[FONT=Verdana]
In a chem lab you can isolate your variables. Because we added calcium it bubbled. Or whatever. IANAC/IANAP.
[/FONT][FONT=Verdana]Yes, we can certainly tell from your ‘understanding’ of how science operates that you are indeed neither a chemist nor a physicists. Physics, like economics, deals with numerable variables, often employing ceteris paribus, just like economics. The so-called universal 'laws' are only abstracts, not something which scientists have ‘uncovered.’ Sure, they call them ‘laws of nature’, but at best they are general descriptions, sometimes even contradictory to one another. Science is certainly not as childishly simple as you have put forth – you have a primary school understanding of it.
But in the social sciences we are not dealing with numbers and figures.
And you'd be naive or stupid to think that physics deals with just numbers and not relationships - just like economics.
First of all take the Great Depression. One person says it ended after the US entered WWII. One person says that the WWII statistics are flawed and the Depression didn't truly end until the post-war period. Whose right? One says once we went to war the depression lessoned, hence we are correct and the other says once we ended the war and cut regulation the depression really ended. Once more which party is correct? Impossible to know with an empiricist epistemology. I wish I had been more concise but I hope you can bear it, old sport.
[/FONT] [FONT=Verdana] I haven’t studied the Great Depression in detail, so I cannot, of course, give you an answer to that question - but your point was one on epistemology. However, first one would need to define depression – perhaps a level of unemployment, a fall in the level of consumer spending, a certain fall in the GDP, reduced trade or whatever. That alone shows how basing a sociological criteria on a priori reasoning is bound to fail – tell me, what is considered a depression a priori? You can’t do it – what constitutes a depression is a normative statement, one which requires a posteriori reasoning of what constitutes a typical functioning economy (which, incidentally, requires the use of statistics and empiricism to form such a conclusion). Economics, truly, is a complex thing because it involves so many factors and influences. Your problem is that you think there is an either/or answer – it is probably much more complex than that, with numerable variables influencing when the US exited depression, not just something which can be reduced to one, as you most probably wish... Please try again.
Part of your confusion is that you are viewing the definition of science where science=scientific method vs. science=systematic knowledge. In this sense of the word I don't see why Austrianism is unscientific, just anti-empiricist. I also don't see why everything should inherently be understood by empirical methods rather than by axiomatic-deduction.
[/FONT] [FONT=Verdana]At my most generous, I might call the Austrian school’s methodology metaphysical:
[/FONT] [FONT=Verdana]AJ Ayer:
[/FONT][FONT=Verdana]One way of attacking a metaphysician who claimed to have knowledge of a reality which transcended the phenomenal world would be to enquire from what premises his propositions were deduced. Must he not begin, as other men do, with the evidence of his senses? And if so, what valid process of reasoning can possibly lead him to the conception of a transcendent reality?[/FONT]
[FONT=Verdana]Surely from empirical premises nothing whatsoever concerning the properties, or even the existence, of anything super-empirical can legitimately be inferred. But this objection would be met by a denial on the part of the metaphysician that his assertions were ultimately based on the evidence of his senses. He would say that he was endowed with a faculty of intellectual intuition which enabled him to know facts that could not be known through sense-experience.[/FONT]
[FONT=Verdana]For it will be shown there that a priori propositions, which have always been attractive to philosophers on account of their certainty, owe this certainty to the fact that they are tautologies. We may accordingly define a metaphysical sentence as a sentence which purports to express a genuine proposition, but does, in fact, express neither a tautology nor an empirical hypothesis. And as tautologies and empirical hypotheses form the entire class of significant propositions, we are justified in concluding that all metaphysical assertions are nonsensical.[/FONT]
[FONT=Verdana]Ultimately, however, I’m not really concerned whether you call it a science or not, or whether you call it a branch of economics or not. That really doesn’t concern me, only the claims it puts forth and whether they are valid or not. Incidentally, no one claimed that it should only be understood empirically. But if you’re totally unwilling to even look at evidence, then no amount of experience can discredit your ideas. Nor can no amount of evidence confirm or support them. So, at best it remains a pseudoscience or metaphysics. Or both. In either event your ‘economics’ remains masturbatory philosophy.
Since I already defended a priori economics, I will simply add that empiricism fails in all other social sciences too.
Nice attempt to slip that one under the radar.
