RE: [OPE] constant returns to scale

From: Michael Williams <>
Date: Wed Oct 01 2008 - 16:33:05 EDT

It is just wrong to say that IRS are not dealt with in current orthodox economics. Industrial/managerial/business economics are replete with tales of long-run average cost curves sloping down, perhaps to the full extent of the market, the implications of a minimum efficient scale large relative to the maximum extent of the market and so on, and the strategic implications of this.

Btw, of course, what is required to sustain competition is not the absence of IRS, but the setting in of decreasing returns to scale at an early enough stage so that there is space for an adequate number of efficient-size firms. Now that is increasingly difficult to evidence empirically, given developments in firm structures and information management.

(One thing I noticed when I was driven by half a life of self-indulgence to sell my economist mental labour in business schools as opposed to soc. Sci. faculties is that whilst academic economists are always rabbiting on about the social desirability of the economic efficiency putatively generated by competition, business/corporate strategy modules in business schools consist almost entirely of wizard wheezes for avoiding competition.

So scale is not some long-lost knowledge that needs reviving; academics and practitioners seem to know what it is all about.

Of course the Austrian answer to the charge of excessive scale leading to concentration is two-fold: 1. The efficiency of markets does not rest primarily on neo-classical style competition, but on the effectiveness of free markets in managing information so that it continually impacts economic decisions, without the costs associated with gathering and centralising that information; 2. Imperfect competition is generally temporary, being created and then undermined by innovation, and such temporary periods of market power are effective in motivating and funding the R&D that contributes towards that innovation.
Dr Michael Williams, BA, MSc, PhD

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-----Original Message-----
From: [] On Behalf Of Martin Kragh
Sent: 01 October 2008 20:52
To: Outline on Political Economy mailing list
Subject: SV: [OPE] constant returns to scale

" So how do you handle increasing returns to scale? What pricing mechanism is appropriate?"

Dear Anders,

Well, I don't have any answers at this point in time, but clearly the issue of IRS is one of the most relevant, and also the most ignored, questions in economics. It is noticeable for example, that Adam Smith, so hailed as the founding father of economics, is ignored completely on the questions of scale (or "space" or whatever term one finds relevant), even though his first three chapters of the WoN deals with this topic exclusively. What he says, is that demographic shifts, introduction of roundabout methods of production, division of labour, and innovations (at the shop floor as well as in science) intertwine with the accumulation of capital, i.e. growth. This has been almost completely neglected in modern mainstream (I am skeptical about the term "neoclassical" because so much of today's mainstream does not really fit the term), who have instead looked to his theory of value, for methodological queues (while though rejecting the value theory). However, his theory about the modus of the manufacture, is rea
lly analogous for any other modern branch today, such as IT-production.

On the topic of equilibrium for example, is there any passage in the WoN where Adam Smith actually says that the market will produce stable equilibrium? He says that "market prices" will "gravitate" towards their "natural prices". But if we take his first three chapters seriously (that is, if we assume that the economy is in perpetual motion), it will become obvious that Smith did not believe in any long term equilibriums. Or at least, that he did not think this to be any interesting point of departure.

In the 20th century there were economists who elaborated on the topic of scale, but I don't think they are being taught anywhere now. Allyn Young, Gunnar Myrdal, Johan Åkerman and Nicholas Kaldor were a few of them (I mention two Swedish economists because they are famous to me). Kaldor's "The Irrelevance of Equilibrium Theory" and Young's "Increasing Returns and Economic Progress" are two of the best articles written ever. I give them to some of my students in history of economic thought. But really, their work should be incorporated into all the basic textbooks in 101 economics.

I agree completely with you that the debate between Mises and Lange is really not interesting when you take topics such as scale into consideration. Instead, I think actually Allyn Young had a better theory to explain the failure of Soviet socialism, even though he actually did not live to see much of it. Below are some books and articles that I can recommend on the topic of scale.

I wish there was more I could bring to the table on this topic, because it really deserves more attention.

All the best

Kaldor, Nicholas, 1908-. - Economics without equilibrium / Nicholas Kaldor ; with a preface by James Tobin. - 1985

A. Young, "Increasing Returns and Economic Progress", The Economic Journal, vol. 38, no. 152, (Dec., 1928)

Myrdal, Gunnar, 1898-1987. - Economic theory and under-developed regions / by Gunnar Myrdal. - 1963[1957] - 5. impr.

Skott, Peter. - Kaldor's laws cumultive causation and regional development / by Peter Skott. - 1989

Toner, Phillip. - Main currents in cumulative causation : the dynamics of growth and development / Phillip Toner. - 1999

J. Åkerman "Samhällsstruktur och ekonomisk teori" (Social Structure and Economic Theory)

-----Ursprungligt meddelande-----
Från: [] För Anders Ekeland
Skickat: den 1 oktober 2008 20:57
Till: Outline on Political Economy mailing list
Ämne: RE: [OPE] constant returns to scale

Let me throw the question of *increasing* returns to scale (IRS) into
the debate. IRS is the great taboo of neo-classical economics, but
very important in real life, especially for the real big firms. In
the extreme Microsoft, but also IKEA or any other volume producer.

IRS is what any rational capitalist want to have, very often have
since there are always some fixed costs. In the "knowledge" economy -
where research and development costs in the wide sense are getting
more important since production is getting more and more automatized
(ICT, global standardisation etc.) - and thinking, programming,
design, organisation almost as labour intensive as it always was, IRS
maybe becoming even more important than in the Fordist economy.

Without taking IRS into account no "results" regarding market
socialism versus market capitalism has any bearing on real life. In
real life IRS leads to firms loosing in competition - this
elementary fact - and the social costs/gains of this competitive
selection process are never discussed. That makes such Mises vs.
Lange debates "academic" in the negative meaning of that word.

So how do you handle increasing returns to scale? What pricing
mechanism is appropriate?


At 17:08 01.10.2008, you wrote:

> > Measuring marginal costs is impractical centrally or in a
> de-centralized fashion,
> > because they vary with level of output. You can assume this away and then
> > assume constant returns to scale, so that MC = Average Cost, but
> this then has
> > none of the efficiency advantages of MC pricing. This is quite
> independent of the
> > incentive problems to which you refer.
>Hi Michael W:
>Yes, but don't most Marxian models also assume constant returns to scale?
>I suppose this would be legitimate in a static model, but surely any
>truly dynamic model of growth and capital accumulation must not assume
>this. This must be the case since technological change in means
>of production and the processes of the centralization and concentration
>of capital require (and, indeed, express) economies of scale.
>In solidarity, Jerry
>ope mailing list

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