NOTES

INTRODUCTION: WHATEVER HAPPENED TO THE COMMON GOOD?

1.    “Cardinal Welfare, Individualistic Ethics and Interpersonal Comparisons of Utility,” Journal of Political Economy (1955) 63 (4): 309–21.

2.    The Soviet “new man” (and woman, although the image was primarily male) was meant by early revolutionaries such as Trotsky and Lenin to bring his exceptional virtues to the service of society, beginning with selflessness but also including physical strength, a determination to work hard (Stakhanovism), education, and strict control of impulsive behavior. The belief that the new state would radically transform human nature quickly led to economic failure and the consequent authoritarian desire to apply state control over individuals.

3.    This refers to Aristotle’s criticism of the notion of the common good as developed by Plato. Plato imagined a community of goods in the ideal society, while Aristotle emphasized that this can raise as many problems as it solves.

4.    So long as I do not pollute this air, of course. These goods, for which my use does not compete with yours, are called “public goods” in economics. (The impossibility of excluding certain users is sometimes incorporated into the definition of a “public good.” I cannot restrict your access to the air, but it is possible to exclude people from a communal space, an online course, a patented invention, or watching a sports event on television, even though these too can be consumed by many users at the same time.)

5.    He described as “dismal” the economists opposed to slavery.

CHAPTER ONE: DO YOU LIKE ECONOMICS?

1.    In his article, “Ideology, Motivated Reasoning, and Cognitive Reflection,” Judgment and Decision Making, 2013, no. 8, pp. 407–424. More precisely, Kahan shows that capacities for calculation and reflective analysis do not improve the quality of the revision of beliefs about the anthropogenic factor. In 2010, only 38 percent of American Republicans accepted the idea that the planet has grown warmer since the pre-industrial era, and only 18 percent credited an anthropogenic factor in this change.

2.    In his book, The Belief in a Just World: A Fundamental Delusion (New York: Plenum Press, 1982).

3.    Daniel Kahneman, Thinking, Fast and Slow (London: Allen Lane, 2011). See also his works with Amos Tversky, in particular a book written with Paul Slovic, Judgment under Uncertainty: Heuristics and Biases (New York: Cambridge University Press, 1982). For a different point of view on heuristics, read Gerd Gigenrenzer, Simple Heuristics That Make Us Smart (Oxford: Oxford University Press, 1999).

4.    Figures given by Charles Kurzman, a sociologist at the University of North Carolina, quoted by Simon Kuper in the November 21, 2015, issue of the Financial Times. This figure excludes the September 11 victims, but it gives us an idea of the perception problem. Kurzman added in the Huffington Post, December 17, 2015: “So far this year, Americans have been more likely to be killed for being Muslim – than by a Muslim. One in 1 million Muslim Americans died because of hatred for their faith, compared with one in 17 million other Americans who died at the hands of Muslim militants.”

5.    In their example, half the Harvard students assessed a probability of 95 percent, when the real probability was only 2 percent. See chapter 5 for a description of this experiment.

6.    In the United States, students go to medical school not directly following their secondary education, but only after four years of university study in other disciplines.

7.    Studied by Michael Kremer and Charles Morcom in “Elephants,” American Economic Review, 2000, vol. 90, no. 1, pp. 212–234. Similar issues arise in the debate between an outright ban on the trade of ivory or rhino horn powder (the current law in most countries) and regulated trade thereof. Those in favor of regulated trade argue that private breeding of rhinos and elephants does not require killing the animal to extract these items of value, and especially that this would make extinction of these endangered species less likely. On the other hand, strict conservationists are concerned that global demand would be increased by marketing.

8.    What counts for the argument is whether the action of reselling goes in the right direction, whatever its level and thus the size of its impact.

9.    Historically, our survival has always depended on a strong norm of reciprocity within a limited social group. One of the novelties of recent history (“recent” in the evolutionary sense) is that we have learned to interact peacefully with groups that are foreign to us. See Paul Seabright’s book The Company of Strangers: A Natural History of Economic Life (Princeton: Princeton University Press, 2010).

10.  Paul Slovic, an American psychologist, has shown how the image of a single starving child in Mali can generate an outpouring of generosity much greater than the donations inspired by statistics on famine – for example, data on the millions of children suffering from malnutrition. This reaction clearly doesn’t make sense, but it shows how our perceptions and emotions affect our behavior.

11.  Part of the “cost” of queuing could be avoided by offering chairs and a heated waiting room, but that would only appear to solve the problem. In this case, potential buyers would come even earlier (the day before, for instance) and wait for longer. The windfall associated with a price lower than the market price would still disappear.

12.  There are some caveats to this broad rule, including the need to design auctions so as to preserve competition among the license users, such as wireless network operators. For example, the state must ensure that the auction does not create a monopoly or tight oligopoly. Similarly, actors must have no incentive to withdraw capacity to raise the price – see, for example, the recent concern about the possibility of capacity withdrawal in the so-called reverse auction in the US. Ulrich Doraszelski, Katja Seim, Michael Sinkinson, and Peichun Wang, in “Ownership Concentration and Strategic Supply Reduction” (2016), express concern about the significant purchases of licenses by private equity firms in the run-up to the US government’s planned acquisition of broadcast TV licenses to repackage them and resell them to wireless carriers in a forward auction (an estimated forty-five billion dollars in revenue).

13.  There are many works on the subject. See for instance two books written by prominent economists who were instrumental in the design of these auctions: Paul Klemperer’s Auctions: Theory and Practice (Princeton: Princeton University Press, 2004) and Paul Milgrom’s Putting Auction Theory to Work (Cambridge: Cambridge University Press, 2004).

14.  Assuming, of course, that firms are not facing financial constraints, a situation that has been analyzed by researchers to study the way in which auctions should be modified in this case.

15.  After a series of negotiations, the United Kingdom contributed very little to the European Union’s budget. Similarly, the argument that the rules issued by Brussels are restrictive is questionable (except for the occasional red tape) if only because most of these regulations are entirely desirable, accepted by willing governments, and necessary for international trade. On the other hand, Britain’s exit from the EU threatens to lead to stagnant investment because of the uncertainty regarding the country’s future, a decrease in direct foreign investment, and the UK’s diminished access to the European market. Trade with Europe represents 45 percent of the United Kingdom’s exports and 53 percent of its imports. The default agreement in matters of trade is that of the World Trade Organization. Although the latter has substantially lowered tariff barriers, the chief obstacles to commerce today are not tariffs, but rather non-tariff barriers such as standards, regulations, rules regarding origin, and banking passports (which Switzerland, for instance, does not have). These barriers will probably become important after Brexit, since Europe has little incentive to negotiate a new trade agreement and create a precedent that would encourage other countries to exit the EU – which some populist politicians in other countries support. The econometric estimates of Brexit’s cost to the United Kingdom vary greatly, but they all go in the same direction.

16.  See for example http://online.wsj.com/public/resources/documents/EconomistLetter11012016.pdf.

17.  On the RTL radio station, March 29, 2014.

18.  As Paul Krugman summed it up in the introduction to his Pop Internationalism: “Intellectual laziness, even among those who would be seen as wise and deep, will always be a powerful force” ([Cambridge: MIT Press, 1996], p. ix).

CHAPTER TWO: THE MORAL LIMITS OF THE MARKET

1.    Groundwork of the Metaphysics of Morals, trans. Mary Gregor and Jens Timmermann (Cambridge: Cambridge University Press, 2012), p. 46.

2.    “This much I know,” The Guardian, April 27, 2013.

3.    World Values Survey.

4.    A merit good is a good (or service) that will be underprovided by the market and is provided to all citizens by the government free or at a low price because it has intrinsic benefits or merit.

5.    New York: Farrar, Straus and Giroux, 2012.

6.    For a rather similar thesis, see Spheres of Justice: A Defense of Pluralism and Equality (New York: Basic Books, 1983) by Michael Walzer, a professor emeritus at Princeton University. For a very different approach to these questions, see Why Some Things Should Not Be for Sale: The Moral Limits of Markets (Oxford: Oxford University Press, 2010) by another philosopher, Debra Satz, a professor at Stanford.

7.    See chapters 8 and 9.

8.    An economic actor (or group) causes an externality when their activity produces, free of charge, a benefit or an advantage (or, on the contrary, a disutility or uncompensated harm) for someone else.

9.    On this, see Daniel Golden, The Price of Admission: How America’s Ruling Class Buys Its Way into Elite Colleges – and Who Gets Left Outside the Gates (New York: Three Rivers Press, 2006).

10.  For an in-depth discussion of voting questions, see for example Alessandra Casella, Storable Votes: Protecting the Minority Voice (Oxford: Oxford University Press, 2012).

11.  For a more detailed discussion of these questions, see James Hammitt, “Positive vs. Normative Justifications for Benefit-Cost Analysis. Implications for Interpretation and Policy,” Review of Environmental Economics and Policy, 2013, vol. 7, no. 2, pp. 199–218. Many articles have shown the inconsistency of our choices in the matter of protecting life. For example, some policies that cost a few hundred dollars per year of life saved are neglected, whereas others that cost billions of dollars per year of life saved are implemented. (Tammy Tengs, et al., “Five-Hundred Life-Saving Interventions and Their Cost-Effectiveness,” Risk Analysis, 1995, vol. 15, no. 3, pp. 369–390). Economists have nonetheless attempted to quantify health-related costs to guide decision makers in their policy choices. The disability-adjusted life year (DALY) and quality-adjusted life year (QALY) are among the most popular measurements. The DALY is calculated by adding a measure of the impact of a disease or disability on life expectancy, and an adjustment in the quality of life prior to death. Each specific condition receives a disability weight between 0 and 1. For instance, one DALY is equal to one year of healthy life lost.

12.  For a classical utilitarian point of view in moral philosophy, see Peter Singer, Practical Ethics (Cambridge: Cambridge University Press, 1993).

13.  See Jean-François Bonnefon, Iyad Rahwan, and Azim Shariff, “The Social Dilemma of Autonomous Vehicles,” Science 352(6293): 1573–1576.

14.  Judith Chevalier and Fiona Scott Morton, “State Casket Sales and Restrictions: A Pointless Undertaking?” Journal of Law and Economics, 2008, vol. 51, no. 1, pp. 1–23.

15.  Roland Bénabou and Jean Tirole, “Over My Dead Body: Bargaining and the Price of Dignity,” American Economic Review, Papers and Proceedings, 2009, vol. 99, no. 2, pp. 459–465.

16.  See chapter 5 for a discussion of the fragility of our morality.

17.  Trade in human organs is legal only in Iran, but illegal supply networks exist in several emerging or developing countries.

18.  For a theoretical study of the expressive character of law, see my article with Roland Bénabou, “Laws and Norms,” unpublished paper, 2013.

19.  An alternative foundation for our rejection of “dwarf tossing” is that we do not want to live in a society some of whose members delight in seeing such a show.

20.  With Lloyd Shapley, who had, like Roth, studied the allocation mechanisms between both sides of a market.

21.  For a description, see for example Alvin Roth’s Nobel Prize address, “The Theory and Practice of Market Design,” online at the Nobel Foundation website.

22.  The Righteous Mind: Why Good People Are Divided by Politics and Religion (London: Penguin Books, 2012).

23.  Some would add job insecurity. It goes without saying that unemployment is a major contributor to the loss of social cohesion. But as I will show in chapter 9, widespread unemployment results from choices made by society; it is about institutions, not the market itself.

24.  Drawing on Marcel Mauss’s The Gift: Forms and Functions of Exchange in Archaic Societies (London: Routledge, 1922), Bourdieu made this remark in a review of the proceedings of a conference on Mauss’s works that was published by Nicolas Olivier in 2008.

25.  For further reading on this theme, see Matt Ridley’s The Rational Optimist: How Prosperity Evolves (Fourth Estate, London, 2011), particularly chapter 3, provocatively titled “The Manufacture of Virtue: Barter, Trust and Rules after 50,000 Years Ago.” See also Paul Seabright’s The Company of Strangers (Princeton: Princeton University Press, 2004).

26.  Samuel Bowles, Microeconomics: Behavior, Institutions, and Evolution (Princeton: Princeton University Press, 2006). The op-ed piece appeared in the Wall Street Journal in 2002.

27.  In “The Crisis of 2008: Structural Lessons for and from Economics,” Centre for Economic Policy Research, Policy Insight, 2009, no. 28.

28.  Paul Seabright, The Company of Strangers (Princeton: Princeton University Press, 2004). For an analysis of the commercialization of sexuality, see also Seabright’s book The War of the Sexes: How Conflict and Cooperation Have Shaped Men and Women from Prehistory to the Present (Princeton: Princeton University Press, 2012).

29.  A “monopsonistic” employer is one who is the sole buyer (here, of the employee’s labor) and is thus able to dictate the terms of the exchange.

30.  Although the market, if not corrected by taxation, generates great inequalities, we must also note that other important forms of inequality develop in countries that are less subject to the market economy.

31.  Overall inequality is measured by indexes (here, the “Gini coefficient”) that take into account the whole revenue curve and not solely the comparison, for example, between the top 1 percent and the rest.

32.  Capital in the Twenty-First Century, trans. Arthur Goldhammer (Cambridge: Belnap Press, 2014).

33.  Facundo Alvaredo, Tony Atkinson, Thomas Piketty, Emmanuel Saez, and Gabriel Zucman, The World Wealth and Income Database.

34.  For example, inequality increased greatly in the United Kingdom while Tony Blair was prime minister (1997–2007) if we consider the proportion received by the top 1 percent, but the UK became more egalitarian if we consider the relation between the top 10 percent and the “bottom” 10 percent. In short, without necessarily concluding that the United Kingdom became more egalitarian, we should note that it is distribution as a whole that counts, and not a single aggregated statistic. See John Van Reenen (London School of Economics), Corbyn and the Political Economy of Nostalgia, based on the works of Gabriel Zucman and the UK government’s Department for Work and Pensions.

35.  See David Autor, Larry Katz, and Melissa Kearney, “The Polarization of the U.S. Labor Market” American Economic Review, 2006, 96 (2): 189–94, and David Autor and David Dorn, “The Growth of Low-Skill Service Jobs and the Polarization of the U.S. Labor Market” American Economic Review, 2013, 103(5), 1553–1597. We find a similar phenomenon in France: see Sylvain Catherine, Augustin Landier, and David Thesmar, Marché du travail. La grande fracture (Paris: Institut Montaigne, 2015). I return to this polarization in chapter 15.

36.  My account here is both sketchy and incomplete. For example, some observers have pointed the finger at an evolution of institutions that does not serve the workers’ interests (decline of unionization, slow growth or decline of the minimum wage). But as David Autor, David Dorn, Lawrence F. Katz, Christina Patterson, and John Van Reenen (“Concentrating on the Fall of the Labor Share”, 2017, NBER Working Paper No. 23108) argue, the decline in the labor share affects all countries, regardless of the evolution of institutions.

37.  There is a debate among economists as to whether skill-biased technological change is occurring exogenously (just because new tasks are more complex) or endogenously. Daron Acemoglu (in “Directed Technical Change,” Review of Economic Studies, 2002, 69: 781–809) observes that innovation is directed and that unskill-based innovation occurred in the late eighteenth century and early nineteenth century, when the artisan shop was replaced by the factory. He shows that there are two opposite effects at play: a price effect, as technologies economize on the more expensive factor, and a market size effect, according to which innovations, which benefit from increasing returns to scale, complement the abundant factor of production. The second factor is illustrated by the fact that the wage premium associated with going to college – the “college premium” – has grown swiftly since the 1970s, despite a large increase in college enrolment.

38.  Autor et al., op cit.

39.  This labor share in GDP used to be stable (although not at the industry level), but has decreased everywhere in the world.

40.  Let us recall that the world has undergone a second wave of globalization over the past fifty years, after the very strong wave that ended with the First World War. International trade now represents about one-third of the gross world product.

41.  The growth of GDP per capita of 326 percent in India and 823 percent in China in only twenty-five years (from 1991 to 2015) is of course exceptional by any historical standard.

42.  Elhanan Helpman, “Globalization and Inequality. Jean-Jacques Laffont Lecture,” October, 2015. Among the recent works, see also Anthony Atkinson, Inequality: What Can Be Done? (Cambridge: Harvard University Press, 2015), and Joseph Stiglitz, The Great Divide: Unequal Societies and What We Can Do about Them (New York: Norton, 2015).

43.  “Bonus culture,” Journal of Political Economy, 2016, 124: 305–370.

44.  However, note the work by Cecilia Garcia-Peñalosa and Étienne Wasmer on the brain drain in France (“Préparer la France à la mobilité internationale croissante des talents,” Conseil d’analyse économique, note 31). They show that the phenomenon is limited, but concentrated on “talents.” They point out that the optimal itinerary for exploitation of the social system is to be trained in France (study is free), go abroad to work, and then return to France when you have to pay for your children’s education or need health care. They advocate a series of public policy measures.

45.  Linda Van Bouwel and Reinhilde Veugelers show that the best European economics students (as measured by their later careers) return to Europe less often, and that few of them return later if they take their first job in the United States. Other studies corroborate this observation in other scientific domains (“Are Foreign PhD Students More Likely to Stay in the US? Some Evidence from European Economists,” in Marcel Gérard and Silke Uebelmesser, eds., The Mobility of Students and the Highly Skilled [Cambridge: MIT Press, 2015]). An important question is whether the recent creation of the European Research Council (whose goal is to help keep the best researchers in Europe) will succeed in stemming the flow, or whether, as is more likely, the creation of the council is complementary to reforms of the university system and will chiefly benefit only the countries that make reforms.

46.  Finally, the data may be difficult to access or may include omissions (as when an overseas student creates a firm in Palo Alto or in Boston after his or her studies).

47.  Some people mention the decline of labor unions, but there seems to be no empirical evidence in favor of this hypothesis.

48.  Odran Bonnet, Pierre-Henri Bono, Guillaume Chapelle, and Étienne Wasmer, “Does Housing Capital Contribute to Inequality? A Comment on Thomas Piketty’s Capital in the 21st Century,” unpublished paper, 2015.

49.  Philippe Aghion, Ufuk Akcigit, Antonin Bergeaud, Richard Blundell, and David Hemous, “Innovation and Top Income Inequality,” unpublished paper, 2015. The authors argue that innovation, although it increases the top 1 percent’s share of revenues, promotes social mobility and does not increase overall inequality.

50.  For example, a number of benefits may be foregone once one reaches a certain level of income. In some cases, an individual may hardly improve his or her net income, or in extreme cases even lose money when reentering the workforce or increasing gross income.

51.  The following borrows from an op-ed piece written with Étienne Wasmer and published in Libération on June 8, 2015.

52.  World Values Survey. See also Alberto Alesina, Ed Glaeser, and Bruce Sacerdote, “Why Doesn’t the United States Have a European-Style Welfare State?” Brookings Papers on Economic Activity, 2001, no. 2, pp. 187–278.

