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Economics for the Common Good

By Jean Tirole

  • Our understanding of how the economy works is shaped by confirmation biases
    • ivory trade
    • baby trade (neglects the interests of a third party)
    • Externality - the cost of an exchange borne by a third party who can't consent to the exchange
  • Economists try to make the world a better place by providing insights for policymakers
    • Game theory - Prisoner's dilemma

A thought experiment that looks at how two prisoners will behave without knowing what the other is doing - will they betray each other in search of a more linient sentence or keep quite?

Asks two questions -

  • What's the best decision for the individual?

  • What's the best decision for multiple parties collectively?

  • Information theory - centers on the way individuals make use of private information

Tenant farmer and a landlord - Private information about the fertility of land he may want to propose for a profit-sharing model rather than renting the land for a fixed sum.

  • Economics has a lot to learn from the social sciences and humanities
    • homo economicus - self-interested and rationally calculating decision maker.
    • homo psychologicus - interested in exploring the hidden drives
    • Psychology - empathetic
    • homo socialis - making informed decisions
    • homo juridicus - obeys the rules and payes their taxes
  • Neither the state nor the market is perfect and they both need each other to function properly

Without markets there'd be little competition or innovation. Without the state and the rule of law, markets would descend into anarchy.

  • Climate change looks like an intractable problem, but economists have already devised potential solutions
  • Southern European countries have problems with the labor market, competitiveness and debt
  • Financial speculation has its uses - but it can also be dangerous
    • Securitization - the financial practice of pooling different kinds of debt and selling it to a third party
  • The state is at the heart of economic life, but it's the market that drives innovation
  • Digitalization brings new opportunities and poses new problems
  • Intellectual property rights are a necessary evil in the struggle for greater innovation
    • patent pool - coopetition