Re: [OPE] Constant returns to scale - IRS

From: Anders Ekeland <>
Date: Thu Oct 02 2008 - 15:41:38 EDT

Hi Alejandro,

I have a deadline on Monday and must be even
briefer and more cryptic in my comments.

At 16:08 02.10.2008, you wrote:
>I agree with you that dynamic competition should
>be preserved in a socialist democratic society.
>But what you have to explain is why do you think
>that pricing based on MC is incompatible with dynamic competition.

I am not sure that I would call it competition,
rather rivalry or better "conscious social
experimentation". It is often difficult to know
which product is "best", this is done by having
around 10-15% of the firms going out of business
each year. A Darwinian selection process. One
might have a more conscious, planned, friendly
competition, where one could learn from each
other, but still develop ones pet ideas.

Secondly - MC pricing is - as pointed out already
in the debate - problematic if you have close
to zero marginal costs - hydro-electric power in
Norway - information goods (music) distributed on
the Internet. If marginal costs are falling in
the segment of the supply curve where the demand
is - and a rational capitalist invests in order
to be in that segment - then MC do not cover the fixed costs.

>We can develop a *social accounting system*
>based on MC€™s without giving up dynamic
>competition, or more properly, *catallactic
>competition*. This last one is preserved thanks
>to an institutional design that encourages rivalry.

Maybe we agree on this, see above.

>2) Anders E.: **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.**
>There is a very good reason. The devolution of
>the profits, which characterizes the Capitalist
>economy, to the citizens in the form of an
>*expansion of the scale of production* until
>prices equalize marginal costs. Even Pareto
>recognized that this is possible only in a
>Socialist economy and this has been the main
>*progressive goal* of liberal economists since Adam Smith:

To repeat: if unit costs are constantly falling
as is the case in modern, large scale production
I cannot see "profits" as a problem - rather an
indication of social demand (given a large degree
of income equality). Maybe we should have social
norms that said that worker managed companies
should not increase wages when profits where
high, but take out the profits as spare time, so
that the incentive for being innovative is spare
time, not more dollars to use for consumption.

>Anders, are you a Market Socialist? Cooperative type?

I do not know. I like Trotsky's article "The
Soviet economy in Danger" which might be seen as
"market socialist". I learned a lot from the
Nove-Mandel debate, not agreeing completely with
neither Nove nor Mandel. I have learned a lot
form my work with innovation - becoming much less
focused on "correct pricing" as for correct "incentives for change".

>4) Anders E.: **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.**
>This is interesting as an alternative pricing
>rule. Could you explain its origins and its
>advantages vis á vis the advantages I pointed out?

We would need two day conference to discuss this
properly, but the main point is:

a) As production of tangible goods becomes more
automated marginal costs are not that interesting
- society has to decide if the investments are
worth the average unit costs that will be
demanded at a certain price. It is this
investment decisions, the social cost involved if
it is wrong that concerns me. When investment has
been done, they must be paid back - and can MC
prices do that if cost curves are downward sloping

b) For labour intensive service products (Baumol
cost disease products) there is practically
constant returns to scale so AC = MC, and the
interesting question is to allocate society's
labour to the services most in demand, but
hospitals, schools, education are typically
"planned production" and political democratic
processes, supplemented by "revealed monetary
demand" for more peculiar services.

c) "Externalities" - or long term rationality
will be come more important in an sustainable
economy, heating technologies, transportation
vehicles etc. have prices dictated by the need to
change peoples behavior - and create sustainable
technologies and patterns of behavior. Just like
alcohol, sugar, tobacco under Nordic type
capitalism. The price of a beer in Oslo has
nothing with either AC or MC to do.

d) The non-mass produced goods will become more
important, leisure homes, untampered nature, use
and access to these goods will only partly be
dictated by AC or MC, if such terms has any
meaning when it comes to this type of good. The
non-democratic "willingness to pay" exercises of
main-stream economics are mostly ridiculous.

In short - not disregarding labour content, but
taking a much wider ecological view the setting
of prices will be more a conscious, social
act. We make the prices so that we get the
technologies that can make the prices like we
want them to be. We will care about some major
price relationships - and there not be much worry
if prices have their celestial
natural/equilibrium level. A lot of this
theoretical interest of prices is only due to the
ideological use of the Gen.Eq. models as part of the neo-liberal agenda.


>Sincerely yours,
>A. Agafonow
>----- Mensaje original ----
>De: Anders Ekeland <>
>Para: Outline on Political Economy mailing list <>
>Enviado: jueves, 2 de octubre, 2008 12:14:52
>Asunto: Re: [OPE] Constant returns to scale - IRS
>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

> 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
>At 11:30 02.10.2008, you wrote:
> >My considerations on Anders E., Martin K. and
> >Michael W.’s statements about
> >It;IRS.<?xml:namespace prefix = o ns =
> >"urn:schemas-microsoft-com:office:office" />
> >
> >
> >
> >1) Anders E.: “In real life IRS leads to firms
> >loosing in competitition - 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? Whhat
> >priciing mechanism is appropriate?�
> >
> >
> >2) Michael W.: “At any level l 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, hoowever achieved.�
> >
> >
> >
> >Accoording to the marginal pricing theory
> >developed so far within the “mandatory price
> >mechanism � variant of Market Socialism –€œthat
> >I personallyy subscribe–, we adopt the simplified
> >rule of equallizing prrices 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
>“private >marginal net productâ€� with the  œsocial
> >marginal net product� (very metetaphysical
> >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 ““subjective costsâ€� that I
> >suspect made Michaeel 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 “social accounting
> >system� upon this basis. We are
> dealing here with “accountable 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 “p“public
> >utilities� (goods with a very high
> prooportion of fixed costs to prime costs).
> >
> >
> >
> >
> >
> >3) Martin K.: “IRS is one of the most
> >relevant, and also the most ignored, questions
> >in economics. […] I agree completely with you
> >that thee deebate between Mises and Lange is
> >really not interesting when you take topics such
> >as scale into consideration.â€￿
> >
> >
> >
> >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
> <<>>
> >Para: Outline on Political Economy mailing
> list <<>>
> >Enviado: miĩrcoles, 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
> > >
> > >
> > >
> > >
> > >
> > >
> > >
> > >
> > >_______________________________________________
> > >ope mailing list
> > ><>
> > >
> >
> >_______________________________________________
> >ope mailing list
> ><><mailto:ope@list
> >
> >
> >_______________________________________________
> >ope mailing list
> ><>
> >
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