For the Wealthiest, a Private Tax System That Saves Them Billions

[coloradoatheist]

Only the economists by trade are using those formulas, the rich use other arguments for their arguments, some use good ones, some don't.

 

[jonatha]

Even in the unlikely event that the estate tax is ever eliminated, that wouldn't be enough to make Bill's billions tax-free. The government would also have to reset the capital gains basis from market value at the time the deceased acquired the stock to market value at the time of death. Without that second step, eliminating the estate tax would simply mean the government was electing to hang onto its valuable lien instead of liquidating it.

That's the way the estate tax currently operates...

 

[ksen]

It's going to produce a little bit of the ongoing expectation that there will be an aftermarket where investments in IPOs can be sold, so people considering financing new productive capacity won't be discouraged by it being a lifetime commitment of their resources. In addition, (assuming the guy who sold the stock to you was making a rational decision), it frees up his assets to be used in some way that's more useful to him. In addition, (assuming you didn't foolishly put your whole life savings into Apple stock), it probably converted some of the economy's diversifiable but undiversified risk into diversified risk, thereby infinitesimally improving the economy's overall risk/return ratio.

But never mind that -- it's inessential to the issue at hand.

No, it's kind of essential since not all spending and investment is equal.

Not all spending and investment is equal, true; but the reason it's inessential is that there are no grounds to assume that what you'd have spent the money on if you consumed it instead of buying Apple stock would have been better for the economy than what the guy who sold you the stock is going to spend the money on. So even if financial instruments were as demonstrably unproductive as betting on dice, there are no grounds to infer that buying such instruments instead of consuming your wealth harms the community. Even then it would be statistically a wash.

Thanks for your point of view.

The problem becomes more and more cash being in the hands of people with less propensity to consume.

The economy is a body and money is the blood. Let a couple parts of the body keep most of the blood from circulating and the body dies.

Failing to drink your own blood has no power to stop blood from circulating through other people's bodies. The total blood supply is not a fixed quantity. Money is a debt instrument -- money is the memory of favors done and not yet returned. If too many people owe too many favors to a few people who are not calling in their favors, and the resulting shortage of IOUs is causing economic activity in general to decline, it's not the nonconsumption that's the problem. Nonconsumption has no magical power to stop people from scrawling up new IOUs and continuing to do favors for one another. The problem is not enough IOUs. You don't need rich people to call in their favors to fix that; you need a printing press. The cure for a recession caused by low demand isn't Bill Gates buying stuff he doesn't need; it's government buying stuff people do need. Isn't that what Keynes said?

What are you blabbering about?

If it's true that too little blood/cash circulating through the body/economy will cause the body/economy to die/collapse, this outcome is easily forestalled by the government compensating for it by simply creating more money and putting it in the hands of people with more propensity to consume -- something governments already tend to be eager to do anyway for their own reasons. So there's no basis for thinking the people who have money and don't spend it are thereby doing any harm. All they're doing is reducing the inflationary danger of the normal predictable behavior of governments. They're doing the rest of us a favor.

Well, it should work that way. However how it has actually worked is that the government prints more money and gives it to those with the lowest propensity to consume (see: Quantum easing). And those with the lowest propensity to consume lobby for less and less government spending to those with the highest propensity to consume.

 

[Bomb#20]

Even in the unlikely event that the estate tax is ever eliminated, that wouldn't be enough to make Bill's billions tax-free. The government would also have to reset the capital gains basis from market value at the time the deceased acquired the stock to market value at the time of death. Without that second step, eliminating the estate tax would simply mean the government was electing to hang onto its valuable lien instead of liquidating it.

That's the way the estate tax currently operates...

Well, the estate tax is a tax. When we tax something it's normal to stamp it "already taxed" and not tax it again. It seems unlikely to me that Congress would get rid of the estate tax and yet still reset basis. That would set the effective capital gains rate to zero. There doesn't appear to be the political will to do that. The trend is very much in the opposite direction -- we just raised the capital gains rate from 15% to 20%, and then we raised it again to 24%.

 

[Canard DuJour]

I'm not following you; maybe it would help if you linked the study instead of just Wikipedia. But a demand-constrained below-capacity equilibrium is an MC=MR equilibrium. If MC is flat or even somewhat decreasing, the supply and demand curves are still going to cross if MR is falling faster, which it surely will be if the market is demand-constrained.

