The Laws of Returns under Competitive Conditions
Piero Sraffa
The Economic Journal, Vol. 36, No. 144. (Dec., 1926), pp. 535-550
OUTLINE: Sraffa argued that Industrial production under either increase or decreasing returns to scale was not compatible with competitive equilibrium.
There was great disagreement on price theory -- Marx, Ricardo etc. -- (just prices) -- but now there is consensus.
This consensus is deceptive; objections keep being swept under the rug
Major problem with the industry supply curve.
Case 1: Industry produces under diminishing returns. This requires increase in price of factors being used by the industry as the industry expands. But if factor prices increase, this will affect production of all industries which utilize the same factors of production.
Case 2: There are increasing returns to scale. In this case, prices decline as scale of production increases, and this is not compatible with conditions for competitive equilibria. It would lead to monopoly.
It follows that the only case which is compatible with a competitive equilbrium is one in which there are constant costs. But in this case, the price depends purely on the cost structure and not on the demand.