Friday, December 11, 2015

Informatization and iconomy

(This is the text of my conference at the 5th World Congress on Information and Communication Technologies, December 14-16, 2015, Marrakesh, Morocco)

Texte en français

We would like to propose here an explanation of the current economic crisis, of slowing growth and of the unemployment that hit several countries. Our thesis is based on the one Bertrand Gille offered in its Histoire des Techniques, published by Gallimard in the collection “La Pléïade” in 1978.

Bertrand Gille proposes to cut the history into several periods, each period being characterized by a technical system, the synergy of a small number of fundamental techniques.

From the Paleolithic, humans were indeed able to develop tools to complement the work of their hands, and since then many technical systems have succeeded.

Consider the last four technical systems: the agricultural system of the feudal regime gave way, from 1775, to the "modern technical system" that relies on the synergy of mechanics and chemistry. Around 1875 these two techniques were supplemented by the control of electrical energy, as well as the control of oil, creating the "modern developed technical system" whose the great firms are the most illustrative creatures. The electric motor was invented by Gramme in 1873, electric lighting by Edison in 1879, the internal combustion engine by Otto in 1884.

The "contemporary technical system" arises around 1975. It is based on an entirely new synergy: that of microelectronics, software and the Internet. The informatization of business is organized around an information system in the 1970s, the microcomputer is spreading in the 1980s, the Internet and mobile phone in the 1990s, the "smart" phone (which is in fact a mobile computer) in the 2000s. In factories, the robotics automates the repetitive tasks that were previously entrusted to the workforce.

The next steps are already underway with the synergy of mobile broadband, cloud computing and the Internet of Things; the human body is informatized with the mobile computer, implants and prosthetics; various tools (3D printer, scanner, etc.) are used to move from the virtual world to the real world and vice versa.

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Each of these passages of a technical system to another was named "industrial revolution": thus we have experienced since 1975 the "third industrial revolution", that of informatization.

Mechanics, chemistry and energy are obviously not eliminated by informatization, just as agriculture has not been replaced by the modern technical system: it was mechanized (and one can say “chemistrized”) with the development of agricultural machinery and fertilizers. The share of agriculture in employment fell sharply in France: it was 66% in 1800, 3% in 2000.

Similarly, informatization does not remove mechanics, chemistry and energy; they are informatized, and their relative importance in employment is reduced.

Each industrial revolution has given rise to a new society, each has had profound anthropological consequences: in the nineteenth century, the modern technical system has created the working class, capitalism, urbanization; industrialized nations entered into competition for the control of markets and raw materials, they competed to build empires and this has caused wars: those of the Revolution and the Napoleonic Empire after the first industrial revolution, the two world wars after the second industrial revolution.

The transition between two technical systems begins always with a crisis because the institutions, the organizations, the borders of social classes are shaken by the appearance of new opportunities and new dangers.

This transition crisis is caused by the inadequate behavior of economic actors in response to the situation that the new technical system gave rise to: the practical conditions of production and trade are indeed transformed, the change in perspective affects the psychology of people; the sociology that delimits the legitimate powers in the institutions is itself transformed, representations and techniques of thought must take into account the new nature which confronts the action. It is as if human beings arrived on a continent where they face plants which they don't know if they are food or poison, to strange animals, to an unknown geography.

Each transition crisis creates an episode of disarray. The ruling class is disoriented, strategic decisions are disorderly, companies that seemed powerful are successfully challenged by smaller companies that are more responsive and able to take advantage of new opportunities. The opinion turns against the leaders, who are judged incapable of understanding the world in which the society is immersed. Laws and regulations that were adapted to the old world, and had been developed after a patient arbitrage between various particular interests, are considered obsolete but one doesn't know by which laws, by which regulations we can replace them. The principles to which the regulators are attached become obsolete or even counterproductive.

The disorder that has gripped the minds in France in the late eighteenth century after the first industrial revolution is one of the reasons that led to the French revolution. The institutions were discredited in the 1880s and 1890s after the second industrial revolution: the Banque de l'union générale made in 1882 a resounding bankruptcy, the president of the Republic resigned in 1887 following a corruption scandal, the Boulanger crisis began in 1889, the Panama scandal burst in 1892, the Dreyfus affair in 1894, etc. Nobody then could predict the expansion that would allow France to become, in the 1900s, a leader among the industrialized nations.

This return to the past helps us to interpret the current situation. Informatization reveals a world of entirely new techniques and methods: the transition from the modern developed technical system to the contemporary technical system is much more brutal than that of 1875, which had only added the mastery of new sources of energy to the synergy of mechanics and chemistry, because the techniques of informatization are entirely new. Many people seem to wish to return to the days of hunter-gatherers; others see salvation only in the energy transition, while it is the response to a constraint and not the conquest of new possibilities.

The confusion we see today, the discredit that strikes institutions, are explained by the brutality of this transition. Most leaders are confused, not just in France: the Volkswagen scandal, the difficulties of Siemens and of the Deutsche Bank, show that the phenomenon does not spare any country.

