THE MAGIC FORMULA OF THE NEW ECONOMY THEORY “THE PRISONER’S DILEMMA”

The circle: Is new economy so new? Are its contributions really likely to improve economic policy decisions to enhance or optimize the regulating action of the States ? Not to go wrong on the analysis of the behavior of individuals, the basis of all economic decisions, “ Traditional micro economy  had the aim to give body to the intuition according to which the functioning  of competitive markets could be effective. On contrary, game theory underlines the importance of the coordination defects inherent  in the decentralized decisions.” [Chang P ; The microeconomic, collection guides, The discovery, 1993 p 23]

 That summarizes the turn taken by the “new economy” as it defines itself while the major teaching of the 20^th is that this are the centralized organizations that have gone bankrupt in the East and are in crisis in the welfare State countries.

But the new economist can’t stop to this kind of detail. They are hard, instead to demonstrate that the decentralized decisions can’t be “optimal”. Such decisions can’t by optimal by they have the merit to exist. This is a major feature; because optimal solutions will never exist.

It’s like the market economy, it function by ups and downs, which allows it to evolve in adapting and innovating because human perfection is not in this world while the application of models of planned and centralizes organization, considered by their designers as infallible and all powerful, and aimed to solve all economic and social problem never works, despite all disastrous attempts that do the tragic 20^th century history.

The function of the market is precisely to require players to make choices, to make decisions. But error is human and since our childhood is mistaking we learn and we correct our behaviors. And the functioning of economy feeds of these necessarily imperfect choices. The new economists still didn’t integrate the idea that nothing is optimal in this world. A scientific spirit has the duty to interest in what really exists and what exists is necessarily imperfect.

What is the use of a model what would be optimal but imaginary so unenforceable? And who could correct imperfect behavior (From what point of view, what critters?) if not a state itself directed by human beings themselves necessarily imperfects?  Models of contemporary economy assume that we are all unconsciously as a “prisoner” of a narrow selfishness that prevents us to make decisions that a “benevolent agent” – necessarily the State-would be in the right and in the need to take in our place.

It’s for destroying the” parable of the invisible hand” proposed by Adam Smith that the parable  of the prisoner’s dilemma was developed by contemporary economists.

Let’s remember the principle of the "prisoner's dilemma". Two prisoners are accused of committing a crime together and are interviewed separately. The police officer their made the following proposal: "If you keep silence and if your accomplice says, you'll be five years in prison. If you admit both, you are only three years old. It is possible that your accomplice is silent. If you shut you also, may you do only one year in prison.

On the other hand, if your partner does not say anything and if you confess, leave you out in three months. You can see if your accomplice speaks, you have interest to confess; and if your partner is silent, you still have interest to confess. Then, why not confess immediately?"

It appears that if each prisoner follows his self-interest, he’ll find advantage in confessing. Because keeping silent, he takes the risk of staying five years in prison. But confess in not the common interest of the 2 prisoners: in confessing both they’ll be three years in prison. Even thought if they had kept quiet both, they would have taken only a year in prison. This parable is interpreted in a very particular sense, showing notably that the private interest is not the best guide to our decisions when the latter lead to results opposite to the general interest.

Thus, this principle serves as a theoretical pretext to a fundamental questioning of decisions decentralized operating in any process of market. New economists think they have found the magic formula t allowing them to say that the "invisible hand" of Adam Smith is invisible precisely because it does not exist. No to  mention that it is in the general interest that criminals whose guilt is established, be all in prison, it is clear, in this example, we define not the general interest. One merely confounds it, at most, with a "common interest" in this case, the interest of the criminals. . However the interest of criminals is, in fact, a corporatist interest, which has little to do with the public interest (and in the case of criminals, it is even contrary to the public interest).

But since the new economists amuse themself constructing stories in order to arrive at their conclusions, let me tell you another story. What if our prisoners were Bonnie and Clyde, crooks madly in love one another? Out of love for her partner, Bonnie would prefer denounce to save Clyde as Clyde would act in the same way to save Bonnie. In the end, our two brigands would still give themselves up to the authorities. Is this to say that love is not a feeling "optimal" since it leads to decisions that will be harmful to our two protagonists? And how will the State claim to correct this "failure"? In this case, it would have been better being selfish.

