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.

e-conomy

(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.

Foreword
Acknowledgments
Preface

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.

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.

Is France really in debt?

French version

To determine whether or not France is in debt, and at what level, we shouldn't look at the report "Government debt / GDP" that - this report is a chimera, see "A misleading indicator"- but the debt of France all actors together, then adding the debt of businesses, households and the government towards actors outside our borders.

Banque de France publishes an annual "current account" which describes the exchange of goods, services, income and current transfers with the outside. The balance of this account is that France borrowed (or lend) each year. His examination will show us that France is not in debt, at least for now ...

The Effects of Informatization on the Economic and Financial Crisis

Intervention at the Conference of the Applied Econometric Association, Ankara, October 4th, 2010

Click here for a pdf text of this intervention (149 KB, with graphics))

The contemporaneous technical system

To understand the effects of informatization, it is useful to refer to the theory of technical systems. A "technical system" is taking place when a small number of techniques come in synergy, their alloy releasing a previously unknown effectiveness. This was the case with industrialization, which was build from the eighteenth century on the synergy between mechanics and chemistry, to which were added electricity and oil at the end of the nineteenth century.

Computerization relies on the synergy between microelectronics and software, to whom network was added in 1975: this synergy allowed the emergence of a contemporary technological system (CTS). The computer, which was previously devoted mainly to calculation, became - with word processing, spreadsheet, grapher, messaging and file sharing, then the Internet and the Web - a universal instrument that brought the assistance of the automaton to personal work as well as communication between people.

The origin of industrialization was purely technical but it had anthropological and geopolitical consequences: it has expanded the system of wage labor and gave birth to the modern corporation, to working class and class war. It has led to rapid urbanization and rural exodus, to rapid technological change and the use of scientific research, it has prompted the deployment of the education system and health system, encouraged imperialism and colonialism, caused wars which used devastating weapons provided by the industry.

It is the quality, the power of their industry which ranked the nations : those who had not been industrialized were soon dominated or colonized by the industrialized nations.

A misleading indicator

Translation from "Un indicateur fallacieux"

We say "the debt of Greece" (or of "Spain", "France" etc.) while we talk about the debt of the Greek State (or of the Spanish, the French State). But the debt of a State and the debt of a country are two different things.

Moreover, we evaluate the level of indebtedness of a State by the ratio "gross debt / GDP", selected in the Maastricht agreements. This ratio is a chimera, a monstrous concept, because it compares a stock of an actor (the level of the gross debt of a State) to a flow of another actor (the annual output of a country, measured by its GDP). Yet we learned in elementary school that all proportion must include things of the same nature ("do not divide leeks by turnips," said our teachers). It is surprising to see so many economists discourse pedantically on such a misleading indicator.

The "gross debt" of an economic actor is less significant than its net debt, the gap between the value of its debts and the claims he has over others.

Why economics is a science

(Translated from Pourquoi l'économie est une science)

"Economics is not a science," said the other day a friend of mine, a well known expert in computers and information systems. The image he has in mind is probably these that give these "economists" that one hears or sees in the French media, real sophists which are able to demonstrate everything and its opposite, and change their mind with always the same confidence. But this image is superficial.

"If you read Adam Smith, I answered, or Alfred Marshall, or Léon Walras, or John Hicks, or closer to us Ivar Ekeland and some others, you would see that there is an economic science. However I must confess that it took me time to understand that... "

Indeed the economics classes that I suffered at ENSAE in 1963-65 were so dogmatic that they could only convince students endowed with a docile memory - while my own memory, as restive as a skittish horse, agrees to hold only what I fully understand. Ekeland opened for me the door of economics with an article in La Recherche in 1976, while I stumbled on the limits of the interpretation of statistics.

When in 1983 I set up a mission of economic studies at CNET, engineers and researchers with whom I worked had the same prejudices that my friend. "Economics, they said, is a soft science". They believed that the economist is a dishonest lawyer whom the leaders instruct to "demonstrate" the profitability of projects they have already chosen.

Economists stunned

(Translated from "Les économistes atterrés")

Some French economists published recently a very interesting manifesto ("Economistes atterrés"). I signed it.

The crux of their argument is as follow: while the market for consumption and investment products converges towards their equilibrium prices due to the interplay of supply and demand, conversely prices of patrimonial assets (financial products, buildings, stocks of raw materials) diverge.

On this latter market, a price increase fuels the anticipation of a higher price in the future ("it goes up, so it will continue to rise"). The hope of a capital gain causes an increase in demand that still increases the price, until the anticipation turns ("it has risen too far, it's not going to continue"). Then the price collapses, crosses the equilibrium price without stopping and decreases until a new turn of anticipations ("it has dropped too much, this decline will not continue").

Hence the price for patrimonial assets undergoes large oscillations, while for consumption or investment products an increase of the price is moderated by a decline in demand (except perhaps for luxury goods).

Nature and us

(Translated from "La nature et nous")

We can see Nature in at least two different perspectives:

- We think it is the physical world, whose order obeys immutable laws and that is external to human knowledge and action;
- Or we think Nature is the “state of things", that is to say everything that confronts our intentions and desires as an obstacle or a tool, and that is transformed by the expansion of our knowledge and by our action.

The first view considers only the physical nature whose complexity is a challenge: our knowledge, cutting a finite sphere in an unlimited space, can never be complete and absolute. Physical nature is as unknowable as God in Judaism.

The second point of view adds to the physical nature the sphere of our present knowledge, skills and artifacts, a sphere whose gradual extension transforms the obstacles and tools that nature presents us. The art of navigating transforms the ocean, a road transforms a wilderness, building a house transforms the ground, our waste pollutes soil, water and atmosphere.

This later point of view transforms the concept of Nature in including, in addition to physical nature, human nature and social nature. It is in this sense that Durkheim said “we must consider social facts as things".

Aristotle and the Business

(Translated from Aristote et l'entreprise)

When the name of Aristotle is uttered, many ears close. How boring! How pretentious! And yet, if we speak like students in a high school, he was not so stupid, this Aristotle…

Consider the four types of causes he has counted: final, formal, material, moving (or efficient) cause. For a long time I did not understand them, but as I kept some memories of the course in philosophy I could see that computerization was the material cause of the financial crisis (see Comprendre la crise) because it has made this crisis possible - and if you cogitate a little, you understand that once the crisis was possible, it was in fact inevitable.

Wondering what place could play in our businesses the three other types of causes, I discovered to my surprise that they stack in a familiar pattern.

If Aristotle were alive today, he certainly would be interested in the business, because it is the locus of the action of mankind in the biosphere - but French philosophers, in their majority, prefer to denigrate business rather than observing it.