January 2015 newsletter – Letter from France – A golden year for french economists

In his latest Letter, Alan Kirman discusses two strands in the French approach to economics as represented by Thomas Piketty and Jean Tirole.

This has not have been much of a year for the French economy, the government has wobbled on, but has not had the courage to form a solid alliance with Italy and accept what is now the overwhelming judgement that austerity is not the right current recipe.

However, it has been a golden year for French economists. Jean Tirole won the 'Nobel Prize' for economics, and Thomas Piketty produced enormous reactions with his best selling book Capital in the Twenty First Century. The Economist decided to portray the situation as a battle between the Toulouse School of Economics with Tirole as its champion, on the one hand, and the Paris School of Economics with Piketty as its standard bearer, on the other. The immediate reaction in many parts of the Press has been to identify Tirole with the right and Piketty with the left. This is, of course, a gross simplification and one which does not do justice to the protagonists. Those who are finely attuned to the nuances of the French intellectual scene will have observed that Piketty is a Normalien i.e. studied at the Ecole Normale Supérieure many of whose alumni become academics, whereas Tirole is a Polytechnicien, that is he studied at the Ecole Polytechnique, from where many go on to become senior civil servants or captains of industry. But there are many exceptions to the rule and Tirole is one of them.

Perhaps the first thing to observe before even discussing the two economists in question is that mien de rien, French economists have managed to occupy senior posts in international economic institutions for some while now. Christine Lagarde, replaced Dominique Strauss-Kahn who, you may remember, was well on the road to the Elysee before a great deal was revealed about his 'private' life. It is one of those remarkable and incomprehensible things that his replacement is French though, to be fair, the French have held sway over the IMF for considerable periods in the past. Olivier Blanchard, not a product of the Grandes Ecoles, by the way, has been director of the research department there for some years now. Francois Bourguignon was the chief economist at the World Bank and so the list goes on. All of this is enough to make one reflect on the adage that there is a strong negative correlation between the level and reputation of a country's economic theorists and its economic performance!

What then of the current situation in France? For someone like myself who came to France 37 years ago, there is something ironic about the current state of academic economics here. Early on there was a strong push from those in formal economic theory to create a separate and new economics section of our National University Council (CNU), which decides whether people who wish to become associate or full professors are qualified or not. This section was to counter the hostile hands that controlled the economics part of the council at the time and to allow some more formally trained economists to enter the profession. This idea was originally favoured by Jean-Jacques Laffont the founder of the Toulouse department of economics as we know it. He dropped the idea, which I have to confess, I thought, and still think, was a bad one but it was around for quite a while. Last year similar pressures were building up to create a separate section for the 'heterodox' who have, by now, become the beleaguered minority, overwhelmed by the Ayatollahs of orthodoxy!. This reveals much about the shift on the French scene.

That scene is nevertheless slowly changing. This year has seen, for all intents and purposes the end of the 'aggrégation'which was the archaic centralised system for selecting new professors in economics. The candidates were ranked and could then choose in that order which of the available university posts they wanted. This led to a poor matching and a rapid return of many of the winners to their own universities after they had purged their period in provincial purgatory. Now universities, as in other disciplines can choose the candidates they want, (provided they are previously approved by the CNU).

Why is this relevant to this year's distinctions? Because, in the past, although both Toulouse and Paris, through Foundations that they have created, could recruit young candidates at good salaries, integrating them as tenured professors was made tricky by the hurdle of the aggregation. This has now gone, and there are now those who fear a massive influx of freshwater economists who will be cheerleaders for further austerity, a somewhat implausible scenario. But, most of us believe that the situation will be healthier as a result.

