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Jean Tirole

from David Ruccio

One story that can be told about today’s announcement is the Royal Swedish Academy of Sciences’ own explanation: that French economist Jean Tirole has been awarded the The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for 2014 because he “has clarified how to understand and regulate industries with a few powerful firms.”

The other story is: Tirole has shown how much the real world of capitalism—industries that are dominated by a few firms that have extensive market power, which can charge prices much higher than costs and block the entry of other firms—differs from the fantasy taught in countless introductory courses in economics: a world of perfectly competitive firms, which have no negative effects on society and which therefore don’t need to be regulated.

In addition, Tirole (in “Intrinsic and Extrinsic Motivation,” an article with Roland Bénabou, published in the Review of Economic Studies) has challenged a central tenet of neoclassical economics, that individuals always respond positively to managerial supervision and incentives. He has demonstrated, instead, that both close supervision and monetary rewards can often times backfire, especially in the long run: they can undermine intrinsic motivations, thus explaining why workers find behavioral punishments and rewards both alienating and dehumanizing.

Last year, the Academy tried to have it both ways, offering the Prize to both Eugene Fama and Robert Schiller. This year, the message is both clearer and yet unspoken: the neoclassical model of perfect competition and individual incentives bears no relation to the kinds of capitalism that exist anywhere in the world.

And the policy implication: we’ll all be better off if we take over the large firms and let workers run them for society’s benefit.

  1. robert r locke
    October 14, 2014 at 11:58 am

    OK. I hate to be a spoil sport, but where is the idea that “the neoclassical model of perfect competition and individual incentives bears no relation to the kinds of capitalism that exist anywhere in the world” some revolutionary discovery, worthy of a Nobel prize. Anybody that has been paying attention for the past one hundred years, knows this, except the economists who aren’t paying attention.

  2. October 14, 2014 at 5:47 pm

    Since at least 50 years “workable competition” (J. M. Clark) which basicly means oligopoly and large firms are agreed to be best for innovation, growth, and employment. This notion is, as we all know very well, based on neoclassical theory and empirical research (Industrial Organization / Harvard). But although politicians in all industrialised countries have done everything to shape an support highly concentrated markets, and for many years this in fact led to growth, today it does not work anymore. Instead big companies and banks are known for excessive lobbying, corruption, manipulation, bad quality, tax evasion and bail outs. One could say quite a number of oligopolistic markets are out of control and the next crisis is just around the corner.

    Well, now that Mr. Tirole received the nobel prize, we all know there is hope for our oligopolistic world. Everything can be solved by smart regulation. That´s good news, isn´t it?

  3. robert r locke
    October 14, 2014 at 6:01 pm

    “And the policy implication: we’ll all be better off if we take over the large firms and let workers run them for society’s benefit.”

    In the 1920s, German business economics, in an attempt to define their discipline, got into a long debate in the journals about how to define the firm and how to measure efficiency. For the Americans it was relatively easy. The firm is equated with its owners, efficiency was determined by return on investment. For the Germans, it was much more complicated because they did not have a proprietary conception of the firm, but an organic one, according to which a firm was composed of at least three legitimate interests; the stockholders, the employees, and the customers. How could the firm serve all three, often contradictory interests, and how could one measure if the firm were being run efficiently. Some talked about a firm’s efficiency in terms of how well it served the community, a very difficult thing to measure, etc. This organic view of he firm evolved into co-determined forms of management after WWII, wherein the employees had a voice in the selection of the management and the firm’s operations. Michel Albert’s book Capitalism vs Capitalism published in 1991, in which he compares American casino capitalism with the Rineland model applies here. Did he get a Nobel Prize?

  4. Eubulides
    October 15, 2014 at 4:18 am

    Workers will never be the saints needed to run firms in ‘the interest of society’. I’m as anti-Thatcher as it gets, but ‘society’ and how ‘it’ ought to be run is 1)vague and 2) the very stuff of politics. And politics, as we can all too easily see, turns people into assholes.

    • robert r locke
      October 15, 2014 at 12:07 pm

      Workers will never be saints if you exclude them from learning management functions in the firms in which they work. Germans instituted co-determination in the 1950s; it took them decades of hard work to work out the management systems. In the meanwhile, all those smart managers in the US and the UK feathered their nests at the expense of society and the firms they managed. If the system of co-determination is properly institutionalized it works well, but first Americans have to be brainwashed not to believe in the hogwash.

      • davetaylor1
        October 15, 2014 at 2:08 pm

        Robert, I couldn’t agree more! This is a topical issue in UK just now, with Scots wanting to stay in Europe but out of England because of what you say (not noticing the EEC having become Americanised into a bankerised EU); and the English (in despair at the Americanisation not only of the EU but of their own political parties), rapidly moving towards a Nationalist party promising to get them out of both, seemingly without having any less bankerised economic policies to put in their place.

      • October 15, 2014 at 2:43 pm

        I´m afraid, at least from my experience in Germany, unions are not that interested in qualifying their members for decision making on higher management levels i.e. for strategic decisions. It is of course a question of power and control within unions.

  5. robert r locke
    October 15, 2014 at 8:33 pm

    Stefan, don’t use these buzz words like Strategic decisions. That is part of the hogwash I mentioned in my post to Dave. American managerialism is a lousy system of firm governance. It might make money for the 1%, but it has not made the employees into a people of plenty, which was the original promise of American managerial capitalism. Give all those who work in a firm a voice in its management, including who gets paid what.

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