IN THE WAKE of the global financial crisis, many observers—including the Queen of England, who asked why economists hadn’t foreseen the crisis—questioned the usefulness of traditional economics. Heterodox economists even called for alternative approaches. But French economist Jean Tirole spells out the usefulness of rigorous economic thinking for society in deep, yet accessible, language in his book Economics for the Common Good.

Abstract

IN THE WAKE of the global financial crisis, many observers—including the Queen of England, who asked why economists hadn’t foreseen the crisis—questioned the usefulness of traditional economics. Heterodox economists even called for alternative approaches. But French economist Jean Tirole spells out the usefulness of rigorous economic thinking for society in deep, yet accessible, language in his book Economics for the Common Good.

The Case for Economic Reasoning

IN THE WAKE of the global financial crisis, many observers—including the Queen of England, who asked why economists hadn’t foreseen the crisis—questioned the usefulness of traditional economics. Heterodox economists even called for alternative approaches. But French economist Jean Tirole spells out the usefulness of rigorous economic thinking for society in deep, yet accessible, language in his book Economics for the Common Good.

The strength of the book is its breadth. It brings clarity and simplicity to many complex topics covering various fields in economics ranging from climate change, labor market laws, and the global financial crisis to the euro crisis and the gig economy. Many illustrative examples—mostly from France—make the book accessible, and each chapter can be read on its own.

I particularly recommend the chapters on digitalization and the future of work, as they propose answers for challenges ahead.

The chapter on innovation addresses a number of interesting questions. How should property rights over data be regulated so that new firms won’t face barriers to entry? What are the implications

Tirole’s book supports policies that improve welfare and regulation backed by careful economic reasoning.

of artificial intelligence and machine learning technologies that allow platforms to break up production into simple tasks and to discriminate among customers via surge pricing? How does the drift to a superstar economy—in which a small group of giant companies dominates—affect the optimal tax system in a dematerialized world of increasingly easy international tax arbitrage? Tirole, to his credit, does not focus simply on the efficiency gains of new technologies but also studies their impact on income and wealth inequality.

Jean Tirole

Economics for the Common Good

Princeton University Press, Princeton, NJ, 2017, 576 pp., $29.95

The heart of the book proposes a shift away from the classic debate of state versus markets, or left versus right, and steers it toward state-with-markets thinking. The role of governments is not to produce goods instead of markets, but rather to complement markets by regulating them through the establishment of common ground rules. However, instead of simply promoting competition, Tirole’s book supports policies that improve welfare and regulation backed by careful economic reasoning.

Most interestingly, Tirole provides numerous examples of misleading simple economic intuition. Intuition often focuses only on direct effects and typically overlooks those that are indirect and equally important. For example, strict environmental laws in one country might reduce oil consumption and hence pollution—the direct effect—and at the same time reduce the demand for oil and hence its price. But the lower price of oil in turn makes it a more attractive energy resource in the rest of the world, possibly increasing pollution—the indirect effect.

In sum, Tirole builds on, but goes beyond, standard economics and explains to the layman the work of an academic researcher. Many readers will benefit from reading this great book, rich with insights into a broad spectrum of policy questions.

MARKUS BRUNNERMEIER, Edwards S. Sanford Professor of Economics, Princeton University

Jockeying for Position

THE STATUS OF a key currency—one used in international trade and bond issuance and held in official reserves—is more contestable and fluid than most think. So argue Barry Eichengreen, Arnaud Mehl, and Livia Chiţu in a readable and timely book. Their argument generalizes previous research by Eichengreen and Marc Flandreau showing that the dollar caught up with the pound sterling in the 1920s, only to fall behind again in the 1930s.

The book begins with a history of 19th century foreign exchange reserves before describing the founding of the Federal Reserve—or “Fed,” as the US central bank is usually called—and the interwar sterling-dollar rivalry. It then analyzes the key roles major currencies can play: trade financing and denominating bonds during the 20th century interwar period and serving as official foreign reserves after World War II. Currency chronicles follow: the retreat of the United Kingdom’s pound sterling, the Japanese yen’s rise and fall, the euro playing second fiddle, and the prospects for the Chinese renminbi.

Barry Eichengreen, Arnaud Mehl, and Livia Chiţu

How Global Currencies Work: Past, Present, and Future

Princeton University Press, Princeton, NJ, 2017, 272 pp., $39.50

The authors take issue with theorists who say that network effects (a currency, like a language, is handier the more people use it) and inertia (in this case, incumbency of a given currency) lead to a winner-take-all race. Instead, national policies to develop markets made a difference, they say. Through large-scale purchases, the Fed promoted dollar IOUs to finance US exports and imports, thereby reducing US dependence on sterling IOUs. They should note, however, that the Federal Reserve Act of 1913 spared such IOUs costly reserve requirements that, in effect, amounted to a 0.5 percent tax. Eurodollars (dollar deposits at banks outside the United States and beyond the Fed’s requirements) enjoyed a similar competitive edge later in the 1950s.

