Complicated? Certainly, and this is not all

My editorial

I need to shake off a bit, regarding the business plan I am currently preparing for the EneFin project. The thing is supposed to be FinTech in the market of energy, with a special focus of promoting renewable energies and fitting into the technological and socio-economic environment of smart cities. As I was preparing my last update in French (see Une plantation des clients qui portent fruit), I became aware that I am entrenching myself in a frame of mind that one of my friends calls ‘the ferocious bulldog’. Those among you, my dear readers, who have been following my blogging for a while, know that I frequently use a metaphor about myself, namely that I am a combination of a happy bulldog, a curious ape, and an austere monk. The important thing about the bulldog, in that internal trinity of mine, is to keep it happy, and now, precisely, my internal bulldog is progressively getting unhappy, and this is when it becomes visible to my friends. My unhappy bulldog has just bitten so strongly in something (or someone) that it can hardly let go. ‘Hardly’ differs from ‘not at all’, and it means it is still possible to unclench my jaws and to get some distance. It is that or a crowbar forcing my mouth open. Distance is better. Crowbars taste iron. Disgusting.

This is the moment of getting some fresh perspective, whilst maintaining a gentle, possibly a graceful drift in the general direction I want to follow. One of the ways I can make my internal bulldog happy is talking to dead people. I mean, not to all of them, just to some. There is a guy I like talking to about the things of life, the name’s Jacques Savary. He used to be French, before he died, by the end of the 17thcentury. He used to be French in the fullness of what I like in the French: he did a bit of everything, probably could wield a dagger and a quill with equal dexterity, and he wrote an interesting book, “The Perfect Merchant”, published on the same year that d’Artagnan died. You can find the French original of the book with I documented a few conversations of mine with Master Savary on this blog (see Comes the time, comes the calm duke, Judges and Consuls, or  Quite abundant a walk of life). Now, I am reading, and translating on the go in English, what he wrote about the securitisation of contracts by the means of the so-called bills of exchange, or promissory notes.

He starts discussing the issue when I would start, i.e. at the origins. ‘It is one thousand years since we learnt what bills of exchange and promissory notes are, an invention which came from the Jews, who, chased away from France, during the reigns of Dagobert the 1st, Philippe Augustus, and Philippe the Long, in the years 640, 1181, and 1316, took refuge in Lombardy, and in order to retrieve money and other possessions that they left in France in their friends’ hands, necessity taught them to use letters and bills written in few words and containing little substance, as it is the case with letters and bills of exchange today addressed to their friends; and to that purpose they used the intermediary of travellers, pilgrims, and foreign merchants. This means allowed them to retrieve all their assets, but, as these people have mind infinitely what regards gain and profit, they paid attention to make themselves intelligent in the knowledge of the pure and the tarnish in currencies, so as not to mistake themselves at the evaluation and reduction of different alloys in coins, which was strongly variable at the time’.

The turn of phrase you could have just read is my personal translation. I made my best so as to keep the original spirit of the text, and, in the same time, make it intelligible. The linguistic niceties properly introduced, I can give that loaf of information to my internal bulldog, for economic analysis, just to see it happy. The passage mentions two distinct economic functions, somehow coinciding with the use of the bills of exchange: controlling distant assets, and setting the market price of capital goods.

Let’s move forward with Master Savary. A few paragraphs later, he writes: ‘The etymology of the word “letter of exchange” is easy to understand, for it means no other thing than changing the money that a Merchant has in one town, and giving it to another [Merchant], who has use for it, and who has no such sum in the town of his residence, where the letter has been drawn from. This exchange is equally advantageous to them both, for the one who will have money in a town without this commodity would have to have his money transported by messengers and carters, and the one who would have need it in the same town, for doing business, would have to have it carted from the place of his residence. Again, the word “change” comes from the fact that the interest, or profit, offered when drawing or offering letters of exchange is never the same: sometimes it is high, sometimes it is low, sometimes you lose on it, sometimes you gain, and sometimes it is just at par; it means that there is nothing to lose or to gain between the Changers: and so it is perpetual change, which is being encountered in the Commerce [done with] the letters of exchange’.

