The Moorish Wanderer

Bonds, Yield and Morocco’s Future

Posted in Dismal Economics, Moroccan Politics & Economics, Moroccanology, The Wanderer by Zouhair ABH on October 3, 2010

Morocco succeeded in levying some fresh money on the international capital markets at good conditions. So that’s € 1.Bn at 4.563% interest to be paid over 10 years at our disposal; Let us just hope it would be put to good use. It is, in all fairness, a good deal. the fixed income market is still quite volatile due to lagging credit crunch effects, especially on the long-term rates. It is a good deal, provided the money is wisely used to create stream of currency cash flows as well as wealth and output expansion at once. Otherwise, it will be difficult for Morocco to meet the payments ahead.

April 2010, the Moroccan finance ministry mandated three international banks -HSBC, Barclays Capital & Natixis- to prospect for funds on the international capital markets. The ministry targeted a $ 500Mn levy, but retracted forthwith two months later, arguing that the “present mood in the international markets does not allow for favourable terms for a loan”. (at that time, the Greek and Spanish crisis was banging hard, and eventually the required risk premium was too high) Late September 2010 however, and due to a high demand for low-risk investment grade emerging markets debt, Morocco secured a good deal, the total offer was twice more than the initial target levy, at a low premium discount. The bond is Euro-dominated, with about 57% European holding and 19% of Middle-east and North Africa origin. Now this should, in my opinion, be good news (time and again), in the sense that the Finance Ministry managed to secured large sums of money at low price. The question remains, how is it going to be spent? If, as La Vie Eco suggested late May 2010, the government plans to use the money and reimburse an outstanding total debt of MAD 36 Bn (Finance Ministry Figures, Q1 2010) then where would the money come from to pay the coupons, and ultimately, the principal in 10 years’ time? Over the last 3 years, the average annual foreign middle and long-term service debt was about MAD 2.621 Bn, that is 52% of the effective coupon Morocco has to service with the new borrowing. It would be foolish to contemplate such policy that reminds us of earlier times, when Morocco was desperately borrowing money to pay back previous contracted debts. It is foolish because of our reliance on foreign currencies. Let us suppose for the sake of argument that there will be benefits in halving our foreign deficit. It would mean that (a) Morocco can borrow some more for other purposes, and (b) the economy is prepared to divert an annual amount of MAD 513Mn in Foreign Currencies and pay back its debt in 10 years time, whatever the economic conjecture impact on Morocco (by means of comparison, the coupon represents about 10-15% of the average annual interest paid on medium and long term debt).

 

The graph measures changes in investors risk appetite for FX emerging markets (Investment-Grade only) Source: Fixed-Income Strategy Monthly survey October 2010, Amundi Asset Management

 

While the first assumption can be translated into seemingly sensible policy of substituting debt, the second one shades great doubts on its soundness, and ultimately exposes its main contradictions. Indeed, the terms upon which the bond emission was agreed are not likely the be met in the present course of time. You will notice the graph on the opposite side that volatility (and thus, required risk premium) has risen sharply since the end of September. If the Ministry goes out on the market in the next months, and bearing in mind the present trend, it will be difficult to reiterate the feat of levying such amount at such low price. The bottom line is, the Bond cannot be used to reduce the level of debt. I had the funny assumption that the government could use the money and invest it in turns in the market for a higher return and capture some profit in the process. I could develop some more later, but it just makes turn around and go back to square one. The last strategy we are left with is therefore to actually spend the money i.e. inject some liquidity in the economic circuit. The way the money is pumped up in the economy will certainly determine its course for the next decade. Let us start off with some figures to understand how a billion Euro is not only too large a sum of money to be trifled with, but it might be a blessing in disguise to renovate some of our public economic policies as well.

