PROFILES OF WORLD ECONOMISTS 28 EDMOND MALINVAUD

EDMOND MALINVAUD A PIONEER OF THE THEORY OF ECONOMIC IMBALANCE

doc. Ing. Magdaléna Přívarová, CSc., University of Economics in Bratislava

The French economist Edmond as a hobby. After completing his studi- Malinvaud was born at Limoges in es at the Polytechnique, he went to the 1923 and lived there until he went to USA for a study visit, on the advice of university. His interest in science led Allais. He gained an economic educa- him to the Polytechnique, where he tion at the Cowles Foundation in Chi- took an interest in economics, initially cago.

From 1961 to 1966, he was director of in the 1980s, a time when economic poli- the École nationale de la statistique et de cy was failing. Expansionist policies of l’administration économique (ENSAE), Keynesian character have a tendency to where he participated in educating the French elite in strengthen inflationary pressures and external imba- the area of mathematical economics. lances. A policy based on deregulation, proposed by From 1967 to 1972, he headed the Prognoses Divisi- supply side economists, also has an inbuilt risk of on at the Ministry of the Economy and Finance. In 1972, causing social pressures and reducing aggregate he became general director of the Institut national de la demand. statistique et des études économiques (INSEE). In In precisely these social circumstances, a stream of 1988, he was appointed a professor at the College de economic thought – the theory of economic imbalan- France, where he will work until his retirement. ce – emerged. It atttempted a new synthesis between Edmond Malinvaud has contributed to economic Keynes and neo-classical economics. It developed theory, not only as an author of brilliantly written text- primarily in France, with Malinvaud standing at its books in the area of statistical econometric methods, head. In working out the theory of economic imbalan- micro-economics and macro-economics, but meanly ce, Malinvaud relied on the work of the founders of as a pioneer of the theory of economic imbalance. this theoretical conception: A. Leijonhufvud and R.W. He produced a typology of states of unemployment Clower from the 1960s.

The basic theoretical postulates aims in the given market. As a result, it changes its of the new synthesis behaviour in other markets. The company with stag- nating demand for its product, reduces its demand The new synthesis (the theory of economic imba- for labour. The worker, who is involuntarily unemplo- lance) preserves the assumption from neo-classical yed reduces his consumption. economics of the optimal behaviour of economic entities, but it rejects the idea of immediate adaptati- Money as the connecting link between on of prices. As soon as we abandon the idea of income and expenditure Walras’ auctioneer, variable adaptation of supply and demand are more important than prices. After rejecting Walras’ hypothesis, according to The theory of economic imbalance starts from the which no exchange is carried out outside balance, hypothesis that prices are fixed in the short-term and the theorists of economic imbalance had to re-evalu- that changes in the market can happen with unba- ate the role of money in the economic system, which lanced prices. In contrast to neo-classical theory, they analyse. which assumes the simultaneous establishment of For Walras, money was not important, because its balance in all markets, imbalance theorists consider function was reduced only to a calculating unit. Eve- the possibility of only one side of the market adap- rything occurs just as if goods were directly exchan- ting. The economic entity, which finds itself there, stri- ged with each other. All the goods were in a state of kes against limitation, since it cannot fully achieve its balance with money, because all were perfectly liqu-