And..? Supply and demand curves crossing doesn't mean MC=MR. Neoclassical theory needs rising MC. Profit-maximising firms should otherwise want to produce without limit - which they patently don't - unless MR were decreasing above some point. A reasonable assumption, but then MC=MR wouldn't necessarily maximise profits, you wouldn't have independent supply and demand curves, firms aren't price-takers etc.

Not that typical real firms even make any such calculation, so MC=MR is a bold assertion regardless.

..which wasn't the point anyway. Whether an MC=MR equilibrium or not, it's a suboptimal one where the inefficiency might be mitigated by the kinds of interventions neoclassical economists claim cause inefficiency under rising MC. Works for me, but it's no accident that neoclassical theory continues to assert an empirical falsehood.

Thus is the evidence ignored by theory never intended as a description of reality.

But ksen was criticizing the rich for saving too much; that's not a valid criticism.

It is if they use economic slowdowns as a pretext for austerity.

I don't know why you think you see some nefarious conspiracy here. It's not a pretext. Of course it was intended as a description of reality. People believe in austerity as a solution to economic hard times because that's the intuitively obvious response; it's the common-sense implication of taking everything mankind has learned about domestic resource management through 10,000 years of operating their farms, and extending the same principles to a nation-state. It doesn't work, because a nation-state is not a farm, but that's something it's going to take a while for mankind to get through its collective thick skull.

Firstly, the people imposing austerity probably do understand that a nation-state isn't just a big household. George Osborne and his advisors almost certainly do but his party is selling austerity on that basis. The last thing the rich (whose interests they represent) want is gov't devaluing the money they charge rent on.

Secondly, even if they did think the economy was just a big household, folks who know better could still blame them for hoarding money while imposing austerity during slowdowns.

 

[Bomb#20]

Why does it make a difference who does the grunt-work of drafting pages and pages of legalese?

For the same reason it makes a difference which side of a negotiation gets final say on the language of a contract or a treaty. I am 99% sure you do not actually need me to explain that.

Oh, for the love of god. People are not sides. Of course it makes a difference which side drafts it; what doesn't matter is which person drafts it. You were making the ridiculous argument that the fact that there are laws favoring the rich written by some rich person, whereas poor people aren't the ones writing laws to favor the poor, somehow makes writing laws to favor one side corrupt but writing laws to favor the other side non-corrupt. The progressive income tax law was written by somebody on the poor's side, just as some tax break for some group of rich people was written by somebody on that group of rich people's side. Having the technical skill to draw up a law usually means you're a lawyer; and being a lawyer usually means you're not poor; but the circumstance that the poor need to outsource their law-drafting and the rich don't need to doesn't change which side is getting final say on the language. The progressive income tax remains an exercise of self-interested political power, just like any tax-break for the rich; and its sheer magnitude dwarfs all the tax-breaks for the rich put together.

Politicians know what poor people want, they know if they don't give it to them they'll lose their jobs

Well, no... they know that if they don't WIN ELECTIONS they will loose their jobs. American politicians do not win elections by passing popular laws, they win elections by running effective campaigns. This is why politicians who pass unpopular laws still manage to get reelected and politicians who pass popular laws are often defeated by better-funded challengers running on campaign promises they have no intention of keeping.

You are not nearly naive enough for me to have to explain this to you.

You are ignoring the Overton window. What politicians can accomplish by campaign tactics is to moderately bend policy in their preferred direction while staying within the range of ideas the public sees as okay to consider. Step outside the window and the voters will turn on you. Poor people who can easily be manipulated to tolerate actions marginally against their interests would not be successfully manipulated into tolerating an increase in their tax rates up to rich people's levels. Likewise, any politician who tried to reduce rich people's rates down to as low as poor people's rates would find he couldn't manipulate his fellow legislators into agreeing to cut off the source of the chief means by which they exercise their power. Making tax levels non-progressive is outside the window of tolerable ideas.

How can whether a law is just or unjust depend on who authored it?

Because obtaining access to a politician through bribery is unethical; using said access to influence legislative action in your own favor, doubly so.

You are not nearly naive enough for me to have to explain THIS to you either.

I didn't ask you to explain bribery to me. Why are you equating bribery with who writes a law? You can bribe a politician to write a law in your favor without writing it yourself; and you can write a proposal for a law and persuade a politician that it would be a good idea to pass it without bribing him.

A law is just or unjust based on what it commands the people to do, not based on who drew it up. Duh!

