RE: [OPE] constant returns to scale

From: Michael Williams <>
Date: Thu Oct 02 2008 - 04:35:27 EDT

Just to add: the theory I outlined can grasp the points you are making: the point about almost zero MC is that they are less than AC. The pricing of non-renewable resources poses, of course, additional problems. Neither markets nor the economic theory of them can cope adequately with the very long run costs and benefits implicit in such ecological issues.

Dr Michael Williams, BA, MSc, PhD

Mob +447906172655
Home tel +4423 80768641
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-----Original Message-----
From: [] On Behalf Of Anders Ekeland
Sent: 02 October 2008 07:24
To: Outline on Political Economy mailing list
Subject: RE: [OPE] constant returns to scale

Dear Michael,

- I am also a revolutionary socialist/absurdist

- The problem with this thinking around MC, AC,
MES is that they - as you point out in you next
contribution - change over time. It is part of
real life competition to change them, to try to
invest to create a plant where all foreseeable
market demand is in the area where you have IRS.
This - given the uncoordinated nature of the
capitalist investment process leads to
overinvestment, overproduction - to "social
competition costs" - and I think "regulated MC,
with subsidy" will not solve that problem.

As soon as you do not have a static model with
technology given (long run or short run) you get
a complex process. And let me add there is a
great difference between products - and I cannot
see that MC pricing is applicable in important
cases. Take the case of Norwegian
hydro-electricity - as soon as the dams etc. are
in place the marginal cost is - close to 0.
Should the long term price be close to zero? The
same goes for oil in Saudi Arabia - where
extraction costs are very low - but it has taken
nature millions of years to create oil - and the
alternative energy sources in the long run are
much more costly. But the long run here might be
50-100 years. My point is that with such enormous
"externalities" for fundamental energy goods only
"political", i.e. planned prices will do, MC
leads to enormous short term (= decades) of
inefficient, wasteful use - in a long term perspective.

So it is either OPEC or a democratic institution
(world parliament) that will decide these prices - MC will not.


At 21:57 01.10.2008, you wrote:
>IRS are indeed widespread (oxymoronically we
>might add: correlated with large firms). A
>corollary is that the minimum efficient scale of
>output is large (in relation to the maximum
>sustainable size of the market). At any level of
>output < MES, MC pricing necessarily implies
>losses (since the long-run average cost curve is
>down-sloping until MES). In the extreme case of
>so called 'natural' monopoly the MES is greater
>than the maximum extent of the market. The
>efficient market structure is then monopoly.
>But, of course, we then lack competitive forces
>to ensure that the single firm does indeed
>behave efficiently. And if they did so - perhaps
>under sanction of the competition authorities -
>they would be operating at a loss (since MC<AC).
>So, effective regulation would require subsidy,
>however achieved. So to answer your question:
>regulated MC pricing, with subsidy, which might
>pragmatically come down to AC pricing.
>(btw, I am a revolutionary socialist, not a
>market socialist in any sense that I have seen
>that term used. Actually, with a promising
>career stretching out ... behind me, I am
>probably more of an absurdist than anything else :) )
>Dr Michael Williams, BA, MSc, PhD
>Mob +447906172655
>Home tel +4423 80768641
> Help save paper - Do you need to print this email?
>-----Original Message-----
>[] On Behalf Of Anders Ekeland
>Sent: 01 October 2008 19:57
>To: Outline on Political Economy mailing list
>Subject: 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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