I'll ignore some loaded language and cut to the chase. You're admitting that people value originals more and you're admitting that this raises the price. Now, whether you find how other people value things correct or not is beyond me. The point is that because people value a painting by a famous artist (b/c it's a status symbol or whatever) they will pay more for it. Hence, the value of the paintings in question is subjective as is all value. Thanks for the opening, old sport. At least concede STV after that. QED.
[/FONT] [FONT=Verdana]Its marginalism that attempts to apply an objective measure to something so inherently subjective. To quote from An Introduction to Austrian Economics: ‘The total demand for a particular good then becomes the summation of each prospective consumer’s individuals demand. And though each individual demand may be unique, each curve depecting an individual’s demand will be downward-sloping to the right. Thus the curve depicting total demand for a particular good will have the same kind of slope, i.e, downward-sloping to the right.’
[/FONT] [FONT=Verdana]So, even Austrian fundamentalists think that individual’s demand curves can be added together. There are numerous logical errors involved with this – to be able to add up demand curves, utility must be quantified – there must be some objective standard to measure. But how can we ‘add up’ something so subjective? Yet demand curves represent just that – one individual’s pleasure. What gives great pleasure to one, may give nothing or little to another, but trying to add them up involves trying to measure that utility. This cannot be done – mathematically or logically. I’ve commented on this problem before:
[/FONT] [FONT=Verdana]Individual rationality requires that if A is preferred to B when both are affordable, then A must necessarily provide more utility than bundle B. However, no such thing applies to a social indifference map. Therefore, they proved that the output level chosen by a market economy does not maximise social welfare. A market demand curve doesn't have to behave identically to a single individual's demand curve; it is plausible to demonstrate that an individual demand curve slopes downward, the same cannot be said for a market demand curve where in some places it may be flat, or even slope upwards. In Varian's Microeconomic Analysis (a well known mathematical advanced microeconomics textbook), Varian states: 'Ultimately...the aggregate demand function will in general possess no interesting properties...The neoclassical theory of the consumer places no restrictions on aggregate behaviour in general.'
One individual's indifference curves are the contours on a map of a utility hill that the individual climbs by consuming. Since, however, utility is subjective, the actual height of the hill cannot be specified because utility cannot be quantified - there being no objective measure. Economic theory ignores the question of where consumers tastes come from and assumes that income (budget line) and tastes (indifference curves) are independent, hence each individual's utility hill can be treated as constant. However, the same cannot be said for the social utility hill. For example, if income is redistributed between individuals then there is no way to say whether this results in a greater or lesser degree of utility, since what gives great utility to one may give very utility to another. Therefore, there are numerous social utility hills, one for each distribution of income.
[/FONT] [FONT=Verdana] Firstly, the distribution of income between individuals changes the weighting of each individual in the aggregate called society. Secondly, any one individual's purchases will alter as her income grows. This wouldn't be an issue if income was fixed, but economic theory argues that the price system determines the distribution of income - but to be able to construct a market demand curve you have to alter prices. There will, therefore be a different social indifference map for every different set of prices. The social budget line and the social indifference surface are therefore interdependent, since every set of prices will generate a different social utility hill. The problem is that any change in prices will change incomes and while this will not shift an individual's preferences (according to economic theory), it will shift society's preferences as they depend on distribution of income.
[/FONT] [FONT=Verdana]Economists, instead of proving that the interests of the community can be summed up as the interests of the individual members who compose it, proved that only under highly restrictive conditions could social welfare be treated as the sum of its individual members. These were:
1.[/FONT] [FONT=Verdana] The distribution of income was fixed and ‘Engels’ curves must have a constant slope; or
2. Engels curves must have a constant slope, and they all have the same slope.
[/FONT] [FONT=Verdana]The first restriction was unacceptable since it contradicts the economic theory of income distribution which argues that relative incomes are determined by the price system. Hence, the adoption of the second restriction. The meaning of the first part of that restriction is that the ‘Engel curves’ must be straight lines, so that commodities are neither luxuries nor necessities. However, as I stated earlier there would unlikely be any commodities which fall into this category. Yet, economists maintain that increasing the income of a single consumer by, say, a factor of 10, increaser her consumption of all commodities by the same factor. This is even more extreme than the first restriction; every consumer has to spend the same proportion of each new dollar of income the same way, which means that all consumers must have the same tastes. Which means that society must either be comprised of one individual or a multitude of clones. And this is from the theory which proudly proclaims the uniqueness and authority of the individual!
