THIS year’s Nobel Prize for Economics (correctly known as the Sveriges Riksbank Prize in Economic Sciences) for 2014 didn’t go to Thomas Piketty as I’d hoped. Piketty and his colleagues have done exceptional work on the question of inequality, and have given us in SA South African some critical insights on the nature and causes of wealth and income inequalities, and how we might solve the problems through policy. But my disappointment wasn’t sustained, as the prize didn’t fall too far away.
It went to another French economist, Jean Tirole. His work, which is in the field of industry organisation, has important implications and relations to that of Piketty’s. As the Royal Swedish Academy of Sciences has noted, the prize this year is about market power and regulation. And, as we have learned, power — whether in the hands of individuals, corporations or institutions — can be destructive to the needs of society.
The Nobel academy further notes that “many industries are dominated by a small number of large firms or a single monopoly. Left unregulated, such markets often produce socially undesirable results — prices higher than those motivated by costs, or unproductive firms that survive by blocking the entry of new and more productive ones”.
This is a phenomenon we saw in SA South Africa with the much-debated construction cartel that colluded on prices to keep out competition and overcharge the government during the construction phase of soccer stadiums — making supernormal profits while distorting markets and harming consumers.
Tirole’s instructive genius is the seemingly obvious proposition that there is no one-size-fits-all solution to industry and market regulation. Each market or industry will need its own set of regulations, depending on context and stage.
Over the past few years the Competition Commission has served some hefty fines to some of SA’s South Africa’s oligopolies, including punishing illegal market behaviour against consumers by bread companies. These cases have highlighted the importance of Tirole’s work. Industry regulation and competition policy are critical fields of economics and policy in the post-crisis era and relate directly to market distortions and failures that harm access and development.
The government’s ambition of developing industry and ensuring access to all will depend on how well it can intervene to correct mischievous market tendencies in this regard — including collusion and uncompetitive monopoly tendencies meant to keep out new entrants into various industries.
Sadly, the phenomenon of asymmetric information, which is the gap between what regulators and the regulated players know — remains an important constraint. In SA South Africa, this has played out strongly in the telecoms sector, though things have improved markedly.
Market failures which are due to distortions or manipulation by large firms have dire implications for access and opportunity.
As Piketty has noted in his book, Capital in the Twenty-First Century, the centralisation of wealth (and thus power) in just a few hands has negative effects on opportunity and meritocracy and thus — more critically — democracy. This principle can be applied equally to the issue of market power, though market-price mechanisms have delivered access and positive effects, but are bereft of morality and social conscience, and have thus been ineffective at in providing redistribution.
To be sure, in the post-crisis era, the idea of “laissez-faire” has all but been debunked. The government’s hand through regulation has become the only way to correct market failures and provide mechanisms for sustainable growth.
Tirole’s instructive genius is the seemingly obvious proposition that there is no one-size-fits-all solution to industry and market regulation. Each market or industry will need its own set of regulations, depending on context and stage. The success will most centrally be informed by the availability of information, and a strong reliance on creative applications of theory and practice.
What is certain is that regulators and policy makers have to pay particular attention to industry development and organisation if they are to succeed in growing economies and securing a fair and equitable distribution of power and wealth.
This year’s Nobel award reinforces the notion that the question is no longer of regulation or no regulation, but how the government can do this effectively.