Sunday, April 28, 2013

Two utility functions

In French: Deux fonctions d'utilité

The classical economic theory (Debreu, Theory of Value, 1959) is based on three elements: the utility function, the production function, the initial endowment that divides ownership of the goods among actors. Starting from these elements one can deduce the vector of relative prices that, directing the exchange, guides the economy to a Pareto optimum.

The elegant simplicity of this model provides it a great power. The general equilibrium is detailed in partial equilibrium, each market being the scene of a supply and a demand. This can be completed by introducing the time: the production function is then modified by the investment.

In "A Suggestion for Simplifying the Theory of Money" (Oxford University Press, February 1935) John Hicks proposed however to fill a gap in this theory. He noted that each agent has actually two utility functions: one describes the satisfaction that comes from consumption, and the other one describes the satisfaction that gives him the possession of a patrimony.

Assets can be classified according to their liquidity. Money, which is the pure liquidity, is readily usable and implies no risk but provides no income. Illiquid assets provide an interest or a rent, but their price is changing: their possession presents a risk of depreciation.

Thursday, April 18, 2013

Creative intelligence

(Tranlated from: L'intelligence créative)

Creativity is a mystery. As we tend to spontaneously reproduce our conditions of existence we are fundamentally conservative, even those who call themselves "leftists." How is it then that we may yet evolve?

In any business, in any institution, conservative forces are struggling to ensure the sustainability of the organization and, as we well know, the leaders never understand anything new. The economic reasoning is not enough to explain why so many innovations happen: for an enterprise embarks on a new project it is not enough that innovation seems profitable, the potential profitability must also have been understood or at least glimpsed. How leaders "who never understand anything new" can nevertheless understand finally the value of an innovation?

These two mysteries are similar to the one the evolution of species confront us. If parents pass their genes to their children, how is it that one species can evolve, that forms life takes can diversify? The answer, as we know, lies in the mutations: genes are not transmitted all the same.

Mutations are random, most of them are harmful and their carriers disappear. Some, however, are so positive that they will benefit their holders in the competition for reproduction: hence evolution.

Does not happen in our minds, in our institutions, a phenomenon similar to this one that would explain the creative thinking in the individual and the innovation in the enterprise?

Wednesday, April 17, 2013


(Translated from e-conomie).

This book was published in 2000 by Economica, 49, rue Héricart, 75015 Paris, ISBN 2-7178-4073-7

The "e-conomy" is based on the synergy between microelectronics, software and network. It is also called "new economy" because it changes the competition on the market, the internal organization of firms and their cooperation.

This is certainly an "immaterial economy" but this characteristic stems from another, more fundamental: the cost of production being virtually independent of the volume produced, it is paid from the initial investment: e-conomy is a "sunk cost economy."

This has profound consequences on the economic equilibrium. The plants are automated, employment lies in design and distribution. The distribution of income is not connected to employment. Enterprises are organized around their information system and differentiate their products to build niche monopoly. Trade occurs through electronic intermediation. The investment being risky, competition is global and extremely violent.

Modeling the "e-conomy" enlightens the game of competition in microelectronics, software, network and in the sectors that use these technologies: broadcasting, airlines, trade. This allows to interpret the evolution of information systems and to diagnose some obstacles.

The "e-conomy" is highly effective but its power can lead to disaster if it is treated in the manner of "laissez-faire". It is therefore necessary to go beyond the economic dimension to consider the requirements of ethics and social cohesion.

Table of Contents: full text access.

List of my books

Table of contents of e-conomy

This book was published by Economica in October 2000. Some details would of course need to be updated, but the structure of the model and of the reasoning remains relevant.

Most of the texts are in French. I shall translate them progressively into English.


Part I: The model
1 - Overview (in English)
2 - Increasing Returns
3 - Contemporary technical system
4 - Monopolistic competition
5 – Layer Model

Part II: Areas
6 - Computing
7 - Audiovisual
8 - Dimensioning
9 - Telecommunications
10 - Airlines

Part III: Uses
11 - Information System
12 - Obstacles
13 - E-commerce
14 - Relationship between nations
15 - Putting in perspective

e-conomy, Chapter I : Overview

(Translated from Vue d'ensemble).

Nota Bene: we use here the term "model" in a sense different from that given to it by econometricians. We want to draw the consequences of a few simple principles (CTS, production function with fixed cost) and compare them with observational data: this allows us to use some mathematical tools and terms such as "exogenous" and "endogenous". By cons we have not built a quantitative model involving a detailed and complete formalization of assumptions and allowing to test them systematically: this work is a preliminary to such a formalization.

CTS, automation and fixed costs

Following an approach inspired by the work of Bertrand Gille1, we consider the synergy proper to the "contemporary technical system" or CTS (microelectronics, automation, computer) that characterized the economies of rich countries from the 70s.

This synergy gives the production function a "fixed cost" structure, which means that the cost (almost) does not depend from the quantity produced: it is easy to check that in the case of electronic chips or of software which are essential and fundamental products of the CTS.

Differentiation and monopolistic competition

The “fixed cost production” function would imply for the market of each product a natural monopoly structure, where only one company can survive. In order to avoid this risk companies seek to differentiate the product as much as they can, that is to say as much as the demand can handle (for a product to be differentiated, it is obviously necessary that there exist a demand for different varieties of this product).

The existence of cross-trade between countries reflects this differentiation. Let us quote one of the favorite examples economists use: if the cars were not differentiated, trade in cars would not exist between France and Germany because for the same price clients would not go looking abroad a model identical to the one they can find at home. Undifferentiated goods (pig iron etc..) are not subject to cross-trade.

Companies enjoy on each variety a niche monopoly on the border of which they compete with suppliers of other varieties. Monopolistic competition is endogenous to the model: at the equilibrium the number of varieties produced is determined, as well as their price and the quantity sold of each variety.

