1.1. The world of yesterday

For our contemporaries, the world of yesterday is the one that emerged from the Great Depression and Second World War. State intervention appeared, then, as the essential complement to the market in the function of coordination of economic activity, and thus, in the wealth creation process. This was not because the State was considered omniscient, but because of the role it could play in regulating aggregate demand, by damping out fluctuations that originated in the private sphere, while possibly allowing an increasing of budget deficit and assuming an increase in public debt when the issue of private debt reduction had to be addressed.

The mandate of public authority was not to substitute itself for the market but to help it function better. Its mission was not only motivated by social concerns; it was also on grounds of economic efficiency. It was equally as absurd to think that an integral laissez-faire attitude would likely ensure growth and well-being compared to thinking that the same objective could be achieved by central planning. Keynes refused to have a moral reading of the economy, and rather adopted an ultimately technical approach. For him, the issue was preserving the market economy while not believing that laissez-faire was the key to its effectiveness.

The world that complies with new guidelines is that of developed market economies. It interacts with the communist and developing worlds by having little or no substantial economic ties with them. It witnessed, from the late 1940s and for about three decades, strong and steady growth as well as full employment. The institutional environment associates regulatory State and industrial oligopolies far from a situation of pure and perfect competition³. The State uses fiscal policy to regulate economic trends in effect to arbitrate between inflation and unemployment rates within narrow limits. It ensures the regularity of major public investments in infrastructure and research. Private companies evolve by focusing more on medium-term planning of their objectives and investments. They are able to mobilize huge amounts of capital to cope with technological development and expanding markets. Corporate planning and aggregate demand regulation are intrinsically linked here, with demand regulation making companies’ forecasts less uncertain, their commitments less risky and the decision-making horizon more distant.

High availability of liquidity results in persistently low interest rates and financiers devoid of real powers. A technostructure is established which shows an accentuated separation between capital ownership and companies’ management and strategic solidarity between companies’ senior executives and management. Despite substantial differences in the organization of powers within companies, agreement regarding the need for equitable sharing of the benefits of growth with employees is made at all levels. This necessity has become a true strategic axis.

The success of this world was, of course, the result of national policies implemented in the aftermath of the war, but it would not have happened if a relative cohesion of international economic relations had not been obtained because of Bretton Woods’ agreements. The real objective of these agreements was to reconcile a domestic macroeconomic regulation power based on the existence of internal stabilizers and the search for social justice (through, in particular, unemployment, health and pension insurance) with a necessary international discipline likely to guarantee gradual trade liberalization. The external objectives of trade liberalization were subordinated to domestic objectives, for example full employment, growth and social welfare. The margin for maneuver left to each nation, including terms of external trade exchange, enabled the development of various forms of capitalism distinguished by different approaches to corporate governance, labor markets operation and social regimes. The internal growth of different countries enhanced trade liberalization much more than liberalization-favored growth⁴.

At the time, the restricted circle of Western countries and Japan obtained the means to manage global imbalances resulting from structural changes and differences between countries, while maintaining control over international capital movements. Such control constituted an arrangement that was intended to be permanent. It went hand in hand with fixed (and adjustable) exchange rates such as to guarantee relative independence of domestic economic policies. The required independence was strengthened by two provisions. The first lay in the possibility for each country to request funding from the International Monetary Fund, guarantor of financial stability, in order to address the temporary difficulties in external payments. The second was the possibility of parity changes in the presence of what appeared to be a fundamental imbalance.

Moreover, fixed exchange rates were a favorable peg for the implementation of corporate development strategies. The choice of progressivity in tariff and non-tariff barrier dismantling gave these same companies time to adapt, reducing the destruction of capital which was its consequence, in accordance with the recommendations formulated long ago, in ultimately analogous circumstances, by Adam Smith⁵.

This world was too soon perceived as relying solely on the implementation of some principles of aggregate demand regulation responding to the existence of cyclical coordination failures that could be resolved immediately. The existence of structural changes, though at the heart of capitalist market economies, was ignored, along with the awareness of the time needed for the required adjustments to take place. However, significant changes occurred that had, as sources, the development of social and military programs in the United States in the late 1990s that obviously had nothing to do with any cyclical regulation and questioned the major balances.

