Thursday 11 July 2013

On Constant Returns to Scale and Marx.

Issue no. 64 of Real-World Economics Review is out.

Among others, it contains a very interesting (and to me, useful) article by Prof. M. Shahid Alam (Development Economics, at Northeastern University), about constant returns to scale.

(For those not in the know, returns to scale are a central concept in mainstream economics).

Alam's thesis is that "the competitive paradigm of neoclassical economics breaks down in the presence of constant returns to scale (CRS)".

While, in general, I found the article quite stimulating I am afraid its last section left me unconvinced.

In that section, I believe Alam is attempting a reductio ad absurdum: first one assumes a hypothesis to be negated (i.e. the presence of CRS), from this hypothesis one derives an absurd conclusion; this provides a reason to negate the original hypothesis.


As Alam argues, assuming for argument's sake the presence of CRS, if the economic agents were in addition either (1) endowed with enough factors of production plus labour (or, alternatively, if (2) there were no factors of production other than labour, and (3) labour were homogeneous), then the result which Alam derives:
"All this establishes a presumption that a market economy may emerge in the presence of CRS only when a person's endowment of factors prevents him from producing his preferred consumption bundle".
Would certainly follow; in other words, "a natural economy [i.e. one where economic agents are self-sufficient and produce their own consumption bundles] will necessarily and fully replace the competitive market economy".

But, Alam correctly points out, in reality we live under a market economy (i.e. an economy where agents are not self-sufficient: do not produce their own consumption bundles, but exchange their initial endowments of goods/factors of production in order to acquire the bundles desired). Thus the self-sufficient economy we derived is in actuality an absurd. Thus, we should reject the hypothetical presence of CRS: which is what Alam intended to conclude.


However (and this is why the paper failed to convince me) under capitalism neither (1), nor (2)&(3) are true: besides labour, there are other factors of production (i.e. land and capital); the ownership of land and capital is unequally distributed among the economic agents; and labour is not homogeneous. In short: self-sufficiency is not a realistic option and a market economy is the result, regardless of the returns to scale regime [#].

By assuming away these facts, Prof. Allam introduced three rather heroic assumptions which distorted the scheme of his reductio ad absurdum.


Nevertheless, hopefully bringing Marx (and a little of history) into the discussion could help Prof. Alam.

The enclosure movement in England and Wales, started during the 16th century and characterized by mass eviction of farmers, provided a mass of economic agents whose only initial endowed "factor of production" was their own labour, with which to "trade" with the owners of land and capital[*]. The former became labourers, the latter capitalists.

A scenario where economic agents own enough "factors of production", in addition to their own labour, seems similar to the Marxist mercantile exchange, characterized by small artisans and craftsmen, and small farmer/tenants working the commons. As labour was heterogeneous, there was reason for exchange, however limited due to small surplus and considerable self-sufficiency by small producers.

13-07-2013 Changed the place where the video goes, added footnotes and fixed some misspellings/dubious expressions.

21-07-2013 David Ruccio on primitive capital accumulation in the West and in China:
China and the West, 25-02-2012

Contra Daron Acemoglu's view that China has failed to make the "happy connection between prosperity and democracy" as Western countries supposedly did as a matter of historical necessity, Ruccio argues that "China is succeeding in showing the West its own past. The secret is the process of primitive accumulation".

The China Syndrome, 19-07-2013
Contra Paul Krugman's views:
"Indeed, the main thing holding down Chinese consumption seems to be that Chinese families never see much of the income being generated by the country's economic growth. Some of that income flows to a politically connected elite; but much of it simply stays bottled up in businesses, many of them state-owned enterprises.
It's all very peculiar by our standards, but it worked for several decades."
Ruccio asks:
"First, how is it possible to consider 'peculiar by our standards' a situation in which a large part of the income generated by a country's growth flows to a tiny elite or stays bottled up in businesses? Isn't that exactly what's been going on in the United States and in other western countries over the course of the past three decades, with the one difference being that in the West we're talking about private corporations as against China where much of the investment takes place within state enterprises?"

Those seem pertinent questions, to me, although perhaps Ruccio may be misreading Krugman: I suspect Krugman means that in China "growth flows to a tiny elite or stays bottled up in business" to be invested in poorly-paid (although, as Ruccio shows, pay conditions have improved), labour-intensive manufacturing; whereas in the U.S. growth still flows to tiny elites, but instead of being invested in the "real economy", as in China, it goes into financial speculation/labour saving technology, without generating much labour demand. Either way, internal consumption demand remains subdued.

Regardless, Ruccio and Krugman must be mistaken. That cannot happen, as good "progressive" quacks can attest: "Playing Profit with the Stock Market". You know, it's not the labour of workers that makes a country wealthy, no siree, it's budget deficits.

[#] Clearly, by the above I am not assuming any position on which returns to scale are prevalent under current capitalism, but only that Prof. Alam's proof did not make a convincing case about constant returns to scale.
[*] The precise term is primitive capital accumulation. Mathew Forstater (University of Missouri-Kansas City) identified a similar process in colonial Africa [Taxation: A Secret of Colonial Capitalist (so-called) Primitive Accumulation, CFEPS working paper no. 25, May 2003, here]

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