53.  Mark Granovetter, Getting a Job: A Study of Contacts and Careers (Cambridge: Harvard University Press, 1974). For example, Granovetter shows that more than 50 percent of jobs in a city in Massachusetts were obtained using contacts. Granovetter is well known for his theory of the “strength of weak ties,” from the title of his article published in 1973 in the American Journal of Sociology, vol. 78 (1973), 1360–1380.

54.  Roland Bénabou and Jean Tirole, “Belief in a Just World and Redistributive Politics,” Quarterly Journal of Economics, 2006, vol. 121, no. 2, pp. 699–746.

55.  Alberto Alesina, Reza Baqir, and William Easterly, “Public Goods and Ethnic Divisions,” Quarterly Journal of Economics, 1999, vol. 114, no. 4, pp. 1243–1284.

56.  Barry Bosworth, Gary Burtless, and Kan Zhang, “Later Retirement, Inequality in Old Age, and the Growing Gap in Longevity between Rich and Poor” (The Brookings Institution, 2016).

57.  In Bosworth, et al. (2016), assuming that the man is still alive at the age of fifty.

CHAPTER THREE: THE ECONOMIST IN CIVIL SOCIETY

1.    Burke wrote this in 1793 in reaction to the beheading of Marie Antoinette.

2.    In the usual sense of the term: as a manipulator, the sophist tries to persuade his audience by means of arguments that seem coherent but are, in fact, false.

3.    The quotation from Burke is ambiguous: Does calculators refer here to a group of manipulators acting out of calculation and self-interest, as his accusation of sophism suggests? Or is he blaming mathematicians, whom he no doubt held in similar esteem as economists?

4.    There is a famous lawsuit concerning his meager reward for the patented technology in relation to the income it earned for the company.

5.    While they are less keen on taking a strong political stance and being involved in a political party, they may be very active in the public debate through blogs, tweets, and op-eds. For example, according to a study by Jean Beuve, Thomas Renault, and Amélie Schurich-Rey (“Les économistes universitaires dans le débat et la décision publics,” Conseil d’Analyse Économique Focus paper no. 17), economists located in the United States and the UK are more active than their European counterparts concerning tweets or contributions to VoxEU, a prominent European policy portal. To be sure, the language factor, the cosmopolitan character of universities in these two countries, and their earlier adoption of new communication tools may of course be part of the explanation, but this strongly suggests that the difference in the patterns of engagement in civil society is not linked to a disinterest in public policy among US and UK intellectuals.

6.    For more on this, see How the French Think: An Affectionate Portrait of an Intellectual People by Sudhir Hazareesingh (New York: Basic Books, 2015). And especially The Reckless Mind: Intellectuals in Politics by Mark Lilla (New York: NYRB Books, 2001), which analyzes the attitudes of eight intellectuals (including Frenchmen Michel Foucault and Jacques Derrida) toward politics.

7.    See chapter 6 for an analysis of the state.

8.    See chapter 4.

9.    American Economic Review, Econometrica, Journal of Political Economy, Quarterly Journal of Economics, Review of Economic Studies.

10.  John Maynard Keynes, The General Theory of Employment, Interest, and Money (Palgrave Macmillan, 1936).

CHAPTER FOUR: THE EVERYDAY LIFE OF A RESEARCHER

1.    E.g., John Vickers, Damien Neven, Massimo Motta, Lars-Hendrik Roeller, and Tommaso Valletti in Europe, or Tim Breshnahan, Dennis Carlton, Joe Farrell, Michael Katz, Aviv Nevo, Nancy Rose, Carl Shapiro, and Fiona Scott-Morton to name a few recent chief economists at the US Department of Justice.

2.    Partha Dasgupta, “Modern Economics and Its Critics,” in Uskali Maki, ed., Fact and Fiction in Economics: Models, Realism and Social Construction, (Cambridge: Cambridge University Press, 2002). Partha Dasgupta analyzes 281 articles published between 1991 and 1995; among them, 25 are purely theoretical, 100 apply theory to a particular problem in economic policy, and 156 (thus more than half) are empirical or experimental.

3.    Daron Acemoglu (economic institutions, labor economics), Susan Athey and Jon Levin (industrial economics), Raj Chetty and Emmanuel Saez (evaluation of public policies), Esther Duflo (economics of development), Amy Finkelstein (health care economics), Roland Fryer (economics of discrimination), Matthew Gentzkow (the media and economic policy), Steve Levitt (social phenomena and economics, the author of the bestseller Freakonomics), to limit myself to the ten researchers who have won the Clark Medal (a prize for the best economist under forty years old who works in the United States) between 2005 and 2015.

4.    For example, in the first case, a three-dimensional, homogenous, and isotropic space, and in the second case, the absence of electrostatic interactions.

5.    See chapter 8 for more details.

6.    See chapter 7.

7.    It consists in summing up, in a single figure, financial flows that are, a priori, not directly comparable because they are realized at different times. In order to do this, the interest rate i is used, reflecting the trade-off between 1 dollar today and 1 + i dollars a year later (this is a simplification; other factors can come into play, such as risk or the discounting of distant profits. See in particular Christian Gollier’s book, Pricing the Planet’s Future? The Economics of Discounting in an Uncertain World [Princeton: Princeton University Press, 2012]).

8.    I cannot cite here the hundreds or thousands of articles devoted to this subject in the literature of economics. For a very limited survey of the references, the reader might consult the works cited in my articles with Roland Bénabou on identity and social norms.

9.    Naturally, the sampling has to be truly random. This would not be the case if subjects self-selected into participating in the clinical test; those who choose to participate in a trial usually have characteristics that differ from those of the population as a whole.

10.  Another case of random sampling is (or was) the gender of infants born to a couple. For example, it is hard to study how the number of her children affects a woman’s career: a mother who benefits from a promotion may decide to have fewer children or to have them later. Then the causal relation is unclear: Does having children cause a mother’s career to be compromised or, on the contrary, does being successful in her career cause a mother to have fewer children? However, the fact that a family with two sons or two daughters is more likely to want a third child makes it possible to push forward the analysis of causality (see Josh Angrist and William Evans, “Children and Their Parents’ Labor Supply: Evidence from Exogenous Variation in Family Size,” American Economic Review, 1998, vol. 88, no. 3, pp. 450–477).

11.  See in particular Abhijit Banerjee and Esther Duflo, Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty (New York: Public Affairs Books, 2011), and more generally the pioneering contributions made by these researchers, who teach at MIT.

12.  This is not necessarily true if the contract between sellers and buyers is incomplete; an important condition is that the terms of exchange are clearly specified. Laboratory experiments have been conducted in which there is an excess of “workers” with respect to the number of “jobs.” If the effort to be expended on the task is specified in the contract, then Smith’s result is verified. If, on the other hand, the effort expended is partly at the employee’s discretion, employers try to appeal to the employee’s reciprocity (see chapter 5) and offer higher salaries than the one they need to offer to attract the employee. See for example Ernst Fehr and Armin Falk, “Wage Rigidity in a Competitive Incomplete Contract Market,” Journal of Political Economy, 1999, no. 107, pp. 106–134.

13.  For an overview, see Steven Levitt and John List, “Field Experiments in Economics: The Past, the Present, and the Future,” European Economic Review, 2009, vol. 53, pp. 1–18.

14.  For recent reflections on the scientific status of economics, I recommend Dani Rodrik, Economics Rules: The Rights and Wrongs of the Dismal Science (New York: Norton, 2016).

15.  Beginning with the discussion of game theory in this chapter. See also chapters 10 and 11.

16.  Of course, I could also take examples bearing on microeconomics.

17.  This challenge is often called the “rational expectations revolution.” Precursors were Columbia’s Edmund Phelps and Chicago’s Milton Friedman, who argued that well-informed, rational employers and workers would care only about real wages.

18.  The conventional wisdom at the time held that economies faced either inflation or unemployment, but not both at the same time.

19.  See chapter 11.

20.  See in particular the site retraction watch.com. For discussions of the reproducibility of results, see (in psychology, for example) the article in Science (Sciencemag) on August 28, 2015: “Estimating the Reproducibility of Psychological Science”; in medicine, the article in PLOS One, “Does Publication Bias Inflate the Apparent Efficacy of Psychological Treatment for Major Depressive Disorder? A Systematic Review and Meta-Analysis of US National Institutes of Health–Funded Trials,” September 30, 2015; in economics, Andrew Chang and Phillip Li’s article, “Is Economics Research Replicable? Sixty Published Papers from Thirteen Journals Say ‘Usually Not,’” (Federal Reserve Board, 2015).

21.  Interview in Le Monde, January 3, 2001.

22.  The great majority of these students will not become economists, but will instead continue their studies in management, law, or another discipline, or enter professional life.

23.  Bruno Frey and Stephan Meier, “Selfish and Indoctrinated Economists?” European Journal of Law and Economics, 2005, vol. 19, pp. 165–171.

24.  Raymond Fisman, Shachar Kariv, and Daniel Markovits, “Exposure to Ideology and Distributional Preferences,” 2009, unpublished paper.

25.  For a study of the impact of narratives on behavior, see my article with Armin Falk and Roland Bénabou, “Narratives, Imperatives, and Moral Reasoning,” unpublished paper.

26.  Recall Adam Smith’s famous formula: “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from regard to their own interest. We address ourselves, not to their humanity but to their self-love.” Of course, Smith also wrote a great deal about the necessity of pro-social behaviors and on the necessity of regulation (recommending state intervention to overcome poverty, to prevent usurious lending, and to subsidize education), contrary to the simplistic image of him often given.

27.  Isaiah Berlin, The Hedgehog and the Fox: An Essay on Tolstoy’s View of History (London: Weidenfeld & Nicolson, 1953).

28.  As well as writers, who were the subject of Isaiah Berlin’s essay. This is just a personal impression, which would have to be confirmed more rigorously by an empirical study similar to Tetlock’s, described below.

29.  See his books Expert Political Judgment: How Good Is It? How Can We Know? (Princeton: Princeton University Press, 2005), and with Dan Gardner, Superforecasting (New York: Crown, 2015).

30.  Tetlock uses factorial analysis. Some examples of questions might be: “Do you think the most common error in judging situations is to exaggerate the complexity of the world?” or: “Do you think that a classic error in decision making is to abandon a good idea too quickly?” Positive responses to these questions signal a hedgehog cognitive style.

31.  Advocates of a minimal state, who see its main role as providing law and order, including court enforcement of contracts and the protection of private property.

32.  Nicolas Bourbaki was an imaginary mathematician. A group of talented French mathematicians (including five Fields Medal winners) met from 1934 to 1968 to write treatises (published under the name of Bourbaki) reconstructing mathematics in a more rigorous, abstract, and unified way.

33.  Incidentally, I disagree with Milton Friedman’s (1953) view that the realism of assumptions is irrelevant and only predictions matter. First, when data are scarce, looking at the realism of assumptions brings extra information. Second, the exact mechanism at work in general needs to be described in order to conduct policy.

34.  Economics Rules: The Rights and Wrongs of the Dismal Science (New York: Norton, 2016). See also “Why We Use Math in Economics,” Dani Rodrik’s Weblog, September 4, 2007.

35.  A good discussion of machine learning viewed from an economist’s viewpoint is Susan Athey’s “Beyond Prediction: Using Big Data for Policy Problems,” Science 355, 483–485 (2017). A focus on correlations has several limitations. First, even if the predictions are credible, making predictions at all requires that the environment be stable. However, it may be unstable because of exogenous or endogenous causes of instability. To grasp the notion of endogenous instability, note that the covariations being analyzed are presumably not just for the sake of pure knowledge; rather, they inform policies. These policies in turn often alter behaviors (although this need not be the case: the fact that my portfolio of book or movie choices is used by Amazon and Netflix for recommendations to others and to myself does not alter these choices). Relatedly, large players must not be able to manipulate the environment. If they are, they will modify their behavior to affect learning and therefore policy. Second, the focus on correlations ignores the issue of causality, which is the bread and butter of the economics profession. Machine learning experts have started working on causality, but it was traditionally absent from their analysis.

36.  Goods can be complements at low prices and substitutes at high prices, or the reverse. Similarly, products and their usage change over time; the current pattern of complementarity/substitutability, even well estimated, will not be the same tomorrow. Two drugs covered by two pharmaceutical patents may be combined to cure a disease, but may also be substitutes to combat another disease. A browser can be a complement to an operating system, but with additional code may become a competitor to that operating system.

37.  Nash, who won the Nobel Prize in 1994, died with his wife in a car accident in May 2015 after his return from Oslo where he had just received the Abel Prize, the most prestigious prize in mathematics (along with the Fields Medal). His life inspired Ron Howard’s 2002 film A Beautiful Mind, in which his role was played by Russell Crowe.

38.  Ignacio Palacios-Huerta, “Professionals Play Minimax,” Review of Economic Studies, 2003, no. 70, pp. 395–415.

39.  An important clarification: laboratory experiments are usually constructed in such a way as to respect anonymity. Individual choices are made on a computer. For example, if I choose a deviant behavior in the prisoner’s dilemma, the person I am playing against will register his loss, but will not know who caused it (and in theory the experimenter doesn’t know that, either).

40.  A person is risk averse if he prefers a guaranteed income to an income that is equivalent on average but subject to risks (for example, receiving twenty dollars, rather than thirty dollars with a probability of 50 percent or ten dollars with a probability of 50 percent). The more risk averse a person is, the more he will ask that a contract transfer the risk to the principal.

41.  Defined by David Kreps and Bob Wilson, researchers at Stanford, and the Nobel Prize winner Reinhardt Selten.

CHAPTER FIVE: ECONOMICS ON THE MOVE

1.    But also adopted by many sociologists, such as Max Weber and James Coleman, and in France by Raymond Boudon and Michel Crozier, not to mention other specialists in the social sciences who are not economists, such as the philosopher Karl Popper.

2.    More generally, interdisciplinarity (work across several disciplines in a constructive dialogue) is necessary, even if, unfortunately, it is often talked about but seldom practiced, except in a few research centers. The Institute for Advanced Studies in Toulouse (IAST) was founded in 2011 and has as its objective precisely to bring together in one place and around common seminars anthropologists, biologists, economists, legal scholars, historians, political scientists, psychologists, and sociologists.

3.    For example, see the literature on “rational inattention” initiated by Christopher Sims (e.g., in “Implications of Rational Inattention,” Journal of Monetary Economics, 2003, vol. 50, no. 3, pp. 665–690) and the literature on the costs of acquiring information and on incomplete contracts (for instance, my article “Cognition and Incomplete Contracts,” American Economic Review, 2009, vol. 99, no. 1, pp. 265–294).

4.    Needless to say, firms and politicians try to exploit behavioral characteristics such as self-control problems, biased beliefs, and self-deception. George Akerlof and Robert Shiller’s Phishing for Phools (Princeton: Princeton University Press, 2015) provides many examples in contexts such as finance, politics, advertising, and sin goods. I also highly recommend John Campbell’s “Restoring Rational Choice: The Challenge of Consumer Financial Regulation,” American Economic Review, (2016) 106: 1–30. That article focuses on consumer protection in an environment where financial ignorance is pervasive.

5.    Samuel McClure, David Laibson, George Loewenstein, Jonathan Cohen, “Separate Neural Systems Value Immediate and Delayed Monetary Rewards,” Science, 2004, no. 306, pp. 503–507.

6.    This property is expressed here in an informal way. The probability that the frequency of tails falls between 49 percent and 51 percent, for example, tends toward 1 as the number of draws becomes large; and this concept can be made still more precise.

7.    This bias has been observed, for instance, in roulette, where players have a tendency to bet on numbers that have seldom won earlier in the game; that is why this bias is called the “gambler’s fallacy.”

8.    Daniel Chen, Tobias Moskowitz, and Kelly Shue, “Decision-Making under the Gambler’s Fallacy: Evidence from Asylum Judges, Loan Officers, and Baseball Umpires,” to appear in the Quarterly Journal of Economics. This article argues in favor of an explanation in terms of the “gambler’s fallacy” in comparison with alternative explanations.

9.    The question was the following: “A disease affects one person out of 1,000. A test diagnosing this illness has a 5 percent rate of false positives, but correctly identifies those who have the disease [i.e., no false negatives]. One person has a positive test result: what is the probability than this person has the disease?” The correct answer is 2 percent (for a representative sample, 5 percent among the 999 healthy subjects, so approximately 50, will be diagnosed; so will the one who actually has the disease; so the probability of having the disease conditionally on being diagnosed is approximately 1/51, or about 2 percent); many of the respondents said 95 percent.

10.  Amos Tversky and Daniel Kahneman, “Belief in the Law of Small Numbers,” Psychological Bulletin, 1971, no. 76, pp. 105–110.

11.  The question of identity also plays a role in individuals’ choice to vote. Voting is partly expressive, and not simply induced by the quest for self-interest.

12.  In most laboratory experiments, the subjects make their choices on a computer. Moreover, a complex “double-blind” procedure ensures that even the experimenter does not know the individual choices made. He or she knows only the statistical distribution of the behavior.

13.  This percentage varies a great deal and depends on different factors, including the other participant’s socio-professional category (as it is declared by the experimenter), the other’s ethnic, religious, or geographical community, or again the Dictator’s physical or psychological state. The important thing is that, on average, subjects are prepared to sacrifice a little of their economic interest for others.

14.  Patricia Funk, “Social Incentives and Voter Turnout: Evidence from the Swiss Mail Ballot System,” Journal of the European Economic Association, 2010, vol. 8, no. 5, pp. 1077–1103.

15.  Many articles have been written about reciprocal altruism. See for example Ernst Fehr and Urs Fischbacher’s synthesis, “The Nature of Human Altruism,” Nature, 2003, no. 425, pp. 785–791.

16.  Joseph Heinrich, Robert Boyd, Samuel Bowles, Colin Camerer, Ernst Fehr, Herbert Gintis, and Richard McElreath, “In Search of Homo Economicus: Behavioral Experiments in 15 Small-Scale Economies,” American Economic Review Papers and Proceedings, 2001, vol. 91, no. 2, pp. 73–78. The article also reports on behavior in these microsocieties in the Dictator Game and in “public good games.” (In public good games, each player chooses how much to contribute. The contributions are then multiplied by a factor, with the resulting payoff being evenly divided among players. The multiplicative factor is greater than one, so there is a social gain to contributing; but the multiplicative factor is also less than the number of players, so that each player receives less than one to one on the money he contributes).

17.  This strategy has also been observed in field experiments seeking to study the behavior of individuals with regard to charitable acts.

18.  “Morals and Markets,” Science, 2013, vol. 340, pp. 707–711. See also Bjorn Bartling, Roberto Weber and Lan Yao, “Do Markets Erode Social Responsibility?” Quarterly Journal of Economics (2015), 219–266.

19.  Preferring B to A amounts to attributing a weight of at least one quarter to the well-being of the other in relation to one’s own well-being (the sacrifice is 1 and the gain for the other is 4). Similarly, when we compare B and C, the sacrifice for choice B is 5, and the gain for the other is 20, or four times greater.