The law exists, in theory, as a means to regulate society and encourage constructive behavior among all citizens, which is why it is assumed that rich people and poor people have to obey the same laws and have the same penalties for violating them. What is just and fair for a rich person is assumed to be just and fair for a poor person and thus both are held to the same standard of behavior.

Yes, that's how it's supposed to be. And yet you proposed a standard, and when rich people violate it you dream of beating them to death with bars of soap, whereas when poor people violate it you leap to their defense.

It's not a standard poor people are capable of violating; bribing politicians requires both personal access and a large amount of money. Poor people have neither.

But "bribing politicians" is not the standard you proposed. Here are your exact words:

Because your position of power to change the rules so you don't "Have to" pay taxes anymore is unethical.​

You were using the phrase "don't have to pay taxes any more" in reference to an article about rich people arranging for themselves a tax rate of "less than 17%". The poor in this country have certainly used their position of power to arrange for themselves a tax rate of less than 17%. Therefore what they have done is "unethical", according to the standard you posted. If you want to make believe that the ethical standard we're arguing about was a rule against bribing rather than a rule against using political power to get yourself a low tax rate, I can't stop you; but what you wrote is in full public view.

And no, having a superpac agree to run $300,000 worth of attack ads against your opponent in exchange for a "no" vote on a key piece of legislation is NOT the same thing as "donating to a campaign fund." You are CERTAINLY not naive enough for me to have to explain that to you and it seems clear at this point you are simply taking the piss.

Have you considered the merits of not taking for granted that I either naively or duplicitously took some position you find unreasonable, and instead fact-checking your first impression that I took that unreasonable position at all? I didn't say those are the same thing. Why did you even write "donating to a campaign fund" and put it in freaking quotation marks? Who the devil do you imagine you're quoting? I haven't said a bloody word about donating to campaign funds. When rich people want to help a candidate win they spend money on his behalf. When poor people want to help a candidate win they vote for him. The latter tends to provide more votes than the former.

And no, don't even go there -- neither am I saying that buying an ad for a politician is "the same thing" as voting for him. "The same thing" is your bugaboo, not mine. I'm simply pointing out that voting is an exercise of political power, and when a voter does it for the purpose of getting the law not to hold the rich and the poor to the same standard of behavior, he's applying a double standard, and he's using his political power to undermine the law's purpose, as you say, "to regulate society and encourage constructive behavior among all citizens".

Three strikes you're out. The rest of your responses in this thread will be ignored.

Please yourself. Your argument remains an exercise in ingroup favoritism.

 

[Crazy Eddie]

For the same reason it makes a difference which side of a negotiation gets final say on the language of a contract or a treaty. I am 99% sure you do not actually need me to explain that.

Oh, for the love of god. People are not sides.

There you are, feigning naiveté again.

They are when the document in question will provide an advantage to one person at the expense of the other. In such a case, it does INDEED matter which person decides who gets the biggest advantage and who gets the biggest disadvantage.

Ethical guidelines for campaign contributions and direct contributions exist for this very reason, to avoid undue influence of individuals and/or organizations in legislative policy. Elected officials are supposed to be impartial, are supposed to make reasoned decisions based on the interests of all the people in their community; they are NOT supposed to draft legislation specifically tailored to benefit their friends and donors.

You are ignoring the Overton window.

I'm not forgetting it at all, I just discount it because it doesn't appear to be true. You can make just about anything seem reasonable with good enough PR; if you can't make it seem reasonable, the next easiest thing is to avoid talking about it at all.

I don't pull for "ideal solutions" to anything. Elected officials have a responsibility to look at public policy from a standpoint of the greatest possible public good. The moment they start implementing the private agendas of their supporters as policy, they are abdicating their responsibilities.

If there was a huge group of poor people with similar power -- community thinktanks controlling billions of dollars that can shape policy debates, media coverage and could even monopolize cable news with pre-planned talking points 24/7, that would be one thing. But that's not what we're seeing here; there is a disparity of access and power between the rich and the poor, and rather than use that power to drive greater national efficiency, wealthy donors are using that access to drive policies that benefit themselves, usually to the disadvantage of everyone else and ultimately (and ironically, accidentally) to the detriment of the entire country.

What it all comes down to in the end is that CORRUPTION IS ILLEGAL FOR A REASON. If there was nothing wrong with bribing politicians, then it really wouldn't matter who wrote legislation or to whose benefit; if poor people didn't want to get disadvantaged, they would just come up with a better bribe.