The recent upgrade in Morocco’s sovereign debt rating in March 2010 finally came into concrete result, in the sense that the present market pricing of our debt gives a quantitative aspect to the rating upgrade. It also means the international capital markets, on which Morocco did not issue debt since 2007, reacted favourably to a new investment-grade debt that is deemed to be yielding enough to attract high demand, but on the same time with low risk with respect to other top-tier “junk” bonds.

 

Foreign Debt. while the outstanding amount declined rapidly from 1998 to 2006, and steadily since then. Paid interest however is relatively volatile across time period

 

The starting point is of course the considerable effort the Finance Ministry consented in order to reduce public deficit and public debt. And indeed the efforts have been must successful. It must be pointed out however, outstanding and interest debt did not fall in the same fashion; In fact, paid interest are comparatively more volatile to the remaining debt, due to a heterogeneous debt structure (an aggregate of common yet distinct maturities as well as an undeniable currency effect) but the fact remains it is quite difficult to forecast how likely the service debt would impact the economy. Please bear in mind the graph did not take into account the present bond emission, which when accrued, drives the paid interest to a two-fold increase for Q4 2010 and onward.

The Ministry (and la Vie Eco as well it seems) keep on comparing the level of debt to the GDP. Though it provides a good idea of how indebted a country is, or how likely a country is able to pay back its debt, it is, in all fairness not accurate nor a good indicator of the actual capabilities in paying back the debt. We should instead look at how well our foreign trade is performing. The reason for such choice is clear: because Moroccan Dirham is not a worldwide currency, we cannot expect the whole economy to pay back a debt. The stream of currency cash flow it generates through trade would instead. Our terms of trades, as well as our present balance of payment are the essential key to understand how crucial the bond emission is, and how equally important it is that we do not mess up with the money. As pointed before, the terms of trades are steadily degrading; Our exports are losing value with respect to the imports’, and the currency reserve is subsequently (but also due to other factors as well) degrading. According to the Office Des Changes and Bank Al Maghrib Figures, not only the balance of good deficit is deepening, but the capital balance does not follow suit (in the opposite direction that is) in facts, while the trade deficit steadily gets worse, capital net inflows are comparatively volatile, a volatility that has a sizeable impact on the national currency holdings. One might ask the question: why should we bother about capital inflows? Does it have any relation with our growth? As a matter of fact, it does. The import structure is very capital intensive. Indeed, according to the Office des Changes statistical survey, 44.6% of the total imports between January and August 2010 were capital-intensive: agricultural and industrial equipment, but also consumption goods such as cars, electronic and household equipment. Oddly enough, Oil imports do not amount to such values (Oil represents less than 8% of total 2010 imports). To sum up, the imports, capital and high skill intensive are less and less met by equal export value, and that could give some idea on how the bond emission could be used.

So there we are: we need money because the terms of trade are less and less in our favour. The borrowed money could be invested in machinery, industrial plants and agricultural investment, or, equally, to please the growing crowd of would-be middle-class aspirations and allow for some rise in wages in order to secure cheap publicity. A blogger colleague offered to vote for the Finance Minister’s party in order to bind him with the debt and urge him to spend it wisely. M. Mezouar does not have to, and even if he wants, he couldn’t. He is just overseeing the spending modalities; As for the strategic thinking, the decisions are taken higher up. a Bloomberg analyst reported M. Mezouar stating that: “The government forecasts economic growth to reach 5 percent in 2011, increasing by 0.5 percent annually through 2013”. I don’t know about this forecast, but it does not say a thing about the economy’s ability to pay back each year MAD 513Mn. In facts, if growth is fuelled by domestic demand, that would be bad news indeed, for domestic demand consumes high amounts of capital-intensive (and ultimately, expensive) goods that are not produced in Morocco. If anything, M. Mezouar has the opportunity of an easy ride: There is an election in 2012, and he could easily tempted to back up substantial tax cuts (or wage increase) to win him some popularity. Now this is all politics, and it does not say much about how the money could expand the economy. As mentioned before, the money could be in turn invested in another sovereign debt as well. Which one then? the US Treasury Bonds? Well, the higher yield is 3.40% for a 20-years maturities; What about the French or German debts then? same level of return and it is riskier to invest the money in another emerging country. The only viable alternative (or as Thatcher used to say, TINA) is to boost the exports with the billion in hand. The targeted sectors would be the semi-manufactured goods, consumption and equipment goods (all of which make up for 68% of the total exports) That involves tax cuts and tax incentives the government cannot deliver; The inflow will actually be used by the treasury and the central bank, subsequently pumped up in the financial markets and would end up in the private banks’ hands. The problem lies in the way the banks will use the money; The most dynamic sector (and for the banks, quite lucrative one might say) is real estate, a sector that is notoriously unable to deliver currency cash flow. So how’s to trust?

