National accounting and gross revenue

Classical political economy was born 35 centuries after the time of the Cnossos Tablets, contemporary with the great nation-states of the 17th and 18th centuries; the Englishman William Petty (1623–1687) named “political arithmetic”⁵ the accounting computation of national wealth; Dr. François Quesnay systematized his estimates in his “Tableau économique” (economic table), which was the first systematic approach to estimate trade and circulation of wealth within a country, as established in France in 1758⁶. Strictly speaking, national accounting took a very long time to take shape, especially since the real economy, that of the industrial revolution, broke away from public power for much of the 19th Century: the classics of this conquering century were first concerned by the observation of great industrial ventures which, driven by private entrepreneurs, was already unfolding on a planetary scale, just as they are nowadays! Consequently, it was only between the two world wars that public power regained a certain importance for economists.

The synthetic computation of national income and wealth, which has been known for almost a century as “national accounting”, took shape in North America on the initiative of Simon Kuznets (1901–1985), the 1971 Nobel Prize winner who, between 1926 and 1937, prepared a first systematic assessment of American national income using long-term statistical series. Kuznets is therefore the “godfather” of the national product. Simultaneously, by modernizing Quesnay’s economic table, a Belarusian economist named Wassili Léontief (1905–1999), who had been a refugee in the United States since 1922 and who also won the Nobel Prize in 1973, published an American inter-industry trade table in 1941, which inspired a long line of macro-economic analyses. Its input-output matrix fed some of the post-war industrial policies in the United States and Europe. This matrix had the great advantage of lending itself to the linear algebra that computers of the fifties and sixties had already mastered well. Gross domestic product, or GDP, measures a country’s output at the macro-economic level it agglomerates at the national level the output of enterprises, which is a mainly competitive sector, and that of public administrations and services, the scope and assessment of which vary from one country to another. This calculation has always been difficult because it adds up data from extremely diverse sources: these raw data are heterogeneous and they are also subject to statistical corrections and adjustments⁷.

The indicators produced by said national accounting mix observed values (such as that hypothetic sales) with values calculated according to – sometimes – artificial conventions and under conditions which can be very different from one activity to another, such as for the provision of commercial or administrative services⁸. The calculation of GDP and other indicators of a similar nature (such as the consumer price index, for example) is therefore disputable; furthermore, since industrial production is decreasing in relation to the total national products recorded (particularly in relation to tertiary activities), average productivity, which is calculated on a national economy as a whole, inevitably stagnates over the years for three joint reasons:

• a) tertiary activities include many services with limited or reduced technical progress;
• b) productivity in the public sector, which represents a significant volume of the national product in Europe (education, health, armies, social benefits, etc.), is almost stagnant;
• c) since our countries have maintained very important trade exchanges with the rest of the world, the national product incorporates a growing share of imported products and services; it therefore no longer has the productive significance that was previously granted to it⁹.

Imports are the result of the joint action of trade, transport and intermediaries that have never been considered to be negligible values; quite the contrary. However, these services are not of a productive nature, in the sense that usage confers to manufacturing activity. These are margins on imported values; these margins admittedly feed commercial employment, logistics, insurance, etc. Considerably amplified by the very extensive international distribution of labor which has redistributed manufacturing industries worldwide for some 40 years, this international trade also involves software, audiovisual programs and games (produced, for example, in Asia); they include industrial property rights whose tracking is very unreliable (within multinational groups such as Google, Apple, Merck or Nestlé) and globalized services such as worldwide advertising campaigns, which are designed and organized on a global scale and which accompany events that follow sport, fashion, and telluric, industrial or political troubles¹⁰. Drawing heavily on territorial decentralization and digital tools, these activities, which have a high digital content, are much less sensitive to territorial attachment than the manufacturing activities for which national accounting was constructed.

To be synthetic at this stage: designed to primarily represent a manufacturing activity, centered on a territory (in other words, a nation), the accounting procedure records actual deliveries; the volume of production is counted in units produced (or sold). The ratio between the value of this production (estimated by its price) and the volume of the same production (counted in physical units) can be observed; otherwise, it is observable because it can be reconstituted. The general productivity of factors, on the other hand, results from a calculation; it is neither observed nor even observable since it is a macro-economic residue, as mentioned below¹¹.