The poor in this country have certainly used their position of power to arrange for themselves a tax rate of less than 17%.

Here is you, once again denying the existence of influence peddling. You're smarter than that, which is how I know you're just jerking off.

Your argument remains an exercise in ingroup favoritism.

It's an argument in favor of integrity statesmanship. Your counter argument being essentially "bribery and voting are the same thing" doesn't change this.

 

[Bomb#20]

Oh, for the love of god. People are not sides.

There you are, feigning naiveté again.

There you are, making a false, abusive claim about me that you don't have any reason to believe is true, again. You evidently have no interest in a substantive discussion, only interest in smearing me for the sin of disagreeing with your ideology.

What it all comes down to in the end is that CORRUPTION IS ILLEGAL FOR A REASON. If there was nothing wrong with bribing politicians, then <snip>

And here you are, insinuating that I need to be argued into disapproving of corruption, even though I've given every indication that I already disapprove of corruption -- apparently even more than you do, since you appear to have no objection to voters voting corruptly.

The poor in this country have certainly used their position of power to arrange for themselves a tax rate of less than 17%.

Here is you, once again denying the existence of influence peddling. You're smarter than that, which is how I know you're just jerking off.

There is me, neither there nor anywhere else denying the existence of influence peddling. You made that up out of whole cloth. Apparently you did it because you've decided I'm an enemy and you don't think whether the things you say about enemies are true or not matters enough to make it worth the effort of applying three seconds of critical thought to your accusations against them.

Your argument remains an exercise in ingroup favoritism.

It's an argument in favor of integrity statesmanship.

No, it's an argument in favor of your outgroup practicing integrity statesmanship. That's not precisely the same thing as an argument in favor of integrity statesmanship.

Your counter argument being essentially "bribery and voting are the same thing" doesn't change this.

Your reading comprehension problem causing you to read what I wrote and fantasize that it means something quite different from what it says doesn't change the fact that my argument is not "bribery and voting are the same thing". Stop putting words in my mouth. Stop arguing corruptly.

 

[Bomb#20]

And..? Supply and demand curves crossing doesn't mean MC=MR. Neoclassical theory needs rising MC.

I don't know where you're getting that. Marshall's "Principles of Economics" is pretty much the foundational textbook of neoclassical theory; it's got two whole chapters devoted to economies of scale.

Profit-maximising firms should otherwise want to produce without limit - which they patently don't - unless MR were decreasing above some point. A reasonable assumption,

Well, yeah. How could MR not be decreasing above some point? If you produce without limit you won't be able to sell everything you produce. Customers willing to pay a dollar a transistor when my industry was making a few million transistors a year didn't stay willing to pay that when we were making trillions of them. Of course in the semiconductor business marginal costs are falling as production rises, but at some point the price will fall so fast marginal revenue declines. When I joined the industry there were hundreds of manufacturers; now that we're making quintillions of transistors a year, there are only a handful remaining. All those other companies folded or went off to do something different because their marginal revenues kept going down faster than their marginal costs were going down.

but then MC=MR wouldn't necessarily maximise profits, you wouldn't have independent supply and demand curves, firms aren't price-takers etc.

Since when does neoclassical theory say MC=MR necessarily maximizes profits? It only maximizes profits when the market is competitive. That's why we have laws against price-fixing agreements, why we have government regulators supervising natural monopolies like utilities, and so forth.

Not that typical real firms even make any such calculation, so MC=MR is a bold assertion regardless.

I don't see how the lack of such calculations matters any more than it matters that Beckham didn't do differential equations in his head in order to get his foot into the path of a ball -- he evidently used some method that got the same answer as solving the differential equation would have. A real firm makes decisions using some procedure that typically approximates the results of calculating marginal costs and marginal revenues, even if that procedure is completely different and idiosyncratic to that individual firm, or else it'll be less profitable than firms that do approximate those results, so it'll grow slower or not at all, so it'll end up as a minor firm rather than a typical firm (where a "typical" firm is defined as the producer of a typical product).

..which wasn't the point anyway. Whether an MC=MR equilibrium or not, it's a suboptimal one where the inefficiency might be mitigated by the kinds of interventions neoclassical economists claim cause inefficiency under rising MC. Works for me, but it's no accident that neoclassical theory continues to assert an empirical falsehood.

