Scissors or Horizon: Neoclassical Debates about Returns to Scale, Costs, and Long-Run Supply,
1926-1942 Author(s): Nahid Aslanbeigui and Michele I. Naples: Southern Economic Journal, Vol. 64, No. 2 (Oct., 1997), pp. 517-530
ABSTRACT: Modem treatmentof long-run (U-shaped) cost curves developed from reactions to Sraffa's
criticismsof Marshall.He argued that internal (dis)economieswere incompatiblewith partialequilibriumanalysis under perfect competition. Pigou concurredand drew L-shaped cost
curves;Vinerrealizedthatthis madefirmsize indeterminate andindustryoutputvolatile.Using
Austin and Joan Robinson's analyses, Stigler justified rising costs/supply, determinacy,and
stabilityby irrationalentrepreneurs enduringcoordinationfailureand by factorprice changes.
We concludethat consistencyrequiresconstantcosts but firmemployment,output,and factor
incomes remaintheoreticallyindeterminate.It becomes likely thatlarge firmswill undermine
perfectcompetition.
SUMMARY:
Sraffa's (1926) seminal article showed the incompatibility of downward- or upward-sloping cost curves
with partial-equilibrium analysis under perfect competition. There were two reactions. Some accepted L shaped curves, which leads to indeterminacy of size of firms and industry. Other reaction created a long run U shaped cost curve -- ignoring the objections of Sraffa that this cannot be competitive.
PIGOU recognizes complexity:
though the... supply... schedule of the market can be represented by a plane curve, the ... supply...
schedules of the separate sources thatmake up the market cannot be so represented,and cannot be simply
added together to constitute the aggregate... supply... schedule.(Pigou 1913, p. 21)
Consider local marginal small scale increases in output -- there cannot be increasing costs, at firm level. or at industry level
... it is impossiblefor productionanywhereto takeplaceunderconditionsof increasingcosts. Inthismatter
my conclusionagrees with that reached by Professor Sraffa in his recentarticle.(p. 193;emphasisadded)
Like Pigou, Viner had realized that constant returns introduced indeterminacy for the firm. Consequently, Viner found the coexistence of constant returns and perfect competition uneasy, To say the least. If each individual firm experienced constant returns, marginal and average costs would be constant and the firm's supply curve horizontal (Viner 1931, p. 211). With heterogeneous costs across firms, the firm with the lowest costs would monopolize the industry. With identical costs, each producer could produce any amount at the equilibrium price (the minimum of the long-run average-cost curve), nothing below it, and unlimited quantities above it. In this case, the industry supply curve would not be definable; "it is impossible to indicate graphically the relationship between the long-run supply curves of individual concerns and the industry as a whole"
Viner's discussion is vague. He appears to say that the industry supply curve cannot be defined, in light of firm behavior. However, the quote above addresses the stability of market equilibrium, not the shape of the supply curve; industry supply would be horizontal and therefore infinitely elastic, given uniform and horizontal long-run average cost curves for all firms. The problem that produces the instability is that perfectly elastic industry and firm supply cause an indeterminate division of industry output among firms. Therefore, firm output will be subject to swings that economists cannot accurately predict and market forces will not attenuate. The precision of the price-quantity solution implied by a horizontal industry supply curve and downward-sloping demand curve belies the market volatility and indeterminacy at the firm level, of which Viner was acutely conscious.
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