[/FONT] [FONT=Verdana]To quote my mircroeconomics book, Microeconomics – a Modern Approach, Andrew Schotter, 3rd ed., 2001, page 68:
[/FONT][FONT=Verdana] ‘When a consumer has homothetic preferences, all goods are superior and purchased in the same proportion no matter what the consumer’s income. In a world where all consumers have homothetic preferences, we might think of rich people as simply expanded versions of poor people. The tastes of such rich people do not change as their incomes change. They allocate their incomes exactly the way they did when they were poor. They just buy proportionally more of each good as their income grows.’[/FONT]
[FONT=Verdana]
[/FONT] [FONT=Verdana]In effect, Schotter is saying that if Bill Gates spent 10% of his income on pizza when he just another university computer science nerd, then he now spends 10% of his total income on pizza. In other words, he spends hundreds of millions on buying pizza for his own consumption.
Alternatively, the poor man who happens to get rich (we all know how often that happens!) did not change his spending habits at all – he still lives in a cardboard box (just an extremely large one). Likewise, the rich man spends the same amount he did on healthcare when he was poor – none. Going from the opposite direction, how many pieces of art work would a poor person have if they spent the same proportion that a wealthy person spends on art? A thousandth of a Mona Lisa?
[/FONT] [FONT=Verdana]Economists are aware of this problem:
[/FONT][FONT=Verdana]First, when preferences are homothetic and the distribution of income (value of wealth) is independent of prices, then the market demand function (market excess demand function) has all the properties of a consumer demand function...Secondly, with general (in particular non-homothetic) preferences, even if the distribution of income is fixed, market demand functions need not satisfy in any way the classical restrictions which characterize consumer demand functions...The importance of the above result is clear: strong restrictions are needed in order to justify the hypothesis that a market demand function has the characteristic of a consumer demand function. Only in special cases can an economy be expected to act as an 'idealized consumer.' The utility hypothesis tells us nothing about market demand unless it is augumented by additional requirements. [/FONT]
[FONT=Verdana]
[/FONT] [FONT=Verdana]Shafer, W. & Sonnenschein, H., (1982). 'Market demand and excess demand functions', in K.J Arrow and M.D Intiligator (eds), Handbook of Mathematical Economics (Vol. 2), North-Holland, Amsterdam.
These strong restrictions are that consumers are all identical, consuming identical commodities.
Economists often ignore the absurd things they say. For example:The necessary and sufficient condition quoted above is intuitively reasonable. It says, in effect, that an extra unit of purchasing power should be spent in the same way no matter to whom it is given (!) Gorman, W.M (1953) 'Community preference fields', Econometricia 21: 63-80.
[/FONT] [FONT=Verdana]Two criteria will be considered which lead to the possibility of aggregation: (1) identical preferences (hence identical demand functions), and (2) proportional incomes... Chipman, J.S (1974) 'Homothetic preferences and aggregation', Journal of Economic Theory, 8: 26-38. Generally these conditions are known as the Sonnenshein-Mantel-Debreu conditions or the SMD conditions.
[/FONT] [FONT=Verdana]The irony is, of course, that economics has proved precisely what it what it opposed. It proved that society is more than the sum of its parts. Even more ironic is that the criticism of trying to aggregate utility from individuals in an objective manner was constructed by its supporters! Economists originally used this aspect of their theory to argue against any social reform which aimed to redistribute wealth from the rich to the poor, since we couldn't possibly know (according to their theory) whether this would result in a greater social welfare, since taking a banana from one rich person whom derives a great benefit from it and giving it to a poor person who derives little benefit from it would be contrary to social welfare! The defence of inequality backfires, making it impossible for them to construct a demand curve. If the market demand curve depends upon the distribution of income, if a change of prices will alter this distribution of income, and if this does not result in an equilibrium between supply and demand, then economists cannot oppose a distribution which, for example, favours the poor over the rich.
***
[/FONT] [FONT=Verdana]Likewise, the supply model, based on the ‘law of diminishing returns’ has been proven to be both logically unsound and without absolutely any basis in reality (firms, in fact, face constant or falling costs – not rising costs based on diminishing marginal productivity). See here.