The idea of employing the CDG fund remains therefore the least disagreeable solution. Mezouar loses every authority over the money, and the sovereign fund gets it all, which is all for the best to generate cash. As an institutional investor, the CDG will look for the best opportunities to offset the money. The core question remains: would this benefit to all Moroccans? or rather, would it benefit to those working in export industries? Wait and See I think, until the first coupon payment that is.

Meanwhile, as another blogger stated: “Moroccans, keep in mind this ISIN code: XS0546649822. You will answer for it in 2020 “

A Socialist Economy For All

In Economic terms, Social Democracy has defined itself de facto. It has led, indirectly or not, to the financial meltdown the world is struggling with today. Democratic socialism, or even Communism are yet to redefine their terms, economic policies-wise.

Allow me to dismiss the old-fashioned economic stereotypes on Communists and Left-Wingers. The stereotypes that they are pro-Statu quo, still clinging on to an evaporated ideal of a centralized, planned economy. These days were over well before the Berlin Wall came down. If anything, New Communism, with its Alter-Globalization stance, embraces a different way of dealing with economics. Not as yet refined as Capitalist economics is in theoretical terms, but I am quite confident a generation of young economists can find a way through.

In any case, it is essential for the reader to bear in mind that the “mother source” of Communism, i.e. Karl Marx, never stated that communist economy should be planned, it was never mentioned how it should be organized, save perhaps for the motto “From each according to his ability, to each according to his needs“. In facts, most of Marx’s work was mainly a scientific attempt to produce a wholesome criticism of the capitalist production mode. Later in his life, he took interest in the mathematical aspect of economics, something that would have been of great use if his great mind was put to it. In any case, his criticism never got round the idea of “banning” markets, that’s for sure.

I promised my friend a post on how I can claim being a socialist, and still uphold the essential aspects of a capitalist economy. How I can find striking similarities in the theoretical groundwork of pure market and pure centralized economies. I shall give my best in this in two parts. First, the basic principles that are common to the two models, and then, a timid attempt to give a simple model of what I believe to be a socialist and democratic economy.

First, I have to say that the statement about Market vs Centralized economies is a bit over the top. When I first came across it, I did not believe it at first. Then, when the canvass of economic formulae was laid before my eyes, I hit upon it. In simple terms, the essential common points are as follow:
– The main economists that shaped the neo-classical models, those that are the core theory of market economics, where mainly (save perhaps for the Fascist Vilfredo Pareto, who, later in his life, accepted a Senator’s position in Mussolini’s Italy) of positivist stance.

And in the late 19th century, being positivist meant, in a way, being in favour of social harmony and progress. That was the case for Walras, but also for Jevons. These defined themselves as social-democrats, which, before 1904, meant they were much more left-wing than those today. The very idea of a Homo Economicus, an iron balance of pain and pleasure is the ideal of a Übermenschen, but in a “good way”. I put the brackets on advisedly, because I mean the Superhuman can be any body, and not an elite among the commons, all of which has a certain flavour of left-wing.

