Eugene Coyle had written:
>>> Of course the high fixed costs (sunk or overhead cost) are quite
>>> pervasive ...
me:
>> 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.
What? I don't know what's meant by the phrase "the share of investment
attributed to units of production." Please explain.
According to standard definitions, overhead costs = fixed costs, which
are usually the _result_ of past investment.[*] This is not a
neoclassical definition: classical economists and Marx called it
"fixed capital" (capital that was tied up in production, in contrast
to circulating capital).[**] At any given moment of time, the total
amount fixed costs must be paid (even if the company stops production)
and is independent of the current level of production.
(Bankruptcy law makes this more complicated, since if a company
declares bankruptcy, it may be able to get out of paying what are
usually seen as fixed costs. But that does not contradict the concept.
Instead, it changes our interpretation of the concept.)
> They [overhead costs] are a piece of the sunk costs, not something
> different. <
You can define things any way you want to, but it's best to use
conventional definitions if you want to communicate with others
(unless these definitions are totally deceiving and useless). Current
overhead costs (or fixed costs) are typically seen by almost all
economists as often being the _result_ of sunk costs being paid in the
past. (I repeat myself here: "sunk costs" are, by definition, costs
that were paid in the past.) But they may not be the result of sunk
costs paid in the past: as Michael Perelman might say, aliens may have
come in the past and imposed a situation which means that a company
has to pay fixed costs now. In that case, there is no sunk cost but
there is a fixed cost.
> 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. ...
Maintenance and replacement costs[***] are definitely current
expenses. If, in the present, they do not change with the level of
production, they are also fixed costs. However, some depreciation and
maintenance costs vary with how much the machinery (etc.) are used in
the present (and thus how much output is produced). In that case,
these costs count as variable costs. Either way, they are (usually)
the result of sunk costs paid in the past; they are not identical to
them. The fact that some current costs resulting from costs paid in
the past (sunk costs) are variable in nature is another reason why
it's wrong to conflate overhead (fixed) costs with sunk costs.
And consider another example: a business pays $1 million dollars for a
fancy machine in year 0. That $1M is its sunk cost. Some of the
machinery's maintenance costs are fixed costs and some are variable
costs. Suppose that the wage paid to maintenance labor rises from year
1 to year 2. All else constant, that means that both the fixed and
variable costs of maintaining the machine rise. ("Fixed" is defined
only relative to the amount of production at a given time.) These
costs, even though they are usually the result of sunk costs being
paid in the past (a number that cannot be changed), have a "life"
independent of the amount paid in the past: the amount of costs paid
now for their maintenance can vary.
me:
>> Again, it's an empirical question about how important this phenomenon
>> (highly capital-intensive enterprises) is.
Gene:
> Yes, it is an empirical question but that doesn't dismiss the question. <
I didn't dismiss the question. Nor would I presume to. Saying that
something is an empirical question is not the same as saying that I
have the empirical answer.
> ... You can't assert "Well, that's an empirical question" as if that ends the
> discussion. <
I did not do so. Why do you think I was "ending the discussion"?
Empirical questions require empirical research, not stopping one's
mind.
> Maurice Clark and I assert it is a very
> important phenomena.
you may be right. It would be good to see if someone has done research
to indicate _how_ important this phenomenon is. Appeals to authority
don't help.
> 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 [marginal] 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.<
Right. Many industries are capital-intensive. But how many? The only
mistake is to assume that we can know the answer to this question
easily.
> Static micro can't be fixed. It can only be discarded.<
Maybe, but we have to have a clear alternative. In any event, you used
static micro above, since you applied the concepts of marginal cost
and overhead costs. That suggests that you really don't want to
discard static micro.
If we reject static micro, does that mean that businesses should heed
sunk costs in making current decisions about the future? it's unclear,
since I don't know what the alternative view of micro is.
I think it's useful to know static micro, if only to understand its
limitations. The fact that Kalecki (and Sraffa -- I forgot about him)
were able to use their knowledge of static micro to argue that
marginal and average variable cost curves are flat (up to capacity)
says that the net benefits of using static micro may be positive. The
fact that neoclassical economics almost always ignores their results
suggests that there's something extra -- beyond simple static micro --
that interferes with their thinking processes. I'd call it ideology.
--
Jim Devine / "laugh if you want to / really is kinda funny / cause the
world is a car / and you're the crash test dummy" -- Devil Makes
Three.
[*] a company may "invest" in hiring overhead workers (supervisors,
management, staff, etc.) At any one time, the costs of keeping these
workers is part of fixed costs.
[**] Differing from the Classicals, one of Marx's points is that the
fixed/circulating capital distinction is not the same as the
constant/variable capital distinction and that the latter is more
important.
[***] Depreciation is a notoriously difficult concept to pin down. I
use the phrase "replacement cost" to refer to the cost of keeping the
quality of a machine (for example) from falling over time.
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