Thus, the "prisoner's dilemma" does tells us nothing else that is already known: it may be dangerous to think only of oneself it can be suicidal to think of the other.

The French growth still in the same stalemate

Since I teach economics to my students, I hear in every media that consumption will boost growth and that salaries must thus be sustained or saving reduced to support consumption.

More than 10 years ago now, I warned in Les Echos (Paris) that this would drive us in a dead end. Indeed, in a situation of under-capitalization, which is probably the situation of the French economy, the reductions of savings mays on term reduce consumption [1].

More than 10 years later, the debate has not advanced.

The teachings of the growth theory and the historical experience show that the State must absolutely control its public finances (stable public deficit, stable public debt) if the government wants to rediscover the path of sustainable growth.

Indeed, if public debt explodes, the State will divert a growing part of households’ savings toward debt financing. These savings will no longer finance private investment of productive sector (eviction effect), which is going to slow the economic growth that fundamentally depends on the accumulation of capital.

In consequence, the economy goes out of its structural path of growth; as a plane losing speed loses its cruise altitude… On term, it’s the crash.

 However, there’s need to realize that nowadays, in France, the payment of debt itself (debt service) occupies the second position of the State budget.

It’s true that the French household savings rate is important, private savings constituting a reaction to the public dissaving (deficit). But a large part of this savings is designated to finance the State debt, though life insurances. In this context, State has no interest to reduce savings on the pretext to reboot consumption in the short term.

However it’s as much savings which is lacking to the productive investment of the private sector thus, on the long term growth. But if business investment declines, then growth will slow and public debt will increase.

In effect, it must be reminded that Maastricht criteria stipulate that for public debt to be stabilized to 60% of the GDP public sector mustn’t be over 3% of the GDP and economic growth must be superior to 2%. It’s a fatal dead end: Debt explodes, State needs more savings to finance its debt and companies can’t find capital to invest anymore. In consequence, growth slows   down and picks…

Despite the political vibrations, it’s the blindness of our political class; prisoner of the blinders of the short term, leading under the fallacious pretext to defend the missions of the State, public finance to derive that has led us to this dead end.

Balanced public finance doesn’t mean that State spends absolutely no more.  But that simply means that these expenses are covered by equivalent revenue. And only a productive and growing economy is likely to generate abundant public revenue with no need to constantly increase the sampling rate which is the surest way to kill the growth in the bud. This is why the comeback of growth is vital for our country.  But the return to growth is something that can’t be decreed and growth isn’t a miracle or a random weather event. It supposes the respect of essential conditions that economic literature extensively recalled since Adam Smith.

[1] “The growth is not a miracle or a fatality “, Les Echos, October, 16^th 2001, Paris.

The basics tenets of the economy

The Circle. Since decades, most clueless accuse economists to understand nothing. It is true that as in all professions, there are charlatans, astrologers and those preferring what is "fashionable" and mays "buzz" than demanding and often unpopular objectivity.  The others are never listened

Everyday, we collect poisoned fruit of a state that no longer plays its role and assumes more duties. The state is a crucial agent of the company as all of society -including its institutions and its economy- who suffers from the failure of a public sector which returns the monopoly in vital areas of our economy. And to interfere in the life of companies, the wanting to enact the "social" and to regulate the economics, state no longer has the means to discharge its essential and irreplaceable police, justice and security missions. Beyond the regrettable fact that rising insecurity increases the risk, and therefore the cost of economic activities, , the indictment of the authority concerned, the serious consequences for the fuel of training of individuals and their ability to work. yet while the Moscow trial ( 1935-196), caught some consequences, the Nobel laureate Kenneth J;Arrow yet very sensitive to social issues and equal opportunities said" " The socialist economy does neither democracy nor individual freedom. I had the naive idea that in the absence of capitalist class, there would be not interest in the operation of one class by another. It had become clear that this vision was not likely. The mysterious failure was the possibility that socialism, focusing the control of the economy in the state apparatus rendered the authorization or even period it inevitable [1]"

Another Nobel price, Milton Friedman, once said «What is extraordinary with the economics law is that all it laws actually in a page, but their simplicity has never been accepted by most people.[2]"

Finally, the professor James Bucchanan himself winner of the Nobel prize in economics, opened the meeting of the Mont Pelerin Society in Potsdam in October 1999 with these words:" "Anyone so little educated and intelligent knows that the liberal doctrine lies in the belief that it is primarily expending the domain of individual decisions that we extend of the issues based on collective projects that can best advance the society [3]"

French don’t like to receive lessons especially coming from American Nobel prize. It would be right to blame the Americans for holding secret the «recipes” for their economic growth. But this is not the attitude they have in reality. The results of economic science are known and moreover are common Knowledge.  But this is because one persists in France to be deaf to these fundamental teachings:  It is because in this blocked country they keep on willing to treat many folders (Pension, education, health, social protection, employment etc…) under the single collective angle that many of these files are now at an impasse.