The great adventure of the electronics and semiconductor industry illustrates, better than others, the combined impact of four factors that are characteristic of globalized industries: they are highly capital-intensive, highly automated productions that are extremely sensitive to economies of scale and whose outcomes are pretty insensitive to the geographical conditions, language, nationality or even the political regime of the country (or countries) of production, as well as to the place where the final client is located (see Chapter 6 and Appendix A in this chapter). Such equipment no longer has a lasting territorial attachment. Furthermore, in less than two years – if need be – and as exemplified in Fukushima, a factory can change location or jurisdiction all the more easily if the lifespan of the series is short and production tools are upgraded with each generation of chip (approximately every two years). In relation to the speed of innovation, the depreciation period of equipment can be counted in months more than it can in years.

How can the digital economy be better described?

Digital activities make it easier for people to get in touch with each other, create new contracts and organize favorable circumstances for deals or for meetings. All this is independent of any production that involves substantial transformation. Digital intermediation is much closer to an act of commerce than to material production; and macro-economic functions are not adapted to describe or assess the value that results from such intermediation! For national accounting, as we have stressed, refers to a territory; it assesses a production which, according to tradition, was mostly material; combining a labor force and capital, the (industrial) production functions compute the final product by combining means of production (labor factor and capital factor, in practice)³³. However, linking the price of an object (or service) to the cost of the factors needed to produce it is not always possible: the price of certain manufactured products results from a particular process (see Chapter 6 on electronic chips). The price of truly competitive services such as sea freight, which is very volatile, fluctuates greatly according to supply and demand. Owners of vessels that are expensive to operate (usually older ships) withdraw from the market when the maritime freight rates are too low for them to cover their costs. The least efficient operators are hence forced either to reduce their costs and their margins, or else voluntarily exclude themselves from the market³⁴.

The production function also fails to account for the circumstances in which many contemporary exchanges are processed: it does not suit intangible exchanges, whether they are pure services (such as legal advice or a guarantee) or intellectual property (such as the use of a name or a trademark) for which the cost pricing makes no sense. Neither the value of a trademark, nor that of a franchise, nor the value of trading is reducible to costs. Most of these market values result from the circumstances in which a transaction is cast, as no cost function gives a fair account of their price. As for digital activities delivered on the Internet platforms, they mainly require significant investments but almost no direct costs; pricing is hence quite independent of costs but linked to externalities or network effects³⁵.

Elements for a summary

While much of his earlier research was focused on demonstrating that the growth of modern industrial countries – such as the United States and Western European countries – is largely conditioned by technological progress, Solow’s historical findings fueled doubts that a new digital-based economy could revive growth in the United States, while current statistics showed a decline in overall productivity. However, after the dotcoms adjustment crisis and despite the heavy consequences of the 2007 financial crisis, the American economy recovered: in just a few years, Internet operators have appeared. A few of them quickly became the stars of the market: they quickly became multinational, growing rapidly, becoming highly capitalized and profitable. They formed a club, both respected and feared, consisting of social networks, search engines, distance selling and, more generally, platforms that are the engines of the Internet.

Many studies have looked into this relational economy, widely acclaimed by the general public, first in America, then in Europe and Asia, before today constituting a true world market³⁹. Continuing along the path opened by Solow, some are still looking into his famous paradox. But it seems to us, in truth, that national accountants must take up a more ambitious challenge and answer questions such as: do indicators such as gross national product (GNP) still measure flows, wealth and income? After finding that the American national product underestimated the productivity induced by previous technical progress, did the macro-economy not once again neglect a significant growth factor that would have been specific to information technology and the post-industrial economy?

In any case, the digital economy differs from the industrial economy: the established categories and sector classifications do not suit it; the firm (with reference to Coase’s meaning of this word from the 1940s⁴⁰) is changing in nature and scope. It follows for instance that the notion of relevant market is no longer adapted to judge the loyalty of competitive behavior, and that pricing is no longer based on a pure accounting approach, etc. Many of the concepts developed in the industrial economy (such as the notions of equilibrium, price and marginal cost) are being challenged⁴¹. The stable and predictable prices of the industrial economy have vanished; electronic markets make it possible to finely tune supply, demand and prices, using a very large number of observational indicators that make it possible to predict the trend; concentrations, dismantling, buybacks, disposals, price rises and collapses are all common in such a framework⁴².

The amount of information to gather, process, interpret and summarize before deciding or arbitrating is immense. Computers are needed to monitor the market instantly, to keep track of its commitments and to prepare for future arbitrations. The notion of being static has fallen into disuse because the economy is never stable; instead, it resembles a Brownian motion whose pseudo-random agitation is coordinated by a decentralized, digital and global information system. The very idea that the economy can be in balance becomes absurd.