BIATEC, Volume XI, 8/2003 PROFILES OF WORLD ECONOMISTS EDMOND MALINVAUD 29 id. Nothing was out of balance with money, no tra- which serves as a measure of value. The fact that naction was possible. Therefore, Walras’ economy is goods cannot be exchanged directly for each other a barter and not a monetary economy. means that a supply of goods does not automatical- The theory of economic imbalance criticizes this ly create a demand for other goods, so that in conception and brings money into economic analy- a monetary economy, the functions of demand are ses. It does this, simply because we observe it there exposed to limitations, which the economics of in reality. Money really exists, so theory must take it a natural economy do not recognize. By introducing into account, it cannot consider an exchange econo- money into economic analysis, the way is opened my, which does not exist in practice. to research limited demand, that is, a type of For goods to be sold for goods, a state of balance demand in which purchasing ability is limited by in the exchange economy must exist in the exchan- various factors. ge economy, which is only possible when the goods According to Malinvaud, money enables the imple- are liquid. However, this never happens in reality, mentation of normal transactions in the market. The because money enables the implementation of nor- only condition, which must be fulfilled is that the par- mal transactions. ticipants in the exchange agree on the price. This is However, the theorists of economic imbalance do usually different from a balanced price, in spite of the not address their criticism only to the static Walras fact that the participants in the exchange act volun- model, but also to the contemporary representatives tarily always if they think that it suits their preference. of neo-classical economics and the Keynesian – This is entirely possible, because individual actors in neo-classical synthesis, in the way they integrate exchange are situated in unequal positions, where money into their theoretical conceptions. the quantities of goods and money available to them The representatives of the theory of imbalance are concerned. consider the attempts of contemporary neo-classical The prices at which transactions take place are economics to introduce money into analyses of the fixed and deformed prices. They are called fixed to Walras balance, either by the Patinkin-Friedman or distinguish them from prices in economic balance, Pesek-Saving methods, to be unsuccessful because which are produced by a process of tatonnement. they neutralize the money by making it only an ordi- The designation deformed prices is used in the nary witness, which makes no essential change to sense that they are prices determined outside the functioning of the barter economy. According to balance. supporters of the theory of economic imbalance, This means that exchange at deformed prices is money is not passive. It has its own role in the pro- associated with economic imbalance, and since cess of exchange and by fulfilling it, puts markets transaction money leads to exchange at deformed into a state of imbalance. prices, this means that money is also associated In the Keynesian – neo-classical synthesis, money with imbalance. A monetary economy is, therefore, is understood as a sort of goods while goods are inevitably an imbalanced economy. understood as money, but in reality they are not. Thus, although the authors of the Keynesian – neo- Malinvaud’s contribution to researching the classical synthesis bring money into economic ana- connection: money – imbalances - markets lysis, their ideas do not really go beyond the frame- work of the barter economy. According to Malinvaud, money does not create The theory of economic imbalance places the con- imbalance by itself. It is not the cause of the origin of ception of the monetary economy against the con- the imbalances. However, the existence of money ception of the barter economy. Since it introduces makes it possible for imbalances to arise, because money into the economic analysis in the phase of money enables the implementation of normal trans- exchange, it emphasizes the transaction function of actions outside balance, that is, at prices, which are money and does not devote attention to its function not balanced, but deformed. The presence of money as a preserver of value. (Money as a preserver of is an obstacle to the reduction of imbalances, becau- value represents a link between the present and the se when exchange occurs at deformed prices, it future and so enables speculation. This function of means that the process of „tatonnement“ is suppres- money is emphasized in the Keynesian theoretical sed, annulment of surpluses of supply or demand system). does not occur, and the result is the origin of quanti- Thus, we find ourselves in a monetary economy, tative limitations. Quantitative limitations, like defor- in which goods are not exchanged for goods, either med prices, are gradual processes of contamination directly or indirectly, by means of one of the goods, transferred from one market to another. This pre-

