Jean Tirole

This review is based on the Blinkist version of the book...thus a summary and my review needs to be qualified as such. Presumably the original full text has much more details and research.....but it also takes much longer to read. If I like the Blinkist version, I might seek out and read the full book. Meantime here are a few nuggets that particularly struck me:
Our understanding of how the economy works is shaped by confirmation biases...The way we see the world is shaped by our beliefs. We show more emphasize facts that confirm ideas we already hold, which is why we read newspapers that echo our own political views and seek out like-minded friends.....Economics is no different; our pre-existing beliefs mould our attitudes toward the facts......This means we often don’t make the wisest economic decisions.
Imagine an environmental NGO that campaigns against poaching. It’s just managed to intercept a consignment of ivory tusks being shipped by a group of poachers who kill endangered elephants. What should it do with the confiscated ivory? Moral intuition tells us that the trade in illegal ivory is reprehensible, which means we should destroy it, right? No! Economic reasoning suggests that the best option would be to do what the poachers were attempting to and sell the ivory. [use the money to pay for preservation policing and selling helps depress prices for ivory]......taking a long-term perspective of the kind offered by economics changes the moral calculus involved in all sorts of decisions.
Markets aren’t the infallible mechanisms they’re sometimes perceived to be. Not every good can be bought and sold freely, and some things, like ivory, need to be more strictly regulated than others.....Imagine, for example, a market in which babies could be traded for cash by parents (the sellers) and adopters (the buyers). It’s easy enough to envisage both parties reaching a mutually beneficial agreement. But here the economist will raise an objection. This exchange, she says, fails because it neglects the interests of a third party, namely the baby. This kind of market failure is the result of what economists call an externality–the cost of an exchange borne by a third party who can’t consent to the exchange.....And that’s where regulation comes in. It’s an attempt to safeguard the interests of all parties
Economists try to make the world a better place by providing insights for policymakers.
Take climate change, for example. Scientists tell us that the best way to prevent catastrophic global warming is to stay within our allocated annual “carbon budget” and cut the amount of greenhouse gases we emit each year......They rely on models to analyze actors’ behavior. Two theories are particularly suited to this purpose.....The first is game theory.....A famous example is the “prisoner’s dilemma,”.......Game theory asks two questions about this kind of situation: First, what’s the best decision for the individual? And second, what’s the best decision for multiple parties collectively?
Another helpful tool is information theory, which centers on the way individuals make use of private information......Analyzing private information lets economists make informed predictions about individual behaviour.
Economic theory begins with a fairy tale. Once upon a time, it says, there was the homo economicus. This fabled character from economics 101 textbooks is the self-interested and rationally calculating decision maker. But as anyone who’s ever felt the lure of unhealthy junk food knows all too well, humans just aren’t perfectly rational creatures.....Take psychology’s homo psychologicus. He’s far from rational, and psychologists are largely interested in exploring the hidden drives that lead him to make decisions that sacrifice his long-term interests for short-term pleasures......Sociology adds another character to our expanding cast–homo socialis.
Because we don’t always have access to all the information we need to make informed decisions, we often buy things because we trust the seller or a recommendation from someone else.......It’s [also] useful to get a handle on another character, homo juridicus, since behaviour is shaped both by legal and social norms.....Take markets. Without them, there’d be little competition or innovation. Yet without the state and the rule of law, markets would descend into anarchy...But it’s not just markets that occasionally fail–states can too.
A more dangerous practice is pandering to special interest groups. That’s especially true in the case of spending commitments, because their true cost can be difficult to calculate.
Businesses face a similar quandary when it comes to decision making. Who gets to make the decisions and why? Every business has multiple stakeholders–groups affected by how a business operates. Balancing the interests of different stakeholders can be a tricky matter. Failure to take action on climate change is an example of what economists call the tragedy of the commons, which essentially refers to a conflict of interest between individuals and the common good....Imagine what would happen if greenhouse gas emissions were reduced globally. Everyone would benefit, right? The problem is that this could only be brought about by individual countries implementing the right policies......each country represents only a small fraction of the total population of the earth.....So there’s a strong incentive to free ride. The tragedy of the commons is the result of widespread free riding.
Economists have come up with two policy proposals that they think might be able to cut through this Gordian knot. The first is a global carbon tax. Polluters would be charged a fixed price per ton of emitted carbon dioxide......The second option proposed by economists is a system of tradable emission permits.
Unemployment in countries like Greece, Spain and France is sky-high when compared to the countries of northern Europe, the United States and Canada.....It’s especially bad for two distinct age groups: young people aged between 15 and 24 at the start of their careers, and older people between 55 and 65 at the end of their careers.....The introduction of the euro as a common currency in 1999 was designed to increase European integration and hasten economic development, but it has come at a high cost. Since 1999, many countries in southern Europe have seen salaries rise faster than productivity. That has made their economies much less competitive than they need to be in today’s global economy.
So what is finance?.....Basically, it’s a service for borrowers. Consider a mortgage; the bank provides borrowers with credit to acquire something they couldn’t otherwise. The finance sector also provides insurance against risk. Without that safety net, borrowers could easily end up in trouble. But as the financial crisis demonstrated, financial speculation can also destabilize the economy. This happens when otherwise useful financial products turn toxic, and a major cause of that is securitization, the financial practice of pooling different kinds of debt and selling it to a third party.If a bank knows it can always flip a mortgage, and get someone else to bear the risks, it’s likely that it’ll become less scrupulous in deciding who’s eligible for a loan......That’s precisely what happened in 2008....the state is the at the heart of economic life in every market economy, because it plays three distinctive and important roles within the market. The first role is one of public procurement.....But the state isn’t only part of the market–it’s also above the market. As a legislative and executive power, it sets the parameters of the market economy by issuing permits and licenses for things like taxi firms, supermarkets and even airline landing rights. In that role, the state is also a referee of markets.....But open competition in free markets provides several goods that the state on its own can’t. Take affordability. Monopolies mean profits because buyers have nowhere else to go...but that also brings competition and lower prices. [This hasn’t been the universal experience of monopolies].
What the platforms of the new digital economy all have in common is that they’re examples of two-sided markets, markets in which buyers and sellers interact via an intermediary. Two-sided markets like Amazon make this a lot easier. By providing a digital marketplace, they bring buyers and sellers together wherever they are. But unlike traditional marketplaces, these platforms also act as regulators to ensure that transactions are fair and smooth. In some cases, they even regulate prices–think of Apple’s iTunes, which limits the charge for downloads to $0.99 per song.....Digital platforms only work when we trust them not to misuse our personal data......But even large companies have been subject to massive credit card theft in recent years. Forty million customers of Target had their details hacked in 2013.
Add to the mix the often dubious terms of use that many websites make users sign and there’s plenty of cause for concern.
One solution is legislation that protects users against one-sided clauses. We don’t need to look far to see what that might look like in practice, since we already have laws of this kind in the offline world.
Innovation is the motor that keeps the economy humming and the wheels of economic growth spinning. But safeguarding innovation requires intellectual property rights....If every innovation were publically available for all to make use of, there would be little incentive for anyone to devote resources to the research and development that underpins all innovation.
By guaranteeing that they’ll profit from their work, tomorrow’s innovators are given an incentive to continue their often difficult and time-consuming work today....That’s where intellectual property rights come in.....But this isn’t the only way of boosting innovation; various governments have experimented with alternative models.
In the seventeenth and eighteenth centuries, for example, both Britain and France granted prizes to innovators in public competitions.....While this was a great incentive for innovators to compete amongst themselves, there was also a downside. Innovation is usually unpredictable–no one knows what tomorrow’s technology will look like.
Companies have also experimented with novel approaches. One idea is patent pools, an agreement among competing firms in the same industry to jointly control patents that they can all use. That is known as coopetition, a portmanteau of the words “cooperation” and “competition,” and has been used to try to lower the price of innovations.
The key message in this book: The science of economics is, like the world it attempts to describe, complex. There are rarely clear-cut rules that can be applied to all situations; instead, there are trade-offs between different and equally valuable goods. Failure is often a result of not striking the right balance, whether it’s in the sphere of the state or markets. Getting it right requires an understanding of economics, a discipline that can help us achieve the common good when it comes to the most urgent issues of the day, like climate change and the transition to a digital economy.
I’d held great hope for this book. The common good was a concept that I’d heard of but didn’t know much about (apart from controversy over the fencing/enclosure of common land in England). But I think Jean Tirole goes well off subject. Yes there is some interesting stuff there, li,e the game wardens selling the ivory seized from Poachers....or the market for babies that failed because the baby’s interest could not be taken into account. But overall, I thought it a fairly superficial account of the common good. Three stars from me. show less

