RE: [OPE] Constant returns to scale

I was not referring to ‘subjective costs’. The problem of ‘public utilities’, with a high proportion of fixed to ‘prime’ (variable?) costs is of a piece with the problem of IRS. Such a cost profile generates increasing returns to scale and so high MES. Or is the reference here to peak-load pricing problems?

michael

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From: ope-bounces@lists.csuchico.edu [mailto:ope-bounces@lists.csuchico.edu] On Behalf Of Alejandro Agafonow
Sent: 02 October 2008 10:31
To: Outline on Political Economy mailing list
Subject: Re: [OPE] Constant returns to scale

My considerations on Anders E., Martin K. and Michael W.’s statements about IRS.

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 pricing mechanism is appropriate?”

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.”

According to the marginal pricing theory developed so far within the “mandatory price mechanism” variant of Market Socialism –that I personally subscribe–, we adopt the simplified rule of equalizing 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 “private marginal net product” with the “social 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 “subjective 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 “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 “public utilities” (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 debate 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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>ope mailing list
>ope@lists.csuchico.edu
>https://lists.csuchico.edu/mailman/listinfo/ope

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Received on Thu Oct 2 08:41:27 2008