20.  John List, “On the Interpretation of Giving in Dictator Games,” Journal of Political Economy, 2007, no. 115, pp. 482–493.

21.  Richard H. Thaler and Cass R. Sunstein, Nudge: Improving Decisions About Health, Wealth, and Happiness (New York: Penguin, 2008). The British government created a “Nudge Unit” in 2010. For an overview of the experiments conducted on default options – that is, options that prevail in the absence of another choice made by the individual – see Cass Sunstein’s article “Deciding by Default,” University of Pennsylvania Law Review, 2013, no. 162, pp. 1–57. A classic article in this domain shows that employees of an American company enrolled in a retirement plan (a savings account subsidized by the United States government) significantly more often when the default option was transformed into a choice between “no enrollment” and “enrollment,” the choices offered the employees remaining the same in both cases (Brigitte Madrian and Dennis Shea, “The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior,” Quarterly Journal of Economics, 2001, vol. 116, no. 4, pp. 1149–1187).

22.  The reader who knows statistics will recognize here the law of large numbers.

23.  Nina Mazar, On Amir, and Dan Ariely, “The Dishonesty of Honest People. A Theory of Self-Concept Maintenance,” Journal of Marketing Research, 2008, vol. 45, pp. 633–644.

24.  Benoît Monin et al., “Holier than me? Threatening Social Comparison in the Moral Domain,” International Review of Social Psychology, 2007, vol. 20, no. 1, pp. 53–68, and, in collaboration with P. J. Sawyer and M. J. Marquez, “The Rejection of Moral Rebels. Resenting Those Who Do the Right Thing,” Journal of Personality and Social Psychology, 2008, vol. 95, no. 1, pp. 76–93. See also Larissa MacFarquhar’s recent book, Strangers Drowning (New York: Penguin Press, 2015).

25.  “Benchmarking,” or rating by comparison, refers to techniques that consist in giving companies or employees models to be followed, and possibly to be used in calculating their remuneration on the basis of the distance separating their performance from that of the model.

26.  An article published in 2000 by Juan Carrillo and Thomas Mariotti, (“Strategic Ignorance as a Self-Disciplining Device,” Review of Economic Studies, 2000, vol. 67, no. 3, pp. 529–544) started this line of research on “behavioral information economics.”

27.  Roland Bénabou and Jean Tirole, “Self-Confidence and Personal Motivation,” Quarterly Journal of Economics, 2002, vol. 117, no. 3, pp. 871–915.

28.  See for example Roland Bénabou and Jean Tirole, “Willpower and Personal Rules,” Journal of Political Economy, 2004, no. 112, pp. 848–887; “Belief in a Just World and Redistributive Politics,” Quarterly Journal of Economics, 2006, vol. 121, no. 2, pp. 699–746; “Identity, Morals and Taboos. Beliefs as Assets,” Quarterly Journal of Economics, 2011, vol. 126, no. 2, pp. 805–855.

29.  For example, the British game show Golden Balls. This has been off air for some years, but economists use YouTube clips to illustrate game theory concepts.

30.  Michael Kosfeld, Markus Heinrichs, Paul J. Zak, Urs Fischbacher, and Ernst Fehr, “Oxytocin Increases Trust in Humans,” Nature, 2005, no. 435, pp. 673–676.

31.  A neuropeptide. This hormone seems to influence certain behaviors and affect orgasm, social recognition, anxiety, and maternal behaviors.

32.  George Akerlof, “Labor Contracts as Partial Gift Exchange,” Quarterly Journal of Economics, 1982, vol. 97, no. 4, pp. 543–569. For a laboratory test showing this reciprocity, see Ernst Fehr, Simon Gaechter, and Georg Kirschsteiger, “Reciprocity as a Contract Enforcement Device. Experimental Evidence,” Econometrica, no. 65, pp. 833–860.

33.  Rajshri Jayaraman, Debraj Ray, and Francis de Vericourt, “Anatomy of a Contract Change,” American Economic Review, 2016, vol. 106, no. 2, pp. 316–358.

34.  Part of the increase, to be sure, had a legal origin, but part came from the employer.

35.  “A Theory of Collective Reputations, with Applications to the Persistence of Corruption and to Firm Quality,” Review of Economic Studies, 1996, vol. 63, no. 1, pp. 1–22.

36.  Hysteresis is the phenomenon in which a system (social, economic, or physical) tends to remain in a particular state after the disappearance of whatever caused that state.

37.  Esther Duflo, Rema Hanna, and Stephen Ryan, “Incentives Work: Getting Teachers to Come to School,” American Economic Review, 2012, vol. 102, no. 4, pp. 1241–1278.

38.  The problem of multi-tasking has been analyzed, for example, in the classic article by Bengt Holmström and Paul Milgrom, “Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design,” Journal of Law, Economics and Organization, 1991, no. 7, pp. 24–52.

39.  Richard Titmuss, The Gift Relationship: From Human Blood to Social Policy (New York: The New Press, 1970).

40.  Besides his academic contributions, Dan Ariely is also known by the public for his TED talks and popular books, such as Predictably Irrational: The Hidden Forces That Shape Our Decisions (New York: HarperCollins, 2008), The Upside of Irrationality: The Unexpected Benefits of Defying Logic at Work and at Home (New York: HarperCollins, 2010), and The Honest Truth about Dishonesty (New York: HarperCollins, 2012).

41.  Dan Ariely, Anat Bracha, Stefan Meier, “Doing Good or Doing Well? Image Motivation and Monetary Incentives in Behaving Prosocially,” American Economic Review, 2009, vol. 99, no. 1, pp. 544–555. The subjects’ choices were either kept confidential, as in the standard experiments, or revealed to peers.

42.  Tim Besley, Anders Jensen, and Torsten Persson, “Norms, Enforcement, and Tax evasion,” unpublished paper. The transition in 1990 from a real estate property tax based on the value of the property to a very regressive poll tax greatly increased tax evasion, especially in constituencies with a majority of Labour voters, who opposed Margaret Thatcher’s government. It took a long time for tax evasion to fall back to a low level after the poll tax was replaced by a fairer tax in 1993. The article extends the model to a dynamic context to understand this hysteresis, and shows how incentives and predictions regarding the social norm explain reactions in different times and in different districts.

43.  Ruixue Jia and Torsten Persson, “Individual vs. Social Motives in Identity Choice: Theory and Evidence from China,” unpublished paper. In China, a child born from a marriage between a member of the majority Han ethnic group and a member of an ethnic minority can be declared to be either a Han or a member of the minority group. The extrinsic motivation comes from the advantages from which minorities benefit because of affirmative action programs; the social norm is connected with the reaction of the ethnic community with regard to the choice of ethnic declaration.

44.  Daniel Chen, “The Deterrent Effect of the Death Penalty? Evidence from British Commutations during World War I,” unpublished paper. In this case, the extrinsic motivation was the implementation of punishments (including capital punishment). Daniel Chen also identifies the impact of the social norm depending on the period and the provenance of the soldiers (for example, English or Irish soldiers).

45.  Roland Bénabou and Jean Tirole, “Intrinsic and Extrinsic Motivation,” Review of Economic Studies, 2003, vol. 70, no. 3, pp. 489–520.

46.  Armin Falk and Michael Kosfeld, “The Hidden Costs of Control,” American Economic Review, 2006, vol. 96, no. 5, pp. 1611–1630. For example, returning to the game in which Player 1 gives Player 2 a sum between zero and ten dollars, which is tripled upon reception (Player 2 then being able to return as much as he wants), the modified game specifies that Player 1 can also require a minimum return (equal to zero or four dollars, for example). Requiring a minimum of four dollars destroys reciprocity (and moreover, most players do not do it).

47.  Robert Cialdini, Influence: The Psychology of Persuasion (New York: HarperBusiness, 1984).

48.  Roland Bénabou and Jean Tirole, “Laws and Norms,” art. cit.

49.  For example, see the works of my colleagues in Toulouse, Ingela Alger and Jörgen Weibull (“Homo Moralis: Preference Evolution under Incomplete Information and Assortative Matching,” Econometrica, 2013, vol. 81, pp. 2269–2302), and Paul Seabright (The Company of Strangers: A Natural History of Economic Life, Second Edition [Princeton: Princeton University Press, 2010]). On the biological sources of cooperation, see Sam Bowles and Herb Gintis, A Cooperative Species: Human Reciprocity and its Evolution (Princeton: Princeton University Press, 2013).

50.  Michael Spence, “Job Market Signaling,” Quarterly Journal of Economics, 1973, vol. 87, no. 3, pp. 355–374.

51.  Amotz Zahavi, “Mate Selection – A Selection for a Handicap,” Journal of Theoretical Biology, 1975, vol. 53, pp. 205–214.

52.  For a historical overview, see Laurence Iannaccone, “Introduction to the Economics of Religion,” Journal of Economic Literature, 1998, vol. 36, no. 3, pp. 1465–1496.

53.  “The [clergy] may either depend altogether for their subsistence upon the voluntary contributions of their hearers; or they may derive it from some other fund to which the law of their country may entitle them; such as a landed estate, a tythe or land tax, an established salary or stipend. Their exertion, their zeal and industry, are likely to be much greater in the former situation than in the latter. In this respect the teachers of new religions have always had a considerable advantage in attacking those ancient and established systems of which the clergy, reposing themselves upon their benefices, had neglected to keep up the fervour of faith and devotion in the great body of the people; and having given themselves up to indolence, were become altogether incapable of making any vigorous exertion in defence even of their own establishment. The clergy of an established and well-endowed religion frequently become men of learning and elegance, who possess all the virtues of gentlemen, or which can recommend them to the esteem of gentlemen; but they are apt gradually to lose the qualities, both good and bad, which gave them authority and influence with the inferior ranks of people, and which had perhaps been the original causes of the success and establishment of their religion.” The Wealth of Nations, Book V, 1776.

54.  Maristella Botticini and Zvi Eckstein, The Chosen Few: How Education Shaped Jewish History, 70–1492 (Princeton: Princeton University Press, 2012).

55.  Mohamed Saleh, “On the Road to Heaven: Self-Selection, Religion, and Socio-Economic Status,” unpublished paper, 2016.

56.  Eli Berman and Laurence Iannaccone, “Religious Extremism: The Good, the Bad, and the Deadly,” Public Choice, 2006, vol. 128, no. 1, pp. 109–129. Daniel Chen and Jo Lind, “The Political Economy of Beliefs: Why Fiscal and Social Conservatives and Fiscal and Social Liberals Come Hand-In-Hand,” unpublished paper, 2016.

57.  See chapter 14.

58.  Emmanuelle Auriol, Julie Lassébie, Eva Raiber, Paul Seabright, and Amma Serwaah-Panin, “God Insures the Ones Who Pay? Formal Insurance and Religious Offerings in a Pentecostal Church in Accra, Ghana,” unpublished paper.

59.  See for example Roland Bénabou, Davide Ticchi, and Andrea Vindigni, “Religion and Innovation,” American Economic Review, Papers and Proceedings, 2015, vol. 105, no. 5, pp. 346–351, which shows a negative correlation (but not necessarily a causal relation) between religiosity and innovation or openness to science.

CHAPTER SIX: TOWARD A MODERN STATE

1.    Published as “Etat et gestion publique” in June 2000.

2.    For example, as a young scholar he had declined comfortable positions in the best American universities to build up an economics department from scratch in Toulouse. Later, he contributed to the promotion of economics research and education in several LDCs.

3.    See chapter 5.

4.    Another inefficiency of inequality is connected with the loss of self-sufficiency. An individual who does not have enough money to eat, use transportation, and pay for housing will find it difficult to get a job.

5.    All the buyers prepared to pay more than the price have bought, and all the sellers prepared to sell at the price have sold. Thus the only remaining potential trades are between buyers only prepared to pay less than the price and sellers demanding more than the price. These exchanges thus involve no gain from trade. This has been approximately verified empirically. See chapter 4.

6.    Such as subsidies for exports (the list of the beneficiaries of these subsidies was not made public on the grounds that doing so would have destroyed their effectiveness by inciting foreign competitors to go them one better), or the cross subsidies between sectors in unemployment benefits (the layoff-intensive sectors that draw heavily on these benefits “taxing” the other sectors).

7.    A ban on imports from such a country might prove impossible because of international trade agreements (WTO) or other political constraints.

8.    By contrast, the judiciary was still subject to political power in France not so long ago.

9.    Defining minimal standards for the regulation of banks, including their capital requirements. See chapters 11 and 12.

10.  http://www.vie-publique.fr/decouverte-institutions/institutions/administration/organisation/etat/aai/quel-est-role-aai.html.

11.  Democracy in America, chapter 5.

12.  Nonetheless, we must remain vigilant on this issue. For instance, in the European crisis, states have been offloading their problems onto the ECB, which, in addition to its normal role as a supplier of liquid assets, has been drawn despite itself onto political terrain (support of a state). Its power struggle with the Greek government in June and July 2015 was no doubt inevitable, but had Greece abandoned the euro, it could have led to a questioning of the central bank’s independence. In the US Senate, in a vote in January 2016, the Republicans (as well as Bernie Sanders on the left) questioned whether the Fed should be independent; fortunately, the Democrats at that stage prevented the Fed from being put under political control.

13.  On the other hand, the state can temporarily manage an enterprise or a failing bank if it does not initially find a buyer; then its duty is to resell the enterprise or the bank as soon as conditions are propitious, as the United States did with General Motors in 2013 (saving it from bankruptcy in 2009 ultimately cost the US government about eleven billion dollars net, out of a bailout of fifty billion dollars), and Sweden did when it nationalized banks on the brink of failure in 1992 and resold them later in the same decade.

14.  As Gaspard Koenig notes in Le Révolutionnaire, l’Expert et le Geek (Paris: Plon, 2015).

15.  In France, the idea of a planned economy comes from the Vichy regime and was adopted after the war, as was noted by Marc Bloch, for example. The Vichy regime rejected the revolutionary heritage of banning guilds and terminating the self-regulation of certain professions, and began to regulate culture, expand the civil service, subsidize population growth, and more generally direct the economy. On the development of the role of the state in France since the liberal revolution of 1789, see also Pierre Rosanvallon, Le Modèle politique français (Paris: Seuil, 2004).

16.  On this subject, see Philippe Aghion and Alexandra Roulet, Repenser l’État. Pour une nouvelle social-démocratie (Paris: Seuil, 2011), or the report of the Conseil d’analyse économique, “Économie politique de la LOLF,” 2007, no. 65 (Edward Arkwright, Christian de Boissieu, Jean-Hervé Lorenzi, and Julien Samson).

17.  The mandatory levies, which include in particular taxes (on income, on businesses, local taxes, etc.), contributions for social welfare programs, and the value-added tax represented only 45.2 percent of the GDP in 2015. The difference between these two figures reflects the nonobligatory levies (revenues from public enterprises and properties, gambling, fines and sanctions, gifts and legacies to the state, etc.) on the one hand, and the public deficit on the other (between 4 and 5 percent in recent years), with the corollary that public debt has increased.

18.  Literally “The Glorious Thirty,” an expression that refers to the thirty years of growth and prosperity in France between 1945 and 1975.—Trans.

19.  To be clear, an elected government definitely has the mandate to extend public services, on the condition that taxes are increased. This is a societal choice concerning which the economist can express an opinion only as a citizen.

20.  For instance, France has a large number of players involved in job (re) training programs or in administering social programs, and a multiplicity of retirement systems. Similarly, the juxtaposition of basic state health insurance and private supplementary health insurance plans doubles management costs and leaves no room for maneuver in contracting with doctors and hospitals; there is, therefore, no incentive to improve hospital management. Savings could be made by moving either to comprehensive state health insurance (as in the UK) or to private but regulated health insurance providers (as in Germany, Switzerland, or the Netherlands).

21.  France has a plethora of communes (France has 40 percent of Europe’s local authorities, but only 13 percent of its population), “départements,” and regions, on top of the central government. Parliamentary representation is itself excessive. For example, the US Senate, which is very active, has 100 senators, whereas France, a country with almost one-fifth the population, has 348 senators (and 577 delegates in the National Assembly); in all, France has almost ten times more legislators per inhabitant than the United States. Personally, I would prefer fewer of them with more active expert advisers.

CHAPTER SEVEN: THE GOVERNANCE AND SOCIAL RESPONSIBILITY OF BUSINESS

1.    See chapter 16.

2.    Some of these have, of course, gone public, like Goldman Sachs, which was founded in 1869 and went public in 1999. Some observers think this initial public offering caused the firm to lose sight of the customer’s interest and led to short-termism in managerial choices.

3.    In France, the “national interprofessional agreement” of 2013 stipulates that employees must have a voice in the deliberations of the boards of directors of large enterprises.

4.    See the articles by Gary Gorton and Frank Schmid, “Capital, Labor and the Firm: A Study of German Codetermination,” Journal of the European Economic Association, 2004, vol. 2, no. 5, pp. 863–905; Stefan Petry, “Workers on the Board and Shareholder Wealth: Evidence from a Natural Experiment,” unpublished paper, 2015; and Han Kim, Ernst Maug and Christoph Schneider, “Labor Representation in Governance as an Insurance Mechanism,” unpublished paper, 2015.

5.    On the other hand, transforming a capitalist enterprise into a self-managed enterprise is more difficult, because employees generally do not have the means to compensate the investors who own the firm—except when the investors’ shares have lost their value, in which case employees can easily take over the firm. Another case is that of “leveraged buyouts” or LBOs, in which the employees (maybe only the managers) put the firm deeply in debt in order to raise the money to buy the shares.

6.    Enron was one of the biggest American corporations specializing in natural gas and energy brokering. Having speculated on the electricity markets, it suffered losses that were concealed as profits via accounting manipulations and no less than three thousand offshore corporations. Enron declared bankruptcy in 2001; the result was twenty thousand redundancies, and many employees lost part of the retirement funds that they had invested in Enron shares. This financial scandal and another scandal at WorldCom led to the Sarbanes-Oxley Act of 2002, which dealt with accounting reform for companies whose shares are traded on the stock market and with the protection of their investors. Arthur Andersen, one of the largest auditing firms in the world, which certified Enron’s accounts, also disappeared as a result of its bankruptcy.

7.    Cambridge: Harvard University Press, 1996.

8.    In the case of card payment platforms such as Visa and MasterCard, there may be misalignment between the interests of small issuers—who cannot develop new services, security features, and brand labeling of their own and therefore want the platform to provide extensive services—and those of large issuers—who may want to self-provide a subset of services to differentiate themselves and thereby gain a competitive advantage. Another possible conflict arises when members differ in their relative focus on cardholders (the issuing function) and on merchants (the acquiring function).

9.    Of course, board members can request access to this information, but nonselective, undigested information is not of much use.

10.  See my article written with Philippe Aghion, “Formal and Real Authority in Organizations,” Journal of Political Economy, 1997, vol. 105, no. 1, pp. 1–29.