Furthermore predators, who do note respect any rules, have no scruple, and are constantly on the lookout, are the fastest to take advantage of new opportunities: organized crime knows how to take advantage of IT to launder profits and conquer strong positions in the legal economy. The financial system has not been able to resist the temptation to perversely use the power of computing: "production of money" to which it gives itself exercises a predation on the production system – for instance, one could say that high frequency trading is a “systemic insider trading”.

The current economic crisis can be explained not by some imbalance in the parameters of the macro economy, but by the fact that informatization has changed the nature to which human actions and intentions are facing. The mission and organization of the institutions as well as the recommendations of most economists, which were adapted to the prior technical system, are affected by obsolescence. The behavior of economic actors, be they firms, consumers or States, does not meet the requirements of the present situation, the "new nature" that informatization brings out.

To get out of a crisis, you have to know where to go.

The “Institut de l'iconomie” I have the honor to chair has a mission to build the model of a digital economy and a digital society that would be effective and in which the behavior of the economic agents would therefore be reasonable compared to the reality of the technical system and of the nature it brings out. We are thus committed to show the necessary conditions of efficiency. This model we named iconomy.

Iconomy is not a forecast: the necessary conditions of efficiency are not sufficient conditions and the future is essentially unpredictable. It is only to place on the horizon of intuitions a benchmark that allows to guide decisions, to unite wishes around a shared goal and to end the destructive behaviors that we see today – in particular, to contain predation.

It is the representation of an economy and a society that would by assumption emerge of the transition crisis. This is to make clear, we repeat, the conditions of efficiency: a society that does not respect them will never achieve efficiency in the Contemporary Technical System.

We now present the essential features of this iconomy, then return to the present situation in order to place it in the perspective of iconomy.

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What are the main features of the iconomy?

First, repetitive work is automated, whether physical or mental work: in factories, robots perform the work which was previously executed by a workforce that was the auxiliary of machine operations: the employment of workforce has disappeared, in factories we see only maintenance crews who maintain the robots and supervisors who control their operation.

The mental tasks are also automated: for lawyers, the research in the jurisprudence is effectively replaced by robots; in architecture, the work of designers and technicians is transformed by programs that facilitate the production of plans and of the documentation. The design of industrial products is similarly accelerated by 3D modeling and simulation tools.

Industrial production being the repeated reproduction of a prototype, its marginal cost is essentially that of this repetition. If repetitive tasks are automated, if the workforce is eliminated, the cost of reproduction is reduced to the cost of raw materials that is generally low: as economists say, "the marginal cost is virtually zero".

This is the case of microprocessors and memories, this is also the case of software: once the program is written, the cost of its repetition by burning CDs, or by downloading, amounts to practically nothing. It is the same for mobile phones, tablets and computers that are built around the integrated circuits and software, and presents the user with a body and a convenient interface.

The share of IT and automation grows in automobiles, aircrafts, networks, the production and transport of electricity: we talk about "smart meters" and "smart grids". The more products are computerized, the more production is automated, the more the marginal cost is low.

The cost of the initial investment is however important. It covers the design of the product, the engineering of its production, the cost of the set up of automatons and of their programs. It also covers a business engineering which we will discuss in a moment. To put into production a new microprocessor costs of the order of ten billions, the cost of production of a new operating system is of the same order of magnitude. It is the complexity and cost of these operations of design and engineering that explain the delay that the design of a new aircraft or a new car, and then the launch of their industrial production require.

Therefore the cost function in the iconomy takes a particular form: a significant sunk cost, a practically zero marginal cost. The business risk is high: the production cost is almost entirely spent before a single copy of the product has been sold and before the initiatives of the competition are known: the iconomy is the economy of maximum risk.

It may be objected that many startups are launching projects whose design and engineering are inexpensive because they can implement software components that can be found for a low price on the market. This is true, and it is true that some of them are successful, but then they must move to true greatness, and this involves setting up a heavy infrastructure (think to the server farms used by companies like Google or Facebook, to Amazon's software investment, etc.). The sunk cost is important in all cases, even if the company pays it after a starting phase which is itself inexpensive.

When the cost function has this form, the average cost is a decreasing function of the quantity produced. This circumstance is one in which a natural monopoly could emerge: a single company, the largest, dominates the world market for each product because its production cost is lower than that of its competitors.

These competitors can however survive if they differentiate their product, if each of them produces a variety that possess attributes answering the needs of a market segment. In this case, the market obeys the regime of monopolistic competition. For this to happen it is only necessary that the product can diversify to meet a variety of needs. This is already the case for books, music, clothing, automobiles, etc. In iconomy, this market regime extends to all products with the exception of those who, like crude copper ingots, do not lend themselves to diversification. Hence the monopolistic competition is the market regime of the iconomy.

This scheme differs of course from that of perfect competition, which remains the reference of economists and whose consequence is marginal cost pricing: this pricing would be evidently absurd when the marginal cost is zero because it does not compensate for the sunk cost. Iconomy requires that the firm sells to the average cost of production augmented by a premium that compensates the risk it took. The firm's strategy will be to gain a monopoly on a market segment, and the regulator must ensure that this monopoly is temporary: the period must be long enough for the company to make a profit that rewards its effort, but not too long because it would rest on its laurels. The art of the regulator in the iconomy is therefore to set the duration of the monopoly so that the engine of innovation is in full swing.