– The intrinsic determination of price market: Smith may have fathered to image of invisible hand, but Walras’ own image is more interesting: He talks of an “Auctioneer” (Commissaire Priseur). In his mind, there is an invisible actor that centralizes prices on both sides (Demand and Supply) then equates them all so that each one’s wealth is maximized. In addition to that, the Price of all prices, i.e. money, is defined as the last recipient of the remaining surplus (what is left of everyone’s maximized utility). I think I went a bit fast, so let me sum it up through mathematical formulae.
1. At the beginning, there is an assumption of universal initial endowment of goods.

 

 

Not just money, goods too. That means for households their labour force, and occasionally some money with unknown value. (Each agent in the market has m-1 goods and a sum of money as initial endowment) That also means for firms some capital or some money, equally of unknown value (value will be determined further on through price clearing mechanisms). The Auctioneer then centralizes all available data, including what everyone asks as a price (how these are determined is something economists did not fully answered until Arrow & Debreu came along, and even their explanation remains incomplete) The Auctioneer, through maximization under constraints of available resources, displays prices, market prices that is, for all individuals and firms to make their deals.

2. Centralized economies, in their theoretical models, differ very little from that scheme. The difference is that prices are not determined through each one’s utility, these are defined as a whole. Here, the Law of Large Numbers makes individual and collective wealth converge into one single item, all of which makes market and centralized economies look alike. The actual economies that we witnessed throughout history are, of course, quite different. Planned Economies failed not because of their own nature of Planning. They failed (and I must stress this is only my opinion) because they kept on producing non-productive goods and spoling the labour force. Non-productive goods means here Arms and Space industry. Capitalist economies, on the other hand, in order to kick out an possibility of communist subversion, managed, or made the impression to manage, an economy devoted to human capital, the so-called “Society of Mass Consumption“.

The Soviet Union, for instance, had experienced a brief period of that kind of economy, when Khrushchev came to power and tried to strengthen the Communist Party’s hold by producing more consumption goods. Same goes along for China after they abandoned Mao’s dogma. There are other factors of course, and my statement remains doubtful until some serious econometric study was carried out, but I am quite confident the theoretical parameter, i.e. the idea of planned economy, is of little consequence over the whole outcome.

The next bit is going to be a bit far-fetched, I am afraid I am going to stretch my knowledge of economic models to its limits. In a nutshell, my model allows for the following players to make their bidding in two times on the economy: The Firms (Banks and Goods-producing firms alike) that rally within employers’ union, and the Workforce that rallies behind trade-unions. These two groups of players are shadowed by the State and the Central Bank. Each player (including the authorities) have incentives and their own maximization program, which might come to the expense of others. Nonetheless, an optimum must be reached. I hold all players to be rational and all of them accept the idea of a cooperative set of games.

The workforce has the following system to solve:

 

 

 

 

Where W is the wage sought for a period t.

The wage W* is the equilibrium wage and is function of the equilibrium inflation rate π*.

Indeed, if the workforce asks for a large rise (meaning a large C) they would end up fuelling inflation, and thus effectively damaging their real income. Alternatively, they choose between a wage rise on their labour (with a fraction α), or they could cash in the dividends from the companies they own (with a fraction 1-α).

Here lies an idea I am very fond of: the extensive use of cooperatives as a form of socialist enterprise. All the aspects of a free market economy remain, save for the property regime, under which all workers have shares in their companies.

The dividends, on the other hands, do not have an impact on inflation, because of some further aspects that are to be discussed later on. Finally, I must admit there is at least something incongruous about the said model. Usually workers do not foresee inflation, but because these gather within trade-unions, the assumption holds, as the trade-union forecasts it for the benefit of its members. On the basis of these forecasts, the trade-unions claim a certain wage rise following constraints on output, inflation and interest rates.

The GDP is broken down as follows:

 

Where the Gross Domestic Product is the sum of each player’s contribution: Wages as marginal labour productivity, Profits as marginal output productivity, governement spendings (function of net wages and profits) and last, the sum of Liquidity Loss functions. These are the “lazy” way for the Central Bank to do its job by manufacturing inflation, instead of increasing interest rates. A job I referred to in a post earlier on.