[/FONT] [FONT=Verdana]To quote:
[/FONT] [FONT=Verdana]Sraffa argued that the law of diminishing marginal returns will not in generally apply to an industrial economy. Sraffa argued that the common position would instead be constant marginal returns, and therefore horizontal marginal costs. This gets to the very heart of economic theory, since diminishing marginal returns is used to determine everything in the economic theory of production. The output function determines marginal product, which in turn determines marginal cost. With diminishing marginal productivity, the marginal cost of production eventually rises to equal marginal revenue. Since firms seek to maximise profit and since this equality of rising marginal costs to marginal revenue gives you maximum profit, this determines the level of output.
However, if constant returns are the norm, then the output function instead is a straight line through the origin just like the total revenue line, though with a different slope. If the slope of the revenue is greater than the slope of the cost curve, then after a firm had met its fixed costs it would make a profit from every unit sold. The more units sold, the greater the profit would be. At least in terms of the economic model of production, there would be no limit to the amount a competitive firm would wish to produce, so that economic theory could not explain how firms in a competitive industry decided how much to produce. In fact, according to economic theory, each firm would want to produce an infinite amount! The economists will reply that this is patently absurd, that firms don’t produce an infinite amount of goods therefore Sraffa must be wrong. Sraffa put the opposite case: sure, the economic model of production works in theory if you accept its assumptions. But do those assumptions that economists rely on actually apply in practice? If they can’t, then it will be irrelevant to practice.
[/FONT][FONT=Verdana]
[/FONT] [FONT=Verdana]If we take the broadest possible definition of an industry, say agriculture, then it is valid to treat factors it uses heavily (e.g. land) as fixed. Since additional land can only be obtained by converting land from other uses (e.g manufacturing) it is difficult to increase that factor in the short run. The ‘agricultural industry’ will therefore suffer from diminishing returns. However, such a broadly defined industry is so big that changes in its output must affect other industries. An attempt to increase agricultural output will affect the price of the chief variable input – labour – as it takes workers away from other industries, and it will also affect the price of the fixed input.
This, however, undermines crucial parts of the model: the assumption that demand for and supply of a commodity are independent, and the proposition that one market can be studied in isolation from all others. If increasing the supply of agriculture changes the relative prices of land and labour, then it will also change the distribution of income. Changing the distribution of income will change the demand curve. There will, therefore, be a different demand curve for every different position along the supply curve for agriculture. This makes it impossible to draw independent demand and supply curves that intersect in one place.
[/FONT][FONT=Verdana]‘…if in the production of a particular commodity a considerable part of a factor is employed, the total amount of which is fixed or can be increased only at a more than proportional cost, a small increase in the production of the commodity will necessitate a more intense utilisation of that factor, and this will affect in the same manner the cost of the commodity in question and the cost of the other commodities into the production of which that factor enters; and since commodities into the production of which a common special factor enters are frequently, to a certain extent, substitutes for one another (for example, various kinds of agricultural produce), the modification in their price will not be without appreciable effects upon demand in the industry concerned.[/FONT] [FONT=Verdana]’ (Sraffa 1926).[/FONT]
[FONT=Verdana]
[/FONT] [FONT=Verdana]This means that the demand curve for this industry will shift every movement along its supply curve. It is therefore illegitimate to draw independent demand and supply curves since factors that alter supply will also alter demand! Supply and demand will therefore intersect in multiple locations as shown in the following figure. It is therefore, impossible to say which price or quantity will prevail.
[/FONT] [FONT=Verdana]What if we use a more realistic, narrow definition of an industry, for example ‘wheat’ rather than agriculture?
It becomes worse for the marginalists, because, in general, diminishing returns are unlikely to exist. This is because the assumption that supply and demand are independent is now reasonable, but the assumption that some factor of production is fixed isn’t! Economists assume that production occurs in a period of time during which it is impossible to vary one factor of production. Sraffa argues that in the real world firms and industries can vary one factor of production fairly easily. This is because additional inputs can be taken from other industries, or garnered from stocks of under-utilised resources. If there is an increased demand for wheat, then rather than farming a given quantity of land more intensely, farmers will convert some land from another crop to wheat. Or they will convert some of their own land which is currently lying fallow to wheat production. Or farmers who currently grow a different crop will convert to wheat.
