Re: Aug 18th WSJ on the blackout

[Eugene Coyle]

The arguments are more general.  Decreasing average costs are most common.  I've already mentioned Steve Keen's website.  There are very few industries where competition works in any way close to lowering prices as is so widely believed.  The traditional course in economics never considers the cost structure of an industy -- to economists they are all the same, and analyzed in a static way.  You could plausibly blame the 2003 blackout on economists.  They are like "The Shadow" with the power to cloud men's minds.  They have the power and they use it.  Hence, blackouts.   I'll give some examples that put the lie to micro-economics as taught in US universities,  from across the spectrum of economists. First, from a modern theorist of the core, George Bittlingmayer --  perhaps a libertarian:   "The most startling result to emerge from work in this area is that, barring only a few special cases, there is no competitive equilibrium in an industry composed of independently operated plants with identical, U-shaped average costs curves.  The cost conditions are, of course, those from the textbook case of the Viner industry, but I think many if not most economists are surprised that this ineluctable result concerning equilibrium is contained in the most familiar of models.  A broader and more practical result is that there is no competitive equilibrium in an industry characterized by quite plausible cost and demand conditions.  all we need for this conclusion is falling long-run average cost, stochastic demand, and some cost associated with having idle plants.  an implication of these largely negative results concerning competition is that some noncompetitive, cooperative solution to market allocation is necessary.  By extension, the importance of this line of reasoning for antitrust is that it becomes unrealistic to expect competitive behavior in certain markets because firms could not behave competitively even if they wanted to." ( Bittlingmayer, George, "Decreasing Average Cost and Competition: A New Look At The Addyston Pipe Case," Journal of Law and Economics, vol. XXV, Oct. 1982, p. 202.) Next, Keynes -- noting, like Bittlingmayer, cost and demand conditions under which competition doesn't emerge, Keynes goes further, to explain how economists move from simplifying assumptions to abandonment of the actual facts, and to conclude that their model is what reality is. "The beauty and the simplicity of such a theory are so great that it is easy to forget that it follows not from the actual facts, but from an incomplete hypothesis introduced for the sake of simplicity.  Apart from other objections  to be mentioned later, the conclusion that individuals acting independently for their own advantage will produce the greatest aggregate of wealth, depends on a variety of unreal assumptions to the effect that the processes of production and consumption are in no way organic, that there exists a sufficient foreknowledge of conditions and requirements, and that there are adequate opportunities of obtaining this foreknowledge.  For economists generally reserve for a later stage of their arguments the complications which arise -- (1) when the efficient units of production are large relatively to the units of consumption, (2) when overhead costs or joint costs are present, (3) when internal economies tend to the aggregation of production, (4) when the time required for adjustments is long, (5) when ignorance prevails over knowledge, and (6) when monopolies and combinations interfere with equality in bargaining -- they reserve, that is to say, for a later stage their analysis of the actual facts.  Moreover, many of those who recognise that the simplified hypothesis does not accurately correspond to fact conclude nevertheless that it does represent what is 'natural' and therefore ideal.  They regard the simplified hypothesis as health, and the further complications as disease."  (J. M. Keynes, "The End of Laissez-faire" in The Collected Writings of John Maynard Keynes, Vol. 9, Essays in Persuasion, London, The Macmillan Press, 1972. ) What needs to be explained is the less general opposite -- why economists believe that competition will somehow break out.  It is in the Krugman piece in the NYTimes today.  How has that been driven so deep into the economist's mind -- and into the public's? Gene Coyle Les Schaffer wrote: Gene Coyle wrote: in which I reject the theory and go into the long list and history of distinguished economists, liberals and conservatives from Keynes to Telser who have intellectually destroyed the conceit that wholesale markets in electric power will foster competition. these arguments are specific to electric power or are more general? les schaffer