Table Of ContentMICRO-ECONOMICS
OPTIMAL DECISION-MAKING
BY PRIVATE FIRMS AND PUBLIC AUTHORITIES
MICRO-ECONOMICS
Optimal Decision-Making
by Private Firms and Public Authorities
by
CLAUDE ABRAHAM AND ANDRE THOMAS
SPRINGER-SCIENCE+BUSINESS MEDIA, B.V.
MICROECONOMIE
DECISIONS OPTIMALES DANS L'ENTREPRISE ET DANS LA NATION
Second edition in 1970 by Dunod, Paris
Translated from the French by D. V. Jones
Library of Congress Catalog Card Number 79-188001
ISBN 978-94-017-2269-8 ISBN 978-94-017-2267-4 (eBook)
DOI 10.1007/978-94-017-2267-4
All Rights Reserved
Copyright © 1973 by Springer Science+Business Media Dordrecht
Originally published by D. Reidel Publishing Company, Dordrecht, Holland in 1973
Softcover reprint of the hardcover 1st edition 1973
No part of this book may be reproduced in any form, by print, photoprint, microfilm,
or any other means, without written permission from the publisher
Sur quoi la fondera-t-il, l'economie du
monde qu'il veut gouverner? Sera-ce sur le
caprice de chaque particulier? Quelle con
fusion! Sera-ce sur la justice? Ill' ignore.
B. PAScAL, Pensees
PREFACE
The origin of this work is to be found in the cyclostyled course on 'The
optimal allocation of resources in the firm and in the Nation' taught by
Mr Boiteux at the Centre d'Etudes des Programmes Economiques
(C.E.P.E.), Paris from 1957 to 1960. Of course, several successive later
rewritings and a great many additions have profoundly altered the initial
version: starting from a remarkably clear and concise exposition of eco
nomic theory, we have ended with a book that is several hundred pages
long. It is not at all certain that Mr Boiteux would recognise this intellec
tual sponsorship. Nor is it certain that the gain in information justifies
such an increase in size. However that may be, the initial plan has survived.
Without Mr Boiteux this book would never have been undertaken: it is
a pleasant duty for us respectfully to acknowledge our debt to him here.
Microeconomic analysis, that is to say that analysis which results from
the study of the behaviour and activities of individual decision-units, was
for a long time the main concern of the neo-classicists. Quite recently
the introduction of macroeconomic theory, dealing with aggregate quan
tities, seemed to relegate it to second place. But this is not where it belongs:
we tend to agree with Mr Raymond Barre that there are "two different
scales of analysis that complement rather than contrast with one another".
Microeconomic theory, which was ignored for a time, is the sole basis
for the real calculations carried out by public authorities and by private
firms. It gives us valuable insights into the role of prices. It allows us to
rediscover by summation the National Income Accounting identities.
Above all, it constitutes an irreplaceable language. But, to be effective,
it must function in a global landscape, that is to say in a macroeconomic
environment.
The majority of microeconomic arguments make use of a very simple
idea which has been the very making of operational research: every
economic agent is subject to a variety of constraints and has an objective
which can be expressed mathematically by a certain function that we
shall call a satisfaction function, which he tries to maximise or minimise.
VIII MICRO-ECONOMICS
From this follow the successes and the failures of microeconomics: the
successes, because the adopted mathematical formulation has shown
itself to be capable of useful and universall application; the failures,
because the goals of men cannot easily be encompassed in a few equa
tions .... Microeconomics has therefore two faces: to parody a famous
phrase, one could say that sometimes it portrays men as they are and
often it portrays economic units as they ought to be.
The conception and the writing of this work were inspired by the
following principles:
(i) As regards its basis, we have tried to bring out two streams of thought:
-the first concerns to general exposition of economic theory or, more
precisely, microeconomic theory;
- the second is arranged around an analysis of the unit of production,
whether public or private. 'The optimal allocation of resources' teaches
us to formulate consistent calculations of profitability. At the same time
it puts us on guard against the difficulties which may arise, as well as
against the inadequacy of certain assumptions.
The analyses of optimal allocation may be undertaken on the basis of
different systems of ethics. Sufficient intellectual rigour nevertheless allows
us to draw out a common fund of results: "Thanks to economic analysis,
it is becoming easier to synthesise complementary points of view, and
easier to lay bare the genuine basic contradictions that are sometimes
hidden beneath tendentious arguments. "2 The systematic use of economic
models whose assumptions are assiduously listed avoids confusion be
tween the deductions and conclusions of axiomatic analysis on the one
hand, and concrete reality on the other.
We have limited ourselves to the framework of accounting economics
and have not tried to describe financial institutions. This serious gap will
no doubt be filled one day, for the techniques of actuarial decision-making
now constitute a very elaborate body of doctrine.
(ii) The form of a book assumes great importance when the book has
a primarily pedagogic aim.
(a) The use of mathematics and, more precisely, mathematical models
was essential. As a rule, the level of a university introductory year in
science is adequate for an understanding of the main results. Those which
require a deeper knowledge can be left aside without penalty; in any case
engineers and economics graduates with a science background will be
PREFACE IX
able to read this textbook without difficulty. Moreover, we have preferred
logical rigour to mathematical rigour. In our view, excessively technical
proofs should not take precedence over the process of deduction and the
economic interpretation of the models.
(b) Economic theory leads directly to industrial applications. There
already exist some excellent books dealing with this subject. Therefore,
although we have not disdained examples, this work remains essentially
didactic.
(c) The large number of variables makes it impossible to use a univocal
system of notation. We have however endeavoured to adopt or adapt the
most usual notations.
