Re: [OPE] Constant returns to scale - IRS

1) Anders E.: **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.**   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.   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.     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:   *When commodities are in abundance, they can be sold to the inferior ranks of the people… Whatever therefore keeps goods above their natural price for a permanency, diminishes nations opulence… To widen the market may frequently be agreeable enough to the interest of the publick; but to narrow the competition must always be against it, and can only serve to enable the dealers, by rising their profits above what they would normally be, to levy, for their own benefit, an absurd tax upon the rest of their fellow.citicens.* (Adam Smith, Wealth of Nations)   Market Socialists have agreed that we should preserve this in a socialist democratic society, and this is possible thanks to a MC pricing.     3) Anders E.: *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.*   Anders, are you a Market Socialist? Cooperative type?     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?   Sincerely yours,A. Agafonow ----- Mensaje original ---- De: Anders Ekeland <anders.ekeland@online.no> Para: Outline on Political Economy mailing list <ope@lists.csuchico.edu> 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 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.: “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 >priciing mechanism is appropriate?â€� > > > >2) Michael W.: “At 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.â€� > > > >According to the marginal pricing theory >developed so far within the “mandatory price >mechanismâ€� 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 “private >marginal net productâ€� with the “social >marginal net productâ€� (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 “subjective costsâ€� 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 “social accounting >systemâ€� upon this basis. We are dealing here with “accountable costsâ€�. > > > >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 “public >utilitiesâ€� (goods with a very high proportion 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 the 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 <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 > > > > > > > > > > > > > > > > > >_______________________________________________ > >ope mailing list > ><mailto:ope@lists.csuchico.edu>ope@lists.csuchico.edu > >https://lists.csuchico.edu/mailman/listinfo/ope > >_______________________________________________ >ope mailing list ><mailto:ope@lists.csuchico.edu>ope@lists.csuchico.edu >https://lists.csuchico.edu/mailman/listinfo/ope > >_______________________________________________ >ope mailing list >ope@lists.csuchico.edu >https://lists.csuchico.edu/mailman/listinfo/ope _______________________________________________ ope mailing list ope@lists.csuchico.edu https://lists.csuchico.edu/mailman/listinfo/ope

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Received on Thu Oct 2 10:18:59 2008