Which interventions are you talking about? Deficit spending and public works during recessions? Those have been pretty-much standard elements of neoclassical economics since Keynes. I'm not seeing where the theory asserts an empirical falsehood, other than the sort of simplifying approximations you have to make in any social science. You can hardly utter any generalization involving humans at all without having it foiled somewhere by the annoying complexity of reality.

Firstly, the people imposing austerity probably do understand that a nation-state isn't just a big household. George Osborne and his advisors almost certainly do but his party is selling austerity on that basis. The last thing the rich (whose interests they represent) want is gov't devaluing the money they charge rent on.

Hey, what do I know of Osborne? Elected officials of all parties should probably be presumed guilty until proven innocent. But it's only been a few years since Britain had 5% inflation. Maybe Osborne just has slow reactions.

 

[DBT]

It still remains that those at the top of the heap, the very rich, are in a better position to influence government and take advantage of tax laws and loopholes that are designed by clever accountants and lawyers to favour the very rich.

Money apparently, contrary to natural law, flows upwards but only trickles downwards.

 

[laughing dog]

Since when does neoclassical theory say MC=MR necessarily maximizes profits?

Since always. As long as MR>MC, an additional unit of output generates more in additional revenue than the additional cost of making it: profits increase. Notice that does not depend on the market structure. So, any profit-maximizing firm will increase production as long as MR>MC. In neoclassical theory, at some point either MR begins to decrease or MC begins to increase as production increase, so eventually MR=MC. Producing until MR=MC maximizes profits (or minimizes losses, depending on fixed costs).

 

[Bomb#20]

Since always. As long as MR>MC, an additional unit of output generates more in additional revenue than the additional cost of making it: profits increase. Notice that does not depend on the market structure. So, any profit-maximizing firm will increase production as long as MR>MC. In neoclassical theory, at some point either MR begins to decrease or MC begins to increase as production increase, so eventually MR=MC. Producing until MR=MC maximizes profits (or minimizes losses, depending on fixed costs).

You're right of course. Gah! Mixing up the MR curve with the demand curve. It's been too long since I took this stuff. Good god I'm getting old!

 

[Canard DuJour]

And..? Supply and demand curves crossing doesn't mean MC=MR. Neoclassical theory needs rising MC.

I don't know where you're getting that.

And I still don't know where you get the idea that supply and demand curves crossing means MC=MR.

Marshall's "Principles of Economics" is pretty much the foundational textbook of neoclassical theory; it's got two whole chapters devoted to economies of scale.

All the weirder that he asserted rising MC then.

Profit-maximising firms should otherwise want to produce without limit - which they patently don't - unless MR were decreasing above some point. A reasonable assumption,

Well, yeah. How could MR not be decreasing above some point? If you produce without limit you won't be able to sell everything you produce. Customers willing to pay a dollar a transistor when my industry was making a few million transistors a year didn't stay willing to pay that when we were making trillions of them. Of course in the semiconductor business marginal costs are falling as production rises, but at some point the price will fall so fast marginal revenue declines. When I joined the industry there were hundreds of manufacturers; now that we're making quintillions of transistors a year, there are only a handful remaining. All those other companies folded or went off to do something different because their marginal revenues kept going down faster than their marginal costs were going down.

Yep, and an equilibrium where firms produce at below capacity because they anticipate MR falling faster than MC is very different from one where price-taking firms stop producing when rising MC equals MR. That doesn't rescue neoclassical theory, it renders it nigh irrelevant. The former does not even tend toward the latter and the policy implications are nearly reversed.

but then MC=MR wouldn't necessarily maximise profits, you wouldn't have independent supply and demand curves, firms aren't price-takers etc.

Since when does neoclassical theory say MC=MR necessarily maximizes profits? It only maximizes profits when the market is competitive. That's why we have laws against price-fixing agreements, why we have government regulators supervising natural monopolies like utilities, and so forth.

You've apparently realised you're wrong here but your comment barely addressed the point anyway.

Not that typical real firms even make any such calculation, so MC=MR is a bold assertion regardless.

I don't see how the lack of such calculations matters any more than it matters that Beckham didn't do differential equations in his head in order to get his foot into the path of a ball -- he evidently used some method that got the same answer as solving the differential equation would have. A real firm makes decisions using some procedure that typically approximates the results of calculating marginal costs and marginal revenues, even if that procedure is completely different and idiosyncratic to that individual firm, or else it'll be less profitable than firms that do approximate those results, so it'll grow slower or not at all, so it'll end up as a minor firm rather than a typical firm (where a "typical" firm is defined as the producer of a typical product).

