Article published by José Alberto León Alonso in Diario de Avisos on 10/26/14.
The Frenchman Jean Tirole has been awarded the 2014 Nobel Prize in Economics thanks to his work related to industrial organization, the market power of companies and regulation. Tirole is the eighth most cited economics researcher in the world and the author of the reference textbook on industrial organization.
According to Tirole, in many markets perfect competition does not work and must be regulated. When competition is not technically feasible, the search for efficiency involves implementing alternatives that economists call “second best.” And this requires institutions that define, execute and enforce an adequate regulatory framework. Their work has become increasingly important as governments have privatized former public monopolies such as water, electricity, transportation and telecommunications. All his work aims to generate regulatory mechanisms that encourage true competition. As indicated by the Swedish Academy, the award was for his work "The power and regulation of the market", a work carried out with Jean Jacques Laffont, who died in 2004. "The best regulation or competition policy must be carefully adapted to the specific conditions of each sector. Jean Tirole has presented a general framework to conceive these policies and has applied them to various sectors, ranging from telecommunications to banking," highlights the Swedish Academy of Sciences.
Their works inspire a way of understanding the functioning of markets that does not understand ideologies but rather the analysis of the incentives of companies, consumers, regulators and governments. In this sense, his book “Theory of Industrial Organization”, published in 1988, is the reference for all of us who have studied economics and can be considered the best text in its area to date. Regulations and competition, he defends, require in a world like the current one “the acceptance of a certain loss of sovereignty and of an independent international organization.” Nobel is also in favor of regulating rating agencies.
One of the main focuses of Jean Tirole's work is that of \"asymmetric information\", that is, those areas where governments do not really know how the industry works, which makes regulation difficult. Tirole makes it clear that all industries are different and this requires them to be treated differently. Regarding a sector such as energy, in which the regulator (the State) has difficulties in knowing how it really works, Tirole defended in 2005 that the Spanish electricity market could not function with only three or four operators, and that the different European local markets should be opened to competition from other countries. Another of the sectors that the new Nobel calls for regulation is the financial sector because, being so complex and with a tendency towards oligopoly, it needs strict and efficient regulation, the complete opposite of what happened until 2008.
The fundamental question that Jean Tirole has tried to answer throughout his career is “to what extent should the Government intervene in a market?” Markets are often full of natural or artificial barriers to competition, which means that companies no longer have to compete to the point of exhaustion to serve the consumer. When this happens, many vital mechanisms come into play to understand the relationship between companies, their market power, the regulator and the economy. Thus, Jean Tirole has provided a common analytical framework for the study of all these types of problems.
Swedish academia likes theory, abstraction and highly specialized technical work. Tirole is a theorist, but his work is eminently practical. He is an expert in regulation, markets and the best way to prevent sectors where a handful of giant companies share the market from becoming a monopoly. An expert in the real world. He is a firm exponent of one of the aspects that society can value most in a scientist: providing, from technical complexity, simple methods and solutions to solve important issues for well-being. Thanks to their contributions, we now better understand such essential issues as regulation, patents, services that are articulated around platforms (such as credit cards, the Internet, etc.), the limits to corporate market power, the value of cooperation and the difficult incentives that determine adequate business management. Thus, when asked about the regulation of the labor market, he maintains that "one of the problems is the excessive judicialization of labor conflicts. A judge never has enough information to decide on dismissals in a company. He does not know if that job is necessary or not. Thus, the employer becomes healthier and prefers temporary hiring, which always involves less compensation, to avoid problems." To avoid this, he proposed, together with Olivier Blanchard, now chief economist of the International Monetary Fund, to replace the judicial process with a tax on dismissal. "The idea is that if a company fires a worker it pays a tax to the Government. The collection of this tax on the dismissal would accumulate in a fund from which unemployment benefits would be paid. It would be much more effective and would encourage companies to create long-term jobs. The problem is that this cannot begin to be done with a crisis like the current one."
While being in favor of regulation, Tirole is also in favor of the liberalization of services, because it generates lower prices in their provision. “We should not fear the markets, but rather regulate them properly.” Thus, the liberalization of services is only efficient if it is supported by adequate regulation and an independent regulator. And he is also in favor of introducing competition mechanisms in public services, such as giving educational or health checks to citizens so that they can choose an educational or health center. All of this as a way to reduce the cost of providing public services, make the Welfare State sustainable and increase citizen satisfaction with the services provided. His latest works deal with patents and innovation, subsidies to culture, the formation of bubbles due to poor market regulation, banking regulation, and global warming.
If sometimes the annual election of the Nobel Prize in Economics is controversial, this time it is not: Jean Tirole is one of the greats.
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