It’s urgent to recall a few founding principles of economic science that sophisticated models as well as academic jargon  -as well as the official language of wood-  tend to forget by treating problems only with technical and specialized angle.

-Principle 1: Nobody spends someone else’s money as carefully as his own. It’s easy thus to be generous with other’s money while one tend to be rational with his own money.

Principle 2: The key of the raising of the standard of living is to develop savings, capital, education and technology training

Principle 3: In any voluntary exchange when they have accurate information, the buyer and seller are both winners; so an increase in trade between individuals, between croups or between countries is beneficial to both parties.

Precept 4: Given the universal reality of limited resources and unlimited asks, concurrency is a universal fact that can’t be abolish by governmental decree. But competition doesn’t exclude cooperation.

Principle 5: Since most individuals aren’t self-sufficient and almost all natural resources must be transformed to become usable, individuals – Workers, owners, capitalist, entrepreneurs etc..- must work together in the aim to produce goods and services of value. But the cooperation doesn’t exclude cooperation.

Principle 6: Differences of talent, intelligence, knowledge and property lead to specialization and comparative advantage for each individual, company or country. Wanting to do everything is inefficient.

Principle 7: Information about market‘s behavior is so diverse, important, changing and pervasive that it’s can’t be fully understood and calculated by a central authority. 

Principle 8: Profit and loss are the market mechanisms that indicate what has or doesn’t have to be product in the long term.

Principle 9: Do something implies to renounce to other thing what you have liked to do too.

Principle 10: Prices are determined by the subjective buyer estimation (request)and the subjective seller estimation (offer),and not by any production objective cost.

Principle 11: It always exists a dose of objective risk and uncertainty about the future, especially when people are free to make choices, learn from their mistakes and change their mind. What makes difficult any prediction on the future and any attempt to failure, at least in a society of freedom.

Principle12: The increase in wages on the long term can be achieved by greater productivity i.e more capital investments for each worker, the chronic unemployment is a consequence of the action of the government which sets the rate of pay above the market clearing level.

Principle13: Controls on prices, wages, and rents can’t benefit to society as a whole. In the end these controls may create shortages, back market, a deterioration in the quality and services. Free meals, that doesn’t exist…

Principle14: Deliberate attempts to depreciate the currency or to artificially lower interest rates, or to engage in easy money policies lead to inflation, cycles of prosperity/recessing and economic crises.

The money is an expression of wealth, it is not wealth.

Principle 15: The government must stick to what private companies can’t do. It must not engage in business that the private sector handles better than him or a fortiori,  prevent companies from doing what they could do at least as well as he  ( enacting a public monopoly, for example)…

The understanding of these principles doesn’t imply to have a PHC in economics. Economics is interested in how people organize, operate and evolve in society and how they reach others objectives by mobilizing resources. The consumer doesn’t make this or that decision because an expert proved it was optimal to do so, expert –competent-   concludes to this model that allows him to predict this out because he has observed consumers to do so.

But our leaders are still surrounded by experts considering that business located within the French territory must behave according to their models and their political choices. Hence the illusory claim to regulate the economy and format the society. May the State restore the conditions of freedom , may the State ensure the protection of human rights of property ( which is the liberty  to dispose of the fruits of his work) , of the freedom of movement and the freedom to work;  may State cease interference in social and economic  and there will be economics mechanisms to develop according to the precepts set out above.

 

1)      [1] In Feiwel,  g.(ed )(1987), Arrow and the foundation of the theory of economic policy, London, Macmillan.

2)      [2] The full text of this speech was published in summer 2000 in the Independent Review, quarterly magazine published by the independent Institute of San Francisco.

3)      [3] Idem