A View from the Top: Jean Tirole, Nobel laureate and global authority on the economics of regulation

The influential French economist talks price caps, Jeremy Corbyn’s nationalisation plans and President Emmanuel Macron’s rejection of postmodernism

‘I’m not a big fan of privatisation but nationalisation can also be even worse’ (AFP/Getty)

Jean Tirole throws his head back and laughs. “You’re kidding!” he exclaims. I’m not kidding, I insist. It’s true. I explain to him, once again, that when proposals for regulatory price caps on energy bills are floated, politicians and respectable commentators in Britain tend to start discussing Marxism.

Tirole’s incredulity is significant. The 64-year-old Frenchman won the Nobel memorial prize in economics in 2014 for his pioneering theoretical work on how utilities ought to be regulated. Tirole is a global authority on the subject, his research influencing regulators the world over. And he knows there is nothing Marxist or communist about restricting the prices a privatised natural monopoly such as energy can charge customers.

“Price caps were introduced initially to deregulate,” he explains, citing the caps imposed by the Thatcher government on what British Telecom could charge after privatisation in 1984. Allowing the newly private BT to jack up prices when there was no competition would have ripped off captive customers and destroyed the social legitimacy of the whole project.

“I can’t believe that price caps would be seen as a communist plot or something like that,” he says, shaking his head at the primitive nature of our national debate.

The key challenge for regulators, as Tirole explains it, is in designing caps so that they are fair to consumers and yet do not discourage private sector investment in the field. It’s not an area in which lectures about the failure of the Soviet Union are particularly relevant.

Yet, as I interview Tirole, who is in London to promote his new book Economics for the Common Good, it gradually becomes clear that I’m not going to get any specific answers to the pressing economic questions of contemporary UK politics. Is Theresa May justified in pushing through a cap on energy prices? What about Jeremy Corbyn’s proposals to nationalise the electricity system, the water companies and the trains? Tirole refuses to be drawn.

Why? Tirole cites something he calls “Nobel prize syndrome”, or the tendency for winners of the biggest prize in the discipline to dispense their economic prescriptions without doing their homework. Since he hasn’t researched the specific details of the UK sectors in question – analysing the degree of monopoly power of firms, the historical context, the likely behaviour of consumers, etc – he won’t commit.

“I really think we should be more humble and not talk about things about which we have an opinion but we have nothing special to say,” he explains. “[The pressure is] stronger when you have the Nobel prize because people believe you know everything!”

Nevertheless, he does caution Labour against regarding national ownership as a magic bullet solution to frustrations with the performance of a privatised utility.

“I’m not a big fan of privatisation but nationalisation can also be even worse,” he explains. “The issue is that [nationalised] firms tend to be overstaffed very quickly because politicians find it easy to create jobs at the expense of the consumer or the taxpayer. I don’t think the role of the state is to be a producer or a job provider. I think the role of the state nowadays needs to be a strong regulator, defining the rules of the game.”

Tirole has been based at France’s respected Toulouse School of Economics for a quarter of a century. But like many of France’s top economists, such as Thomas Piketty, he studied in America. Tirole received his doctorate from the mighty Massachusetts Institute of Technology in 1981 and spent seven years researching there.

Ambivalent as he might be about the merits of public ownership, one thing Tirole is insistent on is the imperative for the state to give people good information to make certain markets work. He is scathing about the idea, promoted by libertarians, that the best thing governments can generally do is simply get out of the way.

“I found it totally outrageous when some American politicians during and prior to the financial crisis said we should not give financial information to people,” he says.

“My goodness! You have to tell them about the risk of teaser rates, about what happens if interest rates go up. They don’t have PhDs in economics. Even if you have a PhD in economics you may not even know if you should switch supplier!”

He says that competition authorities everywhere need to pay much more attention to the insights of behavioural economics and the limits of our cognitive capabilities, citing the work of this year’s Nobel economics laureate Richard Thaler. “When you offer 500 pension plans to consumers we are unable to choose. I think there are too many options. You need to standardise things so you can compare offers,” he says.

The vast majority of winners of the Nobel Memorial Prize in Economics since it was established in 1969 have been American. Britain comes second. But France’s performance is respectable. Tirole is the third Frenchman to have been recognised by the Swedish committee, following Gerard Debreu and Maurice Allais in the 1980s.

What, I inquire, does he make of the striking recent critique from President Emmanuel Macron of “postmodernism”, the theory developed by French philosophers Jean Baudrillard and Jacques Derrida in the mid-20th century that everything is relative and there is no such thing as objective truth. “The worst thing that could have happened to [French] democracy” is how Macron described it in an interview with a German magazine.

Tirole shuffles a little uncomfortably on his sofa and says he doesn’t want to get into “academic conflicts”. But it’s clear where his views lie in this debate. “Economics is an inexact science. We have to be humble. But the idea that everything is cultural I think is completely wrong” he says.

While he stresses that competent economists always take culture and social norms into consideration, that doesn’t mean everything is relative and one cannot say anything definitive about the world.

“Otherwise I would not want my salary to be paid by the French taxpayer,” he says. “I think that would be a shame. We [economists] need to be useful to society.”

‘Economics for the Common Good’ is published by Princeton University Press