October 15, 2014

The 2014 Nobel Prize For Economic Sciences: Jean Triole and "The Pretence of Knowledge"

F. A. Hayek
Jean Tirole

     It's been 40 years since F. A. Hayek delivered his acceptance speech for the Nobel prize in the science of economics. Earlier this month, the annual award was once again decided on; this time for Jean Tirole of France. Perhaps by evaluating the reasons for Tirole's victory on the basis of Hayek's critical acceptance speech; "The Pretence of Knowledge," (in addition to some of his other work) we can, in a crude way, see if Hayek's work has had any influence on their shared discipline.

     Upon first glancing over the reasons the Royal Swedish Academy of Sciences gave for Tirole's victory, one can hardly be blamed for thinking that Hayek's acceptance speech has fallen on deaf ears. After all, the press release announcing the decision to award Tirole is titled; "The Science of Taming Powerful Firms" (because of his work on the regulation of industries dominated by a few powerful firms - a form of "control" over society Hayek discouraged using in the closing remarks of his now famous speech on the limitations of economic knowledge). Yet, despite this potentially glaring contradiction in overall principle, I believe there is reason to think that Hayek's work has had at least some impact on Tirole's analysis of market failure and competition.

     In the paper "Competition as a Discovery Procedure," Hayek opens by criticizing macroeconomists' methodology by accusing them of "investigat[ing] competition primarily under assumptions which, if they were actually true, would make competition completely useless and uninteresting." One assumption of these models frequently criticized by Hayek is that of homogeneity (as far as the products offered by firms, information the firms possess, and the various industries firms exist in). In other words, Hayek questions the value of neo-classical economics' competitive analysis (and the policies these analysis give birth to), because homogeneous assumptions reflect, in no conceivable fashion, the reality of competition.

     It would appear that Tirole (to some extent) agrees with this criticism. According to the above linked press release, Tirole's work has gone some way towards weening policy makers and economic researchers off of the idea that "general principles for all industries" exist and can be acted on. Rather than treating all firms and industries alike (i.e., adhering to a set of assumptions regarding homogeneity), Tirole's work emphasizes carefully adapting research, as well as policy regulations, to "every industry’s specific conditions" (as opposed to resorting to common, often harmful, "solutions" like price-caps, price-setting, and the prevention of mergers).

     On the one hand, if Hayek were still around today, he would likely be disappointed to see that the "pretense to knowledge" he criticized all those years ago seems to be alive and well in economics and public policy decisions... On the other hand, he might derive some small satisfaction from seeing that those decisions are more and more often being guided by attempts to understand society's "fine structure" rather than it's aggregated, or homogenized, "coarse" one. 


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