11.  Or hand over much more information than is relevant, so as to make it impossible for board directors to develop a clear analysis in a (necessarily) limited amount of time.

12.  See chapter 16.

13.  A stock option is an option to buy shares granted to managers or employees of the company. These options authorize their holder to buy a certain number of shares in the company at a date and a price set in advance—for example, to buy one hundred shares at the price of ten dollars in four years. If the share is worth fifteen dollars in four years, the value of the options will then be five hundred dollars. If it is worth less than ten dollars, the options will be valueless.

14.  A clawback covenant specifies that any reward that has been given out be returned in special circumstances or events that are specified in the contract.

15.  Among the classic empirical studies showing the possibility of this kind of connivance are those of Marianne Bertrand and Sendhil Mullainathan, “Are CEOs Rewarded for Luck? The Ones without Principals Are,” Quarterly Journal of Economics, 2001, vol. 116, no. 3, pp. 901–932, and of Lucian Bebchuk and Jesse Fried, Pay without Performance: The Unfulfilled Promise of Executive Compensation (Cambridge MA: Harvard University Press, 2004).

16.  These subjects in themselves deserve one or several chapters. See for example my book The Theory of Corporate Finance (Princeton: Princeton University Press, 2006).

17.  See chapter 8.

18.  See chapter 9.

19.  In its 2001 green paper, Promoting a European Framework for Corporate Social Responsibility.

20.  The following discussion is based on my article written with Roland Bénabou, “Individual and Corporate Social Responsibility,” Economica, 2010, no. 77, pp. 1–19.

21.  See Augustin Landier and Vinay Nair, Investing for Change: Profit for Responsible Investing (Oxford: Oxford University Press, 2008).

22.  A first-tier supplier is one that supplies the company directly; a second-tier supplier is a subcontractor of the first-tier subcontractor, etc.

23.  The task of extrafinancial rating agencies is difficult. These agencies rely on scanty and conflicting data.

24.  The example of Starbucks has been commented upon at length in the press. A study conducted on American data suggests that companies that engage the most in socially responsible action are also those that most aggressively avoid paying (“optimizing”) taxes; there is no proven causal relationship, but it is an interesting correlation (Angela Davis, David Guenther, Linda Krull, and Brian M. Williams, “Do Socially Responsible Firms Pay More Taxes?” The Accounting Review, 2016, vol. 91, no. 1, pp. 47–68).

25.  I refer the reader to chapter 1 for a discussion of inadequate understanding of certain policies.

CHAPTER EIGHT: THE CLIMATE CHALLENGE

1.    In practice, the different gases are lumped together under the term “carbon equivalents.” This chapter will sometimes conflate CO₂ and GHG.

2.    The COP (Conference of the Parties) takes place every year. For example, COP 23 in 2017 took place in Bonn. The fifteenth and twenty-first COPs were the major meetings in Copenhagen and Paris.

3.    Figures 8.2 and 8.3 describe both total emissions and those (usually positive) due to agricultural policy and deforestation and/or reforestation. In general, the two figures yield similar images, with the exception of two countries. The non-energy part of the emissions is substantial in the case of Brazil and even more in that of Indonesia, countries that have engaged in extensive deforestation.

4.    http://www.oecd.org/about/secretary-general/oecd-inventory-of-support-measures-for-fossil-fuels-2015.htm.

5.    This chapter borrows from an article written with Christian Gollier and published in 2015 by Economics of Energy & Environmental Policy: “Negotiating Effective Institutions against Climate Change,” vol. 4, no. 2, pp. 5–27. This article deals with many subjects that we will not take up here, such as the uncertainty and volatility of carbon taxes or the price on the market for tradable emissions permits, long-term commitment to environmental policies, and compensation formulas. It also contains a detailed study comparing different economic approaches. In addition, I refer the reader to my 2009 report to the French Conseil d’analyse économique (CAE) pointing out the lack of ambition in the coming Copenhagen negotiations.

6.    Jared Diamond, Collapse: How Societies Choose to Fail or Succeed (New York: Penguin Books, 2005).

7.    Elinor Ostrom, Governing the Commons: The Evolution of Institutions for Collective Action (Cambridge: Cambridge University Press, 1990).

8.    Moreover, this mechanism may encourage the emerging countries concerned not to adopt environmental legislation and to refuse to sign restrictive international accords. Adopting environmental legislation would in fact discourage projects to reduce emissions: it would exclude them from access to CDM credits by depriving them of their “additional” character!

9.    See Christian Almer and Ralph Winkler, “Analysing the Effectiveness of International Environmental Policies: The Case of the Kyoto Protocol,” in Bath Economics Research Papers 39 (2015), University of Bath and University of Bern.

10.  The Clean Air Act Amendment.

11.  In practice, all emissions are not subject to the requirement of holding emissions permits: for example, less than half of European emissions are now part of a market for permits to emit CO₂.

12.  The prices mentioned in this chapter will be by ton of CO_2. Even if I speak informally of the “carbon tax,” it must be remembered that a ton of carbon corresponds to 3.67 tons of CO₂ Thus the price of carbon is 3.67 times the price of CO_2.

13.  On top of the obligation of obtaining permits for those industries subject to the European tradable emissions permits program. The carbon tax was increased to twenty-two euros per ton of CO₂ in 2016. As always, it provided for many exceptions: trucking companies, taxis, farmers, fishermen, and so on.

14.  And a couple of other small countries’ carbon taxes.

15.  The Quinet report, whose methodology was adopted by the Rocard Commission on the carbon tax. Alain Quinet, La Valeur tutélaire du carbone (Paris: La Documentation française, “Rapports et documents,” 2009).

16.  In 2013, the United States Interagency Working Group offered three different estimates depending on three possible discount rates (2.5 percent, 3 percent, and 5 percent). Taking a real discount rate of 3 percent, the group estimated that carbon’s social cost was thirty-two dollars in 2010, reaching fifty-two dollars in 2030, and seventy-one dollars in 2050. These values obviously tend to be revised upward, because the international community’s inaction reduces our room to maneuver and further increases the cost of emissions.

17.  The expression is that of Harvard economist Robert Stavins.

18.  According to some estimates, purchasing the carbon credits necessary to meet its Kyoto commitments would have cost Canada about fourteen billion dollars.

19.  In 2006–2007, prices had already fallen following an overallocation of permits (pressure exerted by industrialists had led to an inflation of permits) and a defective conception of the European system in phase I (2005–2008): permit holders could not save their permits beyond the end of 2007, which meant that even a very slight excess of permits brought the price down to zero. We are concerned here with the second collapse, the one that occurred after the crisis and that was not due to technical causes.

20.  An additional problem proceeds from the fact that the EU ETS schema covered only a fraction of the European Union’s emissions. Many emitters, for example in the transportation and construction sectors, benefited de facto from a price of carbon that was equal to zero.

21.  This lack of information implies that any accord that results from an INDC process will lead to an inefficient allocation of the efforts agreed upon, because some economic agents will undertake expensive efforts to attenuate emissions while other agents will continue to emit GHGs whose elimination would be much less expensive; I shall return to this point.

22.  Joseph E. Stiglitz, “Overcoming the Copenhagen Failure with Flexible Commitments,” Economics of Energy and Environmental Policy, vol. 4, no. 2 (2015).

23.  Tellingly as well, a composite low-carbon world equity portfolio under-performed relative to a straight world equity index in the year following the accord, when it should have overperformed if the announcement had been good news about the fight against climate change (private communication from Christian Gollier).

24.  Although an economic instrument can be used to encourage the use of thermal insulation in houses by including the price of carbon in the price of home heating, the resulting economic calculus is complex for consumers, who do not always have the necessary information and may engage in short-term thinking (investments in insulation are amortized over decades). A well-conceived standard is therefore fully justified. My reservation is that standards are often established without a clear analysis of the implicit price of carbon involved, the objectives of the policy, and the alternative policies that would make it possible to achieve them. In addition, standards are often coelaborated by established firms and sometimes allow those firms to fend off potential entrants to their market.

25.  Denny Ellerman, David Harrison, and Paul Joskow, Emissions Trading in the US: Experience, Lessons and Considerations for Greenhouse Gases (Pew Center on Global Climate Change, 2003); Thomas Tietenberg, Emissions Trading: Principles and Practice, 2^nd ed. (London: Routledge, 2006); Robert Stavins, “Lessons from the American Experiment with Market-Based Environmental Policies,” in John Donahue and Joseph Nye, eds., Market-Based Governance: Supply Side, Demand Side, Upside, and Downside (Washington, DC: The Brookings Institution, 2002), pp. 173–200.

26.  It may seem surprising that some profitable investments do not move forward. In certain cases, the agent concerned may not have the information; in other cases, he may not have enough available money to make the investment (a modest household’s shortage of cash that prevents it from investing in insulation, for instance).

27.  See Claude Crampes and Thomas-Olivier Leautier, “Le côté lumineux des subventions aux renouvelable,” La Tribune, November 2, 2015.

28.  For example, the US Climate Plan (http://www.usclimateplan.org/at-a-glance) and Sandbag (https://sandbag.org.uk/carbonpricing/). For French-speaking readers, the Nicolas Hulot Foundation has produced a very instructive video on carbon pricing: http://www.fondation-nicolas-hulot.org/magazine/pourquoi-et-comment-donner-un-prix-au-carbone.

29.  An encouraging sign in France is the law on energy transition passed on July 22, 2015. The parliament endorsed the objective of quadrupling the price of carbon between 2016 and 2030.

30.  https://www.project-syndicate.org/commentary/carbon-pricing-fiscal-policy-by-christine-lagarde-and-jim-yong-kim-2015-10.

31.  Of course, this means setting a single total carbon price: adding a uniform carbon price to an already existing national carbon price would be on the one hand ineffective and on the other hand unfair to a country like Sweden, which had been virtuous even before the international accord, and for which the effect would be to make the past surplus contribution permanent.

32.  Proposed by Peter Cramton, Axel Ockenfels, and Steve Stoft, “An International Carbon-Price Commitment Promotes Cooperation,” Economics of Energy & Environmental Policy, 2015, no. 4, pp. 51–64.

33.  In recent years, despite the existence of a binding program and the involvement of the troika representing the creditors, Greece has made little progress in its battle against tax evasion. This shows how difficult it is for third countries to force the collection of a tax if the national government is not much inclined to apply it. In the context of climate change, there is no troika in each country to monitor what is going on.

34.  Let us recall that in France, in 2014, the carbon tax on fossil fuels was compensated (for one year only) by an equivalent decrease in the internal tax on the consumption of energy products, and thus had no effect on the prices of gasoline and heating oil.

35.  A construction standard that further insulates a house leads to fewer emissions. To properly measure the effort made, we need to estimate the savings in emissions achieved on the houses to which the norm is applied, as well as the estimated additional cost of the standards for construction. These operations are complex to carry out.

36.  Albedo is the relation of the solar energy reflected by a surface to the incident solar energy; reflection of the sun’s rays cools the planet, and thus diminishes GHG emissions. Trees on snow-covered land can limit the reflection.

37.  The price on the market is now low, for several reasons. First, the recession that raged in the United States until recently slowed emissions. Second, the discovery of shale gas and the threat (which has still not materialized) of nonnegligible taxes on GHGs discouraged investment and the consumption of coal. This low price thus also corresponds to lesser local environmental damage.

38.  See chapter 11.

39.  See Jean-Jacques Laffont and Jean Tirole, “Pollution Permits and Compliance Strategies,” Journal of Public Economics, 1996, no. 62, pp. 85–125.

40.  Some negotiable emissions permit systems specify a short time limit for using the permits granted, thus generating high volatility: at the end of the set period, let’s say a year, the price is either zero if there is an excess of permits, or very high (equal to the penalty for a lack of permits) if there is excess demand. Consequently, every development that takes place before the end of the year has substantial effects on the market price. However, in general the possibility of “banking” permits, which exists in many countries, reduces volatility.

41.  The NASA Orbiting Carbon Observatory-2, or OCO-2, is already in orbit around the earth. The ESA’s CarbonSat project is also promising.

42.  According to the Green Climate Fund, the firm commitments made by thirty-eight countries amounted, on November 20, 2015, to 5.9 billion dollars, plus 4.3 billion dollars in promises that had not yet been signed.

43.  http://www.oecd.org/env/cc/Climate-Finance-in-2013-14-and-the-USD-billion-goal.pdf.

44.  The small part of the financing going to emerging and developing countries that are targeted for adaptation—16 percent in 2013–2014 as opposed to 77 percent devoted to attenuation—remains a sensitive subject. Emerging and developing countries are asking for more adaptation, whereas the developed countries benefit essentially from mitigation policies.

45.  The question of transparency is one of the reasons why many programs for fighting pollution throughout the world have adopted a cap and trade scheme and have dealt with the question of financial transfers through the allocation of tradable quotas (often a system of grand-fathering), which are less sensitive politically. In the United States, the major transfers to Midwestern states that were generated by the Clean Air Act Amendment of 1990 have never really made newspaper headlines. To be sure, the transfers made in the context of national cap and trade programs differ in nature from the international payments in the framework of an international cap and trade system. However, in the framework of the European Union’s Emission Trading Scheme, billions of euros could potentially have been transferred to countries in eastern Europe and the former Soviet Union (that was the spirit of the program known as “hot air,” by way of the allocation of quotas to convince them to sign the Kyoto Protocol).

46.  Some of these principles are set forth in the previously cited article that I coauthored with Christian Gollier, which does not, however, go into detail about what a good formula would be. A more precise study is provided by the ETH Climate Calculator http://ccalc.ethz.ch/ (Zurich).

47.  It remains to be seen whether a permit to emit in one system is equivalent to the same permit in another system. The more virtuous countries, having issued fewer permits, might then feel that they have lost out.

CHAPTER NINE: LABOR MARKET CHALLENGES

1.    See chapter 15. On the changing nature of jobs, see in particular David Autor, “Why Are There Still So Many Jobs? The History and Future of Workplace Automation,” Journal of Economic Perspectives, 2015, vol. 29, no. 3, pp. 3–30.

2.    In France, this statistic is provided by the National Institute of Statistics and Economic Studies, or INSEE.

3.    Individuals are counted as unemployed in the ILO’s sense if they meet three criteria: 1) they have not worked during the week in question; 2) they are available to work within the next two weeks; 3) they have actively sought employment within the past month (or found a job that begins in less than three months).

4.    Or, more precisely, the Direction de l’animation de la recherche, des études et des statistiques (DARES).

5.    Category B: jobseekers expected to have made active efforts to find employment and who have worked in a short reduced-time job (i.e., seventy-eight hours or less in the course of a month)—716,400 in November 2015. Category C: jobseekers expected to have made positive efforts to find employment and who have worked in a long reduced-time job (i.e., more than seventy-eight hours in the course of a month)—1,151,300 in November 2015. Category D: jobseekers not expected to have made positive efforts to find a job (because they were doing an internship, participating in a training program, were ill, etc.)—280,900 in November 2015. Category E: jobseekers not expected to have made positive efforts to find a job who are employed (benefiting from subsidized contracts, for example)—420,000 in November 2015.

6.    On average, French people from sixteen to seventy-five years of age worked much less than Americans or Britons in 2008, in proportions of 28 percent and 13 percent respectively, whereas they worked just as much as the latter in 1968 (see Richard Blundell, Antoine Bozio, and Guy Laroque, “Labor Supply and the Extensive Margin,” American Economic Review, Papers & Proceedings, 2011, vol. 101, no. 3, pp. 482–486). The disparity has thus grown. Half of it can be attributed to the decrease in the work week and the other half to the stagnation of the employment rate in France, whereas employment rates in the United States and Britain have greatly increased. It is true that middle-aged and elderly French women work more, but this development has been more than counterbalanced by a major decrease in the employment of young people of both sexes, and of men no matter what their age.

7.    And this is not because they are in training: 17 percent of those between fifteen and twenty-four are unemployed and are not participating in a training program. Nine hundred thousand have given up any effort to find work and are not counted as unemployed.

8.    See Jean-Benoît Eyméoud and Étienne Wasmer, “Emploi des jeunes et logement. Un effet Tanguy?” IEP Paris, unpublished, 2015.

9.    It is hard to determine whether reduced social security contributions should be attributed to employment policy, because obviously what counts is the net amount (contributions less reductions in these contributions). Moreover, the reductions have more effect when they affect low salaries, those close to the minimum wage (see Pierre Cahuc and Stéphane Carcillo, Améliorer l’assurance chômage [Chaire sécurisation des parcours professionnels, 2014]).

10.  OECD, Public Expenditure and Participant Stocks on LMP.

11.  Expenditures to benefit employment and the labor market, whether targeted or general, are estimated by DARES to have been 85.7 billion euros in 2012, or 4.1 percent of the GNP (DARES analysis 019, March, 2015).

12.  According to a 2011 report of the French General Accounting Office (Cour des Comptes), “concerning the impact of subsidized jobs on return to employment, econometric models show a positive effect for subsidized contracts in the commercial sector and no effect for subsidized jobs in the noncommercial sector.” The noncommercial sector includes entities that provide services free of charge or at very low prices: public agencies, local governments, works councils, NGOs, etc.

13.  Social security is further financed through various taxes, such as the contribution sociale généralisée (CSG), the taxe sur les salaires or the taxes sur le tabac et les alcools. Social security contributions amounted to 16.9 percent of GDP in 2015, while the European average was 12.3 percent.

14.  See Corinne Prost and Pierre Cahuc, Améliorer l’assurance chômage pour limiter l’ instabilité de l’emploi, (Conseil d’analyse économique, 2015), note 24.

15.  Despite strong fiscal incentives not to use fixed-term contracts (additional unemployment insurance contributions) and to transform fixed-term positions into permanent positions (at termination of a fixed-term contract, the employer must pay a severance package equal to at least 10 percent of the total gross remuneration paid during the contract; also, the employer receives tax exemptions during three to four months if people under twenty-five are hired under a permanent contract).

16.  See OCDE, “Perspectives de l’emploi 2014,” p. 182.

17.  In France, those employees who negotiate with businesses and with the state, and who can cause trouble for the existing government, are not much affected by unemployment (these are mainly public sector employees and permanent employees of large companies). It is not surprising that their positions do not necessarily reflect the interests of the unemployed or workers with fixed-term contracts.

18.  Resignations in theory do not allow the worker to receive unemployment benefits. In practice, employer and employee often collude to disguise a quit and transform it into a redundancy, so as to allow an access to unemployment benefits. In France, such deals are actually now legal under the heading of “ruptures conventionnelles.”

19.  Bureau of Labor Statistics, Current Population Survey (Annual Social and Economic Supplement): CEA calculations.

20.  See Thomas Philippon, Le Capitalisme d’héritiers, which presents the international rankings in quality of work relationships (Paris: Seuil/La République des idées, 2007). Yann Algan, Pierre Cahuc, and André Zylberberg, in La Fabrique de la défiance et comment en sortir, analyze the sources and mechanisms of mistrust in France ([Paris: Albin Michel, 2012], p. 120).

