Wednesday, April 17, 2013

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.

Employment lies in design and distribution

Automation removes the jobs related to physical production. Emcployment in the factories lies in a few maintenance and conditioning jobs. Skilled jobs are needed to design new products, develop new varieties and define competitive production techniques. Other skilled jobs are needed to ensure the distribution of these products and keep the "front line" in front of the customer.

Employment is organized into three layers: design, concentrated in limited geographical regions, and distribution, distributed everywhere close to the customer, are the two most numerous layers. The job required for physical production is low or even negligible2.

New distribution of wealth

The CTS is the richest economy that humanity has known, because the automated production provides in abundance necessary or enjoyable consumer goods. However, the distribution of this wealth is not obvious. Wage labor, which provided almost automatically the distribution in a mechanized economy whose production required many jobs, can no longer fulfill the same role in an automated economy where physical production is (almost) without a job.

Underemployment, with the breakdown of social cohesion that accompanies it, is a risk in the CTS economy: there is no a priori guarantee that the sum of employment in design and distribution ensures full employment. New forms of distribution, closer to rent, become necessary to ensure that all persons in society enjoy an equal access to wealth.

The search for equity implies a deliberate action, because the only mechanism of CTS can as well, and with a high probability, result in an unfair society.

E-commerce and mediation

The population is segmented according to various categories of needs and faces a diversified production. It is not easy for consumers to navigate and choose the variety that best meets their needs. Education of the demand, which results jointly of identification of needs and of knowledge of the offer, is difficult. The abstraction which consists in taking the demand as a starting point for the economy would be here excessive.

Mediation is a form of trade that is endogenous in the economy of the CTS: the mediator is one who is able to find offers that match the needs of a client (so it contributes to the formation of the demand) while minimizing the costs of transaction. He facilitates the customization of the commercial relationship.

Mediation uses the tools of electronic commerce: networks, computers, smart cards, call centers, databases etc. The lower cost of production of these tools is the engine of CTS, whose technologies attract therefore both production and trade.

A risky economy

The fixed cost production function implies some risk for a business, since the entire production cost is spent before the first unit of the produt is sold. Moreover, the boundary ranges for the market of each variety (and for the company that produces it) is subject to price competition and innovation. Hence it can happen that the investment does not find its reward in the market if for example an unexpected competitor raids the demand that the firm anticipated by providing a better quality/price ratio through product or process innovation.

A powerful spring is stretched in the fixed cost production function. He relaxes in situations of competition and extreme risk, the corollary of which is a research of security pushing the companies to form partnerships. They will be also tempted by illegal maneuvers aimed at ensuring market. The violence of the competition, the return to "feudal" forms in relations between companies, are endogenous to the model. The result is a need for clarification of the ethical issues, as well as a legislative frame and judicial practices.

Changes in business organization

Changing business organization is endogenous to the model. The generalization of computers and networks, triggered by their decline in price and the efficiency they provide, facilitates the emergence of transverse organizations that limit the number of hierarchical levels, decentralization to the base of a right to decision, the implementation of a posteriori control and report procedures.

The information system evolves towards the personalization of the customer relationship and the integration of the customer in the information system of the enterprise. This development increases the mediation and contributes to transform the business relationship.

Globalization of the economy

The globalization of the economy is endogenous because the cost of transport undergoes a significant drop in benefiting from CTS. Barriers that resulted from the distance disappear or fade.

Assuming for pushing the idea to the extreme that transport costs are zero, no geographical limitation precludes the ubiquity of goods. Institutional barriers can be overcome: as the location of production sites is irrelevant in the model (because transport and physical production cost nothing), it is easy to install abroad assembly or even production plants to produce models of cars or computers. Globalization is not an exogenous dimension of the context: it is endogenous to the CTS economy.

Globalization contributes to the risk perceived by the company: it is difficult to protect its investments by an active technology watch when the potential competitor is on the other side of the world.

Crisis of adaptation

The above transformations build despite their diversity a coherent whole. They involve a disruption of our institutions (credit, distribution and redistribution, training, insurance, etc.) because they result from a development well suited to the mechanized industrial economy, to a production function and a type market equilibrium that are not those of today.

Our societies are facing a crisis of adaptation. This crisis is endogenous to the model, once the gap is measured from the equilibrium conditions of the economy of the CTS to those the institutions inherited from the recent past provide3.

Representation: a layer model

To consider both the future situation, the present situation and the transition, we will use a layer model. This type of model, invented to represent the architecture of computers and telecommunication networks, is historically consequential to the CTS. It allows to represent the articulation of various simultaneously requirements needed to run a program or to communicate, and avoid sterile but always reappearing questions on the classification of these components in the hierarchy of importance.

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We have, with this model, both an explanatory scheme - the list and diversity of endogenous show - and the type of representation that corresponds to it (layer model).

However all is not endogenous to the model. It does not account for exogenous such as natural resources and population, the evolution of which imposes an impact that a practical analysis must consider. It does not aim, even remotely, to cover the entire cultural, moral or philosophical problem.

Such gaps can not be used to refute the model: a model can not claim to represent and explain everything. It did its job properly if it illuminates a small but well-chosen space, and if the border of validity that surrounds this area is unambiguously defined.

The diagram below presents an overview of the model and of the causal relations it contains. The boxes on the heart of the CTS are surrounded by a thick line.

1 Bertrand Gille, Histoire des techniques, Gallimard, La Pléiade, 1978.< br/>
2 Pascal Petit, Technologie et emploi : ce qui a changé avec les TIC, Cepremap, 1997.< br/>
3 Pascal Petit and Luc Soete, Is a biased technological change fueling innovation, Cepremap, 1997.< br/>

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