The peaceful symbolic of any equilibrium model should not conceal the potentially violent phenomena of creation and destruction that renew the actors. These phenomena will be illustrated by sectoral examples.

Tuesday, April 16, 2013

Critique of correlative reason

(Translated from Critique de la raison corrélative).

Statistics provides counts, averages and totals; it also provides a measure of dispersion for quantitative variables, the standard deviation; finally it provides a measure of the relationship between quantitative variables, the correlation (for qualitative variables, the equivalent of the correlation is the chi2).

I spare the reader the mathematical expressions of these concepts: they are found in textbooks.

When there is an affine relationship (Y = aX + b) between two variables X and Y the absolute value of their correlation coefficient is equal to 1: they are "correlated".

When no such relationship exists, the correlation coefficient is equal to zero: the two variables are not correlated. When the relationship exists but is fuzzy, the absolute value of the correlation coefficient lies somewhere between 0 and 1.

*     *
Confronted to the descriptions statistics provide, we are like those children who always want to know why things are as they are: we want to know the causes. Felix qui potuit rerum cognoscere causas [1]!

How to use Big Data

(Translated from Comment utiliser le Big Data)

Stéphane Grumbach and Stéphane Frénot have published in Le Monde on January 7, 2013 an article that develops what is often said about Big Data: "Les données, puissance du futur."

It is true that the Internet provides powerful editorial means to the institutions that produce statistics, it is also true that the observations collected by computer processes allow novel usages. One should of course be aware of the new possibilities and new dangers that entails.

The authors of this article, however, handle with too few precautions the semantic bombs that are the words "data" and "information." Phrases such as "to digitize everything", "information society", "mass of data", "a resource little different from commodities such as coal and iron ore" are actually deceptive, because by encouraging to consider data according to their volume they slide down the slope of the "information theory."

Monday, April 15, 2013

What is a "concept"?

(Translated from: Qu'est-ce qu'un concept ?)

"What is a concept? " asked once a friend of mine. I had used this word while we were talking about economy.

 This friend has suffered like me philosophy in the last year in high school. She may not have been paying attention, it may be that his teacher was a mediocre philosopher or poor teacher. To understand the philosophy, told me a philosopher who thought of his own experience, one must have reached at least the age of thirty years, have formed a family, have children and practice a profession ... What can we understand at the age of eighteen?

 I admire the choice and depth of the readings of this friend, if not their extent, but this fine and intelligent person kept so unpleasant memories of the course of philosophy that she close her ears when she hears one of the terms of the technical vocabulary, in particular "concept".

It is therefore normal that she does not know what it means. I begun to understand it when, working at INSEE, I questioned the relevance of the classification of activities and the relationship between statistics and economic theory.
*     *
"A concept, I said, that's an idea associated with a definition." As it meant nothing to her, I had to develop.

An essay on industrial classifications

Article by Bernard Guibert, Jean Laganier and Michel Volle, published in Économie et statistique No 20, February 1971

(Translated from: Essai sur les nomenclatures industrielles)

There can be no economic analysis without a classification. Only a classification can give precise enough meaning to the terms that crop up so often in economic reports - "textile industry", "furniture", "steel industry" and the rest. Classifications play an absolutely crucial role, but they tend to be dismissed as tedious. They consist of tiresome lists with only the occasional intriguing oddity to break the boredom. A classification specialist is seen as a real technology geek, and has to be exactly that to answer the seemingly hair-splitting questions (s)he is faced with every day: should the manufacture of plastic footwear come under footwear manufacture or under manufacture of plastic products? What is the distinction between shipbuilding and the building of pleasure boats? Should joinery be classed as manufacture of wood and wood products or as building construction?

Understanding the iconomy

(Translated from: Pour comprendre l'iconomie)  

Notice to the Reader: This text is well suited for those who accept the austerity of abstraction. Others will deem it probably poor and too assertive.

*     *
To understand today's economy, which is obviously complex, one must define a few simple concepts that will allow to build an argument (see What is a "concept"?).

To generate these simple concepts requires a complex meditation fed by experience, conversations and readings. The long journey of this meditation leaving no trace in the dryness of the concepts, only the comment can provide them a little heat.

We will therefore proceed more geometrico. We first present six concepts that provide a theoretical framework for modeling today's economy, then nine concepts that give a content to this framework. Then we cite each concept followed by the comment that explicit it.

*     *
Six economic concepts
  1. the purpose of economy is the material well-being of the population;
  2. any action deemed necessary or advisable by society is carried out by an institution of which it is the mission;
  3. the mission of the enterprise, economical and industrial institution, is to effectively produce useful things; it ensures in the biosphere the interface between society and nature;
  4. the fulfillment of the mission of an institution requires an organization that has a dialectical relationship with the mission;
  5. the State, institution of the institutions, define their missions, instigates their creation and regulates the dialectic of the mission and the organization;
  6. an industrial revolution transforms the nature, and therefore the mission of the institutions and the practical conditions for their organization.
Nine concepts for understanding the contemporary economy
  1. the production system is based on the contemporary technical system (CTS), whose fundamental techniques are microelectronics, software and the Internet; the CTS succeeded in 1975 to the modern technical developed system (MTDS);
  2. the emergence of the CTS sparks a cascade of anthropological consequences;
  3. repetitive work is automated;
  4. the bulk of the effort required by the production is achieved during the initial investment;
  5. market obeys the regime of monopolistic competition;
  6. products are packages of goods and services, each developed by a network of partners;
  7. the material well-being of the consumer depends on the quality of its consumption;
  8. predators are skilled users of CTS;
  9. the crisis is due to the inadequacy of the behavior of economic agents to the productive system that the CTS brings out.