Diversification of a product is designed to provide each customer segment with the "quality" that suits him. We must distinguish the "vertical quality", which is characterized by the degree of finish, and the "horizontal quality" which is characterized by the diversity of parameters of products with the same finish (color of shirts, size of pants, etc.). The customer will choose based on price / quality ratios, the evaluation of quality being subjective: he looks for "what is right to me." The iconomy is an economy of quality.

Seeking a monopoly position in a segment of needs prompts the firm to introduce in its product services that reinforce the satisfaction of the user: pre-sale consulting, financing of a loan, rent, periodic maintenance, repairs, replacing the product at the end of its life, recycling whatever the product contains, etc. The informatization and the Internet of Things have indeed facilitated the production of such services, so much so that in iconomy any product is a package of goods and services whose cohesion is ensured by the information system.

We said that iconomy is the economy of maximum risk: in order to reduce the risk, the firm will build a network of partners that share the production process. The information system must ensure the interoperability of partners throughout the production process, and must further ensure the transparency of the partnership, each partner being able to verify that the sharing of expenses and revenues is in accordance with the original contract.

We summarize : in iconomy, each product is a package of goods and services developed by a partnership. The information system is the backbone of the firm: it automatizes repetitive work and ensures the cohesion of goods and services as well as interoperability and transparency of partnership.

Employment lies mainly in the design of products and the engineering of their production, as well as in the services the product includes: the workforce has been replaced by a brainforce. While mechanized economy did not take advantage of the brain of the workforce, which was the auxiliary of the machine and was simply asked to learn a gesture, then repeat it reflexively, informatized economy requires the brain to work in order to demonstrate initiative, responsibility, creativity, judgment: the iconomy is an economy of competence.

This is obvious for the jobs dedicated to the product design and the organization of production, it is also obvious for service jobs. They are too often believed to require only low skills (and deserve a small salary), but this is completely false: people who work in services must know how to interpret what the client says, they have to react wisely to unexpected events and they need a high relational know-how.

The firm can not behave whith the brainforce like it behaved with the workforce; it must delegate to operatives a legitimacy proportionate to the responsibilities it assigns, and thus give them a right to error and the right to be heard; it is necessary that the agents who have something to say to their firm - a new idea, an observation of what is happening on the market - can be heard. The hierarchical relationship, which sanctified the command function, is then replaced by a "trade of consideration" that also applies to the relations between the various specialties within the firm, between the firm and its clients, between the firm and its partners.

The secret of the effectiveness of the firm is then the quality of the relationship between the brainforce and a computer resource consisting of programs and documents. Informatization brings out a new being in the world of nature, the alloy of the human brain and the programmable automaton, which like other alloys has properties that have none of its two components.

Besides automating repetitive tasks, the computer performs some of the tasks that were formerly attributed to magic: through its peripheral equipment, it commands the things through words that are written in programs which are run at high speed, and that makes real previously impossible actions. The automatic pilot of a plane keeps it at length in the position that allows to save fuel, an unstable position that a human pilot could maintain for only a few seconds.

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We characterized the iconomy as the economy of maximum risk, the economy of quality and the economy of competence. We said that the secret of his effectiveness was the correct articulation of the couple, the alloy formed by the human brain and the computing resource: the successful informatization of an institution, a firm, is an art that requires mastering technical, psychological, sociological and even philosophical dimensions: informatization enriches indeed the techniques of thought.

These results usefully illuminate the present situation. For us to get out of the crisis requires that the behavior of consumers, firms and the State comply with the requirements of the new nature that informatization brings out.

This requires that the discernment of the consumer is oriented by the search for the best “subjective quality / price” ratio, and not only by the search for the lowest price: this results in a better management of his budget.

We need the business strategy to be guided by the prospect of iconomy, the goal of the firms being the conquest of a temporary monopoly on a segment of needs in the global market.

The State must give priority to the reasonable informatization of the big systems of the nation (health, education, justice, defense, etc.) and encourage the firms to move towards the iconomy. This assumes that the reference model for the regulators is monopolistic competition and not perfect competition and pricing at marginal cost.

We need the public to understand that the essential phenomenon lies in the informatization of the productive system, not in the use of "smart" phones, social networks, etc. on which the attention focuses: informatization is not limited to the "digital" layer of applications.

The intelligence is not in computers but in the minds of programmers and users. There is no such thing as “artificial intelligence”: there is only a natural intelligence.

One should not be deceived about the risks: the main danger is not that "too much information kills information" (that was already the case with the books!), nor that "automation kills jobs". To the economy of competence corresponds full employment in a middle-class society - but it is true that this requires a transformation of the education system.

The main danger is the threat of a return to feudalism because predation, relying on the power brought by information technology, might kill the rule of law and democracy.

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