[/FONT][FONT=Verdana] ‘If we next take an industry which employs only a small part of the " constant factor " (which appears more appropriate for the study of the particular equilibrium of a single industry), we find that a (small) increase in its production is generally met much more by drawing " marginal doses ' of the constant factor from other industries than by intensifying its own utilisation of it; thus the increase in cost will be practically negligible, and anyhow it will still operate in a like degree upon all the industries of the group.’[/FONT] [FONT=Verdana] (Sraffa, 1926)[/FONT]
[FONT=Verdana]
Hence, the ratio of one factor of production to any other will remain relatively constant, while the total amount of resources devoted to it will rise. [/FONT] [FONT=Verdana]This results in a straight line output function. Since the shape of the total, average and marginal cost curves are entirely a product of the shape of the output curve, a straight line output curve results in constant marginal costs and falling average costs. Hence, costs for a firm are likely to be constant (or even falling) within the normal range of output.
[/FONT] [FONT=Verdana]Sraffa argues that a firm is likely to produce at maximum productivity right up until the point at which diminishing marginal productivity sets in. Any other patter shows that the firm is behaving irrationally. To use an analogy, suppose you have a franchise to supply ice-creams to a football stadium, and that the franchise lets you determine where patrons are seated. If you have a small crowd one night – say one quarter of capacity – would you spread the patrons around over the whole stadium, so that each patron was surrounded by several empty seats? Of course not. This arrangement would force your staff to walk further to make a sale. Instead, you’d leave much of the ground empty, thus minimising the work your staff had to do. There’s no sense in using ever every last inch of your fixed resource (stadium) if demand is less than capacity.
The same logic applies to a farm of a factory. If a variable input displayed increasing marginal returns at some scale of output, then the sensible thing for the farmer or factory owner to do is leave some of the fixed resource idle, and work the variable input to maximum efficiency on part only of the fixed resource.
Consider a wheat farm of 100 hectres where one worker per hectare produces an output of 1 bushel per hectare, 2 workers per hectare produces 3 bushels, 3 workers per hectare produces 6 bushels, 4 workers per hectare produces 10 bushels, and 5 workers per hectare produces 12 bushels. According to economists, if a farmer had 100 workers he would spread them out 1 per hectare to produce a total of 100 bushels of wheat. But according to Sraffa, the farmed would instead leave 75 hectares of the farm idle, and work 25 hectares with the 100 workers to produce an output of 250 bushels. The farmer that behaves as Sraffa predicts comes out 150 bushels ahead of any farmer who behaves as economics predicts.
Economic theory implies that a farm with 200 workers would spread them over the farm’s 100 hectares to produce an output of 300 bushels. Sraffa says the sensible farmer would instead leave 50 hectares fallow, work the other 50 at 4 workers per hectare and produce an output of 500 bushels. The same pattern continues up until the point at which 400 workers are employed, when finally diminishing marginal productivity sets in. A farm will produce more output by using less than all of the fixed input up until this point. Firms will therefore have straight line marginal cost curves below the level of maximum productivity. If marginal costs are constant, then average cost must be greater than marginal cost, so that any firm which sets price equal to marginal cost is going to make a loss. The economic theory of price-setting can therefore only apply when demand is such that all firms are producing well beyond the point of maximum efficiency. It therefore depends on the economy being in full employment.
[/FONT] [FONT=Verdana]Sraffa’s critiques mean that economic theory of production can apply in only the tiny minority of cases that fall between the two circumstances he outlines, and only when those industries are operating beyond their optimum efficiency. Only then such industries will not violate the assumed independence of supply and demand, but they will still have a relatively fixed factor of production and will also experience rising marginal cost. Only a tiny minority of industries are likely to fill these limitations: those that use the vast majority of some input to production where the input itself is not important to the rest of the economy. The majority of industries are instead likely to be better represented by the classical theory, which saw prices as being determines exclusively by costs, while demand set the quantity sold.