21.  Nicolas Lepage-Saucier and Étienne Wasmer, “Does Employment Protection Raise Stress? A Cross-Country and Cross-Province Analysis,” 2011, report prepared for the Economic Policy Panel, 2012.

22.  On the feeling of security, see also Andrew Clark and Fabien Postel-Vinay, “Job Security and Job Protection,” Oxford Economic Papers, 2005, vol. 61, pp. 207–239; and Fabien Postel-Vinay and Anne Saint-Martin, “Comment les salariés perçoivent-ils la protection de l’emploi?” Économie et statistique, 2005, no. 372, pp. 41–59.

23.  Largely indirect in the case of France, as its banks were much less affected by exposures to subprimes and real estate than many of their counterparts abroad.

24.  In recent years, the French budget deficit has been around 4 or 5 percent.

25.  The following reflections are inspired by studies carried out in collaboration with Olivier Blanchard (a professor at MIT and chief economist of the IMF from 2007 to 2015). See in particular Licenciements et institutions du marché du travail, a report for the Conseil d’analyse économique, La Documentation française, 2003, pp. 7–50; and “The Optimal Design of Unemployment Insurance and Employment Protection: A First Pass,” Journal of the European Economic Association, 2008, vol. 6, no. 1, pp. 45–77. See also Pierre Cahuc and André Zylberberg, Le Chômage. Fatalité ou nécessité? (Paris: Flammarion, 2004).

26.  See chapter 8.

27.  For a description of American institutions, see Julia Fath and Clemens Fuest, “Experience Rating of Unemployment Insurance in the US: A Model for Europe?” CESifo DICE Report, 2005, vol. 2.

28.  For more details, see Olivier Blanchard and Jean Tirole “The Joint Design of Unemployment Insurance and Employment Protection: A First Pass,” Journal of the European Economic Association, 2008, vol. 6, no. 1, pp. 45–77. For the aspects more specific to the financing of enterprises and the notion of making good on liabilities within groups or more informal commercial relations, see this article and also my article, “From Pigou to Extended Liability: On the Optimal Taxation of Externalities under Imperfect Capital Markets,” Review of Economic Studies, 2010, vol. 77, no. 2, pp. 697–729. Facing financial constraints, companies may seek to mutualize part of the risk associated with the cost of dismissals insofar as companies are exposed to economic shocks that are at least partly independent of each other (or course, macroeconomic impacts cannot be mutualized, and stabilizing bottom lines then requires government intervention).

29.  Severance pay, which corresponds to a private cost of dismissal for the company, cannot be less than one-fifth of the employee’s monthly salary per annum of seniority, to which must be added two-fifteenths of a month per annum beyond ten years of seniority. The indemnity provided for by the collective agreement or the labor contract may be more advantageous for the employee than the legal indemnity.

30.  Here, the analysis of legal procedures is very schematic, even simplistic. I refer the reader to the work of Jean-Emmanuel Ray, Droit du travail. Droit vivant, 22^nd ed. (Éditions Liaisons, 2013) for a detailed analysis of the legal aspects.

31.  Since the law on job security passed in 2013. More generally, the limitation period before a labor court varies depending on the object of the demand—six months for the shortest period (denunciation of a settlement: dénonciation d’un reçu pour solde de tout compte) and as much as ten years for the longest (in the case of bodily damage caused by work).

32.  Unless the employees concerned are reclassified (provided with another job) in house, which requires that there be room in another activity, for which the employees to be transferred must, moreover, be competent. The obligation to reclassify as part of a restructuring plan, for example, may prove to be both extremely complex, in particular for an international group (how to prove to the judge that everything has been tried?) and not very effective, especially since in the case of dismissal on economic grounds the employer has to respect criteria (seniority, age, family obligations, etc.) that are connected neither with the vocational abilities of the employees concerned nor with the demand that the company has experienced for its products. Furthermore, an administrative body (the Direction régionale des entreprises, de la concurrence, de la consommation, du travail et de l’emploi [DIRECCTE]) has to approve the conformity of the reclassification plans.

33.  In dual labor markets like France’s, outsiders (excluded workers having no permanent job) are usually distinguished from insiders (socially integrated workers having a permanent job).

34.  See for example Jean-Emmanuel Ray, “Une mue salutaire, pour que la France épouse son temps,” Droit social, December 2013, no. 9, pp. 664–672.

35.  Pierre Cahuc and André Zylberberg, Les Réformes ratées du président Sarkozy (Paris: Flammarion, 2009).

36.  See Franck Seuret, “Licenciements. La grande triche,” Alternatives économiques, December 2006, no. 253, under the rubric “Tendances.”

37.  In their report, “De la précarité à la mobilité: vers une sécurité sociale professionnelle,” (La Documentation Française, 2005).

38.  Note 7 of the Conseil d’analyse économique (Guillaume Plantin, David Thesmar, and Jean Tirole, “Les enjeux économiques du droit des faillites,” 2013) advocates a transfer of control to the creditors of enterprises in difficulty.

39.  The effect of a reform of job protection is complicated to measure empirically, because numerous other variables change at the same time, either because of the reform itself (for example, the Italian reform of 2014 was accompanied by subsidies for hiring), or because of changes in the macroeconomic environment. Economists’ goal is to isolate the effect of the change in protection (and thus to identify the causality). In fact, many econometric studies show that granting more flexibility produces a net positive effect on employment, sometimes a large effect, but also sometimes a very small one (the positive impact of granting more flexibility bears more on young people and women, it appears). A classic study is that of David Autor, John Donohue, and Stewart Schwab, “The Costs of Wrongful Discharge Laws,” Review of Economics and Statistics, 2006, vol. 88, no. 2, pp. 211–231. For a review of the methodology, see Tito Boeri, Pierre Cahuc, and André Zylberberg, “The Costs of Flexibility-Enhancing Structural Reforms: A Literature Review,” OECD Working paper, October 2015. The long-term effects described below are undoubtedly more important.

40.  See chapter 8. The losers (the biggest polluters) have generally been compensated by granting them tradable emission rights free of charge; this does not mean, of course, that the reforms are pointless—quite the contrary. The number of permits is limited (half the earlier annual pollution in the case of sulfur dioxide in the United States in 1990). The big polluters have an incentive to diminish their pollution, because they can resell their excess permits (or have to buy new permits if they do not sufficiently diminish their pollution).

41.  The Italian reform created fiscal incentives promoting conciliation (recourse to the courts has much diminished) as well as the signature of new contracts. And it has also eliminated the possibility of reinstating the employee. One difference between France and Italy is that the latter did not sign the ILO’s convention 158, which requires a valid reason for each dismissal. This article gives the employee a systematic right of recourse before the judge. The question of course is how to determine what constitutes a valid reason. Since article 4 of this convention connects the valid reason with “the worker’s aptitude or behavior” or “the necessities for the functioning of the enterprise, the institutions, or the service,” it can be interpreted in multiple ways. Spain, which signed convention 158, reformed its labor market in 2012 by limiting severance agreements and clarifying the conditions for a dismissal on economic grounds.

42.  See Roland Bénabou and Jean Tirole, “Laws and Norms,” unpublished; and chapter 1 for a discussion of the reasons why the public finds it hard to assimilate the economic message.

43.  See for example George Loewenstein, Deborah Small, and Jeff Strand, “Statistical, Identifiable, and Iconic Victims,” in Edward J. McCaffery and Joel Slemrod, eds., Behavioral Public Finance (New York: Russell Sage Foundation, 2006), pp. 32–35.

44.  Economists cast a critical eye on the French tradition of co-determination (by bosses and employees unions) of vocational training and apprenticeship. Training often does not respond to the needs of companies and of employees; it is often not properly aimed at those workers who need it most, those for whom the return on vocational training is the highest (for example, more than a quarter of “apprentices” are university students!). And the evaluation and system of certification, which is intended to provide employees with training programs that would be truly useful to them, leave much to be desired.

For an analysis of the aspects of the French vocational training system that run counter to the goals of redistribution and making the parties accountable, as well as of the inefficiency of the layers of bureaucracy, see for example Pierre Cahuc, Marc Ferracci, and André Zylberberg, Formation professionnelle. Pour en finir avec les réformes inabouties (Institut Montaigne, 2011); Pierre Cahuc and Marc Ferracci, L’Apprentissage. Donner la priorité aux moins qualifiés (Paris: Presses de Sciences Po, 2015); and Pierre Cahuc, Marc Ferracci, Jean Tirole, and Étienne Wasmer, L’Apprentissage au service de l’emploi (Conseil d’analyse économique, 2014), note 19.

45.  According to the Institut Montaigne, 5.2 percent of French people between the ages of fifteen and twenty-four were in apprenticeships in France in 2013, as opposed to 16 percent in Germany.

46.  Paul Samuelson, one of the greatest economists of the twentieth century, rebelled against this concept in his famous textbook. See also, for example, Paul Krugman’s editorial in the New York Times, “Lumps of Labor,” October 7, 2003.

47.  David Card, “The Impact of the Mariel Boatlift on the Miami Labor Market,” Industrial and Labor Relations Review, 1990, vol. 43, pp. 245–257.

48.  For example, the 2000 law that mandated the thirty-five-hour week introduced the ability to count work time in days rather than hours (forfait jour). Managers (with the exception of the top management) are theoretically subject to the same working time limits as the other employees. However, measuring their work time is complex, as it is more generally for employees with substantial work autonomy, such as traveling salespeople. For this reason, the limit in terms of hours for such employees became a limit on the number of yearly working days, with more extensive paid leave.

49.  These methods are analogous to the techniques of comparing control groups and treatment groups in scientific experiments. They make use of what is called in the language of economics the method of difference-in-difference.

50.  A summary of these contributions is found in Pierre Cahuc and André Zylberberg, Le négationnisme économique (Paris: Flammarion, 2016). See also Tito Boeri and Jan van Ours, The Economics of Imperfect Labor Markets (Princeton: Princeton University Press, 2013); Pierre Cahuc, Stéphane Carcillo, and André Zylberberg, Labour Economics (Cambridge: MIT Press, 2014); and the classic article by David Autor, John Donohue, and Stewart Schwab, “The Costs of Wrongful Discharge Laws,” Review of Economics and Statistics, 2006, pp. 211–231.

51.  See for example Frédéric Docquier, Çaglar Ozden, and Giovanni Peri, “The Labour Market Effects of Immigration and Emigration in OECD Countries,” Economic Journal, 2014, vol. 124, no. 579, pp. 1106–1145. The effects on the salaries of employees in the host country are not negative, even on the lowest salaries. Also, they usually contribute more in taxes than they cost the country. Of course, dysfunctional labor market institutions like those in France weaken the argument, because they offer less flexibility for the creation of jobs and thus for integrating these workers.

52.  See George Borjas, “The Economics of Immigration,” Journal of Economic Literature 32, pp. 1667–1717; or the 1991 book edited by John Abowd and Richard Freeman, Immigration, Trade and the Labor Market (Chicago: University of Chicago Press, 1991). More recent evidence can be found in the Journal of Economic Perspectives’ fall 2016 symposium on immigration and labor markets.

53.  See David Autor, David Dorn, Gordon Hanson, and Jae Song, “Trade Adjustment: Worker-Level Evidence,” Quarterly Journal of Economics, 2014, vol. 129, no. 4, pp. 1799–1860.

54.  In Germany, Wolfgang Dauth, Sebastian Findeisen, and Jens Südekum (“Adjusting to Globalization: Evidence from Worker-Establishment Matches in Germany,” 2016, CEPR Discussion Paper 1145; see also their 2017 American Economic Review, Papers & Proceedings article) show that those who lose their jobs in industries subject to competition from imports do not find new jobs in industrial exporting companies, but have to take service jobs instead.

55.  See the empirical references in Pierre Cahuc’s paper presented in the seminar on employment policies at Bercy on November 20, 2015 (synthesis of the speeches and discussions).

56.  Pierre Cahuc, paper cited in preceding note. Decentralization has been greater in Germany since 2004: see Christian Dustmann, Bernd Fitzenberger, Uta Schönberg, and Alexandra Spitz-Oener, “From Sick Man of Europe to Economic Superstar: Germany’s Resurgent Economy,” Journal of Economic Perspectives, 2014, vol. 28, no. 1, pp. 167–188. This does not mean that German enterprises do not use sector agreements. But their doing so is usually a choice (extensions are state decisions and are rare; the sectors do not have the legal capacity for extension, otherwise one could imagine that they would force firms to apply the sector agreement), but one that is part of a package, because the employers’ organization also provides other services. The fact that the adoption of sector agreements is voluntary greatly changes things, because sector agreements then have to be attractive for companies, since they cannot be constrained, and institutions are more in phase with competition law.

57.  In practice, the labor code remains directive in some of its dimensions and leaves negotiation no room to maneuver. This is what the Combrexelle report (2015) calls the “conventional public order,” from which management and labor cannot deviate (minimum wage, overtime beginning at thirty-five hours, priority of permanent contracts). This report advocates an extension of negotiation between management and labor in France.

58.  See chapter 8.

59.  See chapters 14 and 15.

CHAPTER TEN: EUROPE AT THE CROSSROADS

1.    Barry Eichengreen, “Is Europe an Optimal Currency Area?” National Bureau of Economic Research, 1991, Working Paper no. 3579.

2.    More generally, intra-European trade is considerable: intraregional trade makes up almost 70 percent of total exports in the larger European Union (EU-28). For more detail, see https://www.ecb.europa.eu/pub/pdf/other/art2_mb201301en_pp59-74en.pdf.

3.    See Luigi Guiso, Paola Sapienza, and Luigi Zingales, “Monnet’s Error,” Economic Policy, (2016) 31 (86): 247–297.

4.    The euro was introduced in 1999 for financial transactions. Households started using the legal tender in the form of bills and coins on January 1, 2002.

5.    Christian Thimann, “The Microeconomic Dimensions of the Eurozone Crisis and Why European Politics Cannot Solve Them,” Journal of Economic Perspectives, 2015, no. 3, pp. 141–164.

6.    See chapter 9 for the case of France.

7.    Here I am not taking into account the adjustments made by southern Europe. If we consider only intra-European trade, we can, of course, conceive of a rise in prices and salaries in Germany as a substitute for a decrease of prices and salaries in southern Europe.

8.    One variant of which was the proposal in France for a “TVA sociale.”

9.    Jeremy Bulow and Ken Rogoff note that Greece’s GDP per capita moved from 41 percent of Germany’s in 1995 to 71 percent in 2009, and then fell back to 47 percent in 2014 (“The Modern Greek,” Vox EU, June 10, 2015).

10.  Olivier Blanchard and Francesco Giavazzi, “Current Account Deficits In the Euro Area: The End of the Feldstein-Horioka Puzzle?” Brookings Papers on Economic Activity, 2002, vol. 2, pp. 147–209.

11.  The endogenous nature of public policy in reaction to the ownership of financial assets is a classical theme of economic theory (it is, for example, the argument often given in favor of fully funded retirement schemes that are based on capitalization and make the population—and not only its most affluent members—the owners of enterprises through their shares in pension funds, thus creating popular support for policies favorable to investment). In the case of international finance, and regarding the benefits of investors’ home bias (to the detriment of the international diversification of domestic savings), see for example my article “Inefficient Foreign Borrowing: A Dual- and Common-Agency Perspective,” American Economic Review, 2003, vol. 93, no. 5, pp. 1678–1702.

12.  Despite the “no bailouts” clause of the 1992 Maastricht Treaty specifying that member states should not be liable for, nor assume, the commitments or debts of another member state.

13.  Carmen Reinhart, Kenneth Rogoff, This Time is Different: Eight Centuries of Financial Folly (Princeton: Princeton University Press, 2009).

14.  On this subject, see the IMF’s report, “Global Financial Stability Report,” IMF, June, 2012.

15.  An additional problem: they then raised capital, issued preferred stocks (a form of debt in which the distribution of coupons can be interrupted so long as no dividends are paid to shareholders, thus providing a certain flexibility for the borrower in comparison to ordinary debt), and subordinated debts to new entities, which were themselves financed by Spanish investors, who were often also depositors. This made participation by the private sector in future bailouts politically difficult.

16.  This strengthened the rules in several ways: a deficit cap at 0.50 percent (for the structural deficit, that is, adjusted to the economic cycle); automatic sanctions, cancelled only in the event of a majority vote; implementation of decisions by the European Court of Justice.

17.  In addition to the evidence cited below, Europe was not prepared and had no firewall; but the situation has changed somewhat.

18.  Domestic banks today find themselves holding a lot of government bonds, which incidentally raises concerns about possible “doom loops.”

19.  In November 2015, despite debt at 240 percent of GDP, the interest rate on thirty-year government bonds was only 1.36 percent!

20.  For an interesting comparison of the role of reputation with that of sanctions, see Jeremy Bulow and Ken Rogoff, “Why Sovereigns Repay Debts to External Contributors and Why it Matters,” Vox EU, June 10, 2015.

21.  In 2012, Judge Thomas Griesa of the United States Southern District Court of New York ruled in favor of “vulture funds,” which had refused to settle with Argentina. This ruling not only specified favorable financial terms for the vulture funds; crucially, it also prohibited Argentina from making any payments to creditors who had settled before the vulture funds had been repaid in full.

22.  See Guillermo Calvo, “Servicing the Public Debt: The Role of Expectations,” American Economic Review, 1988, vol. 78, no. 4, pp. 647–661.

23.  Citi Global Perspectives & Solutions, “The Coming Pensions Crisis,” 2016.

24.  In Europe, attempts have recently been made to extend the part of the debt that cannot be bailed out by going beyond shares: large deposits (in theory, not insured) in Cyprus, and subordinated debt and hybrid securities in the case of the SNS Reaal bank.

25.  Unlike Europe, the United States is a federation. I will return to this point at the end of the chapter.

26.  Private lenders are by definition willing to grant a country a loan at the market interest rate if they are sure that this loan will be repaid. Unless the IMF takes a risk of nonrepayment, the specificity of its loan with respect to those of the market lies elsewhere.

27.  Michael Bordo, Lars Jonung, and Agnieszka Markiewicz, “A Fiscal Union for the Euro: Some Lessons from History,” CESifo Econ Stud, 2013, vol. 59 no. 3, 449–488.

28.  Thomas Philippon, “The State of the Monetary Union,” Vox EU, August 31, 2015.

29.  The troika is composed of the IMF, the ECB, and the European Commission. It was formed in 2010 to set up plans for coming to the rescue of Greece, and later Ireland, Portugal, and Cyprus.

30.  From 25 percent at the beginning of 2014, according to a European Commission report.

31.  See Jeremy Bulow and Ken Rogoff, “The Modern Greek Tragedy,” Vox EU, June 10, 2015. To be sure, the first bailout partly benefited the French and German banks, which held a lot of Greek debt; but the money that went to those banks was a substitute for the payments that were supposed to have been made by Greece.