What are the practical consequences of this present order of things? The economic machine tends to behave as a system that is all the more complex, in that the phenomena that we wish to highlight are mostly unstable or transitory: the macro-economic aggregates, which are presumed to be representative of a nation’s wealth in time and in space, are no longer a true reflection of the actual economic process which is multidimensional (financial, monetary, technical and industrial), nor of the evolution of value and wealth. The hunt for meaningful data to describe the relational economy is therefore on:

• – the methods that currently make it possible to manage big data that are presumed to be “incalculable” (here, just as in other fields mentioned in the first volume) are probably transposable to economic analysis as the flows scheduled via platforms and networks leave traces just about everywhere⁴³;
• – these traces, often relating to individual behavior, make it possible to measure economic transactions indirectly, as well as their purpose, their amount and their main characteristics. Transposing Heisenberg’s “uncertainty principle” for quantum physics to the intangible economy might help to estimate this economy that generated blockchains and cyber-currencies. Although this kind of analysis requires much caution, it deserves to be explored⁴⁴.

The period of the first oil crisis in 1973 was a good time to discover the hidden order of the industrial society, that of its dependence on energy resources; the recent period, marked by the opening of borders, by the deregulation of many sectors and by digital technology, may give the impression of a disordered proliferation. That is no reason to give up! The orderly mechanisms which were characteristic of the post-war Planning and public action have definitely come to an end; the abundance of present economic data certainly disrupts the habits of thought that were adopted during the previous era; but, beyond the apparent disorder which is accentuated by the rigidity of the existing statistical tools, other laws or other rules may as well govern the current world; new methods will probably be needed to reveal it; some methods, which are linked to big data, are taking shape, exploiting disparate and voluminous data that social networks and Internet platforms gather, store and process.

Time has therefore come to adapt our statistical tool and its metric to this present context; it remains to be determined who will be able to manage this transition, how and with what means? Adaptation will not be simple: it will almost certainly call into question the sovereign privileges granted to the official statistics up to now. Two factors play in favor of such a change: first, within all nation-states that have agreed to open their borders to people, capital and goods⁴⁵, the national reference is no longer sufficient for observing the economy. Additionally, in an open and highly competitive context, the probability that several competing institutions of international scope will develop their own statistical instruments is not zero.

Furthermore, the variety of topics to be covered (industrial, commercial, administrative, financial, social, etc.) and the multiplicity of sources needed to set up credible worldwide observations will encourage some specialization of the relevant statistical bodies, as has already happened in somewhat similar areas such as opinion polls and market research; a most likely outcome would be the emergence of a few global economic institutes, partially competing with each other: could this be a next stage of deregulation? [GOL 97]. It could in any case be a replica of the financial market reporting that we have known for quite some time, illustrated by the squadron of the international rating agencies!

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Appendix A. Microelectronics: a typically multinational sector⁴⁶

Produced within a very limited club of international manufacturers, the chips which constitute the heart of our computers, telephones and video game consoles, are hardly sensitive to the national framework: certainly, Intel, Qualcom and Texas Instrument are American companies; Toshiba⁴⁷ and Samsung are Japanese and Korean respectively; STMicroelectronics and Infineo are presumed European. But these companies have long installed factories well outside their home territory (in Hong Kong, Taipei, China and Korea), and they distribute their products throughout the world. However, several of their core functions remain at their headquarters for the time being: product creation and design, catalogs, some of the tools needed for manufacturing, finance, marketing and industrial relations.

Table 7.1 illustrates the high multinational level of this industry, for which research and production investments are so high that very few companies can compare with industry leaders. In recent years, only a few communist Chinese manufacturers, supported by a mercantile policy, a very large domestic market and an omnipresent political administration, have dared to enter this oligopolistic market. They have done so under conditions that are not always perfectly clear, particularly in view of the previous commitments that they may have made as subcontractors to Western (especially American) companies that were established in this sector for a very long time. The recurrent history of relations between China and the West suggests that the emergence of these new entrants testifies not only to the inventive spirit of their leaders, but also to public policies that maintain favorable conditions for their take-off, whilst chiefly acknowledging that their own nation globally maintains favorable conditions for international exports⁴⁸.