This world lost its coherence at the turn of the 1970s. The break with the existing economic and political order resulted in a shock on raw material prices and especially on oil prices, following tensions on the markets owing in particular to strong growth driven by the US public deficit. The situation for States and companies was shattered. States had to deal with the issue of loss of control of the economy as inflation and unemployment rose. Companies had to face the additional challenge of technological change brought about by oil price increas and opening of new markets in a context of liberalization of capital movements. Beyond the ups and downs of the moment and the necessary choice of controlling an inflation that became too strong, a revolution took place in the field of ideas whose effects on behavior gradually spread.

1.2. Toward an economy of supply

The strong and steady growth experienced by Western world economies in the three decades following the end of the Second World War paradoxically brought back ideas that the Great Depression had torn apart. The rules of perfect competition became reference rules, albeit not becoming, in the immediate future, rules of conduct. The ruse of reason consisted of separating the short from the long term. In the short term, the State’s ability to regulate demand was still, for a moment, recognized. In the long term, market forces were judged to be the only truly effective forces. Demand could fluctuate but around a trend that obeyed the conditions of labor supply and technology only and constituting an attracting force for the economy.

In the long term, no place was given to money and financial system whose neutrality was postulated. Banks became pure intermediaries between ultimate lenders (households) and ultimate borrowers (companies), their behavior affecting in no way the volumes saved and invested and the trend pattern followed by the economy. There was no alternative to savings invested in corporate investment. The amount of money in circulation, controlled by the Central Bank, was supposed to grow at a rate equivalent to the potential growth rate of the economy.

As for the State, its long-term action was limited to ensuring compliance with full competition rules. In the short term, it could at most control and limit demand fluctuations around the growth path determined solely by supply forces⁶.

The economy thus described is a scale model of general market equilibrium defined by Walras. Technological and demographic offer determine potential growth and income distribution. Compliance with competition rules help in getting the best out of them. Prices and factor remunerations are flexible and instantly clear markets. Technologies are at constant returns, if not decreasing⁷. A possible undermining of scientific and technological progress and productivity gains is, in this perspective, only likely to explain the entry into an era of secular stagnation⁸.

The paradox is that the economies of the period in which this analysis was made – in the 1950s and 1960s – did not fulfill any of the conditions of this general equilibrium⁹. Many prices and wages were controlled, the others were not very flexible. Economies of scale were omnipresent. The State acted on the economy but also on growth capacities through massive public investments, and this, in the dominant economy (the United States) as in catching-up economies (Western European countries and Japan).

This gap between facts and theory never seems to have really posed a problem. There was a period when the so-called Schumpeterian hypothesis was adopted, according to which obtaining a monopoly rent was an incentive to innovate as well as a growth factor. But this situation was quickly circumscribed to the case of backward economies placed in catch-up position, as was the case with European economies after the Second World War, whereas in the case of economies considered to be on the technological frontier, the idea of maintaining or establishing the conditions for competition as close as possible to the ideal type took root again in the 1980s¹⁰. We are thus called upon to return to the findings of the canonical model. Not without maintaining the confusion with regard to the reality of the competition phenomenon defined as a state of the market and not a process consists of conflict and rivalry.

The observation that work productivity, far from being regular, follows cycles does not in any way question this doctrine. If there are any fluctuations, they are attributed to random – positive and negative – productivity shocks, which are, however, of low amplitude. These are supposedly natural and optimal equilibrium fluctuations, as they take place in an environment of full competition and comply with the behavior of individuals seeking to maximize their utility. Only price rigidities are then assumed to prevent this economy from being at the potentially highest level of production and must be addressed¹¹.

1.3. Withdrawal of the State

While the idea that growth obeys only supply forces persisted, the idea that the State maintains a short-term regulatory role was undermined. The Keynesian vulgate, which was established in the late 1960s, was part of the belief in the possibility for governments to meticulously and almost instantly regulate the economy mainly through public budgets. This belief lost ground on contact with a new reality, the simultaneous rise in inflation and unemployment, and finally yielded to another belief: that governments are permanently incapable of providing discretionary regulation and cannot and should not oppose supposedly self-regulating market forces.

