Re: Keynes and competition

[Bruce McFarling <ecbm@xxxxxxxxxxxxxxxxxxx>]

On Tue, 22 May 2001 09:55:39 +1000, "John M. Legge"
<jlegge@xxxxxxxxxxxxxx> wrote:

>I am currently ploughing through Marshall, and it seems clear
>to me that he did NOT contemplate "perfect" competition in the
>modern neoclassical sense, with free entry and exit and the
>mathematically incredible horizontal firm level demand curve,
>now exposed by Steve Keen.  To paraphrase Schumpeter, "no matter
>how many horizontal infinitesimals you add up, you will never get
>a sloping industry demand curve thereby."  Marshall clearly
>recognises market power and his discussion of competition between
>firms is recognisably one of oligopoly.

Schumpeter has (had) a cute quip there, BUT ...

But adding individual demand curves from the pure competition
case is simply a fallacy of composition, because the individual
curve is drawn _ceteris paribus_, including output of other
firms.  Suppose that no firm has no more than 0.1% market share
and the products are standardised -- wheat that is stored by
type and grading, rather than by individual producer.  Then if
you begin with the current allocation, and draw a firm level
demand curve for an individual producer by fixing the output
of all other firms, and allocating a section of the industry
demand curve as the response to an individual change in output
by the firm, the firm demand curve would have a slope of at
most 1/1000 the slope of the industry demand curve.  Given
that additional information taken into account is not costless,
it is perfectly sensible to take the market price as
representative of the firm demand and therefore treat the
market demand as perfectly horizontal.

Between a trivial slope with a total rise of less than the
smallest price unit and the market slope, the more and more
firms that you aggregate to form group demand curves, the
less and less trivial the slope becomes.

However, it is not surprising of the New Keynesians fall
into logical traps and empirical absurdities under perfect
competition, since the inability to spot fallacies of
composition seems to have spread through the profession
like a slow working flu, while the empirical absurdities
are built in from the start.

--
Dr. Bruce R. McFarling, PhD
Bus. Office 1.72 -- (02) 4348-4078
School of Business
Faculty of the Central Coast
Newcastle University, Ourimbah