheile, Pierre Borthiry, Steve Johnson, Timon Studler, Scott Graham, Lenny Kuhne / Unsplash

FACTSHEET:

Title: Economics of the common good 

Original Title: Économie du bien commun 

Author: Jean Tirole