THE DUALITY OF ECONOMY CLOSED AND TRANSIT STRUCTURES

1. THE DUALITY OF ECONOMY CLOSED AND TRANSIT STRUCTURES Valerian Popkov, Andrey Baturin International Alexander Bogdanov Instinute, Yekateriburg, Russia www.bogdinst.ru

2. Closed structures – is a “blind spot” of economic theory • input-output –paradigm:enterprises appear in these models in the form of “black boxes”, converting inputs into outputs • These “black boxes” compete with each other for the access to limited resources and the main argument in this struggle being the value of added cost they may provide. • it results in chains of enterprises and production programs, providing the highest possible result within the «input-output» system under specified limits on initial resources. • The only thing they couldn’t do is to consume goods they produce themselves, even if such consumption were mediated by closed supply chains. The optimal program of input-output model eliminated such cycles • closed structures were left unconsidered, as irrational, non-economic ones. And this is not surprising, because they broke the fundamental philosophy of commodity production. • Along with the closed structures any unproductive consumption as such was left out of consideration • For example, if rural population of an agrarian country eats a part of bread it produces, this part is automatically omitted from the model.

3. The phenomenon of domestic markets • As far as they consume what they produce, it seems there is no sense in searching any complex structures in domestic market environment; isolation of domestic markets and their withdrawal considered no more than an atavism • there appeared a myth, that if power obstacles are removed and transaction expenses are reduced, no one economic structure would be able to exist long enough “against the market” • Meanwhile, domestic markets do not “disperse”, more than that, they multiply • Reforms of Eastern Europe became a vivid illustration of this back side of the market • Half-closed production chains with their alternative surrogate “money” kept on functioning in the depth of post-planned domestic economies of the former socialist countries • Cyclic structures, “ring causality” underlie most synergy models, since they naturally generate the so called “aggravation mode”

4. Open enterprise network is a “black box”, transforming one set of products (resources) into another set, in accordance with discharge coefficient – a classical character of all balance models The only goal of such “transit” production structures is acquisition of added cost, the difference between input and output (unit) prices. But cyclic processes are absolutely different: the closed flow means, that there is no sense in comparing expenses and production results in its every link – expenses and results, inputs and outputs are mutually cancelled in final units, the cycle contains no added cost, the balance is zero (that is why balance models have no cycles) And it will remain zero independently of market price conditions Cyclic and transit production structuresLet’s take an arbitrary enterprise network. This may be a global, national, regional economy, a regional production complexAny simple network analysis would reveal in this network some set of cycles and open(or transit) flows

5. The balance and balance-network models • The balance model doesnot examine the closed (cyclic) structures and uses open (transit) structures only • The balance-network model not only considerscyclic structures, but allows to find conditionsof cycle existence and calculate their influence on the transit processes

6. Divergent and convergent processes in economy • The global closing of economic processes can be carried on only thought overcoming of powerful and universal processes of their opening. A spring, working for the opening of closed life support systems, is set into the very foundation of modern economy, and this spring is nothing else than marketability of economy • We would call this group of processes “commodity divergence” in economy, on the analogy of the concept of divergence in physics • Where in economy does convergence spring wings up? The answer is obvious – in those structures, where marketability eliminates, and a particular need comes to the foreground. We believe such structures are either cyclic or closed ones • However, convergent processes in economy still have to get an adequate institutional equipment, not to mention the theoretical reasoning. Because cyclic processes and cyclic structures in economy differ from transit ones in no smaller degree, that an atmosphere cyclone differs from an anticyclone

7. Goods and services • Classical political economy, from A.Smith to K.Marx, use to consider services “noneconomic” welfare, “nonproductive” labour • Modern analysts of service industries keep on consider the service to be a variety of goods (“goods – services”), whose distinctive feature is “direct connection, interactive relations between the producer and the consumer” • The service is creation of object conditions, necessary for successive activities of the client • the service participates in the following consumption circuit: Activity – Product - Activity (A–P-A) • While the production follow the sequence: Product – Activity – Product (P-A-P) • If in P-A-P sequence activity may represent a “black box” and participate in balance models • In A-P-A sequence a product becomes a “black box” • As for the two interacting activities, they interact as “white” boxes, initiating a shift of the partner’s internal parameters.

