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.
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.
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;
* 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"?
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.
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.
Cheers,
Steve