Jim,
Some of your assertions in this post puzzle me, some baffle me. And
some are (I hope) the result of dealing with short bursts on e-mail.
Here goes:
On Sep 3, 2009, at 11:33 AM, Jim Devine wrote:
Eugene Coyle wrote:
< snip>
Of course the high fixed costs (sunk or overhead cost) are quite
pervasive,
well beyond the two industries DeLong and Summers mention.
Devine then says:
It's a mistake to combine sunk costs and overhead costs. The former
were paid in the past (as with a fixed investment done then) while the
latter refer to costs that must be paid now (maintenance of the
existing fixed equipment, etc.) independent of the level of
production.
Jim, I can't imagine what you are saying in the paragraph above.
Overhead costs are the share of the investment attributed to units of
production. They are a piece of the sunk costs, not something
different. Maintenance is a current expense. What do you think
depreciation is? It is the annual expense attributed to spreading the
initial investment over the years. This is baffling. Did you ever
take an accounting course?
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 [i.e., capital-intensive, not greedy] 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.<<
Jim writes:
Again, it's an empirical question about how important this phenomenon
(highly capital-intensive enterprises) is.
Yes, it is an empirical question but that doesn't dismiss the
question. It leaves the question. You can't assert "Well, that's an
empirical question" as if that ends the discussion. Maurice Clark and
I assert it is a very important phenomena. Consider agriculture. For
commodity crops, farmers sell at what they can get -- marginal cost,
to be less-than-precise -- and don't recover overhead costs. In the
case of farmers, land. They cover margibal costs in the sale of
crops, and cover overhead costs with an annual $25 billion farm
subsidy. Agriculture and many other industries -- you can think of
them-- are capital intensive and thus not able to be analyzed with
static models.
Static micro can't be fixed. It can only be discarded.
Gene Coyle
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