In its present form, this book has been or is being used as a course-book
at the Centre d'Etudes des Programmes Economiques (C.E.P.E.), at
l'Ecole Nationale du Genie Rurale, des Eaux et Forets (E.N.G.R.E.F.),
at l'Ecole Nationale des Pants et Chaussees (E.N.P.C.). As a result its
production has led to a continuous dialogue with the students whose
criticisms and suggestions have been of great value.
The book's plan was referred to above: it consists of two parts of
roughly equal inportance:
-The first five chapters are devoted to a genera/look at economic theory,
which numerous authors have considerably enriched in recent years.
Among French writers we can name in particular Messrs Allais, Debrue
and Lesourne. After production and consumption, after Pareto's 'obstacles'
and 'tastes', it is possible to describe an economic equilibrium, to construct
a 'social mechanism', following the Lausanne School tradition. Several
recent lines of research relating to imperfect competition, axiomatic
theory and the stability of equilibrium allow us, we believe, to underline
the model's extreme generality and its limitations.
Chapter IV attempts to summarise the main theories of the economic
optimum. Now equilibrium describes a way in which economy can func
tion. It is not an ideal in itself. After the work of A. C. Pigou, the concept
of welfare became established in economics: "Ethics", writes J. Hobson,
"are never an intrusion into economics; the same facts are both economic
and ethical."
A suitable generalisation of Pareto's formulation and a clear explana
tion of the social welfare function provide a common language for a good
many hypotheses.
X MICRO-ECONOMICS
Within the framework of this book it was unfortunately impossible to
review the various economic systems and to compare them with the
concepts of the theory. The calculation of marginal costs and planning
'a la fran~aise', the German-style 'social market economy', and the recent
efforts of certain Soviet economists would provide the reader intent on
concrete applications with a good many fascinating subjects for reflection.
Chapter V introduces time into the analysis and leads to the important
definition of the discount rate. Several observations must be made on this
topic:
(a) the discount rate summarises the arbitrage of an economic unit
between the present and the future; it is therefore not the same as the
various rates of interest, which are exogenous institutional data;
(b) the discount rate is a product of marginal analysis. Its use is not
necessarily legitimate in the study of large investments;
(c) the discount rate is independent of the type of economy (capitalist
or socialist). For example, with the aim of selecting profitable operations
under the National Plan, Kantorovich has proposed a coefficient, which
he calls 'normal efficiency', that gives rise to identical calculations.
- The next six chapters are centred on some fundamental problems of
the theory of production. After two chapters devoted to marginal costs
and investment choice, we tackle, very briefly, a subject which is full of
promise but also very controversial: that of public investment. To tell
the truth, the method of approach to these problems has hardly changed
since the last century: Jules Dupuit's consumer's surplus remains the
pivot of our formulations. But every day administrators and engineers
working for public authorities have to take highly important decisions on
the basic of certain calculations. These have therefore become operational,
so it was important for us to emphasise their difficulties and their full
implications.
The replacement ofp lant and machines and their amortisation form the
subject of two chapters. There are two very traditional subjects. But the
recent studies of Messrs Desrousseaux, Lhermitte and their teams have
brought about a real revolution in this area of thought. Their results
allow us to give a rigorous definition of amortisation within the frame
work of perfect forecasting, thereby underlining the highly subjective
nature of the value of a production good. Now amortisation is revealed as
the stumbling-block of the theory of firms' production cost, and, more
PREFACE XI
generally, of the theory of capital: "The depreciation of capital is at the
very heart of the thought process which leads an individual to acquire a
capital good. "3
Chapter XI describes the relationships between economic theory and
normal accounting concepts. It is based on two main ideas. On the one
hand economists usually argue in terms of real monetary flows, while
accountants, by means of amortisation and various special funds and
accounts, introduce fictitious monetary flows. On the other hand micro
economics is based on marginal analysis, while current practice is often
content with the traditional language of standard cost and profit margins.
A comparison between theory and business practice seemed to us un
avoidable if perhaps premature.
- The last chapter takes up a thankless but necessary task: the intro
duction of an uncertain world, the substitution for the attractive but
unrealistic analysis of perfect forecasting of the more complex and true
to life schema of the 'calculated adventure' of which Mr Pierre Masse is
so fond. In the search for decision criteria, the economist humbly re
discovers-if he had for a moment been able to forget it-that a man's
action is a projection into the future. He thus returns to the everlasting
problem of philosophy.
Before ending this introduction, we should like to thank all those who
have contributed to the creation of this book: Mr Edmond Malinvaud
who, by entrusting one of the authors with the teaching of microeconom
ics at the C.E.P.E. showed in him a confidence of which this book is the
fruit and the evidence of his gratitude. Messrs Prou, Boiteux, Lhermitte,
Lesourne and Deheim whose encouragement, advice and comments
made possible the writing and then the improvement of this work. Mr
Jacques Fayette who agreed to read the chapters on economic theory
and let us have his criticisms and suggestions. Mr Jacques Thedie was
initially to have collaborated in writing this book: he will recognise in
places ideas which are dear to him but that he has never had the oppor
tunity to publish. We hope that all will find here the expression of our
sincere gratitude.
May 1969 CLAUDE ABRAHAM
ANDRE THOMAS
XII MICRO-ECONOMICS
NOTES
1 To such an extent that it has proved possible to apply this formulation to the State,
that is, to the macroeconomic entity par excellence.
2 Jacques Lesourne, Le calcul economique, p. 244.
3 Alain Cotta, La depreciation du capital et le sujet economique, p. 327.
