Re: [OPE] Constant returns to scale - IRS

From: Anders Ekeland <anders.ekeland@online.no>
Date: Thu Oct 02 2008 - 06:14:52 EDT

Hi all,

I am a bit too busy to go deep into this, but very briefly:

1) Firms innovate/invest in order to create IRS -
this is one of the most important drivers of
growth, one of the most important aspects of
real-life, dynamic competition (the only type of
competition that exists, what most economist call
competition is some static models, where prices
and technology are given - this is not
competition at all.) No real theory of optimal
pricing can be derived, deduced from Pigou like static models.

2) What's wrong with average costs + a margin for
future R&D expenses, seasonal variations in
demand and whatever. In the long run the "burden
of the fixed costs", the investment costs, the
loans have to be paid too. I cannot see that *in
real life* MC = price has any canonical status as
a pricing principle. It is not the principle of
real life capitalist firms, and I see no reason
to give it any special status under a democratic socialist economy.

3) Faced with the big questions of our time, like
climate change, poverty in the "South", obscene
income differentials in the developed countries,
the most important and fundamental prices would
be "political", high prices on fossil fuels,
radical change in wages in the south (up) and
capitalists/elites in the rich world (very much
down). One would use prices to solve (in a
continuos democratic process) and global dynamic
optimisation problem = creating a sustainable,
affluent and just economy. Prices should of
course be rational , i.e. signal the labour and
ecological costs involved, but they would have to
be dynamic, to get the kind of technology we need/want.

4) This means that the separation of economics
and politics is artificial (as the current
bailout package demonstrates 110%), that
production and distribution policies cannot be
separated, that justice is an important factor in economics.

5) When environmental and social "externalities"
are taken care of, then AC prices + a "R&D"
margin will work OK. Changes in demand will then
determine the volume of each and every product -
most of them I hope are produced having IRS.
There certainly will be a (social) science of
predicting changes in demand for particular
products and product groups - a lot has already
been done here already using information from
"bonus cards", techniques of "user-driven innovation" etc.

If one used all the available digital traces that
we leave behind every day a lot can be done by
socialist experts. The "big" issues on social
infrastructure and technologies has to be decided
in various forms of democratic processes. When
the "technologies" that determines supply and
demand are fixed, then the price is given. It is
how one "fix" these "technologies" that is the real interesting question.

in a hurry
Anders

At 11:30 02.10.2008, you wrote:

>My considerations on Anders E., Martin K. and
>Michael W.‚€™s statements about
>IRS.<?xml:namespace prefix = o ns =
>"urn:schemas-microsoft-com:office:office" />
>
>
>
>1) Anders E.: ‚€œIn 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
>priciing mechanism is appropriate?‚€
>
>
>
>2) Michael W.: ‚€œAt any level of output < MES,
>MC pricing necessarily implies losses (since the
>long-run average cost curve is down-sloping
>until MES). […¶] So, effective regulation would
>require subsidy, however achieved.‚€
>
>
>
>According to the marginal pricing theory
>developed so far within the ‚€œmandatory price
>mechanism‚€ variant of Market Socialism –“that
>I personally subscribe–, we adopt the simplified
>rule of equallizing prices to marginal costs.
>
>
>
>Then arises the problem pointed out by Michael
>W. that I assumed Anders E. intended to suggest
>in his question, i.e., goods experiencing
>decreasing costs to scale (increasing returns)
>will show loses if we adopt the above pricing
>rule. To avoid this they should be priced
>according to average costs. But to operate
>pricing mechanism with two different rules could be a very demanding.
>
>
>
>The best contribution I have read to avoid this
>problem belongs to Henry D. Dickinson. Contrary
>to Arthur Pigou who chose a subsidy –mentioned
>by Michael W. – to equalize the he ‚€œprivate
>marginal net product‚€ with the ‚€œsocial
>marginal net product‚€ (very metaphysical
>concepts), Dickinson proposed a Marginal Cost
>Equalization Fund to subsidize the production of
>decreasing costs to scale goods. After all,
>Hayek thought that these goods were less
>numerous than those experiencing increasing
>costs to scale (decreasing returns).
>
>
>
>The key in this question is that we are not
>dealing with ‚€œsubjective costs‚€ that I
>suspect made Michael W. think that they are not
>measurable; of course the are not or they are
>very difficult to measure which makes
>impractical to manage a ‚€œsocial accounting
>system‚€ upon this basis. We are dealing here with ‚€œaccountable costs‚€.
>
>
>
>So, to handle increasing returns to scale is not
>a big deal and they have not been ignored by
>Market Socialists. You should be far more worry
>about the complexity of pricing ‚€œpublic
>utilities‚€ (goods with a very high proportion of fixed costs to prime costs).
>
>
>
>
>
>3) Martin K.: ‚€œIRS is one of the most
>relevant, and also the most ignored, questions
>in economics. […] I agree completely with you
>that the deebate between Mises and Lange is
>really not interesting when you take topics such
>as scale into consideration.‚€
>
>
>
>I can not disagree more with this statement. Of
>course, if one focuses in a fraction of the
>literature that concerns the economic
>calculation controversy, represented only by the
>works of Lange and Mises, we could have this impression.
>
>
>
>Oskar Lange was not the smartest opponent to
>Austro-liberals, contrary to what suggests his underserved fame.
>
>
>
>Yours sincerely,
>A. Agafonow
>
>
>----- Mensaje original ----
>De: Anders Ekeland <anders.ekeland@online.no>
>Para: Outline on Political Economy mailing list <ope@lists.csuchico.edu>
>Enviado: miércoles, 1 de octubre, 2008 20:56:38
>Asunto: 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?
>
>Regards
>Anders
>
>
>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
> >
> >
> >
> >
> >
> >
> >
> >
> >_______________________________________________
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>
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Received on Thu Oct 2 06:18:13 2008

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