[/FONT][FONT=Verdana]‘Reduced within such restricted limits, the supply schedule with variable costs cannot claim to be a general conception applicable to normal industries; it can prove a useful instrument only in regard to such exceptional industries as can reasonably satisfy its conditions. In normal cases the cost of production of commodities produced competitively-as we are not entitled to take into consideration the causes which may make it rise or fall-must be regarded as constant in respect of small variations in the quantity produced.' And so, as a simple way of approaching the problem of competitive value, the old and now obsolete theory which makes it dependent on the cost of production alone appears to hold its ground as the best available.’[/FONT] [FONT=Verdana] (Sraffa, 1926).[/FONT]
[FONT=Verdana]
[/FONT] [FONT=Verdana]If rising costs and constant revenue do not determine the output from a single firm or a single industry, what does? Sraffa’s argument is simple: the output of a single firm is constrained by all those factors that are familiar to ordinary businessmen, but that are abstracted away by economic theory. In particular, rising marketing and financing costs, both of which are a product of the difficulty of encouraging consumers to buy the firm’s output rather than a rival’s. These are a product of the fact that, in reality, products are not homogeneous and consumers do have preferences for one firm’s product over another’s. Sraffa mocked the economic belief that the limit to a firm’s output is set by rising costs, and emphasised the importance of finance and marketing in constraining a firm’s size:
[/FONT][FONT=Verdana]‘Business men, who regard themselves as being subject to competitive conditions, would consider absurd the assertion that the limit to their production is to be found in the internal conditions of production in their firm, which do not permit of the production of a greater quantity without an increase in cost. The chief obstacle against which they have to contend when they want gradually to increase their production does not lie in the cost of production-which, indeed, generally favours them in that direction-but in the difficulty of selling the larger quantity of goods without reducing the price, or without having to face increased marketing expenses. This necessity of reducing prices in order to sell a larger quantity of one's own product is only an aspect of the usual descending demand curve, with the difference that instead of concerning the whole of a commodity, whatever its origin, it relates only to the goods produced by a particular firm; and the marketing expenses necessary for the extension of its market are merely costly efforts (in the form of advertising, commercial travellers, facilities to customers, etc.) to increase the willingness of the market to buy from it-that is, to raise that demand curve artificially.’[/FONT] [FONT=Verdana] (Sraffa, 1926)[/FONT]
[FONT=Verdana]
[/FONT] [FONT=Verdana]Economists assumes this real world answer away by assuming that products are homogeneous, consumers are indifferent between the outputs of different firms and decide their purchases solely on the basis of price, that there are no transportation costs etc. In such a world no-one needs marketing because consumers already know everything, and only price distinguishes one firm’s output from another. On the contrary, in most industries products are heterogeneous, consumers do not know everything and they consider other aspects of a product apart from price. Further, even where products are homogeneous, transportation costs can act to give a single firm an effective local monopoly. Hence, even the concept of a competitive market, in which all firms are ‘price-takers’ is suspect. Instead, most firms will to varying degrees act like monopolists, who according to economic theory face a downward-sloping demand curve.
[/FONT] [FONT=Verdana]A firm has a product which fits within a broad category, for example passenger cars which is qualitatively distinguished from its rivals in a fashion that matters to a subset of buyers. The firm attempts to manipulate the demand for its product, but faces prohibitive costs in any attempt to completely eliminate their competitors and thus take over the entire industry. Not only must the firm persuade a different niche market to buy its product – to convince Porsche buyers to buy Volvos for instance, it must also convince investors and banks that the expense of building a factory big enough to produce for both market niches is worth the risk. Therefore, with the difficulty of marketing beyond your product’s niche goes the problem of raising finance:
[/FONT][FONT=Verdana]Thus, the limited credit of many firms, which does not permit any one of them to obtain more than a limited amount of capital at the current rate of interest, is often a direct consequence of its being known that a given firm is unable to increase its sales outside its own particular market without incurring heavy marketing expenses. If it were known that a firm which -is in a position to pr6duce an increased quantity of goods at a lower cost is also in a position to sell them without difficulty at a constant price, such a firm could encounter no obstacle in a free capital market. On the other hand, if a banker, or the owner of land on which a firm proposes to extend its own plant, or any other supplier of the firm's means of production, stands in a privileged position in respect to it, he can certainly exact from it a price higher than the current price-for his supplies, but this possibility will still be a direct consequence of the fact that such a firm, being in its turn in a privileged position in regard to its particular market, also sells its products at prices above cost. What happens in such cases is that a portion of its mono-poly profits are taken away from the firm, not that its cost of production is increased.[/FONT] [FONT=Verdana] (Sraffa, 1926).[/FONT]
[FONT=Verdana]
[/FONT] [FONT=Verdana]Neoclassical theory cannot be saved by simply adding marketing costs to the cost of production, and thus generating a rising marginal cost curve.
[/FONT] [FONT=Verdana]
Firstly, marketing is not a cost of production, but a cost of distribution. Secondly it is inconsistent with the underlying economic premise that marginal cost rises because of diminishing marginal productivity. Thirdly, its implausible in the economic context of the theory of the firm. There is no point saving the concept of a rising marginal cost curve by introducing marketing costs since this requires acknowledging that one firm’s product differs from another. If products differ from one firm to another, then products are no longer homogeneous which is an essential assumption of the theory of perfect competition. It is more legitimate to threat marketing cost as a cost of distribution, whose object is to alter the demand faced by an individual firm.