In analyzing currency choices for foreign exchange reserves, the authors face a methodological question: how to measure a currency’s domain. Where are network incentives at work? The authors choose the scale of the currency’s own domestic economy.

This choice does not jibe with the authors’ story about the interwar sterling-dollar rivalry. In the 1930s, sterling returned to its top dog status and replaced the dollar, but not because the UK economy outgrew the US economy. Instead, countries such as Japan shifted their foreign exchange reserves into sterling after they joined the sterling area, a group of jurisdictions that kept their currencies more stable against the pound sterling than against the dollar.

Thus, the dollar area rather than the US economy may define the dollar network. This area includes the US economy, economies such as Hong Kong SAR with dollar-linked currencies, and most of the economies with currencies that move less against the dollar than against the euro. The dollar area covers about half of the global economy, according to the 2015 Annual Report of the Bank for International Settlements. Taking the US economy as the dollar’s domain is like using the US population to count global English speakers.

Is a renminbi area forming with Asian currencies moving together with the renminbi? Could the dominant international currency change as fast now as it did in the 1920s and 1930s? The book never answers these questions directly, but this sweeping history’s idea that policy can boost a challenge to an incumbent key currency leaves the reader well placed to ponder them.

ROBERT McCAULEY, senior advisor, Bank for International Settlements

Views expressed are those of the author and not necessarily those of the Bank for International Settlements.

Less Globalization, More Growth

STRAIGHT TALK ON TRADE is the latest book in Dani Rodrik’s globalization series. The first—Has Globalization Gone Too Far?—raised concerns about social cohesion when large groups of people are left behind by trade and technology. He took his thesis further in challenging the global order in his 2011 book The Global Paradox. The first book was highly controversial when it was published two decades ago, and many economists dismissed it as stoking protectionism.

But time has proved Rodrik right, at least as a political prognosticator. The blowback he warned about has come true. The Brexit vote and the election of Donald Trump set the stage for this powerful and provocative sequel exploring the survival of democracy and globalization as nationalism rises.

Rodrik stresses ideas in shaping policy and accuses economists of overreaching when translating economic models into policy, especially on trade. Theory implies that unskilled labor will lose from open trade policies in advanced economies. But when economists talk publicly about trade, it is always the aggregate gains they emphasize.

Rodrik does not endorse protectionism or embrace deeper economic integration. Instead, he thinks domestic policy space is needed to manage existing globalization. Developing economies need scope to pursue industrial policies, while advanced economies should protect workers from unfair trade practices, he contends. These goals can be achieved without pitting the global poor against low-skilled workers in advanced economies he says.

The stick of trade remedies is better equipped to manage globalization than the carrot of trade agreements, says Rodrik, and countries that protect workers’ rights should be entitled to restrict imports from countries that don’t. The alternate strategy of using trade agreements to prod developing economies into adopting higher social standards is ineffective and gives corporations too much influence over public policy and development, Rodrik argues.

While Rodrik is right about tensions in the global system, blaming economists for the backlash against trade seems excessive. Technology, trade, and demand shifts all reduced the need for low-skilled workers in advanced economies, while deregulation reduced workers’ bargaining power. The current globalization backlash may have more to do with the need for a villain than with trade’s actual role in the process, a point Rodrik concedes. Even so, he continues, deeper integration is a policy choice feeding workers’ anger, which not only puts globalization at risk but stokes nationalism and endangers democracy.

Dani Rodrik

Straight Talk on Trade

Princeton University Press, Princeton, NJ, 2017, 336 pp., $29.95

Whereas most economists advocate redistribution and investment in education to manage change, Rodrik argues that it is too late for redistribution and that returns to education take years to materialize. Instead, less globalization and more growth are needed. He proposes green industrial policies and public investment to spur growth. The most novel idea is an “innovation fund,” a public venture fund for new technologies whose profits would be returned to citizens as an income supplement. If successful, it would improve income distribution, but it could also speed the pace of job loss to technology. Rodrik acknowledges that carefully designed institutions would be needed to ensure that industrial policy and state-managed investment aren’t themselves captured. But he does not provide details.

The book offers far-reaching insights on political economy, democracy, and development. A reader expecting a narrative focusing on trade, however, may be disappointed. What is noticeably absent is a delineation of the many benefits of international trade, not to mention a discussion of the long period of global prosperity, poverty reduction, and peace that rising global integration supported.

CAROLINE FREUND, senior fellow, Peterson Institute for International Economics

Finance & Development, December 2017
Author: International Monetary Fund. External Relations Dept.