This book would be a good gift to a young person about to make decisions on university studies, at least if you want to encourage her to consider economics. The author demonstrates clearly that academic economic research can contribute to the common good on many fronts, and that basic economic knowledge can be important for avoiding social calamity. He discusses market failures, climate change, labour markets, national debt, the financial crisis of 2008, innovation and industrial policy, show more intellectual property and economic efficiency in infrastructural industries, etc.

The discussion is non-technical and for the most part accessible also to readers without economic training. It takes a good writer to distill important practical conclusions from economic theory without simplifying too much. The book also contains a couple of chapters on economics as a profession. The author stresses the societal role economists should take in educating the public. His own efforts in this vein are certainly impressive. show less

A great find, this little-known volume by a Nobel Prize winning economist is the English translation of the French original of 2016. In a series of not very long chapters, the author ranges over the main topics covered by modern economic theory, and also shows how they are translated into practice, especially how markets are created for public goods and services, how public utilities and natural resources are auctioned, and so on. For the most part the book sticks to the received wisdom of show more neoclassical economics, with priority given to achieving economic efficiency and allowing the marketplace to decide. This, however, inhibits us from delving a little deeper into how large scale decisions are taken in the real world; like many well-meaning European thinkers, for instance, the author would probably favor free migration, whereas most people not hobbled by ideology would recommend a cautious approach. Indian policy makers, for instance, are quite firm on the need to protect domestic producers from imports of agricultural and dairy products, and of late have demonstrated that economic and strategic independence rests on a robust military preparedness in the real world. Another typical policy conclusion of the economist is in the sphere of global warming and climate change, where the author struggles to establish the primacy of carbon taxation. show less

By far the best IO book I've ever read!