Well no, because when theoretical entities are translated into behaviour of real firms, they don't make the calculations imputed by theory and those calculations aren't necessarily profit-maximising under real conditions.

..which wasn't the point anyway. Whether an MC=MR equilibrium or not, it's a suboptimal one where the inefficiency might be mitigated by the kinds of interventions neoclassical economists claim cause inefficiency under rising MC. Works for me, but it's no accident that neoclassical theory continues to assert an empirical falsehood.

Which interventions are you talking about? Deficit spending and public works during recessions?

Those and, more generally, stuff which increases wage share/flattens income distribution. Not that each and every intervention helps (for I hear the rustle of straw..) but that laissez-faire begets a sub-optimal equilibrium over the long run.

Those have been pretty-much standard elements of neoclassical economics since Keynes.

Sorry but you don't know what you're on about.

I'm not seeing where the theory asserts an empirical falsehood, other than the sort of simplifying approximations you have to make in any social science. You can hardly utter any generalization involving humans at all without having it foiled somewhere by the annoying complexity of reality.

The empirical falsehood is rising MC, which is no more a simplifying approximation than falling or flat MC observed in real firms. But key assumptions like independent supply and demand curves, price-taking firms etc need it so theory continues to assert it. Worse, as Steve Keen puts it :

"If marginal returns are constant rather than falling, then the neoclassical explanation of everything collapses. Not only can economic theory no longer explain how much a firm produces, it can explain nothing else.

Take, for example, the economic theory of employment and wage determination. The theory asserts that the real wage is equivalent to the marginal product of labour. The argument goes that each employer takes the wage level as given since with competitive markets no employer can affect the price of his inputs. An employer will employ an additional worker if the amount the worker adds to output - the worker's marginal product - exceeds the real wage. The employer stops employing once the marginal product of the last one has fallen to the same level as the real wage.

This explains the predilection for blaming everything on wages being too high (neoclassical economics can be summed up, as Galbraith once remarked, in the twin propositions that the poor don't work hard enough because they're paid too much, and the rich don't work hard enough because they're not paid enough). The output of the firm is subject to diminishing marginal returns, and thus marginal product falls as output increases. The wage is unaffected by the output level of the firm. The firm will keep on hiring workers until the marginal product of the last worker equals the the real wage.

Since the rational employer stops at that point, the real wage - which the employer takes as given - determines how many workers this firm employs. If society desires a higher level of employment and output, then the way to get it is to reduce the real wage. The real wage in turn is determined by the willingness of workers to forgo leisure for income, so that ultimately the level of employment is determined by workers.

If in fact the output-to-employment relationship is relatively constant, then the neoclassical explanation of employment and output determination collapses. With a flat production function, the marginal product of labour will be constant and it will never intersect the real wage. The output of the firm then can't be explained by the cost of employing labour, and neoclassical economics simply explains nothing: neither the the level of employment, nor output, nor, ultimately, what determines the real wage."​

Firstly, the people imposing austerity probably do understand that a nation-state isn't just a big household. George Osborne and his advisors almost certainly do but his party is selling austerity on that basis. The last thing the rich (whose interests they represent) want is gov't devaluing the money they charge rent on.

Hey, what do I know of Osborne? Elected officials of all parties should probably be presumed guilty until proven innocent. But it's only been a few years since Britain had 5% inflation. Maybe Osborne just has slow reactions.

I'm happy to leave that "argument" standing on its merits.

 

[Bomb#20]

I don't know where you're getting that.

And I still don't know where you get the idea that supply and demand curves crossing means MC=MR.

I think we already established that I was confusing some curves. Consider my statement withdrawn. Now what's the basis for your not-yet-withdrawn claim that Neoclassical theory needs rising MC?

Marshall's "Principles of Economics" is pretty much the foundational textbook of neoclassical theory; it's got two whole chapters devoted to economies of scale.

All the weirder that he asserted rising MC then.

Cite?

(It should be noted, of course, that MC rises in the asymptotic limit simply due to physical limitations. You can't increase production of platinum beyond what's already present in the Earth unless you go into space to get it or you transmute something into it in a nuclear reactor, either of which will cost a bundle. No doubt there is some economist somewhere who said MC rises, purely based on that sort of theoretical consideration. That doesn't mean he was claiming MC rises for practical purposes when realistic amounts are being produced; it certainly doesn't mean neoclassical theory requires it.)