The flow of ideas took place progressively. Even before the problem of the simultaneous increase in inflation and unemployment arose, the debate concerned the respective merits of monetary and fiscal policies between economists sharing the same formal construct, and the same economic model, to the point that everyone intended to follow the Keynesian theory like Friedman, leader of the monetarist theory. The cleavage, which remained apparent on an empirical field, related to the existence or not of a crowding-out effect of private expenditure by public expenditure following a revival of the latter and the ensuing increase in interest rates. A positive response to this question, as per the monetarists, was already questioning the government’s regulation ability, especially since the subsequent choice of prioritizing monetary policy led to the exclusion of any discretionary approach to establish a strict rule, the monetary rule, consisting of establishing a growth rate of the quantity of money equal to the product growth rate.

The explanation of the simultaneous increase in inflation and unemployment was at the origin of a real revolution in the history of ideas¹². The inverse relationship between inflation and unemployment rate – the famous Phillips curve – is maintained insofar as we continue to consider that an increase in unemployment is an obstacle to wage demands and price increase that may follow. But to this is added the perfectly legitimate observation according to which current inflation rate is all the more higher than the expected inflation rate is itself. The economy is in equilibrium when this expectation is confirmed. Its corresponding unemployment rate is called the natural unemployment rate. In this perspective, any revival of activity through budget or monetary means from this position is doomed to failure. Increase in demand weighs on prices, leads to an upward revision of anticipated prices and subsequently an increase in wages, that is, a drop in profitability with the consequence, sooner or later, of rendering inevitable a return to the initial production level and thus, the unemployment rate¹³.

In doing so, the inflation issue is dissociated from the employment issue. Inflation once more becomes a purely monetary phenomenon, following excess money creation by the Central Bank that controls it, and unemployment is a real phenomenon, indicative of demographic conditions and the way in which labor, goods and services markets operate. The dichotomy between real and monetary phenomena, at the heart of Walrasian general market equilibrium theory, is reestablished.

Under the new doctrine, the Central Bank now has a primary, if not sole, objective, which includes controlling the inflation rate by controlling the money supply or subsequently, the interest rate. The Central Bank becomes independent and is headed by a Governor convinced by the new ideas, so that monetary policy decisions escape voters’ pressures, considered inappropriate by proponents of the new doctrine. With regard to the government, it is up to it to ensure the balance of its accounts. Reducing budget deficit to restore this balance may, certainly, first lead to a rise in the unemployment rate that becomes higher than the natural unemployment rate, but the downward revision of wage and price expectations is assumed to ensure the reduction of this unemployment and a decrease in inflation rate. Therefore, the government must simply ensure the proper functioning of markets, that is, eliminating rigidities, both those of the labor and goods markets, whose only effect would be to increase the natural unemployment rate.

Concretely, in the course of the 1980s, inflation was overcome at the same time as inflationary expectations because of monetary constraint, which is not surprising in itself, as it is true that there cannot be a price increase without monetary facilities. Mass unemployment, where it continued to exist in Continental Europe, was presented as the consequence of the refusal to implement specific structural reforms to ensure market flexibility and reduce the natural unemployment rate.

The advantage of the new doctrine was simplicity. It marked the return of ideas that prevailed before Keynes. All that was left was to establish it in practice. This was facilitated by trade globalization through the establishment of liberalized finance as some sort of deus ex machina whose action was supposed to discipline bad students, companies and governments. Yet we must believe in the efficiency of financial markets, in other words in their absolute neutrality with regard to fundamentals including technologies and preferences.

1.4. Idealized globalization

Globalization, idealized by its supporters, is in line with this evolution of ideas. This is the presumed optimal situation characterized by total market liberalization as well as budgetary and monetary neutrality of governments whose share is reduced, independently of sovereign tasks devolved to them, to ensure compliance with full competition rules. The dream would all the more easily become reality as globalized financial markets would have the virtue of disciplining governments and companies, the former to ensure their budget balance, and the latter to meet the goal of maximization of the value of shares. There would thus exist an optimal variety of capitalism to which all countries would have to comply. Poor micro- and macroeconomic performance would be caused by discretionary and therefore inappropriate interventions by governments and institutional failures, in particular, the maintenance of rigidities in goods and factor markets. In this virtual world, not only is the State neutralized, but companies are overshadowed by markets, becoming a mere collection of tradable assets.

