Economics and the Nobel

The Nobel Committee today awarded a French Economist the Prize in Economics for the work done in regulation theory. The NY Times states:

The Royal Swedish Academy of Sciences said that (he) had helped governments tame such firms by analyzing when and how regulators should intervene to constrain activities, and when to stand back. (he) helped show “what sort of regulations do we want to put in place so large and mighty firms will act in society’s interest,” (said) the chairman of the prize committee, said after the award announcement. His work focuses on markets that lack the perfect competition portrayed in textbooks, where the push-and-pull among firms keeps prices low and quality high. In reality, many markets are dominated by a small number of firms that have the power to keep prices artificially high, and may lack incentives to improve quality. Furthermore, these firms tend to know much more than their regulators.

Now this is a topic that I have some firsthand knowledge. The winner for example addressed the issue of interconnection fees, best discussed in his book entitled Competition in Telecommunications.  One need read no more than pp 100-133 to see that although he is good at mathematics he has failed in my opinion to understand the business. His arguments are repositioning of the Baumol-Willig Theorem on interconnect. The theorem justifies the incumbent charging the new entrant an interconnect fee, thus maintaining the monopoly.

In this case it was the interconnection between long distance or wireless carriers and the incumbent wire line carrier. In my analysis in the early 1990s I indicated that they were separate services and that they should be priced to reflect their costs not costs bearing unacceptable cross subsidies. It was this person's studies that through complex mathematics he argued for the cross subsidies to maintain the existing monopoly incumbent.

The essence of the argument is simple. If one buys a pair of socks, must one pay the shoe maker a fee for interconnecting your foot to the shoe via the sock? The logical real life answer is no! However to this person he sets up an argument to minimize consumer costs but subject to the incumbent monopolist not losing any money. Ad hoc propiter hoc. The true fact is that a consumer should pay for each piece from the provider of that piece and there should be no interconnection. This false concept took consumer monies in the hundreds of billions if not trillions over decades.  If one places a long distance wireless call then one should select the local carriers and the long distance carriers. It was a nice idea in 1982 with the Judge Green decision but it has been lost in my opinion due to sophistry of the type we see in the above arguments.

It is a shame that his analysis failed to see and understand the need for separation and that wireless was and would become a dominant player as we clearly understand today. I had written a paper for the White House Staff in 2002 depicting the changes in telecom having just battled the issue in the trenches in 22 countries. There is a need to do "bench work" in economics, namely to understand the technology and actual cost structures, not just expansive mathematical analyses.

Unfortunately this award, to a highly competent mathematical manipulator of economics issues, in my opinion lacks the factual underpinnings which all too often are lacking in the political swamp of regulatory proceedings.