In any case, my vision of a socialist economy remains, as someone puts it, very “moderate”: an open-Market economy where long-term stability on unemployment, inflation and growth is achieved through mass private ownership of one’s company, and the systematic involvement of unions (employees and employers alike) in defining the targets to meet.

Then there’s a bunch of other ideas, like free public transports to reduce the number of private cars (reducing thus effectively CO2 emissions) slimming down the civil service to an efficient corps of dedicated and professional civil servants (ideally, administrative costs relative to that of investment should be of 1 to 4 ratio), the abolition of VAT, and levy taxes on the large fortunes, while getting small amounts of taxes from a wider base.

There are other things I cannot afford to enumerate pêle-mêle, I need time and skill to study these policies a bit further. I know it is quite blur, but I am working on getting the necessary skills to describe it further.  In any case, the policies I support have one crucial criterion: the need to address any privilege, any inequality that is likely to degenerate into a rent.

I am well aware inequalities cannot be fully addressed, but there is a wide margin on narrowing these to a state such, as Tocqueville stated: “Among a democratic people, where there is no hereditary wealth, every man works to earn a living. Labour is held in honor; the prejudice is not against but in its favour“.

The Good, The Bad and the Greedy

Posted in Dismal Economics, Read & Heard, The Wanderer, Tiny bit of Politics by Zouhair ABH on August 7, 2010

I spot in my little fellow nihilists lot, the Doctor One. The last piece I read on his Blog falls right within my purview, so to speak. I have been studying economics for a long time, I’m still at it, but with his own piece on a seemingly unrelated matter, I realized I have been spending little time on philosophical economics.

This provides me therefore with an opportunity to expand my own thoughts on the matter, plus, it is always a pleasure to write back to a fellow blogger and a personal friend.

I will deal with the immediate material I claim I can master, i.e. the relationship between “good” and economics. I put advisedly the word “good” between brackets because in the world of economics, this cornerstone of philosophy (alongside Beauty and Truth) is defined in such broad and smudged manner that many economists didn’t bother discussing it and ended up with different definitions, and ultimately, with different theories about it. In a nutshell, the dominant paradigm economic science moves on is of utilitarian nature.

The philosophical foundations were laid in late 19th century, mainly through the works of Karl Menger, and Stanley Jevons. These thinkers provided the set of axioms fit for mathematical economics.

The second video Hisham uploaded is very interesting, because M. Friedmann explains, in quite simple terms, the essential axioms of Economic theory, the very ones the Founding Fathers provided economics with, so that it would run like a core science. Greed, in Milton’s scientific world, is defined as the systematic maximization of one’s utility by choosing or not to “enjoy” an additional unit of a definite good, regardless of what others might suffer as a consequence of one’s own acts.

In mathematical terms, it goes like this:

 

 

 

I fancy this mathematical formulation (upon which I warn those with advanced skills in economics, it merely expressing in simple mathematical terms the consumer maximization program) because it leaves a great deal of interpretation on how the utility function U(.) changes from one individual to the other.

However, it gives no precise information on how an individual is supposed to quantify as it were, the utility each merchandise delivers. Incidentally, the utility in question is the economic translation of the philosophical concept of good. That’s why merchandise is dubbed as good, and that’s why economists, and more specifically Walras, thought of ordinal utility. Because no scientific measure can be provided for measuring good, Pareto had the clever idea to derive it from the preference one has for one good (or bundle of goods) over the other. Trade-off is therefore the ultimate criterion.

We do now have a closer definition of what Friedmann defined as Greed: The systematic preference of the best bundle of goods, regardless of other individuals. The fact this takes place in a capitalist economic system is irrelevant; Indeed, the founding axioms for neo-classical economics are oddly similar to those that shaped centralized/plan economies.