The dream world is none other than that of pure and perfect competition brought up to date by the new classical school, the world of general market equilibrium imagined by Walras, which is a social optimum in the sense of Pareto, a state in which the situation of one of the agents cannot be improved without deteriorating the situation of another, but also a state in which the enormous wealth of a small number can go along with the poverty of all the others.

This world is, de facto, devoid of institutions. It brings together in the various markets large numbers of people, deprived of all powers and whose demand and supply decisions depend on equilibrium prices communicated by the market¹⁴. These autonomous individuals, who are freed from any constraint related to the belonging to a social, ethnic or religious group or affiliated with a particular institutional system, stick to maximizing their utility¹⁵. Social interaction is presumed purposeless when the price system is optimal from the outset, ensuring perfect coordination between individuals. Consumers and suppliers are in direct contact via this system. There is no intermediary or if one formally exists, he/she does not play any specific role, and does not interfere with decisions actually taken¹⁶.

The absence of the third party in the exchange reflects the absence of conflict or imbalance that would require the involvement of an arbitration and coordination function. The State has to remain neutral by ensuring that its revenues and expenditures do not interfere with private choices of resource allocation. Money and finance are simple veils that cover, without altering, the real economy, the one structured by individual preferences, technologies and the relative prices resulting from it. Once the factors of production are remunerated for their contribution to the production activity (marginal productivity), they absorb the whole of the earnings and corporate profit is nil. There is no room in this context for entrepreneurs carrying out an organizational activity, as producers are assumed to react mechanically and optimally to price signals sent by perfectly competitive markets.

This world of pure and perfect competition is out of time even in its modern sense¹⁷. Present and future decisions are taken simultaneously in relation to the knowledge of different states of nature. The number of goods is multiplied, each of them designated by the place and time of exchange. Future events are brought back to present time. Expectations are assumed to be perfect or more subtly rational when errors are allowed, provided they are purely random and do not force individuals to change their plans and behaviors. What happens in the short term has no influence on the long-term trajectory of the entire economy contained in the attributes of individual preferences and present as well as future technologies. Finally, governments that may make mistakes are only those that would want to contravene the fundamentals, face the temporal incoherence of their successive policies, and end up conflicting with the expectations of individuals.

Rational expectations most often lent to individuals imply excluding non-routine changes, in fact any innovation that brings about radical uncertainty. Preserving the principle, while recognizing that the information held by individuals is imperfect, allows the financial market efficiency hypothesis to be modified, but reference to the ideal of perfect competition in its prescriptive dimension remains. The elimination of market distortions should particularly ensure that the prices of financial assets reflect true values, those dictated by the state of technology and preferences¹⁸. The globalization sought remains the idealized globalization.

Implicit reference to the virtual world of perfect competition has become all the more significant since the obstacle to the existence of such a world, including increasing returns to scale, has disappeared. The new industrial revolution promoted by the development of the digital economy would have the virtue of favoring the deconcentration and decentralization of production activities and even eliminating all forms of intermediation directly, bringing suppliers and consumers into contact, thus making the existence of a competitive equilibrium possible. The theory’s omnipotent individual, both consumer and producer, solely in search of maximum utility, would become the standard individual of the new globalized economy.

1.5. Between dream and reality

The globalization we experience presents features that are primarily the product of dream, but a necessarily disguised dream. This is the case with the decline desired or suffered by the modern State. Rules prevail over discretionary choices. Social choices are increasingly subordinated to economic requirements assimilated to immanent market forces brought back to the mechanics of individual choices. Economic policy domestic objectives concede to the need for global liberalization of markets. Structural reforms with the objective of ensuring the flexibility or fluidity of markets are promoted, in other words a systematically strong and rapid response of prices and wages that are supposed to guarantee market equilibrium. Legal systems – norms – compete with one another and are the subject of selection carried out by individuals maximizing their utility, in effect by companies seeking the best fiscal and social offer.

The new liberalism, from this essential point of view, is a reversal of classical liberalism. The rule of law makes way for the rule of individual calculation of utility, as it was able to make room for the rule of social calculation of utility at the time of real communism. Indicators intended to serve as a guide to public and private behaviors, whether stock market share values or public debt rates to gross domestic product ratios, give a picture of the belief preceding their development rather than the reality itself, if by that we mean the company or country performance¹⁹. Dream establishes performance measure simultaneously with behaviors controlled by this measure. In a somewhat paradoxical way, the homo economicus, abstract and despised as it may be, finds its place in the new world when the various actors are ordered to comply with the enacted rules.

