Gene, Thanks for your helpful references.
Arguably the prevalence of high fixed and low to zero marginal costs is becoming greater, especially in the internet sector (which characteristics Perelman labels as "quasi-public"). There have been, from time to time, economists who have actually written about increasing returns to scale.... So it's good to see work from DeLong and Summers on this as well....and even Clark. Did Landes also have a "dynamic fix"? Ann ----- Original Message ----- From: "Eugene Coyle" <[email protected]> To: "Progressive Economics" <[email protected]> Sent: Thursday, September 3, 2009 2:13:20 PM GMT -05:00 US/Canada Eastern Subject: Re: [Pen-l] Presumed "irrevelence of sunk costs" 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. 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