Paris v. Toulouse?
This would seem to be mainly a creation of the media. The two institutions are so different that it does not make a great deal of sense to compare them. Although Jean Tirole has been interested in many aspects of economics Toulouse has built its reputation on industrial economics and on the questions of incentives and regulation. It has, therefore, a strong identity and, indeed, the Nobel committee explicitly emphasises this aspect of Tirole's work. Another characteristic of the Toulouse school is its insistence on the use of well developed formal theory and this has become associated, in the minds of some, with an adherence to right wing beliefs. But the preoccupation with regulation which has been a major characteristic of Toulouse, can hardly be assimilated to the hard line libertarian vision that all government activity is necessarily harmful. So this identification of Toulouse with libertarianism by the French left is unfair. Indeed, one has only to peruse the book Balancing the Banks: Global Lessons from the Financial Crisis by Jean Tirole with Jean Charles Rochet and Matthias Dewatripont, to see that the Tirolean vision of regulation is not one that would suit the libertarians at all. A basic point is that the financial sector is a constantly evolving system and that regulation has to be adaptive. But this requires a strong and reactive central authority far from the idea of pure self organization.

Yet it would also be reasonable to say that the models developed by Toulouse aim at removing imperfections in the system which prevent it from satisfying the welfare theorems. Developing theory for this is paramount for the Toulouse school. Thus there is a persistence in the belief that we have to work towards markets which work as theory assume that they will. The role of regulators is to assure that the rules and incentives are consistent with this. There is still considerable faith in the benchmark models of the economy.

Paris, on the other hand, is a tribe with many different views and beliefs. For its university identity it is built around Paris 1 but has nothing like the relationship that TSE has with its university. There are close relationships with the Grandes Ecoles and the members of PSE have very different affiliations. It would be very difficult to pin an identity on PSE and the suggestion that Thomas Piketty somehow is representative of that school is not very credible. If he has one attitude that has attracted a lot of attention and criticism it is that he attaches very little importance to theory and much more to data. This is irritating for his adversaries, partly because he began life as a theorist, and because it is an attack on their human capital. Furthermore, his identification with the left is rather clear, having been an advisor to Ségolène Royal in her unsuccessful bid to become president. As soon as his book became a spectacular success the Financial Times took considerable pains to set some tame econometricians on his analysis to discredit his results. He met these attacks with, almost British, phlegmatic calm. However, it might be noted that no such efforts were deployed on the work of Reinhart and Rogoff on the famous 90% inflection point in government debt, nor on the Blanchard fiscal multiplier calculation both of which turned out to be clearly erroneous. However, it is only fair to say that the FT showed a remarkable sense of fair play and redeemed itself by naming Capital in the 21st century, its book of the year.

The responses to Piketty have been interesting, since it would be difficult to deny that in some cases, they reflect the ideology of those who criticise and, on the other, the disdain of those who are of a more theoretical bent. But, perhaps the most interesting critique came from Acemoglu and Robinson who argue that there are no 'general laws' in economics, all depends on cases and circumstances. Pushing that argument to its limit should make quite a lot of economists nervous.

Nevertheless despite all the criticisms of specific aspects of Piketty's work there seems to be an accumulation of evidence in favour of his basic premise if not of his specific conclusions. A number of people have argued against the measures he uses, such as the wealth of the top 1%. However, recent work by Roy van der Weide and Branko Milanovic shows that if one disaggregates the data Piketty's arguments are reinforced. As they say, ' …high levels of inequality reduce the income growth of the poor and, if anything, help the growth of the rich. When inequality is deconstructed into bottom and top inequality, the analysis finds that it is mostly top inequality that is holding back growth at the bottom'.

Jean Tirole has certainly been less controversial than Thomas Piketty. The first has built up initially with Jean Jacques Laffont, an enviably powerful and coherent institution. The second is now the most prominent of the economists at PSE but there are a number of economists in that institution of whom any economics department would be proud. French economists exhibit an admirable heterogeneity, a quality which does not figure prominently in economic models! As a result, whichever way the debate among economists goes in the future, French economists will be well placed to participate.

After discussing the attention that this year's stars have attracted and the controversy that has developed around one of them, it might just be worth recalling, in conclusion, that another French economist was caught up in a mini maelstrom, in the past. Figaro magazine the weekly glossy that goes with the newspaper of somewhat right wing persuasion announced, when Gérard Debreu got his Nobel prize, that he had proved scientifically that leaving markets to their own devices yields a social optimum. When we asked him why he had not pointed out the inaccuracy and simplistic nature of this assertion, he answered that 'trying to react to such idiocies will only provoke more stupidity'. Yet, somehow, deep down I do not think that he was wholly unhappy with the Figaro'sclaim.

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