8. Excursus into topology of comprehensive wholes • A usual system is a bound aggregate of parts • while a wholeness is invariant to a certain degree, relatively to partition • Such property is characteristic of network models (generally, topological models), where enterprises do not work singly, unlike well-known balance models, but join in chains, and each individual business system represents an aggregate of such chains • Allocation of independent chains in the network may be done in different ways, but the number of closed chains (cycles) in such partitions would keep permanent • It is cycles that represent the topological invariant of a comprehensive whole, - a characteristic number of cycles remains within the comprehensive whole, despite its any deformation, aggregation, development

9. Chains and Cycles • The comprehensive whole, as well as any other one, is made up of processes, adjoining each other, of chains of such processes. Process chains form chain complexes, which are systematically analyzed by topology • A special attention topology pays to closed chains, or cycles. The cycles, as opposed to opened chains, are able to feed themselves, and therefore may exist relatively autonomously and stably. Thus, if there were no circulation of raw materials, power and money resources in gross production, no production would exist, - it would become a single-shot phenomenon • The algebraic topology (a hundred years ago such construction arose in the works by Henry Pointcare), distinguishes not only structures, but most important parameters of processes, taking place within those structures. Here is meant a systematic distinguishing of contravariant and covariant substances or flows and potentials.

10. Flows are balanced in the node (The law of conservation mass) Potentials of adjacent nodes are balanced on the branches i2 i1 e2 e1 (i1 – i2) (e1 – e2) Processes The unity in duality

11. Generally, the flows balance on structural elements of lower dimension, on their lower boundaries The flow is characterized by some variant of the principle of conservation of mass, substance, volume, quantity – it is an external motion (visible parameter) in general. Potentials, on the contrary, spread to their upper boundaries and balance there This is how stress, force, pressure distribute, how need is produced, how subjectivity (invisible or hidden parameter) is shown in general. Flows and Potentials

12. The world is a multi-dimensional process • It’s consisting of local processes, adjoining one another • for example– a river has 3-dimensions • a pilot of a plane see it as 2-dimensional water ribbon • a hydrograph examines one as 2-dimensional bottom topography • The top and the bottom meet, making up a costal line (1-demensional) • there are also fish resources, birds and animals populations in the high-water bed • There are also the goods and financial flows, associated with the river

13. Kinetic world (a flow) The streams are structured and coordinated towards decrease of structural level dimensions: from the general to the particular, from the concrete to the abstract, from the depth to the surface. This is the direction of differentiation of the wholeness Stressed world (a potential) Potentials are coordinated in the opposite direction: with increase of dimension, through structural elements of higher dimensions. The world is gathered, integrated, joined through stresses This is the direction of integrity of the wholeness The wholeness – the world from two points of view

14. Types of networksopen (transit) mixedclosed

15. The generalized balance-network modelIt has 5 nodes and 5 brunches. 2 nodes (oil and grain) haveexternal export potentials. 2 brunches (social and agriculture sectors) have internal potential sources. 2 nodes (migrants and land) have outside restrictions.

16. The external price: Concerns to grocery inputs and outputs Stimulus of maximization of profit It exists in the opened circuit It is uniform for all enterprises which are letting out the given product Goods Opened (transit) structure The internal price: Concerns to a branch, - to the enterprise or the group involved into a cycle Stimulus not giving enterprise to stop there It exists in the closed circuit Each enterprise has own internal price Needs Closed (cyclic) structure External and internal prices

17. Cycles (red) and open (transit) paths (yellow) • 3 cycles and 3 open paths Экспорт нефти Мигранты Е Нефть Рабочая сила e Бензин Экспорт зерна e Е Земля Зерно

18. Results of calculations for three types of economy • Export – raw economy: • all economy was reduced to oil extracting by hands of migrants and petro-export • economy all as export-focused, but now the basic is the export of agricultural industry. Contours are not closed. • Agrarian: high efficiency of rural work and low norms of consumption of grain have provided high stability of an agrarian contour • Innovative: two contours Compete: 1. The innovative contour focused on export of bio-oil to the detriment of society, • 2. The аgri-social contour focused on internal demand. • Solving in this dispute there is an intensity of solvent demand of society. In the balanced condition these two contours coexist, supporting each other.