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The Concept of Economic Capillarity

The Concept of Economic Capillarity Economy Near Us (XXII)

The term capillarity belongs, from a historical point of view, to physics, but it has been taken over, in terms of its general, philosophical significance, both by psychology and sociology, as well as by historical science. From a semantic point of view, capillarity indicates a property of a phenomenon or of some entity to evolve (from a spatial point of view or structural-functional properties) in a manner contrary to all laws and mechanisms known and accepted as governing the phenomenon or the respective entity. The classic example of capillary is that of a liquid that, in a tube narrow enough that its surface tension exceeds the value of the gravitational force, instead of moving down (more precisely, in the direction of the source of the gravitational force), moves in the opposite direction.

We notice, from the outset, that this has nothing to do with a perverse effect (that is, an unexpected and, even more, unpredictable effect), since we know from the beginning that, at a certain section of the tube we mentioned, the liquid will move up, not down. Moreover, the question of the tube section does not even need to be considered a black box, as we have a coherent and experimentally proven explanation that between the tube section and the manifest strength of the surface tension of the liquid (of course, depending on the nature of the liquid and on other conditions of the experimental environment) there is a unique and scientifically known relationship. In this way, not only will we know in advance whether and when the liquid will be subjected to the capillary property, but we can adjust the environment so that the capillary effect occurs or not.

The interest of economic theory in relation to such capillary effects must start from the idea that they are governed by thresholds. Indeed, insisting on the example with the liquid in the tube, the capillary effect only occurs when a certain value of the tube section is reached. This value is nothing more than a threshold, in the terminology used herein, beyond which there is a phenomenon that can be either a perverse effect, if the conditions of capillarity are ignored, or an orthodox effect, if these conditions are known and possibly managed. The main difference of the capillary effect from the perverse effect is that the latter exists or does not exist, in a given phenomenological context, whereas the capillary effect can develop. Given that the economic phenomenon is dynamic par excellence, a certain phenomenon can be, for a certain period or to an extent, orthodox, after which it becomes perverse. This passage is the result of a capillary effect. Of course, economic theory will overcome the physical image, that is, the simple spatial displacement, of the capillary in physics, and will accept that this effect occurs whenever a threshold is reached in the dynamics of an economic process.

We would like to make a few further clarifications that may help to conceptualize the capillary effect and to highlight the methodological role of this phenomenon.

Firstly, the qualification of the macroscopic result of the capillary effect is ambivalent: it can be both an orthodox and a perverse one, depending on the resolving competence of the empirical observer. Therefore, the interest of the research should not be channelled in the direction of the result of the capillarity effect, but rather in that of the internal dynamics of the effect, of the conditions that determine it and of those that allow its management.

Secondly, the capillary effect seems to be the result of the restrictions (normative, institutional, material, informational, etc.) that appear and act at a given moment on a certain economic entity or on a certain economic process. Obviously, these restrictions do not necessarily have to be imposed consciously by the human factor, because they can also be self-activated. Therefore, we could talk about induced capillarity and self-capillarity.

Thirdly, capillarity is a property of the economic environment as opposed to that of viscosity. It is known that the fundamental paradigm on which Keynes has built his whole theoretical construction is that of the lack of flexibility of prices (due to the cartelization of the employers) and of the salaries (due to the unionization of the employees). Moreover, it has been observed (for example, by James Duesenberry, with his delayed effect of decreasing consumption as a result of decreasing income) that this viscosity is more pronounced when variables decrease than when they increase.

Capillarity represents, in this context, a fluidization of the economic environment, in a sense close to the physical concept of decreasing density, that is, of its viscosity. In an economic environment with a high capillarity, however, it is not the speed of the economic processes which is higher (because, from a methodological point of view, we would be in a contradiction: it can be assumed that a higher density of the economic space leads to an acceleration of economic time relative to physical clock time, which results in macroscopic increase in the speed of economic processes; in this context, we cannot argue that greater capillarity of economic space, i.e. a lower density thereof, has the effect of increasing the speed of the economic processes), but the probability that the respective processes will follow courses different from the ones followed in similar situations in the past or the one provided by the economic theory, is greater.

We could say that, in this case, there is a certain property of permissiveness of the economic environment, more precisely, of increasing its permissiveness in the production of specific economic phenomena. Let us take an example: to admit that, at a given moment, in a given economic system, the government considers the question of lowering inflationary pressure on costs, especially costs with wages. For this purpose, the government asks the employees either an acceptance of the decrease of the nominal wages or a decrease of the real wages (by accepting nominal increases smaller than the anticipated inflation). Due to the viscosity of the economic environment when the wages decrease, the employees' trade unions will not accept the proposal. Under these conditions, the government establishes a wage taxation grid that makes the available wage income higher at a lower wage level than at a higher one. As a result, the employees' trade unions will accept the requested reductions. What happened? The mentioned regulation raised the capillarity of the analysed economic environment, creating the conditions of the wage level movement in a direction opposite to that indicated by the Keynesian theory of viscosity.

Fourthly, capillarity is a compensation of the expected effect, either in the form of substitution or in the form of acceleration. In this way, it could be considered that the capillary effect can also be considered a new form of conservation of economic effects. Let us give some examples:

  1. a) Lionel Stoléru shows, in L'ambition international, that the French government's failed to use the fiscal facilities policy, in 1975, to increase the aggregate demand which, which, in turn, would lead to the corresponding increase of the aggregate supply (according to Keynesian theory of the multiplier of autonomous investment). This was an obvious invalidation of Keynesian model of governmental intervention by fiscal means within an open economy. The explanation for this failure is that consumer economic agents (both of consumer goods, and of investment goods) have directed their higher demand, given the increase in the monetary mass relative to the budget deficit, not to the domestic supply, but to the external one. It is obvious that, in this case, it is not a perverse effect, as the purpose of the government – to increase the demand and, finally, the supply – has been achieved, only that this growth has taken place in the world economy, and not at the level of the French economy. This type of capillary can be called capillarity by transcendence;
  2. b) in Romania, long ago, the CNVM (National Securities Commission) had the initiative to elaborate methodological regulations regarding the calculation of the value of the net assets of the mutual funds. The purpose, more or less transparent, was to discourage monetary deposits to these funds – which use the money deposits mainly for speculative purposes – and to reorient them to commercial banks that could have granted loans for real investments, with an impact on the growth of the domestic supply. The method was to prohibit the calculation of the net asset value of the presumed income from investments, which was not only going to reduce the present value of the depositors' certificates of deposit, but also to reduce the expectations regarding the future growth of the investments. All these measures had to directly discourage the clients of these mutual funds. However, the measure had the following result: depositors massively withdrew their money invested in mutual funds, but did not deposit them in banks, instead increased the demand for currency, which increased the pressure on the exchange rate, with foreseeable effects on growth of interest rate, which discouraged investment demand. Again, we do not have a perverse effect, because the purpose of CNVM – to diminish the interest of the agents that save for the mutual funds – was achieved, but the funnelling of the liquidated money was not oriented towards the banking system, but towards the accumulation of foreign currency, considered more stable in terms of value conservation. This type of capillarity could be called substitution capillarity.

The difference between the transcending capillarity and the substitution capillarity is the following: the transcending capillarity achieves the proposed purpose even on the economic variable concerned, but at another level of aggregation (higher or lower), while the substitution capillarity achieves the proposed purpose, but not on the economic variable concerned, instead on a substitutable one in terms of the active mechanism of the analysed process. 

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