32.  “Greece: Past Critiques and the Path Forward,” imf-Direct (blog), July 9, 2015.

33.  In the late 1980s, bank lenders in deeply indebted Latin American countries received negotiable instruments with a large discount in relation to their initial debt. The liquidity of these bonds allowed them to make a fresh start and to remove the debt from their balance sheets by selling the instruments.

34.  “PIIGS”: Portugal, Ireland, Italy, Greece, and Spain.

35.  The acquis communautaire refers to the whole set of laws that apply more generally to the countries of the European Union. It is generally accepted that the acquis communautaire has made it possible to protect governments against powerful national lobbies, and that it has thus been beneficial for countries that have joined the EU (in contrast with other countries: compare, for example, the very different paths taken by Poland and Ukraine, even before the tragedy that has recently overwhelmed the latter).

36.  Private creditors holding Greek government debt were asked to extend the maturity of their debt, to decrease the interest rates, and to reduce the nominal value of the debt by more than 50 percent. This private sector involvement (PSI) operation led to a decrease in debt of over one hundred billion euros through a haircut on privately held debt.

37.  Which centralizes the prudential regulation of banks through the “Single Supervisory Mechanism” and is broader than the Eurozone (it includes twenty-six EU member states).

38.  This is a shortcut. The treaty is well known for leading to the creation of the euro, on which we focus, but had other provisions as well.

39.  Jean Tirole, “Country Solidarity in Sovereign Crises,” American Economic Review, 2015, vol. 105, no. 8, pp. 2333–2363.

40.  The nominations are validated by the European Union. The councils report to the latter and to the European Court of Justice. The members of these councils are supposed to be competent and experienced.

41.  In France, the Haut Conseil des finances publiques consists of four magistrates from the Cour des comptes and four other experts (with expertise in macroeconomic forecasts, public finance, etc.) appointed to five-year terms. Its missions are 1) to validate growth forecasts, 2) to give an opinion on the proposed finance law and the way back to a balanced budget, and 3) to possibly ask for corrective actions in the course of the year.

42.  On the other hand, Europe would not be a federation like others, because the segmentation of the financial market in periods of crisis limits the risk sharing by the financial market.

43.  Alberto Alesina and Ed Glaeser, Fighting Poverty in the US and Europe: A World of Difference (Oxford: Oxford University Press, 2004).

CHAPTER ELEVEN: WHAT USE IS FINANCE?

1.    A “swap” is a contract exchanging financial flows between two parties. For example, Airbus and its financial counterparty (such as a bank) can agree on a future transfer of one dollar by Airbus in exchange for x euros by the counterparty. Thus Airbus would be less badly affected by a fall in the dollar. (Of course, it will be unfavorable to Airbus if the dollar rises, but in that case its revenues would increase as well; this is like any insurance contract.)

2.    For example, in 2012, the departments of Rhone and Seine-Saint-Denis had, respectively 418 and 345 million euros in toxic loans; the commune of Argenteuil had 118 million.

3.    Public-private partnerships, which can provide advantageous solutions for financing public infrastructure by combining public goals with the efficiency of the private sector, have historically been adopted for bad reasons: the private partner took responsibility for the initial expenditure, while the public authority committed itself to making considerable but distant payments (or else gave up its rights to future revenues connected with the investment). Public accounting systems have tried to penalize such strategies of delaying payment.

4.    The IMF in particular regularly publishes studies on the functioning of fiscal rules. For example, “Expenditure Rules: Effective Tools for Sound Fiscal Policy?” February 2015, working paper.

5.    It might be useful to add other supervisory controls over public sector borrowing—for example, by requiring that for each public program there is some specified means in the subsequent years of financing associated expenditures (except perhaps in the case of very long-term investments that need a longer horizon).

6.    A currency that seemed to involve no risk, but was in reality very risky: the Swiss central bank was artificially keeping the Swiss franc undervalued at 1.2 Swiss francs to the euro—until January 2015, when it let the Swiss franc rise by about 20 percent against the euro.

7.    Boris Vallee and Christophe Perignon, “The Political Economy of Financial Innovation: Evidence from Local Governments,” Review of Financial Studies (forthcoming). These authors show that the large local authorities (which, a priori, had a more highly qualified finance department and access to external expertise) had more recourse to structured loans; the same goes for mayors with extensive training—for example, those with backgrounds as high-ranking civil servants.

8.    An over-the-counter transaction is one in which the transaction is made bilaterally, between the buyer and the seller, with a contract that is usually not very standardized. On the other hand, exchange trading involves an organized market in which numerous buyers and sellers exchange relatively standardized securities.

9.    Warren Buffet, one of the wealthiest people on the planet, is considered one of the smartest investors. For more than forty years, his Berkshire Fund has outperformed the S&P 500 and the Dow Jones stock indexes, which is exceptional.

10.  For a discussion of the incentive effects and dangers of securitization, see (among many other sources, because this point has been extensively discussed in the economic literature) Mathias Dewatripont and Jean Tirole, The Prudential Regulation of Banks (Cambridge: MIT Press, 1994).

11.  Benjamin Keys, Tanmoy Mukherjee, Amit Seru, Vikrant Vig, “Did Securitization Lead to Lax Screening? Evidence from Subprime Loans,” Quarterly Journal of Economics, 2010, vol. 125, no. 1, pp. 307–362.

12.  I will not go into the complexity of the process of securitization here. The issuers handed over their loan portfolios to “conduits” (“structured investment vehicles”) that then sold more or less risky “tranches” of these loans to provide products suited to the risk appetites of different investors (many investors want high-grade securities to enable them to manage their risks better, or for regulatory reasons). For example, the prudential rules for commercial banks required 8 percent of the bank’s own equity to back assets weighted by their risk. For AAA tranches (the highest grade), the risk is estimated at only 20 percent, so requiring 1.6 cents of the bank’s own funds per dollar of such securities. The credit lines granted by banks to the conduits that they had created did not have strong requirements either. I refer the reader to my 2010 monograph with Mathias Dewatripont and Jean-Charles Rochet, Balancing the Banks (Princeton: Princeton University Press, 2010) and to the many articles devoted to this subject.

13.  The rating agencies (Standard and Poor’s, Moody’s, Fitch) have scales ranging from AAA to D (which means “in default”): AAA, AA+, AA, AA-, A+, etc…. Investments below BB+ are called speculative, even though such a line of demarcation is, of course, to some extent arbitrary.

14.  The reader may disapprove of an investor receiving coupons from a company that makes money at the expense of its customers’ health. Some socially responsible investment funds (see chapter 7) avoid investing in this kind of company, and it is also up to the state to assume its responsibilities. The point is that since profits are being made, in this case it is better that they go to savers rather than being reinvested in the company.

15.  That is, good quality bonds. Junk bonds can be just as risky as stock shares.

16.  A security of this kind is called a consol. If r is the interest rate (here, 0.10), the fundamental value of the console is [1/ (1+r)] + [1/ (1+r)²] + [1/ (1+r)³] + … = 1/r = 10.

17.  This argument does not consider the “aura” discussed by Walter Benjamin (see The Work of Art in the Age of Mechanical Reproduction, 1936). For Benjamin, the term “aura” refers to the quasi-mystical relationship we have with the original work of art produced by its creator. This magical aspect disappeared with the invention of reproduction (the printing press, photography, and film in Benjamin’s time); authenticity cannot be reproduced. On the other hand, a reproduction can make us aware of the original’s aura. From the point of view of economics, it suffices to note that the absence of reproduction is crucial for the existence of both a bubble and an aura.

18.  Princeton: Princeton University Press, 2009.

19.  For instance, Olivier Blanchard (a professor at MIT, then the IMF’s chief economist for eight years) and I separately published several papers on this subject in the early 1980s.

20.  Jean Tirole, “Asset Bubbles and Overlapping Generations,” Econometrica, 1985, pp. 1499–1528. The condition involving comparison of the interest rate and the growth rate has a long academic tradition going back to the works of Maurice Allais (1947) and Paul Samuelson (1958) on fiat currency.

It is difficult to tell whether this condition has been met or not, because it implements long-term predictions regarding these two variables. François Geerolf (in an article entitled “Reassessing Dynamic Efficiency,” UCLA, 2014) shows that the condition seems to be met by most of the countries in the OECD.

21.  First, note the qualifier “on average”: the risk that the bubble might burst requires a yield higher than the interest rate (so long as it has not burst) to compensate for the risk of bursting. Next, the rule of average growth at the interest rate is only approximately true. Agents’ aversion to risk and the fact that the bursting of a bubble will be reflected in falling interest rates imply some corrections to this rule.

22.  For example, it has been shown that hedge funds sometimes contribute to a bubble’s growth, and often get out before it bursts (Markus Brunnermeier and Stefan Nagel, “Hedge Funds and the Technology Bubble,” Journal of Finance, 2004, vol. 59, pp. 2013–2040).

23.  Emmanuel Farhi and Jean Tirole, “Bubbly Liquidity,” Review of Economic Studies, 2012, vol. 79, no. 2, pp. 678–706.

24.  See for example his book Irrational Exuberance, 3^rd ed., revised and expanded (Princeton: Princeton University Press, 2015).

25.  The relevance of another ratio, the relationship between the mortgage payment on the loan and the borrower’s income, stems from a household’s debt capability: the ability to borrow depends on the ability to pay back the loan, and therefore the borrower’s income. In turn, the ability to borrow determines whether new borrowers or those who are moving to improve the quality of their accommodation can pay the price asked by the sellers. If the banks anticipate a rise in real estate prices, the borrower will be able to borrow more against a given income, because the bank, which will foreclose on the property if the borrower can no longer make the loan payments, is taking less risk.

26.  The definition of an investment bank (also called a merchant bank) may vary. In this chapter, we distinguish between a retail bank (also called a commercial bank), which receives deposits from small depositors and generally simultaneously makes loans to small and medium-sized enterprises, and an investment bank, which has no small depositors (and until recently was practically unregulated). The investment bank deals with initial public offerings on the stock market, bond issues, and mergers and acquisitions for large corporations, bond issues for governments, and the design of derivatives; it fulfills the function of a deal maker (market making) in organized markets and as a counterparty in over-the-counter (OTC) markets.

27.  At the outset, the game is a zero-sum game, the profits made by some being compensated by the losses of others; but it becomes a negative- sum game when we take into account the costs of investment in software, fiber optics, and colocation.

28.  Thomas Philippon and Ariell Reshef, “Wages and Human Capital in the US Finance Industry: 1909–2006,” Quarterly Journal of Economics, 2012, vol. 127, no. 4, pp. 1551–1609.

29.  Thomas Philippon, “Has the US Finance Industry Become Less Efficient?” American Economic Review, 2015, vol. 105, no. 4, pp. 1408–1438.

30.  On bank runs, the pioneering article is Douglas Diamond and Philip Dybvig, “Bank Runs, Deposit Insurance, and Liquidity,” Journal of Political Economy, 1983, vol. 91, no. 3, pp. 401–419; on sovereign debt panics, the pioneering article is Guillermo Calvo, “Servicing the Public Debt: The Role of Expectations,” American Economic Review, 1988, vol. 78, no. 4, pp. 647–661.

31.  Mary Poppins is a nanny employed by a bank employee. One day he takes his children to his workplace. The branch manager advises the son to invest his money in the bank; the son asks that his money be returned, and the depositors present in the bank, hearing this request, think they are confronted by a bank run and the rumor spreads. These depositors also demand the return of their money, creating a real bank run.

32.  That is, for example, the case for loans to small and medium-sized enterprises, which reflect a great deal of information about the bank that is not known to other financial intermediaries.

33.  See also chapter 5.

34.  For instance, markets can react excessively to very salient trends (say, something an analyst can pick out in Google Trends) and generate a temporary change in the valuation of an asset.

35.  Roland Bénabou, “Groupthink: Collective Delusions in Organizations and Markets,” Review of Economics Studies, 2013, vol. 80, no. 2, pp. 429–446.

36.  A classical application of these ideas concerns the domain of health. Human beings tend to repress thoughts connected with illness and death, whether regarding themselves or those close to them. This attitude is partly functional: it allows us to enjoy a more serene, carefree life because most of the time it allows us to escape anxiety-producing thoughts. However, it also involves dysfunctional aspects: not having regular checkups, leading a not very healthful way of life, etc.

37.  Bénabou shows that the denial of reality tends to be contagious when it creates negative externalities (other people’s errors make the situation worse).

38.  In the context of an auction, this is called “the winner’s curse”: the person who makes the winning bid should take into account the information contained in the fact that he has won the bidding, that is, that other buyers are not prepared to pay as high a price for the object on sale.

39.  The state can then “resuscitate” these markets, but at a financial cost: see Thomas Philippon and Vasiliki Skreta, “Optimal Interventions in Markets with Adverse Selection,” and my article “Overcoming Adverse Selection: How Public Intervention Can Restore Market Functioning,” American Economic Review, 2012, vol. 102, no. 1, pp. 1–28 and 29–59, respectively.

40.  The limits to arbitrage can have even greater consequences: in particular, some institutional investors face constraints that produce predictable liquidity shocks. For example, insurers have to get rid of downgraded bonds, or investment funds experience massive withdrawals. In anticipation of these shocks, hedge funds sell short the securities that have to be sold by these institutions, further destabilizing the market. See Markus Brunnermeier and Lasse Pedersen, “Predatory Trading,” Journal of Finance, 2005, vol. 60, pp. 1825–1863.

41.  Ultimately, US taxpayers profited overall from the bank bailouts, but this could not have been known in advance, and in other countries taxpayers have lost money on financial sector rescues.

42.  I refer the reader to my book with Mathias Dewatripont, The Prudential Regulation of Banks, (Cambridge: MIT Press, 1994) for a discussion of the “representation hypothesis” and the reasons why things are different in the stock market.

43.  This weight was later reduced to 0.35 to reflect a decrease in the perception of risk connected with real estate, ironic in light of later events.

44.  This possibility of “regulatory arbitrage” has been studied, for example, by George Pennacchi and Giuliano Iannotta in “Bank Regulation, Credit Ratings and Systematic Risk,” unpublished paper; and by Matthias Efing in “Arbitraging the Basel Securitization Framework: Evidence from German ABS Investment,” unpublished paper (the latter also discusses other ways of arbitraging the Basel regulation).

45.  Pension funds sponsored by states, broker-dealers, and mutual funds themselves were already compelled or encouraged to invest in assets that were sufficiently highly rated.

46.  Following this logic, we have to reduce reliance on ratings if the rating agencies do not show greater integrity in their process than they did before the 2008 crisis. For example, following Basel II, 7.5 times more equity was required to pass from a security rated AAA or AA to a security rated BB+ to BB-; such an impact on the profitability of banks requires considerable confidence in the process of rating, without which sensitivity of requirements to ratings must be reduced.

CHAPTER TWELVE: THE FINANCIAL CRISIS OF 2008

1.    During a visit to the London School of Economics on November 5, 2008.

2.    On the other hand, the banking problems in Italy, Portugal, and Greece are due more to the poor performance of their economies (see chapter 10).

3.    For example, Ben Bernanke, The Courage to Act: A Memoir of a Crisis and Its Aftermath (New York: W. W. Norton & Company, 2015); Gary Gorton, Slapped by the Invisible Hand: The Panic of 2007 (Oxford: Oxford University Press, 2010); Randall Kroszner and Robert Shiller, Reforming US Financial Markets (MIT Press, 2011); Paul Krugman, The Return of Depression Economics and the Crisis of 2008 (New York: Norton, 2009); Atif Mian and Amir Sufi, House of Debt: How They (and You) Caused the Great Recession, and How We Can Prevent It from Happening Again (Chicago: University of Chicago Press, 2015); Robert Shiller, The Subprime Solution: How Today’s Global Financial Crisis Happened, and What to Do about It (Princeton: Princeton University Press, 2008); the symposiums in the Journal of Economic Perspectives on the tightening of credit (Fall 2009), macroeconomics after the crisis (Fall 2010), the financial “plumbing” (Winter 2010), financial regulation after the crisis (Winter 2011), and the bailouts connected with the crisis (Spring 2015). Several books published by economists at New York University: Viral Acharya and Matthew Richardson, eds., Restoring Financial Stability: How to Repair a Failed System (New York: John Wiley & Sons, 2009); Viral V. Acharya, Thomas Cooley, Matthew Richardson, and Ingo Walter, eds., Regulating Wall Street: The Dodd-Frank Act and the New Architecture of Global Finance (New York: John Wiley & Sons, 2010). See also my monograph Balancing the Banks: Global Lessons from the Financial Crisis, written in collaboration with Mathias Dewatripont and Jean-Charles Rochet (Princeton: Princeton University Press, 2010).

4.    Fortunately, that was not the case in Europe, where the ECB pursued a tighter policy. Naturally, loose monetary policy is only one facilitating factor, as is shown by the experiences of Britain and Australia, two countries in which a real estate boom developed despite more normal interest rates.

5.    France was largely spared by this phenomenon. French banks have traditionally lent to solvent households, this practice being confirmed by jurisprudence (the Court of Cassation having ruled that a credit institution that grants a borrower a loan disproportionate to his present or future ability to repay it had failed to do its disclosure duty). Loans at variable interest rates, which have long been very popular in the United States, always remained very much in the minority in France (24 percent of outstanding loans in 2007), and always with a small proportion (less than 10 percent) at variable rates without a ceiling limiting the rates or the amount of monthly payments.

6.    This group of borrowers was given the nickname “NINJA”: no income, no job, and no assets.

7.    These sales at rock-bottom prices increased the cost for banks beyond the transaction cost through administrative fees, the nonoccupation and deterioration of the property, unpaid taxes and insurance policy premiums, and the commissions of real estate agencies.

8.    The ratings market is very concentrated. There are only three major agencies, and two of them (Moody’s and Standard and Poor’s) hold about 80 percent of the market. Since two ratings are often required, these agencies are frequently in a quasi-monopoly situation.

9.    In other words, they kept the risk of the products off the balance sheets, and this risk now required little in capital. They also resorted to monoline insurers who were themselves overrated. And they staked their reputations without hoarding any capital in return (thus, Bear Stearns went far beyond its legal obligations to bail out the conduits it had created).

10.  This rescue of an unregulated actor was not the first of its kind. In 1998, the Fed had already organized a rescue plan and had lowered its interest rates several times in order to avoid the collapse of a speculative fund, Long Term Capital Management (LTCM).

11.  Another sore point is that AIG had also distributed a very large dividend to its shareholders only two weeks before it was bailed out by the US government.

12.  These “Government Sponsored Enterprises” (GSEs) bought real estate loans from the issuers. Their 5,300 billion dollars in assets was broken down into a portfolio of 1,600 billion dollars and a securitization (including its part in the securitized portfolio) of 3,700 billion dollars.

13.  But they nonetheless repaid, in the form of dividends, the public aid (nearly two hundred billion dollars) received in 2008.

