I have borrowed this title from a book written by the French economist Jean Tirole, winner of the 2014 Nobel Prize in economics. Tirole’s goal is to show how a society can use the discipline of economics to pursue its common good whatever that is. It’s like saying, let’s show how we can use the laws of aeronautics so we can fly from here to there. In other words, Tirole reminds us that economics is a means to reach an end, not the other way around.
That’s important because many, whether by ignorance or calculation, identify economics very narrowly with institutions and practices that advance the interests of some people and ignore or hurt the interests of others. It’s a social loss that most students leave their secondary education with little understanding of economics. This limited knowledge is very responsible for the rise of populist economic ideas or the support of policies that worsen instead of improving the economic interests of the society.
Although economics can provide more informed and efficient answers to many practical problems the road to employing it in the service of the common good is full of challenges and tough choices. Knowing how markets work, being able to design economic contracts that optimize the interests of sellers and buyers, and having answers for the economics of climate change and the digital economy do not necessarily take us to the common good.
To grasp the potential and the limits of economics as a means to serving the common good, first, we need to understand the role of the market and the state. Tirole reminds us that markets are mere mechanisms of exchange without an a priori purpose to serve this or that common good. They have no inherent morality of their own; nor do they and by themselves produce the distribution of gains a society prefers. Market failures and outcomes rather reflect the moral values of societies and the market rules they set.
The economic roles of the market and the state are not mutually exclusive; they are instead complementary. We rely on the state to guarantee contracts and property rights; to keep competition fair; and correct market failures. If we were very honest and had all the information we needed, transactions would be fair and the state would have less of a role to play. Adam Smith believed that self-interest would make good markets for both sellers and buyers. But often, self-interest veers into exploitation of other market participants. Thus, a bank may engage in reckless lending and fail to redeem the savings of its depositors. Or a firm deliberately withholds vital information affecting the value of its stock and bonds. In these and other cases where behavior and information are important, state regulation is the necessary remedy.
Just as the market is open to failures so is the state. Political power can enable special interests to capture the state authorities that set and enforce regulation and hold individuals and firms accountable for the consequences of their economic actions. The winners and losers of an economy are often determined by the political power special interests and groups can wield.
The main actors in markets are business organizations which operate under different organizational forms. They may be non-profit entities, simple proprietary firms, cooperatives or corporations. Each form serves the interests of a distinct set of stakeholders, the most dominant being the shareholders. But do their interests serve the common good? How do we align the interests of these organizations with the common good?
Pursuing the common good is not cost-free. We need to decide how the cost of negative externalities (like pollution, displacement of workers, community decline) are to be shared between private business and the state. Society as a whole can also produce unwelcome externalities. The more innovation-intensive and globalized a society prefers to be the more turmoil will prevail in its industrial and labor fabric. The more individualistic a society is the more economic inequality will exist. Again, the question is whether a society will ignore any negative effects of these choices or it will serve as a shock absorber and stabilizer. The more of the burden falls on the state the more willing we ought to be to pay higher taxes.
The group most affected by the structure and performance of an economy are the workers. Tirole argues that a good economic policy should prioritize employees not jobs. Since we have very little control over jobs it is the workers we need to protect as firms, industries, even the whole economy transition to a new phase. In the US, we have learned the hard way the costs of lacking a sound transition policy as the pace of offshoring of jobs intensified through the 1990s and beyond. The anxiety of workers (coal miners for example) in industries in decline has a lot to do with this lack of a transition policy.
Tirole stresses that “Economics is not in the service of private property and individual interest, nor does it serve those who would like to use the state to impose their own values or to ensure that their own interests prevail. . . . Economics works toward the common good: its goal is to make the world a better place.”
But after the impartiality of economics toward the market and the state is established and its dedication to the pursuit of a better world has been declared, the challenge of what a better world is still bedevils us along with the question of how we get there.
As argued above, pursuing a common good requires that we accept a tradeoff. Scandinavians trade high taxes for state services in education, health and retirement benefits. The French trade stubbornly higher unemployment for job protection. Many countries have minimum wage laws even if this may mean some unemployment for low-skill workers. In the US, belief in the primacy of markets and private enterprise foreclose initiatives for universal health insurance.
Tirole’s book makes a persuasive case for the analytical rigor of economics and its ability to guide us toward more optimal solutions. But at the end of the book our quest for the common good is still elusive. It’s like we have been given a perfect airplane but we now have to choose our destination. For this we need more than economics.
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