Language is intriguing. When we deconstruct the etymology of a word, we can find the function that it corresponds, too. Here, Master Savary explains us the etymology of ‘letter of exchange’, and, by the same occasion, unveils the social function behind. When some capital good, coined money in the case of Master Savary’s explanation, is pretty clumsy and costly to transport, homo sapiens invents ways to use just the information about said capital good. Information travels faster, cheaper, and less riskily than coined metal, so let’s use information as payment. Information has its price, too, and, in this case, the price of letters of exchange – thus their exchange value – was made as the local (i.e. in the given transaction) evaluation of how much exchangeable value I can acquire when accepting, as payment, a letter of exchange allowing to draw on that other gentleman’s metal money stored somewhere far (too far for transporting the money physically).

Thus, as soon as an acceptably stable legal system with acceptable reliable property rights emerged, that little idea emerged as well: what has the most bulk value are big things, hard to move around, like real estate, big stocks of metals, big stocks of food etc. They have value, those big things, but they have little velocity, so let’s give them a kick into more velocity by drawing more or less standardized legal deeds, embodying claims on parts of those big things.

If you read carefully Master Savary’s explanation, you will see that letters of exchange, which, centuries after their invention, turned into paper money, were initially options on the value of coined metal. I had money stored somewhere far from the place where I was currently doing business. I offered to other business people to pay them with letters of exchange, giving them claim on some amount of my far-stored money. Those business people weighed the practical value that having a claim on that money had, from their point of view, and proposed a price for those letters. It went (probably, more or less) like: ‘Good, so you want that cart of silk, and you want me to pay with a letter of exchange that gives me unconditional claim on your silver money, and let’s say – for the sake of convenience in those folks who will read it like in four hundred years from now – that silver money is 200 ducats. That money is stored 100 miles from here. I am pondering two things now. Firstly, I am going through the idea of going and physically claiming that money of yours. Secondly, I am thinking about, instead of doing the trip, to hand that letter of exchange over to another business person, who might be willing to go and claim the money, or to make the letter circulate further. I am anticipating both the for and against of claiming physically your money, and the odds that you letter of exchange will have any exchangeable value in itself. All in all, I propose you to buy this letter of exchange from you for the equivalent, in that silk you want to buy from me, of 200 ducats minus one fifth, thus 160 ducats’.

Complicated? Yes, certainly, and this is not all. There was another factor in the game of pricing the letters of exchange: the properties of the metal money they allowed claiming. Here, a little remark is due about the origins of coined money, and, by the same means, another deceased gentleman joins the conversation. Welcome Adam Smith. What Master Smith explained, in a book published 90 years after that by Master Savary, is that coined money emerged out of the necessity to evaluate the true value of metals used in exchanges. Copper, silver, and, less frequently, gold, were the main metal exchangeable, back in the days (many days). Somehow, people came to the idea that the purer is the metal offered in exchange, the more it is worth. The presence of other substances than silver, in your average pound of silver, decreased the exchange value of that pound of silver. I know, I know, from the today’s point of view it is not one hundred percent logical, yet it was what it was. People used small, portable scales to weigh the metal in exchange (this is where the scales held by Themis, the goddess of justice, comes from), but it was a bit slow to use. Besides, once the metal graded by weighing, the question of how precise was the weighing naturally came to the fore, possibly together with skilled labour force, equipped with tools proper for violence.

What the sovereigns (kings, princes, and whoever efficiently claimed to rule the land) came up with was the idea of minting. The local sovereign proposed the following deal to business people: ‘See, here I have that little facility, which I have just named “mint”. The people I employ at the mint will weigh your metal and grade it, and, in order to streamline the subsequent exchanges, will make into small pieces of standard weight each, with my royal/ducal/whatever-I-am-currently stamp on them. My minting stamp will guarantee the exchangeable value of your metal. Isn’t it a tremendous improvement? Oh, there is that tiny little detail: as minting will take off your shoulders the burden of (some) transaction costs, you pay me a fraction of the exchangeable value in the metal being minted. Deal?’.

