RE: [OPE] constant returns to scale

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 :) )

Comradely
michael
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-----Original Message-----
From: ope-bounces@lists.csuchico.edu [mailto:ope-bounces@lists.csuchico.edu] 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?

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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>ope@lists.csuchico.edu
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Received on Wed Oct 1 15:59:36 2008