EUROPEAN PAPERS ON THE NEW WELFARE

Abstracts from The Employment Dilemma and the Future of Work

3. The Economic Context for Productive Labor: some Premises

3.1 The pricing system, uncertainty and risk

Classical and neoclassical economics are based on a notion of value built into an ‘equilibrium system’. Prices are supposed to represent the equilibrium point between supply and demand at a given point in time. At that point, all prices together represent the general equilibrium system.
While classical economics underlined the importance of the supply-side in this equation, the neoclassical school emphasized the priority of demand. But in either cases, reference to the equilibrium system was identical, one side of the equation being by definition considered equal to the other.
It is here that the notion of performance as measurement of value as well as the increasing importance of service functions in the economic system require a fundamental change in approach. Indeed, the notion of performance cannot be identified with a point in time but must refer to a period of time. First of all, the very period during which the system is utilised is inevitably uncertain and can be expressed only as a probability. Second, the functioning of such a system will also occur within a context of events, some of which are bound to be uncertain. All future costs, linked to performance, can be understood — even when they are strictly monetarized — only in terms of probability.
Therefore, the economic system which the Service Economy is leading to is an economic system that is by definition uncertain. In classical economics, uncertainty is equated with inadequate, insufficient or asymmetric information, as if such information could ever be obtained completely. In the case of the Service Economy and the notion of performance value, uncertainty, and more generally disequilibrium as a condition to the development and dynamic systems, is a key factor.
Given the functioning of a very large number of economic activities in today’s world, it is clear that any price set at a given moment merely represents a probability which will be confronted with costs arising in the future and which cannot be precisely determined.
This has always been the case with the activity of the insurance industry and also explains why this discipline has largely been overlooked by both classical and neoclassical economic theory as taught in universities around the world today.
It is indeed paradoxical that increasingly the price fixing mechanism of all sorts of activities is beginning to resemble the probabilistic one that faces an insurance manager. This is true for example of a research manager having to choose investment in different projects with varying probabilities of success. This applies to all investments or mechanisms having to do with the leasing of any kind of material and also to any type of production process likely to face unknown future costs related to waste management, pollution and other liabilities. It is another paradox of history that insurance, largely neglected by economic thinking for the last two centuries, is taking centre stage in much the same way as the textile industry symbolised practical application of the new methods of industrial production in the 18th century.
All of this points clearly to the fact that the equilibrium system of classical and neoclassical economic theory is based on a deterministic philosophy which the hard sciences abandoned at the beginning of last century. The notion of price uncertainty and disequilibrium is rooted in the philosophy linked to indeterministic systems which for many decades have indicated the way forward in physics and other hard sciences. This also means that the notion of risk, within an indeterministic framework, is not the equivalent of threat but of opportunity and real development.

3.2 Risk management, vulnerability and volatility

The notion of risk management, as well as the risk management function and professional activity, was first introduced in the United States about 50 years ago. It was the consequence of the growing vulnerability in the performance of modern technologies used in the production system.
Over time, it became obvious that the success of technology in the modern economic system had increased the necessity to control vulnerabilities for very clear economic reasons. First, because specialisation has been reducing and at the same time multiplying the classes of risks and their homogeneity. Whereas in the past a more limited number of different risks had to be faced, the new situation confronted the economy with more specific and varied potential hazards due to the new production reality. In addition, technology has become increasingly reliable, with the positive effect that accidents are occurring less and less often. Nevertheless, due to the increasingly complex and interrelated technological systems employed today, in the increasingly improbable case of a breakdown, the consequences are getting more and more serious in absolute as well as in relative terms. all this increases the level of uncertainty and the economic relevance of risk management.
These risks have nothing to do with entrepreneurial, commercial or financial risks, since they depend on the surrounding environment and they occur independently of the will of any economic or social actor. They simply reflect the vulnerability of a system. But because of their gravity, over time they have become more and more strategically important for the contemporary industrial world even if this type of risk is often dismissed in economic textbooks. The profession of risk management therefore developed not only in the United States but also in the rest of the world as a practical reaction to the changing constraints in the economic system.


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