Ann, do you have tenure?
You are asking a dangerous question. The gods of micro rage when "an
alternative dynamic" is raised.
IMO you've brought up the main reason students choose to major in
business rather than economics. They can swallow much of beginning
economics but they know business is dynamic. CEOs don't believe in
the U-shaped cost curve -- they report that cost curves flat to the
horizon are typical. Without the U-shape it is all straw, as Aquinas
said on his death bed, about something else.
You can use Larry Summers and Brad DeLong on your topic. They
presented a paper at Jackson Hole a few years ago which said this,
among other things:
A world in which the information-technology sector is salient is one
in which more of the goods that are produced will have the character
of pharmaceuticals or books or records, in that they involve very
large fixed costs and much smaller marginal costs.
An industry with high fixed costs and near-zero variable costs has
another important characteristic: it tends to monopoly.
… competition in already established markets with high fixed and low
variable costs is nearly impossible to sustain. (Thanks to Ian for
this cite at the time.) The "New Economy": Background, Questions, and
Speculations. DeLong, and Summers, Jackson Hole, August 2001.
Of course the high fixed costs (sunk or overhead cost) are quite
pervasive, well beyond the two industries DeLong and Summers mention.
John Maurice Clark's book addressing overhead costs showed that:
"Thus the world of economic thought was made aware of a fact,
which is older than railroads, older than economic science and, far from
being a peculiarity of one business or of a group of highly capitalistic
businesses, is universal.
…
It became evident that economic law did not insure prices that
would yield "normal" returns on invested capital, because the capital
could not get out if it wanted to, and so had to take whatever it
could get.
…"Cut-throat competition" was seen to be a natural thing, and it was
seen
to be equally natural that business should adopt protective measures,
whether combinations, pools, gentlemen's agreements, or a mere
sentiment against "spoiling the market."
Clark, John Maurice, Studies in the Economics of Overhead Costs,
Chicago, U. of Chicago Press,
1923. Quotation spliced from pages 10 & 11. Clark's work was grounded
in business practice.
A lot of mainstream economists have tried to introduce dynamic fixes
-- Baumol, among others. But they can't bring themselves to admit it
is all straw. My friend, the late David Landes had a good handout
where businessmen where asked to choose among a variety of cost
curves, from U-shaped to horizontal as typical. I can't find it at
the moment. But the majority strongly rejected U-shaped and reported
that the more horizontal shape was realistic for business.
I don't envy your struggle over this. I couldn't handle it.
Gene Coyle
On Sep 3, 2009, at 5:30 AM, Ann Davis wrote:
Beginning principles of micro one more time............the focus on
marginal costs and marginal benefits, ignoring sunk costs, seems to
make very clear how micro is simply ignoring the problem of
capital. If capital investment can be interpreted as "sunk costs,"
it is "irrelevant." Mainstream economics has left this question
entirely to "finance" and to accounting, it seems.
Michael Perelman's recent piece on "an Idiosyncratic Road to Crisis
Theory" also expands upon this issue, as well as Harcourt's book
from 1972, "Cambridge Controversies in the Theory of Capital" (as
well as Michael's other books).
I add to my classes an alternative dynamic, within micro
terminology, of the competition to lower AVC, by moving down the
long term AC curve, in the increasing returns to scale section. But
the investment decision is still very vague, and this process leads
again to the zero profit equilibrium (which might be realistic
within the context of perfect competition).
How do others handle this frustration? Suggestions are most welcome.
Ann
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