C Ruiz wrote: I think Krugman is totally right. On the other hand it is hard to understand your point, since you don't define "cost structure" and specify its connection with knowledge and growth.What is it? Cristobaal Senior
Well, first of all I wasn't thinking about knowledge and growth. I don't know anything about knowledge and growth in the context of Krugman's review. Two things caught my eye about the Krugman review. First, his concurrance with Warsh on why the Pin Factory is pushed into the background: "... it wasn't about ideology; it was about following the line of least mathematical resistance." Of course it was about ideology. The U-shaped cost curve is one of the most ideological totems in the world, right up there with the crescent and the cross. Later Krugman remarks that the Pin Factory failed to make it into the mainstream of economic thought because of economists' inability to state their ideas with sufficient rigor. Rigor about studying the economy? That reminds me of the joke about the man going to help a drunk looking under a streetlight for his lost car keys. When asked where he dropped the keys the drunk points down the block. "Why are you looking here?" "Well, the light is better here." The economy isn't much about increasing cost industries but the public needs to be taught that it is. Economists focus on the U-shaped cost curve not because they seek rigor but because they are ideologues, for whatever reason. Who knows why cults grip people? If economists had sought rigor they would reflect on actual businesses. So Krugman's review itself carried out an ideological obfuscation. In the 1890s prominent and respected USA economists argued against the anti-trust movement because they recognized the benefits of monopoly via the Pin Factory. Prominent and respected economists still argue for monopoly as benefitting mankind, now with intellectual property as the excuse in the analysis. Was that "increasing returns to scale" in the 1890s? Whatever it was, it was -- and neo-classical economics remains -- static analysis in a dynamic world. I'm not too clear anymore what "increasing returns to scale" is (Michael's book on railroads has yet to turn up at my bookstore). I think the concept of overhead costs is a clearer way to thing about what drives monopoly and why it is beneficial, and the necessity of price fixing. And why USA farming gets $25 billion a year in federal money to cover overhead costs. Maybe it was easy for Galbraith to be heterodox because he was a farmer. Gene Coyle