With this critique, the most popular image of economic theory, a falling demand curve and rising supply curve intersecting to jointly determine the equilibrium price is an illusion. Rather than firms producing at the point where marginal cost equals marginal revenue, the marginal revenue of the final unit sold will normally be substantially greater than the marginal cost of producing it, and output will be constrained not by marginal cost but by the cost and difficulty of expanding sales at the expense of sales by competitors.
[/FONT] [FONT=Verdana]These may look like minor points. The supply curve should be horizontal rather than upward sloping; the output of an individual firm isn’t set by the intersection of marginal revenue and marginal cost; and marketing and finance issues, rather than cost of production issues, determine the maximum scale of a firm’s output. What’s the deal?
If marginal returns are constant rather than falling, then the neoclassical explanation of just about everything collapses. For example, the theory of employment and wage determination. The theory asserts that the real wage is equivalent to the marginal product of labour. The argument goes that each employer takes the wage level as given, since with competitive markets no employer can affect the price of his inputs. An employer will employ an additional worker if the amount the worker adds to the output – the worker’s marginal product – exceeds the real wage. The employer stops employing workers once the marginal product of the last one employed has fallen to the same level as the real wage.
Since employment in turn determines output, the real wage determines the level of output. If society desires a higher level of employment and output, then the only way to get this is to reduce the real wage (and the logical limit of this argument is that output will reach its maximum when the real wage equals zero!). The real wage, in turn, is determined by the willingness of workers to work – to forego leisure for income, so that the level of employment is determined by workers alone. This is why Galbraith said that economics can be summed up in the two propositions that the poor don’t work hard enough because they’re paid too much, and the rich don’t work hard enough because they’re not paid enough .
However, if the output to employment relationship is relatively constant than the neoclassical explanation for employment and output determination collapses. With a flat production function the marginal product of labour will be constant and it will never intersect the real wage. The output of the firm then can’t be explained by the cost of employing labour.
[/FONT] [FONT=Verdana]Empirical studies have confirmed this as well:
[/FONT][FONT=Verdana] "so as to cause the variable factor to be used most efficiently when the plant is operated close to capacity. Under such conditions an average variable cost curve declines steadily until the point of capacity output is reached. A marginal cost curve derived from such an average cost curve lies below the average cost curve at all scales of operation short of capacity, a fact that makes it physically impossible for an enterprise to determine a scale of operations by equating marginal cost and marginal revenues.” (Eiteman, 1947)[/FONT]
[FONT=Verdana]“Over 89 per cent of respondents indicated that ‘marginal’ costs either declined or stayed constant with changes in output (sometimes involving discrete jumps). Finally, only four [of 200] enterprises had both elastic demand curves and increasing marginal costs.”[/FONT] [FONT=Verdana] (Downward & Lee 2001, reviewing Blinder)[/FONT]
[FONT=Verdana]
[/FONT] [FONT=Verdana]The neoclassical concept of cost curves (shared with the Austrian school) fits just 5% of companies & products, the other 95% experience constant or falling marginal cost. The ‘law’ of diminishing returns has absolutely no relevance or basis in the real world, it is a total statistical anomaly. As Keynes once put it, it is rare for anyone but an economist to suppose that price is predominantly governed by marginal cost.
So, no, the STV is a laughing stock of a theory, with so many holes it deserved to be thrown away years ago. But since it serves as an ideological prop for capitalism, its likely to be around as long as capitalism is.
Austrian Economics is value-free, or at least it strives to be.
[/FONT] [FONT=Verdana]I very much doubt this – all your economics are in favor of capitalism (actually, this is questionable - you posit a hypothetical version of capitalism, which has never existed except in the minds of various economists - ironic, indeed, that communists are called utopian) and are fundamentally opposed to the working class. Just like neoclassical economics. You might claim, just like neoclassical economics, that you are engaged in a ‘positive’ discipline but that is just a smokescreen for your pro-business, anti-worker ideology. At least I have the honesty to maintain that I am completely in favor of workers.
Of course slipping bias in is what happens in all versions of economics.
[/FONT] [FONT=Verdana]No question there – it’s a part of all sciences and will continue to be so.[/FONT]