That, of course, is merely the description of economic science. Much has been done on that issue since Friedmann stood in front of the camera. The standardized economic idea -upon which Gekko in “Wall Street” coined the famous quote “Greed Is Good“- considers this maximization program to be Pareto-efficient.

Meaning, Good and Happiness are achieved when each individual cares solely about themselves and only so.Truth and the constraints of real world are of course, quite complex to fit in this model. That’s why economists use concepts such as “Externalities“, and later on, “Cooperative Game Theory” to explain how a higher commonwealth (and therefore the ability to achieve a larger amount of Goods, and presumably, reach a higher scale of “Goodness”) could be reached without a systematic Laissez-Faire policy. (I know I am at odds with my fellow neo-liberal enthusiasts economic students, but the academia as well as the data confirms it, under a set of conditions that remain very controversial, but that is the essence of economic policy) If I may, I would like to summarize my statement: Good in economics is a matter of individual materialistic preferences.

On a society scale, this does not necessarily hold through a systematic maximization trade-off. In these cases, good is achieved collectively, as Nash famously considered, one’s utility is defined through their own direct personal utility, as well as their collective action contribution return. Let me now turn to the full-philosophical discussion of Good.

I don’t think Good/Evil-Bad are solely a matter of religious beliefs. I still think one can have an ethical compass independent of any religious or moral beliefs. In a society, people, individuals or communities, are expected to behave following a pre-defined pattern of behaviour, what sociologists call “norms”. These norms are the one that shape the scale of values, these define what is good and what is not. The fact some of them integrate the idea of tolerance towards deviance (I borrow here the Durkheimian definition of the word) makes them more democratic than others.

In any case, Good is defined through these norms, and how these come to be dominant is a matter of historical course and the very object of human action. The problem with societies like Morocco is that the norms are still dominant, and are expected to be followed scrupulously. Deviants are socially punished, when labelled as “outcasts”, and, in extreme cases, physically liquidated. Therefore, when my friend asks the question “What is Good?”, and in the Moroccan context, it means yielding the perfect behaviour the myriad of norms requires from each one of us to be so. In a western context, good is of a somewhat blurred definition, and is left for individuals to define their own set of references.

How to achieve it is even trickier. In Morocco, the mere façade of Good behaviour is enough to buy the respect of “society“. I restrain myself to the Moroccan case because I have to confess my lack of knowledge of other MENA countries, but I expect it should be similar in Egypt for instance, or even Saudi Arabia.

In any case, my own Good-Evil analysis is heavily influenced by Popper’s epistemology; i.e. I don’t believe there is a paramount good, and any action that seeks to achieve it has at least one self-contradiction (which eliminates religions from that lot, oh, my agnostic creed came out so unexpectedly…)

I posted something quite beside the point put forward by my fellow blogger. It may go back to the fact I don’t take my own principles as “Good”. I have to confess my ammorality when it comes to social contact, for it boils down to a matter of politeness. When it comes to politics, I am a partisan of policy-relativism.

I don’t think socialism -which I support- is the best set of policy to achieve good, I merely wich to put it to practise and see if it works. I hold all policies in equal skepticism until one or all of them acheive their objectives. Does good exist? Perhaps. Can we achieve it? I don’t think so, but some actions could embody the idea of it.

Markets, Innovation and Competition

Posted in Dismal Economics, Read & Heard, The Wanderer, Wandering Thoughts by Zouhair ABH on July 4, 2009

To quote Immanuel Wallerstein ‘Only a monopoly could pursue innovation (as a way to secure and expand its rent)’.