As a significance of the electronic sector and other information technologies, the concentration of these industries and their specialization (which is the corollary) have accelerated since the end of the 20th Century: it is a very large series production to which economies of scope and scale of great intensity apply; in this type of production, which is distributed among competing but distant companies, it is very difficult to plainly discern the share of added value that can be attributed to each territory or to estimate the amount of “production” that can be attributed to one or the other⁵⁰. Depending on circumstances, locations and exchange rate movements, the “value chain” of such production is spread across multiple countries and distributed differently. This complex, interdependent and multinational process escapes the accounting rules that were established when subcontracting could still be described according to a simple and stable scheme over time: permanent sharing, which is still possible in clothing or furniture for example, is no longer suitable for the moving combination of mass production of smartphones, computers or multifunction printers!

The cataclysm that struck Fukushima Prefecture in Japan on March 11, 2011 revealed both the complexity of these managerial arrangements and the ability of the companies (Japanese, in this case) to very quickly reconfigure their logistics in order to meet a very serious and unforeseen challenge: Canon and Ricoh, world leaders in printing and reproduction of documents, manufactured the core of their printers in Fukushima, the assembly and shipping of which were carried out from Chinese workshops⁵¹. The tidal wave on March 11, 2011 not only caused great loss of life, but it also destroyed the Fukushima electronics factories that were essential to the production of laser printers, which put Japanese manufacturers in great difficulty and left them unable to supply their global customers with new machines.

Within a few weeks, a rescue was organized in two stages: a reconditioning line for the machines in the installed base was first organized – particularly in Europe, from Dutch and French subcontractors – in order to temporarily satisfy demand with second-hand machines, guaranteed by the seller; concurrently, the construction of new factories then made it possible to produce the cores of these printers somewhere else, but still in Japan. In less than a year, production had practically returned to normal, a perfect illustration of the ability of today’s major manufacturers to bounce back from the unexpected, even the most catastrophic of events!

The production of equipment and software specific to the information industries is therefore never reduced to a simple and permanent scheme. It adapts to the economic situation and leaves little grip on the net woven by national accounting. Conversely, the manufacture of telephones and network equipment practically disappeared in Europe and the United States in just a few years; however, Chinese and Korean manufacturers have been growing steadily since 2005; they almost supply the entire world market, while the software that gives life to these materials partially comes from Indian workshops⁵².

Appendix B. Trade, currencies and digital disruption

A wide variety of devices, hardware and software are redesigning business practices; we can see this everywhere, including in regions where technology has hitherto been less present than in Western Europe, North America or Japan. The Indian subcontinent, for example, has entered the digital era to a level that no one would have been able to predict 20 years ago⁵³: software workshops are extremely effective and their contribution to the global digital era cannot be avoided.

Another continent, another perspective: the very rapid ingress of cellular telephony in Africa has allowed electronic wallets to multiply much more rapidly across Africa than in Europe. Since bank branches are scarce, there is a shortage of money; the mobile phone, which has already been present on the territory for 15 to 20 years, supplies the markets with a currency such as the CFA franc, which circulates quickly and well, including from one country to another. Hence, nowadays, there is much less need for traditional banks!

As a shining example of global digital disruption, the bitcoin system and its many substitutes open up multiple perspectives for services for which money handling has been essential for centuries. Could this remote recording and transaction tool – the blockchain – replace some of the institutions that have benefited from the legal privilege of issuing and managing money or securities, and financing industry, individuals and public authorities? Such registration systems are reliable, international and decentralized; could they substitute some of the registrars, maintain the land registry or manage intellectual property rights? Given the extraordinary international opening of trade and production over the last 30 years, an opening that goes hand in hand with the great permeability of borders to people and to the many signs of their activity, where will the ambition of a cooperative and stateless blockchain stop⁵⁴?

Other applications, like electronic exchange tables, for example, are just as significant for developed countries as African electronic wallets are for bush taxis; both revolutionized banking and/or stock exchanges. Political life is also shaken by the electronic media: some countries allow electronic voting to take place⁵⁵; the political debate itself has clearly been influenced by the Internet and social networks for the past 10 years or so: the style and form of campaigning are influenced by media such as Facebook and Twitter; public expression even leads to caricature-like practices such as the constant broadcast of tweets and the multiplication of Facebook pages, on which commentators and politicians from all sides broadcast their instant reaction to both big and small events. These comments littered the daily news throughout France’s long presidential campaign of 2016–2017.

The American election campaign in 2016 and the long period before the French presidential elections in May 2017 were somewhat similar. The first tangible signs were identified in France during the 2007 elections⁵⁶. In the United States, Barak Obama’s 2008 presidential campaign revealed the use of social networks and crowdfunding by his team. The election of Donald Trump, who uses tweets, also highlighted this medium, both during his presidential campaign and since he took over the presidency.

Chapter written by Jean-Pierre CHAMOUX.