14.  They were regulated by a special agency rather than by the banking supervisor. Their regulator, the Department of Housing and Urban Development (HUD) did not really have expertise in matters of prudential supervision, and moreover it had incentives to support the real estate market.

15.  See John Cochane’s blog (The Grumpy Economist, May 9, 2017); and a working paper by Greg Buchak, Gregor Matvos, Tomasz Piskorski, and Amit Seru “Fintech, Regulatory Arbitrage, and the Rise of Shadow Banks.” Quoting John Cochrane: “the market share of shadow banks in the mortgage market has nearly tripled from 14% to 38% from 2007–2015. In the Federal Housing Administration (FHA) mortgage market, which serves less creditworthy borrowers, the market share of shadow banks increased … from 20% to 75% of the market. In the mortgage market, ‘fintech’ lenders, have increased their market share from about 5% to 15% in conforming mortgages and to 20% in FHA mortgages during the same period.”

16.  For example, in the case of Crédit Foncier (a bank that specializes in financing real estate transactions in France, part of the BPCE group).

17.  A model, on the basis of the theory of credit rationing, of the idea that the state has one ability that markets do not have—providing liquidity in difficult situations—is developed in my works written with Bengt Holmström (“Private and Public Supply of Liquidity,” Journal of Political Economy, 1998, vol. 106, no. 1, pp. 1–40; and Inside and Outside Liquidity (Cambridge: MIT Press, 2011); and with Emmanuel Farhi (“Collective Moral Hazard, Maturity Mismatch, and Systemic Bailouts,” American Economic Review, 2012, vol. 102, no. 1, pp. 60–93). The latter article also shows that a loosening of monetary policy should be used to save the banks even if the state can also bail out the banks through personalized transfers.

18.  Strictly speaking, the central bank does not go into debt when it issues liquidity—for example, by accepting poor quality collateral under a repurchase agreement (repo) when making a loan to a bank. However, if the central bank suffers losses on these loans, it will have no choice but to create money or else receive it indirectly from the taxpayer. If it creates money, holding money will be “taxed” by inflation.

19.  The chairman of a London hedge fund, Marshall Wace, wrote a commentary in the Financial Times in September 2015 with the provocative title “Central Banks Have Made the Rich Richer.”

20.  Of course, in theory, sellers of life assurance should ensure that their assets have the same duration as their liabilities. Then, if rates fall, this will increase the price of the assets “dedicated” to the payments due to customers. In practice, however, policyholders have the option of extending their contracts, which they will logically do when rates fall and alternative saving instruments become less attractive; the result is an imbalance of maturities between assets and liabilities. It probably is better to deal with the incentive to take risks directly, through prudential supervision, rather than abandoning low interest rates if they are useful to the economy. We must nonetheless be aware of the risk posed by this level of interest rates.

21.  To be sure, there are transaction costs in holding cash, and thus it is possible to have slightly negative nominal rates, which some central banks have today (for example, at the date of this writing, the European Central Bank is paying a minus 0.4 percent interest rate on excess reserves; central banks of other European countries, such as Sweden, Switzerland, and Denmark, also have negative interest rate policies); but interest rates cannot be very negative.

22.  The creation of inflationary expectations, forward guidance (announcing low interest rates not only for the present but also for the future), quantitative easing (the central bank’s acceptance of risky assets as collateral—for example, risky bonds or commercial paper issued by businesses, mortgage securities, or even bonds issued by countries in financial difficulties), or fiscal stimulus (the latter not being in the domain of the central bank, of course).

23.  The notion of secular stagnation is very old, but it was made fashionable again in 2013 by Lawrence Summers, a professor at Harvard and formerly Bill Clinton’s secretary of the treasury. For an overview of the debates on this subject, see Coen Teulings and Richard Baldwin, eds., Secular Stagnation: Facts, Causes and Cures (CEPR Press/VoxEU.org Book, 2014).

24.  Ricardo Caballero and Emmanuel Farhi, “The Safety Trap,” forthcoming in Review of Economic Studies.

25.  Other causes have been suggested. For example, the slowing of innovation that is supposed to make the demand for investment diminish, about which I personally have doubts, but regarding which it is hard to find decisive evidence. Others have proposed the hypothesis that technological progress in the sector of investment goods has the same effect of diminishing investment.

26.  Jean Tirole, Leçons d’une crise, Toulouse School of Economics, TSE Notes, no. 1 (English translation by Keith Tribe in Balancing the Banks: Global Lessons from the Financial Crisis, written in collaboration with Mathias Dewatripont and Jean-Charles Rochet [Princeton: Princeton University Press, 2010]).

27.  However, some of these contracts (like foreign exchange swaps) are still traded over the counter.

28.  The default in 2006 of Amaranth, a big hedge fund that traded especially in natural gas futures contracts on centralized platforms, had practically no systemic effect; the hedge fund did not need to be bailed out.

29.  For an evaluation of this approach, see for example my article “The Contours of Banking and the Future of Its Regulation,” in George Akerlof, Olivier Blanchard, David Romer and Joseph Stiglitz, eds., What Have We Learned? (Cambridge, MIT Press, 2014), pp. 143–153.

30.  These two arguments are developed in Holmström-Tirole, “Financial Intermediation, Loanable Funds, and the Real Sector,” Quarterly Journal of Economics, 1997, vol. 112, pp. 663–692; and “Private and Public Supply of Liquidity,” Journal of Political Economy, 1998, vol. 106, no. 1, pp. 1–40. My book written with Mathias Dewatripont, The Prudential Regulation of Banks (Cambridge: MIT Press, 1994), suggested reducing the procyclical character of regulation by introducing insurance premiums that were themselves procyclical.

31.  See the preceding chapter.

32.  Some economists demand a much higher level, in particular Anat Admati and Martin Hellwig, The Bankers’ New Clothes (Princeton: Princeton University Press, 2013).

33.  If here I take the example of CEOs, we must not forget that these principles of remuneration do not apply solely to the management team. Bonuses distributed farther down the hierarchy are often substantial in the world of finance.

34.  An indemnity the enterprise pays a manager after his dismissal.

35.  See my article written with Roland Bénabou, “Bonus Culture,”, Journal of Political Economy, 124(2): 305–370.

36.  Of course, we are well aware of this argument’s limits. Long-term remuneration plans (in particular stock option plans with very deferred effects) are systematically renegotiated if the incentives they create have become nonexistent or perverse after the arrival of bad news.

37.  See my article with Bengt Holmström, “Market Liquidity and Performance Monitoring,” Journal of Political Economy, 1993, vol. 101, no. 4, pp. 678–709.

38.  Xavier Gabaix and Augustin Landier (“Why Has CEO Pay Increased So Much?” Quarterly Journal of Economics, 2008, vol. 123, no. 1, pp. 49–100) connect the distribution of remuneration with the size of the company (considered as an indicator of the importance of managerial talent) and show a strong link between the growth in the size of companies and that of CEO remuneration between 1980 and 2003 (this study is not specific to banking).

39.  For an account of the role of hubris in finance, see for example William Cohan’s House of Cards: A Tale of Hubris and Wretched Excess on Wall Street (New York: Doubleday, 2009).

40.  Since 2010, a “renationalization” of financial markets has resulted in a situation in which government bonds held on banks’ balance sheets are essentially domestic; the banks are consequently very exposed to the risk of their sovereign’s default; conversely, states are exposed to the risk of having to bail out their banks. This interdependence between banks and states gives rise to the possibility of a vicious circle (called in this case a “doom loop” or “deadly embrace”) in which the markets’ concerns about a country’s solvency devalues the bonds it has issued and destabilizes domestic banks that hold these bonds, which then forces the state to bail out the banks, thus reinforcing the markets’ worries about the state’s solvency, making the price of sovereign obligations fall still further, etc.

41.  There is a strong temptation for governments to live comfortably when prices of raw materials are high, instead of setting up (as Norway and Chile did, for example) a sovereign wealth fund to smooth out activity and protect themselves against periods when raw materials prices are low. Thus, since 2001 Chile has applied a budgetary rule that makes public expenditures conditional not on revenue (which is heavily dependent on the price of copper), but rather on revenue adjusted to the copper cycle. This kind of rule enables states to avoid spending heavily when raw materials prices rise and then finding themselves in budgetary difficulties when they fall. A contrario, Venezuela—a country with the largest known oil reserves in the world, which was profligate when oil prices were high and today is in a desperate economic and humanitarian situation—demonstrates the importance of smoothing country income through budgetary rules and sovereign wealth funds.

42.  The excessively systematic resort to bailouts using public funds has logically been replaced by an attempt to apply a consistent policy of making imprudent investors pay—“bail ins”—although no clear doctrine concerning its scope has emerged.

43.  Of course, little credit should be granted those who predicted the crisis without describing its mechanisms, insofar as (to paraphrase Paul Samuelson) they had a tendency to predict nine of the last five crises (mocking economists’ inability to predict, Samuelson had declared: “Wall Street indexes predicted nine out of the last five recessions”). Among the well-known economists who provided substantiated warnings against the dangers of the situation, we can mention Raghuram Rajan (University of Chicago; former governor of India’s central bank) and Nouriel Roubini (New York University). Robert Schiller (Yale) had also expressed strong concerns about the real estate bubble.

44.  I refer the reader to chapter 4 for a discussion of prediction in the scientific domain in general.

45.  See the preceding chapter.

46.  John Maynard Keynes, “Great Britain’s Foreign Investments,” in Collected Writings, vol. 15 (London: Macmillan, 1971), p. 46.

CHAPTER THIRTEEN: COMPETITION POLICY AND INDUSTRIAL POLICY

1.    France has only recently been converted to idea of competition and to the need to monitor it. A 1986 order put an end to the administered economy and to price control by the state, and it established the Competition Council. The Germans were converted much earlier, and with bipartisan agreement. In the United States, the Sherman Antitrust Act (the basis of antitrust law) dates from 1890. There are, of course, antecedents, such as the antimonopoly decisions in England in the early seventeenth century.

2.    More precisely, until the 2008 Modernization of the Economy Act.

3.    According to McKinsey, labor productivity (the value of output per hour of labor) in the French automobile sector grew at a rate of almost 8 percent from 1992 to 1999 (and 15 percent from 1996 to 1999), thanks to better purchasing policy, administrative reorganization, and the simplification of production. Still, the value added per employee in the automobile industry remains below the European Union average.

4.    See for example Nicholas Bloom, Mirko Draca, and John Van Reenen, “Trade Induced Technical Change? The Impact of Chinese Imports on Innovation, IT and Productivity,” unpublished paper.

5.    “(Not) made in France,” Lettre du Cepii, June 2013.

6.    For the United States, see Lucia Foster, John Haltiwanger, and C. J. Krizan, “Aggregate Productivity Growth: Lessons from Microeconomic Evidence,” New Developments in Productivity Analysis, National Bureau of Economic Research, 2001, pp. 303–372. For France, see Bruno Crépon and Richard Duhautois, “Ralentissement de la productivité et réallocations d’emplois: deux régimes de croissance,” Économie et statistique, 2003, no. 367, pp. 69–82.

7.    Some argue that local consumption reduces carbon emissions. This is correct, provided that local production is not more carbon intensive than nonlocal production. However, the solution is not to distort markets, but rather to make firms accountable for the emissions associated with the transportation of their goods. As we have seen in chapter 9, this is best achieved through carbon pricing.

8.    Introduced by Edward Chamberlin and Joan Robinson in 1933, this approach says market structure affects firms’ behavior (“conduct”) and that this in turn affects their performance, with feedback loops occurring between these.

9.    See chapter 9.

10.  Examined in chapter 8.

11.  Here, of course, I remove Mao’s formula in his famous “Hundred Flowers” speech (February, 1957) from its context.

12.  For a study focused on China, see Philippe Aghion, Jing Cai, Mathias Dewatripont, Luosha Du, Ann Harrison, and Patrick Legros, “Industrial Policy and Competition,” American Economic Journal: Macroeconomics, 2015, 7(4): 1–32.

13.  I exclude the sectors in which the state is necessarily a buyer (education, health care, armaments, infrastructure, etc.) and is therefore compelled to intervene.

14.  I refer the reader to the famous study by AnnaLee Saxenian, Regional Advantage: Culture and Competition in Silicon Valley and Route 128 (Cambridge: Harvard University Press, 1994), which suggests that the culture of informal exchanges in Silicon Valley gave it an advantage over the hi-tech center in Boston, which was located along Route 128.

15.  See the study by Gilles Duranton, Philippe Martin, Thierry Mayer, and Florian Mayneris, which notes that “in fact, there are very few examples of successful policies of support for clusters” (Les pôles de compétitivité. que peut-on en attendre? [Paris: Cepremap, 2008]). In 2007, there were seventy-one competitiveness clusters (pôles de compétitivité) in France.

16.  For example, out of 105 submissions for becoming a competitiveness cluster in France in 2005, 67 were accepted.

17.  Damien Neven and Paul Seabright, “European Industrial Policy: the Airbus Case,” Economic Policy, 22, September 1995.

18.  Postwar Japan was constructed essentially around private groups, with a state that planned (the famous MITI) but was less interventionist.

19.  Philippe Aghion, Mathias Dewatripont, Caroline Hoxby, Andreu Mas-Colell, and André Sapir, “Universities,” Economic Policy, June 2010. This article emphasizes the complementary relation between the autonomy of universities and competition (intuitively, competition can play an important role only if universities are free to adopt their own strategies). It also shows the impact on patents of the type of financing provided by the NSF and NIH.

20.  In their book État moderne, État efficace. Évaluer les dépenses publiques pour sauvegarder le modèle français (Paris: Odile Jacob, 2012), Marc Ferracci and Étienne Wasmer propose to invert the burden of proof: according to them, it should be incumbent upon the defenders of the policy concerned to prove, after x years, that it has been effective, and thus that it should be continued; if this proof is not forthcoming, the policy should be abandoned.

21.  The reader may object that if the private sector is willing to finance the project, then there is no market failure and no need for government intervention. Perhaps a better interpretation of the call for private financing is that private financiers may receive a rate of return above that of the public sector (requiring differentiated claims), as long as the return differential is not too large. This approach may put a boundary on the amount of money that the government might lose in the process. The return differential may be larger for those projects that create large spillovers.

22.  For an excellent analysis of this country, see Bruce Greenwald and Joseph Stiglitz, Creating a Learning Society (New York: Columbia University Press, 2014). On the other hand, I have doubts about the argument that without an industrial policy South Korea would necessarily have remained a rice producer, which was its comparative advantage in 1945. First of all, comparative advantage is a dynamic notion. Starting from the moment that the country invested in education and infrastructure and made access to credit easier, there was no reason why the economy could not turn toward industrial jobs. Then, pushing the country to specialize in rice would have been a perfect example of industrial policy!

23.  Élie Cohen and Jean-Hervé Lorenzi, “Des politiques industrielles aux politiques de compétitivité en Europe,” in Politiques industrielles pour l’Europe (Paris: La Documentation française, 2000).

24.  See for example Mark J. Perry (University of Michigan Flint) “Charts of the day: Creative destruction in the S&P500 index,” American Enterprise Institute, January 26, 2014.

25.  Gauging threshold effects is complex. See for example Nila Ceci-Renaud and Paul-Antoine Chevalier, “L’impact des seuils de 10, 20 et 50 salariés sur la taille des entreprises françaises,” Économie et statistique, 2010, vol. 437, pp. 29–45. It is not only the French state that is responsible for threshold effects. The European Parliament has opted for a reduction in the equity capital required of banks when they make loans to SMEs.

26.  Luis Garicano, Claire Lelarge, and John Van Reenen, “Firm Size Distortions and the Productivity Distribution: Evidence from France,” American Economic Review, 2016, 106(11): 3439–3479. These authors estimate the cost at about 5 percent, which is in large part due to the rigid labor market in France (they estimate that in a country like the United States, the cost of such a regulation would be at most 1 percent). This cost may, of course, differ depending on the country and the time, but it does not seem to be negligible.

27.  See for example my note written with Guillaume Plantin and David Thesmar, “Les enjeux économiques du droit des faillites,” Conseil d’analyse économique, 2013, note 7, on proposals for reform. An order issued in March 2014 on bankruptcy law moved in this direction by authorizing creditors to convert their debts into capital and to propose a recovery plan concurrent with the CEO’s.

28.  The report of the Conseil d’analyse économique, “Faire prospérer les PME” (October 2015) notes that the rate of (forced) conventional coverage by sector agreements is abnormally high in France in comparison with the rest of the world (93 percent in 2008, as compared with an average of 56 percent for the OECD). See chapter 9.

29.  See Yves Jacquin Depeyre, La Réconciliation fiscale (Paris: Odile Jacob, 2016).

CHAPTER FOURTEEN: HOW DIGITIZATION IS CHANGING EVERYTHING

1.    Machine learning is statistical and uses an algorithm that allows a robot or computer to gradually learn to recognize a face, to walk, or to complete any other kind of complex learning.

2.    Or multisided markets: for instance, Microsoft Windows has to attract users (you and me), computer manufacturers, and application developers.

3.    Glenn and Sara Ellison, “Match Quality, Search, and the Internet Market for Used Books,” unpublished paper.

4.    It is not known whether this economic model can be indefinitely replicated. Even though advertising is more effective when the target (that is, ourselves) receives the advertisement repeatedly, in the end there are decreasing yields from exposing the target to a given advertisement; moreover, a weariness and increased inattention to advertisements in general may ensue. Finally, more and more software programs make it possible to escape commercial advertisements (like TiVo for television).

5.    The manufacturers of printers sell a printer at a loss, or without much profit, when they also sell their own exclusive ink cartridges, on which they then make their profits. Purchasers of printers should anticipate that they will have to pay high prices for their cartridges. However, the situation is different from that of videogames. In the case of the printer, there is only one side to the market; the same consumers buy the printer and the cartridges. The manufacturers of the printer have to find ways of reassuring the consumer: either they set a very low price on the printer to attract the consumer, or they promise to adopt an open architecture that will allow other cartridge manufacturers to supply the buyer of the printer, thus lowering the price of cartridges through competition; the printer manufacturer can then sell the printer at a high price, and make its profit on it rather than on the cartridges.

6.    David Evans and Richard Schmalensee, Matchmakers: The New Economics of Platform Businesses (Cambridge: Harvard Business School Press, 2016). See also the same authors’ book, Catalyst Code (Cambridge: Harvard Business School Press, 2007); and the one written in collaboration with Andrei Hagiu, Invisible Platforms: How Software Platforms Drive Innovations and Transform Industries (Cambridge: MIT Press, 2006). I also recommend reading the book by Marshall Van Alstyne, Geoff Parker, and Saugeet Paul Choudary, Platform Revolution (New York: Norton, 2016).

7.    Apple has fewer customers, but they spend more money than Android’s customers, and are therefore more attractive to developers of applications.

8.    See Tim Bresnahan, Joe Orsini, and Pai-Ling Yin, “Demand Heterogeneity, Inframarginal Multihoming and Platform Market Stability: Mobile Apps,” unpublished paper.