Though this statement is purely abstract, many examples come to mind when it is about innovation : apart from Edison-like geniuses, market innoation comes from large, oligopolistic or monopolistic structures : Apple with its Ipods and Iphones, Microsoft with Window and Internet browser (Albeit threatened by newcomers)…

The sum of examples is too large to be presented in length. One the other hand, economists from the dominant stream advocate strongly the idea that only free markets could bring about wealth, well-being and subsequently innovation (as part of the positivist ‘progressivism’ competition makes shared among agents)The main issue, therefore, is an attempt to find out about the various relations markets, innovation and competition have with each other : Could market competition encourage innovation ? How can innovation be measured in an economy ? what changes does innovation make within market structures ? The present article will present (or at least will try to) a proper definition of innovation, as a first step to understand mechanisms behind market changes. Secondly the readers will get acquainted with various theories contradicting the previous thesis, essentially on the point of competition. historical evidence shows the large role monopolies assumed in the global innovation, throughout human history. Finally, One will show that, though competition is for innovation to emerge, monopolies store undeniable advantages in controlling and improving it.

When an economist presents the free market as beneficial for innovation, they have in mind the following reasoning : an individual firm makes profits when its marginal cost is below the market price (one assumes the firm operating in a pure and perfect competitive market). Innovation intervenes when a firm makes a ‘discovery’, namely, a new combination of factors of production that produces more output for the same amount of input. In that sense, innovation is nothing more than a new combination of Labour and Capital, that increases significantly their marginal productivity.

So, a firm in a competitive market has a strong incentive to innovate, in order ot outsmart their competitors, and to increase its share of profits. In the short term, consumers benefit from competition, as the quality of goods improves (thanks to a better combination of means of production) at the same price, or even lower. In that sense, a free and competitive market presents all the incentives for companies to innovate, at least for the short run, since their innovation combinations -as a knowledge/information- are bound to be known to the market (fluid and transparency assumptions hold) and therefore neutralising their initial advantage. The theory seems perfect. Perhaps too perfect, as the real world differs significantly from the one pure microeconomics builds.

Game theory, as well as actual corporate behaviour tend to be more accurate in dealing with the innovation issue : a famous economist, H. Varian, wrote an article about network and high-tech economics, an article one should look at very closely : in an innovative market, two variables tend to contradict some of the important assumptions of free markets theories : transparency and fluid information.

A firm has the choice (or not) to undertake R&D studies, a decision that could cost a certain amount of money. As a rational agent, the firm has to guarantee sizeable returns over this investment : returns of investment have to outbalance their initial cost. Firms could for instance, develop some kind of restriction to the use of their innovative goods : Microsoft protects its software and forbids their uses to get to the original code-source (namely, the very heart of the software, which could be altered). Patents could also guarantee a rent to the innovative firm, by protecting its innovation. Those two pattenrs of behaviour contradict indeed the very heart of free and competitive markets : free information.

Another way of looking at the matter would be the ‘free rider’ theory : in a relatively open market, a firm could just wait for innnovation to ‘pop’ and grab it. The free rider firm would be actually happy to get a small but stable rent on the market, by adopting a ‘follower strategy’. In that case, and if all firms were to follow the same reasoning, no innovation would be expected.  In a monopoly though, things are different : as many economists put the stress on it, a competitive monopolistic market could be innovative, but to make sure that no potential newcommer would get into the market. In that sense, innovation works as a barrier to entry. Because monopolies do not bring maximum social utility, they are actively denounced by economists. The plain fact of the matter is, Innovation IS more effective under monopoly situation thant in competitive markets pattern.

The stumbling block in this issue is without doubt the treatment of information. Should the benevolent government -i.e. the public authorities- abandon te patent system ? Should it introduce some change in it ? As H. Varian, pointed it out, there could be various alternative economic models : the most novel and original one being the ‘cooperative’ innovation (with a paradigme far from the dominant one in economic theory) : Linux, an alternative operating system, improves and expands because a community of engineers and IT technicians want to contribute to the Linux project.

This authentic public behaviour might give ideas to the public authorities : why shouldn’t the innovation be a public good ? instead of being ‘produced’ in a competitive market, main innovations could be the fruits of public R&D, and at the reach of everyone. Firms, as well as other agents could expand it -to a minor or marginal scales-.

This proposal, of course, has to be discussed and expanded, but the idea of a public and free innovation monopoly could be a suitable answer to the problem.