In the Europe of the past, which, fault of a better word, we call ‘feudal’, there were many sovereigns, living in really complicated, hierarchical combinations. Most of them used to run their mints, whence the presence of many minting stamps in the market. Ducats were metal stamped with ducal minting stamps, for example. A duke was the highest in rank in the feudal hierarchy, regarding the control over precise territories. Kings and their royal families were technically above that hierarchy, but, as regards the claim on territories, kings made themselves into dukes, frequently. You can find a trace of that legal trick in the today’s royal families, whose members, whilst being kings, queens, princes or princesses, are dukes or duchesses of something as well.

That little conversation with two dead gentlemen, Master Savary and Master Smith, helps me to kind of ground my thoughts regarding EneFin, that FinTech project I am business planning. First of all, find something big, valuable and pretty fixed in one place. Big power plants, for one. Populations of consumers of energy, thus the geographical structures of human settlement, for two. Power grids, for three. Now, determine countable claims on those big fixtures. Next, figure out a legal way (a contractual pattern) to derive tradable deeds on the base of those claims. Once this done, think about the pattern(s) of pricing those deeds, and about making profits out of organizing exchange in them. Intuitively, the best FinTech business is to be found where uncertainty as for the market value is the greatest, and where a proper FinTech functionality can contribute to reduce uncertainty.

I am consistently delivering good, almost new science to my readers, and love doing it, and I am working on crowdfunding this activity of mine. As we talk business plans, I remind you that you can download, from the library of my blog, the business plan I prepared for my semi-scientific project Befund (and you can access the French versionas well). You can support my research by donating directly, any amount you consider appropriate, to my PayPal account. You can also consider going to my Patreon pageand become my patron. If you decide so, I will be grateful for suggesting me two things that Patreon suggests me to suggest you. Firstly, what kind of reward would you expect in exchange of supporting me? Secondly, what kind of phases would you like to see in the development of my research, and of the corresponding educational tools?

Stratégie fin 17ème , stratégie fin 18ème

Mon éditorial

Je suis en train de revoir mes notes de recherche (donc ce que j’avais écrit sur mon blog) et de les compiler en un livre. Voilà donc que je revoie deux mises à jour récentes (Quite abundant a walk of life et Countries never behave as they should ) et voilà (seconde fois) que je tombe sur quelque chose d’intéressant : la connexion entre la croissance du marché et l’opportunité pour innover. Je compare deux traités : « Le parfait négociant » de Jacques Savary, de 1675, et « La richesse des nations » d’Adam Smith, datant d’un siècle plus tard. Adam Smith, au milieu de la seconde moitié du 18ème siècle, dit fermement que les meilleures opportunités pour ce qu’il appelait « la division du travail » – et qui aujourd’hui voudrait dire l’innovation – se présentent dans les marchés qui croissent à une cadence relativement rapide. En revanche, Maître Savary, au milieu de la seconde moitié du 17ème siècle, était beaucoup plus enclin à voir des bonnes opportunités dans des marchés bien stables. Qu’est-ce qui eût changé le contexte de l’innovation si profondément in l’espace d’un siècle ?

Trois facteurs de différence viennent à mon esprit : la croissance démographique, la standardisation des systèmes monétaires, et la diversification des technologies. Les années 1670, c’était le temps quand une récession démographique profonde commençait à se faire remarquer un peu partout en Europe. Il avait fallu attendre les années 1760 pour voir un rebond dans la population. Vous pouvez trouver une description fascinante de ce processus de plusieurs décennies – quoi que c’est une histoire froide comme la finance dont elle parle – dans « La théorie de l’impôt » (1760) par Victor Riqueti, marquis de Mirabeau (oui, le même Mirabeau).

