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1-Page Summary of Economics for the Common Good

Overview

Economics is a science, but it’s not always dismal. It involves observing the world and drawing conclusions from those observations. The Nobel Prize-winning economist Jean Tirole can do that because he has decades of experience in economics.

In this interview, Tirole talks about the big topics that shape our present and will determine our future.

Why do we need financial markets even after the 2008 crash? What stops us from tackling climate change, despite repeated warnings from scientists? How can state and free markets be brought together to guarantee growth, innovation and the common good? This essay will answer these questions.

You will also find out what makes the tragedy of the commons so tragic. You’ll learn how economists can benefit from their colleagues in other fields. Finally, you’ll discover how dodgy mortgages led to the 2008 financial crisis.

Big Idea #1: Our understanding of how the economy works is shaped by confirmation biases.

The way we see the world is influenced by our beliefs. We emphasize facts that confirm ideas we already hold, which makes us read newspapers that echo our own political views and seek out like-minded friends. Economics is no different; our preexisting beliefs mold our attitudes toward the facts. This means we often don’t make the wisest economic decisions because economics can be deeply counterintuitive.

A non-profit organization that works to protect endangered species has managed to stop a group of poachers from shipping ivory tusks. What should it do with the confiscated ivory?

Morally speaking, ivory trade is wrong. We should destroy it. Economically speaking, however, the best option would be to do what poachers are doing and sell the ivory instead of destroying it. But wouldn’t that put the NGO in the same shoes as poachers? Not quite because selling the ivory would raise funds for future projects while also depressing its value so that there’s no incentive to kill elephants since they’re not scarce anymore.

As you can see, taking a long-term view of the economy changes your moral calculus. This doesn’t mean that economics is purely about cold rationality. Think of a market—it is just a mechanism to allocate scarce resources; buyers and sellers meet in the marketplace to exchange goods and services.

But markets aren’t perfect. There are some things that shouldn’t be bought and sold freely, like ivory. Some things need to be more strictly regulated than others.

Imagine a market where parents can sell their babies to other people. Some economists would object because they don’t consider the baby’s interests in this transaction. This is just one example of an externality, which refers to costs borne by third parties who have no control over the transaction.

Therefore, regulation is necessary to protect the interests of all parties involved. For example, it protects babies from their parents’ poor decisions and elephants from poachers.

Big Idea #2: Economists try to make the world a better place by providing insights for policymakers.

Economists have many roles. They can contribute to our knowledge of the world and help policymakers solve problems. They often participate in public debates, as well

For example, take climate change. Scientists say we need to cut down on the amount of carbon dioxide that’s being released into the atmosphere each year.

Because economists typically deal with budgets, they’re the best people to help us figure out how to allocate our carbon budget in an efficient and cost-effective way.

Economists use models to analyze problems. Two theories are particularly useful for this purpose: the theory of rational choice and the theory of game theory.