BIATEC, Volume XI, 8/2003 PROFILES OF WORLD ECONOMISTS 30 EDMOND MALINVAUD

supposes that vertical links should exist between ment, which we briefly presented, leads to two markets. important conclusions: Malinvaud’s analysis starts from the hypothesis of 1. The measures of economic policy directed the existence of two markets – the market for goods towards reducing unemployment should depend on and the market for labour - each of which may be in the specific type of unemployment found in the a state of imbalance. Four different configurations country. can occur: 2. Just as Keynes saw the neo-classical analysis Malinvaud calls the first of them Keynesian unem- as a sort of partial configuration of his own theoreti- ployment. Companies, which do not find enough cal system, Malinvaud understands the theory of demand for their products, reduce employment. Hou- economic imbalance as a broader economic con- seholds, which do not have enough employment ception in relation to Keynesian economics. opportunities, reduce their consumption of goods Malinvaud’s typology of states of unemployment and services. can be regarded as a sort of culmination of the first This situation, therefore, means a surplus of supp- developmental stage of the theory of economic ly in both markets. The surplus of supply in the mar- imbalance. Naturally, like every emerging theoretical ket for goods is a result of the fact that the market conception, it has some weaknesses. Some econo- price is higher than the balanced level, and so com- mists especially criticize the assumption of the panies cannot sell as much output as they would homogeneity of the market for goods or the labour like. market. Heterogeneity is typical in the real world, Malinvaud explains the surplus of supply in the with segmentation of the labour market and differen- labour market in a similar way. The valid wage is hig- tiation of goods and services. her than the balanced level and so the household Malinvaud’s analysis also disregards the fact that cannot sell the quantity of work it would like. real economies have a multitude of markets and the Malinvaud called the second possible configurati- imbalances, which appear in them, have different on classical unemployment. It corresponds to the natures. For example, unemployment in some sec- coexistence of insufficient demand in the market for tors of an economy may be caused by insufficient goods with unemployment. demand, while in other sectors it may be caused by In this situation, there is surplus demand in the low profitability. market for goods, caused by market prices lower The second developmental stage of the theory of than the balanced level, and a surplus of supply in economic imbalance, which is inseparably conne- the labour market, caused by excessively high cted with the name of E. Malinvaud, but also of P.Y. wages. Henin, already takes into account the construction of Therefore, households are exposed to limitations models taking into account the structure of markets in both markets, which are explained by insufficient and the different degrees of openness of a particular profitable opportunities for companies. economy. The third possible configuration corresponds to From this point of view, an economy is divided into a situation with surplus supply in the market for two sector. One sector is relatively “protected” aga- goods and surplus demand in the labour market. In inst foreign competition and mainly involves busines- other words, the economy produces excessive ses providing services. It usually suffers from imba- goods and there is a state of full employment. Such lances of the Keynesian type. In the sector, which a situation is improbable in reality: why should com- must confront international competition, widening of panies have an interest in employing more people, the market is changing the hypothesis concerning when there is a state of over-production? limitation by quantity. National companies cannot In the fourth configuration, there is a surplus of rely on being able to permanently sell at prices hig- demand in both markets, caused by excessively low her than world prices. The limitations to which eco- prices both for goods and services and for labour. In nomic entities are subject no longer have the nature this case the limitation presses hard only on compa- of quantities, but of prices. The imbalances confron- nies. Malinvaud described this situation as suppres- ting the sector exposed to foreign competition have sed inflation. By this, he wants to express the fact a classical character. that if prices were flexible, inflationary tendencies Malinvaud’s contribution to the present stage of would appear. In reality, it concerns an economy development of the theory of economic imbalance undergoing a process of reconstruction, or a socia- The present stage of development of the theory of list economy. economic imbalance shows a greater effort to app- Malinvaud’s typology of the states of unemploy- roximate to economic reality. This appears especial-

BIATEC, Volume XI, 8/2003 PROFILES OF WORLD ECONOMISTS EDMOND MALINVAUD 31 ly in the fact that its representatives are attempting, According to Malinvaud, the solution to this pro- in their studies, to grasp the inter-connections bet- blem can use two different approaches. The first of ween shocks, institutions and unemployment. Apart them starts from the fact that certain social groups, from oil shocks, they also concentrate their attention including single mothers, unsuccessful students on the shocks caused by explosion of wages or by and the long-term unemployed losing their qualifica- high real interest rates. Among institutions, they con- tion, still move on the edge of this trap. It is neces- sider especially the introduction of a guaranteed sary to find a specific solution to stimulating each of minimum wage in France at the end of the 1980s, these groups to work. Malinvaud points to the fact increased protection for employment and gradual that such an approach increasingly strikes against reduction of payments into social funds from low the barrier that these groups are not clearly distin- wages. guishable and that frequent amendment of regulati- The latest research of the representatives of the ons is required. theory of economic imbalance has devoted conside- For these reasons, Malinvaud prefers a second rable attention to the problem of long-term unemplo- approach, which takes into account the whole set of yment. In this context, they point to the risk of the transfer payments and contributions to social insu- trap of long-term unemployment. To prevent the eco- rance funds. He claims that to eliminate harmful sti- nomy falling into this trap, it is necessary to find work muli, which lead in the end to only a weak stimulus for the existing long-term unemployed, and to pre- to seek work, it is necessary to build up a stable and vent people entering the labour market for the first transparent system of transfer payments and contri- time becoming unemployed. butions to social insurance funds.

Bibliography • Malinvaud, E.: Voies de la recherche macroéconomique, Paris, Ed. Odile Jacob, 1991. • CERC: Existe-t-il des trappes a pauvreté et a chômage? • Malinvaud, E.: Vers la fin du chômage? Problèmes éco- Problemes économiques 2 mai 2001. nomiques, 2 mai 2001. • Le Cacheux, J.: Héritages keynésiens dans la pensée • Přívarová, M.: Rovnováha a nerovnováha v ekonomickej économique contemporaine. Les Cahiers Français, teórii (Balance and Imbalance in Economic Theory), IURA no.280, 1997. Edition, Bratislava 2001.

BIATEC, Volume XI, 8/2003