Donc, lorsque Jacques Savary écrivait, en 1675, que « cest une chose bien importante que dentreprendre des Manufactures, car il ny va pas moins que de la ruine des entrepreneurs, si elle nest pas conduite avec prudence et jugement », il faisait un croquis sur un fond de teint fait d’une population en déclin. Cette différence cardinale de contexte démographique se mariait d’une façon intéressante avec la diversité technologique. Durant la seconde moitié du 17ème siècle, l’industrie textile semble avoir été le secteur dominant, et de loin, en ce qui concerne l’innovation. Apparemment, à l’époque, inventer un tissu nouveau était l’équivalent de l’invention informatique aujourd’hui : un vrai cerveau, ça inventait un nouveau draguet pour les gens pauvres ou un nouveau ruban décoratif pour les riches. Notre guide dans les aléas de cette époque, Maître Savary, se vante lui-même d’avoir inventé, ainsi qu’avoir mis en marché, trois produits textiles différents, dont un – et voilà un petit bijou historique – était un ruban tissé en fil d’or et d’argent. En revanche, à la fin du 18ème , l’innovation prenait place un peu partout et, ce qui est un phénomène intéressant, elle prenait place dans le secteur financier, tout en contribuant à la standardisation financière. A l’époque, la finance, c’était en train d’inventer sa Ford Modèle T.

Voilà donc que j’arrive à ce troisième facteur : le pognon. Lorsque Maître Savary décrit les différentes stratégies de ce qu’il appelait « La Manufacture » – donc l’industrie – il préconise très clairement de se concentrer sur les étoffes bien établies dans le marché, qui ont « un cours ordinaire ». Cette notion de cours ordinaire reflète bien le fonctionnement des systèmes monétaires de l’époque : extrêmement diversifiés, basés très largement sur la circulation, par l’endossage, de la dette privée décentralisée. La plupart du monde d’affaires était basée sur un système des prix qui se croisait constamment avec le système des taux de change très fluide, y compris les taux de change des dettes privées provenant des sources diverses. Aussi bien dans le marché de vente que dans le marché d’achat, ce qu’on appelle aujourd’hui la politique de prix, dans le marketing mix, ressemblait plutôt au marché Forex moderne, mais avec plus de risque et avec une absence quasi-totale de ce que nous appelons, de nos jours, les valeurs-refuge (le franc suisse, tiens). La seconde moitié du 18ème siècle – les temps d’Adam Smith – c’était presque ennuyeux, par comparaison.

Voilà donc que nous arrivons à deux types de stratégies différentes en ce qui concerne l’innovation et le changement technologique. La stratégie « Fin 17ème » est celle qu’on pratique dans des marchés en déclin démographique, où la perte de vitesse en termes de population se traduit par un rétrécissement dramatique de la palette d’innovations possibles, ainsi que par un système monétaire où personne n’a vraiment d’intérêt à créer une circulation prévisible et à réduire le risque financier. D’autre part, je définis la stratégie « Fin 18ème », où une croissance démographique marquée, une innovation florissante et des systèmes monétaires qui croissent par standardisation. Bon, maintenant j’applique ça à ma petite obsession : les énergies renouvelables. Dans cet article que je viens de terminer , j’ai découvert un équilibre entre la population et la quantité d’énergies renouvelables par tête d’habitant. Il y a des pays, où l’importance des renouvelables pour l’équilibre démographique est extrêmement importante. Ce sont des cas aussi divers que l’Arabie Saoudite, Turkménistan, Botswana, Finlande ou la Lettonie. Là-bas, la population, ça semble être étroitement lié au marché d’énergies renouvelables. Par coïncidence, ce sont des pays avec des populations relativement stables et pas vraiment les plus grandes du monde. Intuitivement, j’associe leurs marchés d’énergies renouvelables avec la stratégie « Fin 17ème ». A l’extrémité opposée de l’échelle vous trouverez des pays comme la Chine ou l’Inde (mais aussi l’Ethiopie ou le Japon), où le marché des renouvelables semble avoir relativement peu de connexion avec le facteur population. Je pourrais être tenté de les associer avec la stratégie type « Fin 18ème » et en plus ça pourrait tenir pour les pays comme la Chine ou l’Inde, mais l’Ethiopie… Pas évident du tout. Là, je me sens comme dans un cul de sac. On va bien voir.