[OPE-L:344] Re: Chaion Lee's Short Question

Gilbert Skillman (gskillman@mail.wesleyan.edu)
Thu, 26 Oct 1995 06:41:44 -0700

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Steve writes:

> Gil asks:
> |Why not ask the more general question: why isn't the value of every
> |commodity determined by marginal rather than average production
> |conditions, as in Marx's specification?
> Because marginal considerations only determine the lowest cost
> producer if the marginal is rising.

This isn't a question of "marginal considerations determining the
lowest cost producer"; non-reproducible differences in input
quality, which *may* translate solely into differences in *average*
cost, determine the lowest cost producer.

At any rate, mine is a possible case which Marx does not rule out, so
the objection stands.

> If marginal costs are constant or falling, then they are
> largely irrelevant to price formulation; in this case, the
> firm with the lowest fixed costs may well be the most
> competitive, and that relates to average cost. The more
> units sold, the lower per-unit fixed costs are, hence
> economies of scale may be more important than issues of
> marginal cost.

To say that economies of scale are important is not to say that
marginal cost is irrelevant. Unless the scale economies derive
purely from spreading overhead, they also inform the shape of the
long-run marginal cost curve. If scale economies obtain throughout
the region in which price > average total cost, you have a natural
monopoly. But that's not what Marx had in mind.

If there are not conditions of natural monopoly, and the industry
acts competitively, then price is equated to (long-run) marginal

Once we put aside natural monopoly, non-reproducible differences in
input quality translate into different levels of average cost, so
that if price equals *average* rather than *marginal* SNLT, the
marginal firms will be continually driven out of business, as
mentioned before.

> This leads to the need to explain why economies of scale do not
> drive competition down to zero, and the answer has a lot to do
> with issues of:
> * the availability of finance to fund the necessary investment;

Such considerations would inform a firm's cost curve, as long as
costs are interpreted more broadly than as strict costs of

> * the heterogeneous nature of demand in most "markets"--if Volvo
> had the lowest average costs, would all car buyers buy Volvos?
> I doubt it; * the "principle of competitive exclusion": when there is
> competition between similar species in an ecosystem, then each
> niche within that ecosystem will end up being filled by one
> species only--how many car companies compete on the basis that
> their cars are, to quote Dudley Moore--"boxy but safe"?

Valid, but such extreme product differentiation (and even in the
market for autos price competition has increased at the margin, at
least in the US) is not the standard case, and certainly wasn't what
Marx had primarily in mind. For one thing, there's no reason to
believe that goods will exchange at their values in such a world.

> These are all issues which are developed in Post Keynesian
> theories of the firm, which themselves arose out of
> dissatisfaction with the neoclassical story of firms, markets and
> price-setting via the intersection of (rising) marginal cost
> with (falling) marginal revenue.
> Rising marginal cost, in a context of general competitive
> markets, arises out of declining marginal productivity, which
> of course implies over-full employment of all fixed factors of
> production within a setting of short-run equilibrium.

I don't know what over-full employment of fixed factors means, but in
long-run equilibrium rising marginal cost simply means the firm faces
diseconomies of scale at the margin, possibly due to the financial
considerations Steve referred to earlier.

> While Gil and I probably have similar opinions of the labor
> theory of value, we do differ here! I don't believe that
> introducing such neoclassical concepts into a marxian paradigm
> is progress.

This is not neoclassical! It's straight out of Ricardo, indeed
Ricardo's treatment of value theory. Marx does not explain why in
his definition of socially necessary labor time he departs from
Ricardo in using average rather than marginal. There's no good
reason to.

The fact remains that under Marx's assumption that commodities
exchange at their value (which practically speaking rules out the
cases of natural monopoly and "monopolistic competition" driven by
product differentiation, as Steve's own analysis suggests), non-reproducible
quality differences translate into differences in average cost, which means
high-cost firms will continuously be driven out of existence if SNLT
is defined in average rather than marginal terms.

Gil Skillman