Introduction. The Concept of Economic Transformation

Time is either creation or is nothing.
Henri Bergson, Creative Evolution

Microeconomics is the most conservative part of economic theory; its contents have remained virtually unchangeable throughout the last hundred years. At the same time the economic reality itself has changed during this period fundamentally. The point is not that nowadays they use totally new technologies, commodities etc. The main distinction of the contemporary productive forces is not so much their composition and structure as unprecedented frequency of their constituents’ changes. The intensity with which productive forces components are changing has been growing increasingly fast over the last decades. This tendency allows one to confirm that the world civilization is entering into a new stage of development requiring thorough investigation and comprehension.

In the present conditions it is necessary to bring the basic assumptions of economic theory in conformity with the reality of the modern dynamic society. This work should be started with microeconomic models, which are based on suppositions of static type. For instance, the traditional consumption model is founded on an invariable utility function, the traditional theory of production— on an invariable production function etc. Static microeconomic models consider the change of any numerical parameter in terms of “if this were the case” assumption. To illustrate, in market demand model price changes only in researcher’s brain: “If the price was initially 1 dollar higher, then the quantity demanded would be 20 tons less”.

The author has made it his aim to transform well-known microeconomic models in such a way that they could describe the consequences of the real changes of economic parameters. The basic notion underlying the concept being offered is “transformation”. We contrast this idea with “statics”, but at the same time we do not equate it to “dynamics”.

In the widest sense, transformation is a purposive change in the state of economic object. No only consumer, producer or firm can become such an object. An individual-creator who transforms himself during the process of purposeful creative labor has come to play increasingly important role in economy. The interpreting of creative person as an object and a subject of economic transformation enriches and extends the existing system of microeconomic models.

The notion of “transformation” being used here differs from the notion of “dynamics” in the following aspects:

  1. transformation is a purposive change, while dynamics is usually treated as just some change in time, without taking into account the goals having brought this change about,
  2. transformation is a one-time change in specific conditions, while the term “dynamics” is accepted as the time dependence of some parameter, i.e. the function defined on the wide enough range of time points,
  3. in mechanics, the concept of “dynamics” is opposed to “kinematics”, the former being connected with internal reasons of changes and the latter describing the external manifestations of these changes. At the same time the term “dynamics” in modern economic science is usually used to describe the consequences of internal factors impact — which have been appointed through quantitative change of some observed parameters with time. Thus, instead of the conventional term “economic dynamics” one ought to use the term “economic kinematics”. We use the term “transformation” when examining internal factors of changes of economic object, i.e. when analyzing economic “dynamics” in original (physics) meaning of the word.
  4. it is not necessary to describe labor can be described by invariable with time measure of richness of labor,
  5. we use the concept of “transformation” to describe simple microeconomic processes for which it is possible to establish clear cause-and-effect relation between one factor impact and its consequences. Yet economists also use the term “dynamics” when describing complicated macroeconomic processes brought about by concurrent influence of a great number of multifarious factors, some of which cannot be formalized and allowed for.

Fig.1. Transaction as a special case of transformation

Our concept of “transformation” is essentially the generalization of the concept of “transaction”. Transaction is defined to be a one-time change in the state of economic subjects having made a deal. Each of them has lost the property right to one kind of asset and acquired one to another.

The main characteristic of transformation is transformation cost — expenses involved in implementing purposive change in the state of some economic object. The notion of transformation cost is basically the generalization of the transaction cost concept, or cost of striking bargains. However, in the microeconomic models being discussed we don’t look at transactional interplay between various economic subjects, and so transaction costs as such are not taken into consideration.

The method of the present study consists in developing traditional microeconomic models by means of assuming additional postulates that refer to transformational factors impact and at the same time excluding the least realistic “static” suppositions of invariability of one or another economic index. We term the models improved in this way transformational ones, and the starting models — static or traditional ones. Introduction of the notion of transformational cost allowed us to describe and investigate, in the framework of microeconomic models, “routines” phenomenon which is the major subject of inquiry in the modern institutional theory. Thus, the models posed in this work bear features of both neoclassical and institutional schools.

Let us consider an example of simple static production model where the production function is supposed to be a priori given and invariable. This assumption would be quite realistic under the economic conditions of the 19th century, when technologies remained immutable over many years. In this time period a producer could accumulate hands-on production experience under every possible combination of resources inputs; thereby he or she gained reliable information about the form of production function. Once and for all established equilibrium input choice ensured peak output in the period of static state of production. At the same time average annual producer costs, associated with obtaining information about the type of production function and determining equilibrium parameters, were negligibly small.

Under present-day conditions, when production technologies replace one another extremely fast, the producer does not have time to gain experience that is necessary to estimate equilibrium parameters. Therefore the assumption that production function is known to producer a priori is by now totally unrealistic. To get trustworthy information about the type of this function the producer has to “experiment”, that is to change levels of resources inputs, and the latter requires incurring additional transformation costs. And what is more, under the conditions of “floating” production function the equilibrium input choice is also constantly changing which demands actual (and not fictitious, as in the static model) alterations. In practice this usually entails hiring new workers or firing available ones. This as well is connected with substantial transformation costs.

Generally, the tendency of increasingly frequent replacement of capital components in the 21st century calls into question the expediency of using in microeconomics production functions that in practice cannot be determined owing to too short period of employing appropriate technologies. In our opinion, it is more perspective to use the notion of the producer goal that can be achieved by utilizing this or that set of substitute resources. From the formal point of view, the producer goal is given by only one isoquant that in practice can be determined with lower costs than the production function described by the infinite aggregate of isoquants. The concept of production function corresponds to the routine nature of production in industrial age, whereas the concept of a single isoquant is to a greater extent consistent with the present-day stage of development of economy when production institutions are changing dynamically.