On 6/8/2012 1:18 PM, Jim Devine wrote: > What keeps that supply price above zero in Marshall's view? I would > say that it’s because of the existence of barriers to entry into the > capitalist class (the normal existence of a reserve army of labor, the > accumulation and inheritance of wealth, etc.) But that’s a Marxian > explanation.
Marshall, himself, argued from the "real cost" doctrine, which is basically some form of sacrifice. So, for Marshall, wages are the return from working (a painful activity), interest is the return from waiting (also painful), and normal profit arises "when the work of management is heavy. The work of management may be heavy because it involves great mental strain in organizing and devising new methods; or because it involves great anxiety and risk: and these two things frequently go together." Under the influence of the early Austrians, real cost was replaced with alternative (or opportunity) cost. In that case, normal profit is an amount of income (put up by the consumer) that will induce the entrepreneur to use their business ability and energy (a scarce resource) in the production of a particular product rather than in the production of some alternative product. I think this is the process that causes normal profit to equalize across industries. The actual level of normal profit is determined by the interaction of supply of and demand for entrepreneurial activity, where the demand is derived from consumers' product demands. Thus, entrepreneurship is treated just like any other resource in the scarce means that have alternative ends problem. > >> The problem with the Marshallian idea of normal profit is that it cannot >> enter a production function like other "factor" inputs -- it is not a >> quantity, and therefore is not divisible, and it is not homogeneous. Thus, >> it does not have a marginal product and the product exhaustion theorem >> fails.< > > Shouldn’t it be “business ability and energy” that enters into the > production function and not “normal profits”? Yes, my wording is unnecessarily confusing. > As such, it would be a > kind of labor income and the product exhaustion theorem stands. Yes, this is one way to approach the problem. But, if entrepreneurship is work, then the return is a wage; there is no normal profit; in equilibrium there is no pure profit; and thus, profit is always a disequilibrium phenomena. That's Walras' story (and JB Clark's and the neo-Austrians). On the other hand, if entrepreneurship is a factor of production separate from and additional to land, labor and capital, and, thus, normal profit is a cost of production, then, as Edgeworth argued, entrepreneurship has no marginal product. This is because entrepreneurship has no units of measurement like hours of labor, dollars of capital, or acres of land different from the conventional triad. Either way neo-classical theory has an unsolved problem: it either ignores profit or fails to explain profit. _______________________________________________ pen-l mailing list pen-l@lists.csuchico.edu https://lists.csuchico.edu/mailman/listinfo/pen-l
