"To defend the truth, to articulate it with humility and conviction, and to bear witness to it in life are therefore exacting and indispensable forms of charity."

H. H. Benedict XVI. Caritas in Veritate Encyclical. June 29, 2009

Friday, October 24, 2014

Returns to true scale

If you think you have a case of either increasing or decreasing returns to scale, check again your list of inputs. In the true long run, there are only constant returns to scale.

What you really have when you apparently have either increasing or decreasing returns to scale is an instance of not taking into account that some input(s) can be "fixed" in the sense that they are collective for some range of output production, but this in advance is an instance of short- not long-run production, and therefore, not liable to be analyzed through the returns to scale perspective, which is only applicable to long-run, i.e. all-inputs-varying, cases.

This means that you can never justify that in the long run there are natural monopolies due to increasing returns to scale. What you may have in this sort of cases, it is a firm operating in the short-run first stage of production, where there can be increasing marginal returns on some inputs while keeping fixed others.

See also this post of mine on the same topic.

Wednesday, September 17, 2014

Sources of market power

Market power arises from two sources: violence which avoids competition from other market participant and the favor of the people with which the market powerful trades. There is no third source whatsoever.

Friday, September 12, 2014

False dichotomy between profit and utility


The whole difference between the economic analysis of a consumer and that of a producer for the market is this: when you analyze a consumer you only pay attention on how the consumer tries to optimize value for himself while when you analyze a producer for the market you pay attention on how the producer tries to optimize value for buyers as a means to optimize value for himself.

Saturday, July 26, 2014

About Hayek's "Economics and Knowledge"

This paper by Hayek is of the utmost importance for understanding the key difference between pure Misesian economic theory and the positivism of Popper/Friedman. Indeed, they do not contradict each other. One way of seeing it, and this is precisely what is illuminated by Hayek, is: Misesian economic theory would say that there are supply and demand curves, and why they are of such and such shape and so on. But Misesian theory could never assure that an equilibrium is going to be achieved. That is not pure logic of choice (theory, in Mises terminology) but history (or empiricism or behavior, according to neoclassic parlance).
Given that some individuals have in their minds at a specific instant a certain maximum price to pay and/or a minimum price to be paid, the actual process of groping is achieved by specific individuals in specific situations in time and space: they are empirical!
What Hayek says is akin to: "hey guys, economics is not only what Mises calls theory (pure logic of choice) but is also history (and then empiricism, positivism, etc.).