9.    For an account of Apple’s demise in the 1980s, see Jay Yarow’s “How Apple Really Lost its Lead in the ’80s,” Business Insider, December 9, 2012.

10.  Even if it was accused of not having given sufficient access to its code and of favoring its browser, on the whole Microsoft has always been a very open system.

11.  In the case of Apple, a successful version—Apple II—had been released in 1977, so the brand was well established in the 1980s.

12.  This opening to the outside is done by publishing Application Programming Interfaces (API). Of course, things don’t go entirely smoothly: platforms and the external services designed for these platforms are sometimes in conflict before arbitrating competition authorities on questions of “tie-in sales,” i.e., the presumption that the platform favors internal applications. See below.

13.  New regulations, such as the Macron Law in France, have limited these requirements in some countries. The Macron Law stipulates that hotel owners are completely free to set their prices.

14.  See for example Renato Gomes and Jean Tirole, “Missed Sales and the Pricing of Ancillary Goods,” unpublished paper. See also the literature on “hold-ups” and attributes hidden from consumers. Focusing on card payments, Hélène Bourguignon, Renato Gomes, and Jean Tirole in “Shrouded Transaction Costs,” unpublished paper, argue that the new regulations limiting the amounts of surcharges for paying by card in the United States, the United Kingdom, and Australia are too lenient.

15.  In 2015, Booking.com made commitments to the French competition authority. Hotels will have more freedom of action. In particular, they will be able to charge prices lower than those offered on Booking.com, not only on other platforms, but also through their own offline channels (reservations by telephone or by email) or, in the framework of loyalty programs, online on their own websites. In theory, Booking.com is supposed to extend these commitments to the rest of Europe.

16.  See Jean-Charles Rochet and Jean Tirole, “Cooperation among Competitors: Some Economics of Payment Card Associations,” The Rand Journal of Economics, 2002, vol. 33, no. 4, pp. 549–570; and Ben Edelman and Julian Wright, “Price Coherence and Adverse Intermediation,” Quarterly Journal of Economics, 2015, vol. 130, no. 3, pp. 1283–1328.

17.  For example, chapter 8, on the environment.

18.  This principle is called “the avoided cost test” or the “tourist test” (would the merchant prefer that the customer pay by card rather than in cash, knowing that the customer is in the store, that both payment methods are available, and that the customer will no longer be a customer in the future—for example, he or she is a tourist?). The theory corresponding to the European Commission’s guidelines was developed in my article with Jean-Charles Rochet, “Must Take Cards: Merchant Discounts and Avoided Costs,” Journal of the European Economic Association, 2011, vol. 9, no. 3, pp. 462–49.

19.  We include in this category the metasearch sites, which (contrary to the reservation agencies) do not process the reservations themselves.

20.  See the following chapter.

21.  For a more complete discussion of the question of competition law and tie-in sales, see my article “The Analysis of Tying Cases: A Primer,” Competition Policy International, 2005, vol. 1, no. 1, pp. 1–25.

CHAPTER FIFTEEN: DIGITAL ECONOMIES

1.    Cookies are small files stored on our computers. Through them, sites collect personal information that can be used later, for example to send us targeted commercial offers or, for search engines, to help us find what we are looking for more easily or return to a site that we have already visited.

2.    And the transaction has to be repeated: what we learn about the person to whom we have entrusted our savings or about the surgeon is not of much use to us if we have lost our savings or our health. Besides, it is difficult to gauge the effectiveness of certain goods, such as vitamins, even after we have consumed them.

3.    With its famous slogan, “Life is short. Have an affair.”

4.    However, the Federal Trade Commission and state courts intervened to limit the extent of the data transfer.

5.    There are, of course, other considerations to be taken into account regarding the gap between the United States and Europe, such as the distance that still separates Europe from a single market.

6.    Which is the case under European law. Granting competing platforms free access to data is an alternative, but it raises questions of confidentiality.

7.    Blue Button is an app that allows patients to download their personal health records or to view them online.

8.    What role will the physician play in this new environment? I am not competent to make that prediction. At one extreme of the medical fiction spectrum, the doctor of tomorrow will just be a safeguard—making a commonsense judgment when the computer system might have been hacked—and will further offer the patient a human contact. Whatever the future of this profession, it will (at the least) rely on a provisional, but exhaustive, diagnosis made by software on the basis of analyses.

9.    Since 2008, this has been a legal way to break open-ended contracts in France. To terminate an employee by mutual consent, the employer now pays an indemnity of at least the amount of the legal termination payment. Termination by mutual consent is not a resignation, and the employee therefore receives unemployment benefits.

10.  Similarly, when local authorities are aware of flood risks but nonetheless grant a building permit in such a zone, they should be held responsible.

11.  Hypochondria itself is on the borderline between adverse selection (a real problem of anxiety) and moral hazard (a lack of control over one’s behavior). The pathology is clearly involved when individuals constantly seek medical advice on the Internet, though moral hazard cannot be blamed, because they are not imposing any cost on the health insurance system.

12.  Starting at one euro per biological analysis, examination by a doctor, or instance of medical imaging; eighteen euros per treatments whose cost exceeds one hundred and twenty euros; fifty cents per box of medication and per paramedical treatment; two euros per transportation by ambulance, with an annual ceiling of fifty euros; and eighteen euros per day of hospitalization.

13.  Economists call this phenomenon “the Hirshleifer effect” after an article by Jack Hirshleifer, “The Private and Social Value of Information and the Reward to Inventive Activity,” American Economic Review, 1971, vol. 61, no. 4, pp. 561–574.

14.  The Swiss system is analyzed in Brigitte Dormont, Pierre-Yves Geoffard, and Karine Lamiraud in “The Influence of Supplementary Health Insurance on Switching Behavior: Evidence from Swiss Data,” Health Economics, 2009, vol. 18, pp. 1339–1356.

15.  By making employees’ contributions deductible from income taxes and granting an exemption for social security contributions made by the employer. The income tax deduction was eliminated in 2014, but supplementary group insurance policies were extended to all employees in private enterprises.

16.  See my note, “Refonder l’assurance-maladie,” cowritten with Brigitte Dormont and Pierre-Yves Geoffard, Conseil d’analyse économique, note 12.

17.  Robert Reich’s blog, February 2, 2015 (robertreich.org/post/109894095095).

18.  One might ask why the employer doesn’t simply deduct the extra cost of expenses (like taking a taxi) from the employee’s paycheck. The answer is simple: the use of a taxi, like expensive air tickets (with flexible dates, business class, etc.), is a form of disguised remuneration that, unlike salary, is not subject to social security charges and income tax. For managers who don’t want to post high salaries, it also makes it possible to underestimate the cost of the perks given employees.

19.  We here focus on economics-related debates. There are also current debates concerning rampant sexism, the possible theft of autonomous-car technology, and the use of software to evade transport regulators.

20.  For a theoretical analysis of collective and individual reputations, see my article “A Theory of Collective Reputations, with Applications to the Persistence of Corruption and to Firm Quality,” Review of Economic Studies, no. 63, pp. 1–22.

21.  George Baker and Thomas Hubbard, “Contractibility and Asset Ownership: On-Board Computers and Governance in US Trucking,” Quarterly Journal of Economics, 2004, vol. 119, no. 4, pp. 1443–1479; and “Make Versus Buy in Trucking: Asset Ownership, Job Design, and Information,” American Economic Review, 2003, vol. 93, no. 3, pp. 551–572.

22.  Diane Coyle, “Precarious and Productive Work in the Digital Economy,” National Institute Economic Review, May 10, 2017.

23.  Except Part VI of the labor law, bearing (essentially) on independent labor.

24.  See Diane Coyle, “Precarious and Productive Work in the Digital Economy,” National Institute Economic Review, May 10, 2017.

25.  Anthony Atkinson, Thomas Piketty, and Emmanuel Saez, “World Income Database,” wid.world.

26.  Erik Brynjolfsson and Andrew McAfee, The Second Machine Age (New York: Norton, 2014).

27.  $1,884 per resident in 2014.

28.  David Autor, “Why Are There Still So Many Jobs? The History and Future of Workplace Automation,” Journal of Economic Perspectives, 2015, vol. 29, no. 3, pp. 3–30.

29.  See James Bessen, Learning by Doing: The Real Connection Between Innovation, Wages, and Wealth (New Haven: Yale University Press, 2015).

30.  Except in countries like those of southern Europe, whose labor markets, as I explained in chapter 10, present certain specific challenges.

31.  In “Economic Possibilities for Our Grandchildren,” where he suggested that this change would require only two generations.

32.  “Will Humans Go the Way of Horses?” Foreign Affairs, July–August 2015.

33.  “Ireland considers the company to be tax-resident in Bermuda, while the US considers it to be tax-resident in Ireland. The result is that when royalty payments are sent to the company, they go untaxed—unless or until the money is eventually sent home to the US parent company.” Vanessa Houlder, Financial Times, October 9, 2014 (www.ft.com/content/f7a2b958-4fc8-11e4-908e-00144feab7de). A further refinement is the “double Irish with a Dutch sandwich,” which routes profits through one Irish subsidiary, then a Dutch one, then another Irish one headquartered in a tax haven.

34.  As they did in the past to eliminate double taxation.

CHAPTER SIXTEEN: INNOVATION AND INTELLECTUAL PROPERTY

1.    Economic institutions are another decisive factor, as shown by many economists, notably Daron Acemoglu and James Robinson in Why Nations Fail: The Origins of Power, Prosperity, and Poverty (New York: Crown Business, 2012).

2.    Here I use Philippe Aghion and Peter Howitt’s terminology.

3.    Edmund Phelps (Nobel Prize, 2006), “What’s Wrong with the West’s Economies,” New York Review of Books, August 13, 2015.

4.    Stimulated by the works of Michael Kremer, professor of economics at Harvard. See “Making Markets for Vaccines: Ideas to Action, Center for Global Development,” 2005. A major actor is GAVI (Global Alliance for Vaccines and Immunization), a public-private consortium formed by several countries and the Bill and Melinda Gates Foundation.

5.    For points of view that are both very critical of institutions but draw divergent conclusions, see Adam Jaffe and Josh Lerner, Innovation and Its Discontents: How Our Broken Patent System Is Endangering Innovation and Progress, and What to Do about It (Princeton: Princeton University Press, 2004); and Michelle Boldrin and David Levine, Against Intellectual Monopoly (Cambridge: Cambridge University Press, 2008).

6.    US 5960411 (1999).

7.    Many patents were granted for practices that had existed before the Internet, sometimes for centuries; for example, the online use of the Dutch auction model, in which the auctioneer begins with a high asking price and lowers it until a bidder accepts it.

8.    Carl Shapiro, “Navigating the Patent Thicket: Cross Licenses, Patent Pools, and Standard Setting,” in Adam Jaffe, Joshua Lerner, and Scott Stern, eds., Innovation Policy and the Economy, vol. 1 (Cambridge: MIT Press, 2000), pp. 119–150.

9.    There were thirteen tolls between Mainz and Köln alone. The situation was similar to that on the Elbe or on the French rivers (the Rhône, the Seine, the Garonne, and the Loire): see Robert Spaulding, “Revolutionary France and the Transformation of the Rhine,” Central European History, 2011, vol. 44, no. 2, pp. 203–226.

10.  See Garrett Hardin, “The Tragedy of the Commons,” Science, vol. 162 (1968), 1243–1248.

11.  In fact, all the tolls on the Rhine were simply eliminated.

12.  To tell the truth, I didn’t know what the term “patent pool” meant when I began working on industrial economics while writing my doctoral dissertation.

13.  Another problem is that patents can be both complements when license fees are low (the users will make use of the whole set at low prices, and an increase in the price of a given license reduces the demand for the general technology) and substitutes when licensing fees are high (an increase in the price of the license for a patent can lead to a shift of demand toward licenses for other patents).

14.  Josh Lerner and Jean Tirole, “Efficient Patent Pools,” American Economic Review, 2004, 94(3): 691–711.

15.  Assuming a zero cost of marketing licenses, the monopoly price is the price maximizing the product, PD(P), of the price of the license P and of the demand D(P) for the use of the technology, a decreasing function of P.

16.  Unequal sharing of the dividend would imply that the patent holder with the smaller share would have an even greater incentive to reduce the price; the argument for undercutting the pool price would be even stronger.

17.  For a bad pool, the competitive equilibrium in individual licenses still restores the level of competition before the pool when there are more than two patents and/or when patents are imperfect substitutes. With more than two patents, problems of coordination may result in several equilibria: owners of two complementary patents may fail to coordinate in their individual license fees to undercut the pool. Aleksandra Boutin (“Screening for Good Patent Pools through Price Caps on Individual Licenses,” American Economic Journal Microeconomics, 2016, 8: 64–94) shows that adding the requirement of unbundling (described later in the text) privileges the equilibrium that reestablishes competition.

18.  “Tacit” because firms do not need to sign a cartel agreement (which would in any case be illegal almost everywhere in the world), or even meet to discuss coordination of a “peaceful” mode of behavior.

19.  See my article written with Patrick Rey, “Price Caps as Welfare-Enhancing Coopetition,” Toulouse School of Economics, unpublished paper.

20.  In practice, an obstacle to the formation of pools concerns the distribution of dividends, members having clearly divergent interests in this area. Sharing these dividends in proportion to the number of patents held, independent of the value of their contribution to the technology, can incite the owners of particularly important patents to remain outside the pool. Agreements of mutual moderation (“I agree to reduce my royalties by so much if you agree to set a ceiling on yours at such a level …”) like the one described here implicitly determine this sharing.

21.  The goal of requiring commitments regarding the price of licenses is to avoid the licenses for standard-essential patents from becoming too expensive. This does not necessarily please owners of intellectual property, but the standard-setting organization needs these patent holders to identify the patents and construct the standard. Moreover, the patent holders often have a choice among several standard-setting organizations and may turn to one that is more accommodating if the standard-setting organization in question demands price commitments. See my articles with Josh Lerner, “Standard-Essential Patents,” Journal of Political Economy, 2015, vol. 123, no. 3, pp. 547–586; and “A Better Route to Tech Standards,” Science, 2014, vol. 343, pp. 972–973.

22.  Frederik Neumeyer, The Employed Inventor in the United States: R&D policies, Law and Practice (Cambridge: MIT Press, 1971).

23.  Later, after a legal suit, he received about nine million dollars.

24.  In “What’s Wrong with the West’s Economies,” New York Review of Books, August 13, 2015.

25.  See Gaspard Koenig, Le Révolutionnaire, l’Expert et le Geek (Paris: Plon, 2015), p. 89.

26.  Technically, Linux is only a kernel of an operating system (OS). Android, which is a complete OS, is based on a Linux kernel. Complete operating systems refer to “GNU/Linux.” They are then packaged in a convenient form in what are called “Linux distributions” (Ubuntu is probably the one best known to the general public; Red Hat Enterprise Linux is the best known of the companies).

27.  The following discussion is inspired by our articles “Some Simple Economics of Open Source,” Journal of Industrial Economics, 2002, vol. 50, no. 2, pp. 197–234; and “The Scope of Open Source Licensing,” Journal of Law, Economics and Organization, 2005, no. 21, pp. 20–56.

28.  Free programs such as LyX have tried to emulate Scientific Workplace’s ease of use.

29.  See N. Taylor Thompson, “When ‘Scratch Your Own Itch’ Is Dangerous Advice for Entrepreneurs,” Harvard Business Review, May 19, 2014. hbr.org/2014/05/when-scratch-your-own-itch-is-dangerous-advice-for-entrepreneurs.

30.  Apache 2.0.

31.  Late 2007. The iPhone had been launched in early 2007.

32.  The LGPL (Lesser General Public License) is a version modified to be less restrictive regarding its use in conjunction with proprietary software.

CHAPTER SEVENTEEN: SECTOR REGULATION

1.    My work with Jean-Jacques Laffont on incentive regulation (but not our work on opening up to competition, part of which came later) is synthesized in A Theory of Incentives in Regulation and Procurement (Cambridge: MIT Press, 1993).

2.    The company is the agent in this context, thinking of this in terms of a principal-agent problem. An agent performs a task for a principal who defines the task and pays the agent for services on the basis of performance.

3.    A common form of price cap regulation, “RPI minus X,” lets the price cap automatically adjust for the previous year’s retail price inflation (RPI) and for expected efficiency improvements (X) during the time period the price adjustment formula is in place.

4.    Consider, for example, public markets for supplies and services to local authorities, hospitals, universities; mass transportation, water, and sanitation; construction projects (schools, highways, bridges); and athletic and cultural equipment. The reader may consult, for example, my note written with Stéphane Saussier, “Renforcer l’efficacité de la commande publique” (Conseil d’analyse économique, note 22); and Stéphane Saussier’s book, Économie des partenariats public-privé (Brussels: De Boeck, 2015).

5.    The so-called “hold-up problem” associated with contract incompleteness was emphasized by Oliver Hart (2016 Nobel laureate) and Oliver Williamson (2009 Nobel laureate).

6.    The alternative is to create a leasing market for rolling stock, as in Britain with the ROSCOs (rolling stock operating companies).

7.    The goal of these guarantees is to ensure that the creditor is paid, and to deal with the debtor’s insolvency. The guarantees can take the form of caution money or collateralized assets.

8.    Consumer surplus is the net benefit from consuming this good; as the French engineer-economist Jules Dupuit showed in 1844, it can be calculated on the basis of the demand function. To understand how it is calculated, let’s take the following example: Suppose a good is sold at the price of ten dollars, and that there are ten consumers prepared to pay more than ten dollars for a single unit each. The consumer who wants to buy it most will buy as long as the price does not exceed twenty dollars, the second is prepared to buy as long as the price does not exceed nineteen, etc., down to the last, who is prepared to pay eleven dollars. The consumer surplus is their total surplus: (20 – 10) + (19 – 10) + (18 – 10) + … + (11 – 10) = 55. Thus, the service is justified as long as the fixed expenses do not exceed fifty-five dollars.

9.    See my article with Glen Weyl, “Market Power Screens Willingness-to-Pay,” Quarterly Journal of Economics, 2012, vol. 127, no. 4, pp. 1971–2003.

10.  In technical terms, the relative margin (the markup above the marginal cost expressed relative to the product’s sale price) must be inversely proportional to the elasticity of demand, where the elasticity of demand is equal to the percentage demand loss for a 1 percent increase in the price.

11.  www.ofcom.org.uk/about-ofcom/latest/media/media-releases/2017/duct-pole-access

12.  Applying the Ramsey-Boiteux formula, the price for access in this case might even be less than the costs, because it makes sense to compensate partly for the monopoly’s distortion.

13.  Particularly the Kirchhoff laws.

14.  Paul Joskow and Jean Tirole, “Transmission Rights and Market Power on Electric Power Networks,” Rand Journal of Economics, Autumn 2000, 31(3): 450–501.