Debunking economics (Chapter 6)

["John M. Legge" <jlegge@xxxxxxxxxx>]

Further numerical investigation of the Keen hypothesis suggests that if will hold except when suppliers are limited to an integral number of deliveries and the output per supplier is relatively low.

 

If output is infinitely variable such that a supplier may make an arbitrarily small reduction in output then I think Steve is correct under all conditions: the so-called competitive equilibrium is not a stable one, in that individual suppliers will gain by reducing output below the P=MC point and raising the market price by the amount appropriate for the aggregate marginal revenue.  If other suppliers fill the gap they will be forced, under the hypothesis of rising marginal costs, to raise their price above the previous equilibrium point, and I think that it can be proved that this will leave the original quantity-reducing supplier better off.  The other suppliers will hardly be acting rationally, since each of them could likewise gain by a quantity reduction.

 

It may be possible to prove that the rational behaviour of independent suppliers will move a "competitive" market to the monopoly price, but only under the assumption of a continuous, differentiable cost function with a positive definite first derivative.

 

Real wheat farmers, of course, have constant variable costs, or very nearly so, until the plough reaches their boundary fence, at which point there is a sharp discontinuity as the cost of buying or leasing an extra paddock cuts in.  Unfortunately the sort of blind neoclassical ideologue who can believe in uniform, indestructible capital can also believe in infinitely variable boundary fences.  I expect proof of the Keen hypothesis to lead them to jump to the "as if" position.  Under constant variable costs there is a definite, not a marginal, loss incurred by any producer who restrains production, and this may be why wheat producers are in Bertrand competition.

 

JML