A Sustainable Review of Conventions between Economic Actors

Pierre-Charles Pupion (2020)

In: Eric Milliot & Sophie Nivoix (eds.), Economic Transition and International Business – Managing Through Change and Crises in the Global Economy, New York: Routledge, pp. 39-49

Abstract. The economic convention theory approach gives insight into the genesis and the deepening of the financial crisis. This crisis is coming from mature countries such as the United States; it has impacted countries such as Russia on the way to their growth. This chapter highlights the failure of these coordination mechanisms, so-called conventions necessary for the functioning of the now globalized banking sector. The international rating convention allows the various players to assess the risks of issuers of securities through ratings issued by rating agencies. The collapse of this international rating convention in mature countries was accompanied in the main places by a collapse in financial markets and a generalization of distrust. This study shows that high-growth countries were dependent on financial conventions that were largely created in the United States. They had difficulties in establishing new growth-friendly convention after the collapse of these conventions. The direct financing from the state has emerged in Russia as an effective lever for action for responding to the collapse of the conventions.

Excerpts. “The economic convention theory approach gives insight into the genesis and the deepening of the financial crisis. This crisis is coming from mature countries such as the United States; it has impacted countries such as Russia on the way to their growth. This chapter highlights the failure of these coordination mechanisms, so called conventions necessary for the functioning of the now globalized banking sector. The international rating convention allows the various players to assess the risks of issuers of securities through ratings issued by rating agencies. The collapse of this international rating convention in mature countries was accompanied in the main places by a collapse in financial markets and a generalization of distrust. This study shows that high-growth countries were dependent on financial conventions that were largely created in the United States. They had difficulties in establishing new growth-friendly convention after the collapse of these conventions. The direct financing from the state has emerged in Russia as an effective lever for action for responding to the collapse of the conventions. […] Originally, the economic theory of conventions seeks to solve the problems of economic coordination posed to classical theory. These agreements apply to all the unspeakable problems of coordinating social life such as the management of the phone break or the choice of the dress code for a professional interview. The economic convention is understood as an implicit acceptance of rules of thought or conduct, socially constructed and not imposed by nature, which allows the individual to know how he should behave in given situations, without private calculation. An agent seeking to answer to a specific question may refer to the convention as a model of answer. The convention does not allow him to objectively justify his choice, but it provides the answers needed to overcome his problem. A convention is, according to Gomez (1994), a procedure of collective resolution of the problems characterized by uncertainty and undecidable decisions. A convention emerges as a regular process intended to provide a system of rules giving a solution to the problem. The conventions are arbitrary, for the outside observer, in the sense that there are other possibilities for coordination. The economic theory of conventions has developed two branches called “strategic” and “interpretative” (Batifoulier, 2001). […] The interpretative approach is an extension of the analysis of Weber (1971). This author refers to rules of conduct subject to social judgment, which he distinguishes from custom, habits and law. The convention is also called common sense (Dupuy, 1989), system of knowledge (Salais, 1989) or collective cognitive device. It corresponds, according to Favereau (1989), to a set of rules systems to which individuals refer or conform for his behavior. This approach identifies two levels of convention: conventional rules and evaluation models. The first are simply rules of behavior that allow individuals to cooperate (individuals have divergent interests) or to coordinate themselves (individuals have common interests). However, any rule is incomplete and cannot provide a turnkey solution. Rules need evaluation models that allow interpreting them. The evaluation models are at a higher level; if the rules act at the level of the behaviors, the models of evaluation are ways of the coordination of representations and judgments on the behaviors. To follow a convention it is necessary to follow a rule at the first level and to seek its meaning at the second level. Individuals with a procedural rationality (Biencourt et al., 2001) need to judge the collective in which they are included. […] The rule only makes sense if it is shared by a collective. To follow a rule is to engage in common action by mobilizing values. The choice among several conventions is no longer arbitrary; it is based on a common world supported by certain values and ideas of justice. Boltanski and Thevenot (1991) provide six models of judgment called “cities” (Boltanski and Chiapello (1999) add the city by project) which describe the representations of the agents. To make a judgment on a rule, an individual will mobilize an argument that comes from one of these six cities. As Petit (2014) recalls us, the aforementioned authors study the relations between the different worlds and the resolutions of inherent conflicts. They identify three forms of resolution: the prevalence of one order of worth of worthiness, the arrangement where everyone stays on their positions and finally the compromise.

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