The globalization we experience has, at the same time, features that clearly put the dream at odds. Certainly, tertiarization, relative dematerialization and computerization, which characterize the profound transformations of production activity, may suggest that new technologies have properties, which make them compatible with full competition. They tend to render the image of the factory as a preferred place of production outdated and that of machines as the main expression of technology. The product industry is outweighed by that of function. It is less a matter of providing products than solving problems. Customers become actors in the production process. The interaction of successive production phases is increasingly stronger, without this implying that it operates in a single company and is worth integrating.

The extension of roundabout production remains a central characteristic of growth-promoting technological changes that require the implementation of heavy equipment investments. Economies of scale are still very present even though they are, more and more often, obtained through the establishment of corporate networks and fragmentation of value chains²⁰.

The development and transformation of global markets, to a large extent, consist of the emergence of new oligopolies. The dominant practices remain monopolistic practices. One of the characteristics of the final goods markets structured by new information and communication technologies is that they are large demand markets whose supply is captured by a small number, if not even by one seller. Major intermediaries develop technological platforms that put final supply and demand in contact and exercise a particularly high market power²¹.

The intervention or regulation capacity of the State is certainly reduced. However, their purpose is still valid. National communities shaped by culture, history and geography continue to exist. When, contrary to expectations, there is divergence in their actual performance, as is the case between euro zone countries, it is still the States that are required to and should intervene. They do so with the means at their disposal, that is, by practicing forms of tax and social competition with the avowed purpose of strengthening corporate competitiveness to obtain a surplus in their foreign trade. Disorder then arises from the functioning of markets whose characteristics are in no way similar to those dreamed and powers whose exercise can no longer ensure the necessary coordination.

1.6. Viability in question

Thus, for several decades, the market has taken precedence over public regulation and the attention given to individual behaviors has outweighed that relating to social interaction requirements. These requirements have never disappeared. We cannot refute the everrenewed existence of these difficulties of acting together encountered by economic actors, different from each other and poorly informed, inheriting constraints resulting from their past mistakes, belonging to heterogeneous and antagonistic social groups, and motivated as much as subjected to change. They cannot disappear simply because of the discovery of the right incentives guiding individual behaviors that have become optimal. They are in the nature of a process relating to the creation and destruction of capacities and competencies with never fully anticipated consequences. They appear in the short term and structure the long term in an irreversible manner. We must invest today to produce and consume tomorrow, but without knowing for sure what tomorrow will be made of. The adoption of rules and practices that conform to the claimed ideal could translate into more instability intrinsically linked to the behavior of companies and public authorities that have become incapable of controlling the long term, because they do not recognize the inevitable nature of conflicts and, as a result, of devising ways and means to deal with them²².

In an uncertain world with irreversible evolution, the market is not a simple place for recording information that ultimately belongs to isolated individuals. It is a place of discovery, confrontation and rivalry, of trial and error with the stakes being nothing less than the viability of these economies permanently subjected to technological and preferential changes. The superiority of market economy, when it is obvious, lies in its ability to promote slow and gradual adjustments that ensure the resolution of imbalances²³. In this economy, the experience of yesterday’s world teaches that frictions and rigidities, far from being an anomaly that should be eliminated, have a proven usefulness. While they enhance the widening of the time horizon of different actors, they however make it possible to control a necessarily irregular evolution, and guarantee that the economy stays within the limits of a stability corridor.

Proponents of an idealized world see it as a source of distortions that can impede the smooth functioning of the economy, while the informed observation of yesterday’s world makes it possible to see factors, although now weakened, of stabilization. Indeed, they cannot be reduced to regulatory constraints that introduce distortions in individual choices, which is most often emphasized. Observation and theory teach us that they respond to rationally assumed choices and are the result of the experience arising from social interaction: the experience of the functioning of market economies that helped to shape them and are in line with contingent social norms. These norms, far from producing an immutable order, evolve in response to the events they help to guide, as was the case after the Great Depression and Second World War, leading to a reduction in income and wealth inequalities, a source of cohesion and efficiency. They are at the heart of regulatory mechanisms of which it would be hardly credible to imagine that they are simply a substitute for the confidence that individuals should have in each other in a spontaneously well-ordered society.