Tuesday, October 14, 2014

In Which I Appeal to Authority to Support My Argument About Economic Regulation

-- Posted by Neil H. Buchanan

My Verdict column and Dorf on Law post last Thursday extended my ongoing discussion of the misuse (by economists, policy types, and politicians) of the concept of "efficiency."  In particular, I discussed how it is possible, notwithstanding the free market mantras emanating from both U.S. political parties, that regulation by the government can be efficient.

One way to restate my point is that, even if one sets aside my usual arguments about how to define efficiency in a coherent sense, there must be something that would qualify as "efficient regulation," because the economy is -- and must be, at all times -- regulated by the government.  What people call "unregulated" actually just means, in most cases, "Powerful entities get to do what they want, and the government enforces rules that back them up and that move wealth and power in their direction."  That is regulation, too, but the mouthpieces for those powerful entities like to sell the idea that the government is not involved, and thus that "freedom is enhanced," when the government does their bidding.  Liberty!

When I wrote those pieces last week, I did not know that this year's "Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel" would be awarded yesterday to a French economist named Jean Tirole.  By pure happenstance, his work is relevant to the argument that I was making last week.

Long-time readers of this blog know that I insist (see, e.g., here) on not following others' persistent error in calling that award "the Economics Nobel," in part because doing so tends to make it seem that the award recipient has just been deemed An Economic Expert Par Excellence For As Long As He (or, only once, She) Shall Live.  Actually, for many of them, the quasi-Nobel aura extends beyond the grave (although Milton Friedman's ghost has taken a bit of a beating recently from his former conservative admirers, who now apparently think that his willingness to use monetary policy amounts to closet Marxism).

The obvious problem is that it is all too easy for people to get excited when the annual award goes to an ideological compatriot, and to dismiss the award as merely political theater when a bad guy wins.  Last year, the committee pulled one of its occasional "make everyone happy" multiple-recipient announcements, succeeding only in confusing everyone and making no one especially happy.

With that caveat, I will note here that Tirole's work has always been in that rare category of being respected by his technique-obsessed profession, while also being relevant to real life.  That is no small feat.  And the central goal of Tirole's work is to try to figure out how to regulate large, powerful entities (communications companies, banks, and so on) to maximize the public good.  For the government to choose "not to regulate," in the usual sense of that word, not only allows large entities to harm everyone, but it does not even achieve a narrow economic conception of efficiency.

The Times story describing Tirole's work offers a nice real-world example, explaining how the U.S. does a worse job of regulating cable TV companies than Europe and other countries do, because our government refuses to directly force Time Warner and Comcast to provide access to competitors to use the wires that run into people's houses.  This has the perverse effect of forcing a potential competitor to decide whether to compete by running new lines into new customers' houses (an expensive proposition), or to drop out of the market entirely and try to monopolize the markets in which it already has an advantage (if any).  Guess what happens most of the time?  In Europe, Australia, and New Zealand, by contrast, they follow Tirole's advice, and customers receive better service at lower prices.

So there.  A Nobel Prize Winner agrees with me.  Are you impressed?