Profit-maximising firms should otherwise want to produce without limit - which they patently don't - unless MR were decreasing above some point. A reasonable assumption,

Well, yeah. How could MR not be decreasing above some point? ... All those other companies folded or went off to do something different because their marginal revenues kept going down faster than their marginal costs were going down.

Yep, and an equilibrium where firms produce at below capacity because they anticipate MR falling faster than MC is very different from one where price-taking firms stop producing when rising MC equals MR. That doesn't rescue neoclassical theory, it renders it nigh irrelevant. The former does not even tend toward the latter and the policy implications are nearly reversed.

Are you under the impression that neoclassical theory claims all firms are price-taking? In any event, there is no equilibrium in my industry -- Moore's Law pretty much guarantees that -- and it's not because of anticipation of falling MR that firms produce below capacity. It's because modern chip factories cost billions of dollars so there can only be a few of them, and you have to begin construction on them far in advance, before some of the photolithography equipment that will go in them has even been invented, so the executives who decide how much capacity to build have to guess how much production will cost and how much demand there will be years in the future; and building too little capacity is likely to be worse for your company's future than building too much.

Besides, so what if MC doesn't even tend toward MR? MR tends toward MC. What policy implications do you think that reverses?

but then MC=MR wouldn't necessarily maximise profits, you wouldn't have independent supply and demand curves, firms aren't price-takers etc.

Since when does neoclassical theory say MC=MR necessarily maximizes profits? It only maximizes profits when the market is competitive. That's why we have laws against price-fixing agreements, why we have government regulators supervising natural monopolies like utilities, and so forth.

You've apparently realised you're wrong here but your comment barely addressed the point anyway.

Well, I've realized I'm wrong here in the sense that neoclassical theory does say MC=MR implies a local profit extremum; but LD's argument nails you here every bit as much as it nailed me. "As long as MR>MC, an additional unit of output generates more in additional revenue than the additional cost of making it: profits increase." So what's your scenario for MR decreasing above some point causing MC=MR not to maximize profits? Do you have either theory or empirical evidence that shows some company with MR different from MC has in fact maximized profit?

As far as addressing the rest of the point goes, sorry, I thought you were deriving the rest of it from the initial premise that I misunderstood due to my aforementioned curve mix-up. My bad. So do you have any citation showing that neoclassical theory assumes independent supply and demand curves, and assumes firms are price-takers?

I don't see how the lack of such calculations matters any more than it matters that Beckham didn't do differential equations in his head in order to get his foot into the path of a ball -- he evidently used some method that got the same answer as solving the differential equation would have. ...

Well no, because when theoretical entities are translated into behaviour of real firms, they don't make the calculations imputed by theory...

Are you merely repeating a claim not in contention, or do you mean that whatever decision procedure real firms use doesn't get roughly the same answer as those calculations?

... and those calculations aren't necessarily profit-maximising under real conditions.

It is of course entirely possible for the MC or MR curve to be non-monotonic over a short range, which could lead to MR dropping below MC at two different production levels. So they could both be local profit maxima but only one is the global profit maximum. Is that the scenario you're talking about? That's much more likely to happen at a very small firm than at the large firms that make up the bulk of a modern economy. Do you have evidence that any large firm that has not profit-maximized is nonetheless at MC=MR?

If that's not the scenario you're talking about, what makes you think the calculations imputed by theory aren't necessarily profit-maximising under real conditions?

..which wasn't the point anyway. Whether an MC=MR equilibrium or not, it's a suboptimal one where the inefficiency might be mitigated by the kinds of interventions neoclassical economists claim cause inefficiency under rising MC. Works for me, but it's no accident that neoclassical theory continues to assert an empirical falsehood.

Which interventions are you talking about? Deficit spending and public works during recessions?

Those and, more generally, stuff which increases wage share/flattens income distribution. Not that each and every intervention helps (for I hear the rustle of straw..) but that laissez-faire begets a sub-optimal equilibrium over the long run.

Are you suggesting that neoclassical theory claims that laissez-faire begets an optimally efficient equilibrium over the long run, Mr. rustle of straw? Laissez-faire begets price-fixing arrangements. When has neoclassical theory ever endorsed restraint of trade or rejected interventions requiring producers to compete with one another?

As far as interventions to increase wage share and flatten income distribution are concerned, what evidence do you have that those interventions don't cause inefficiency? People normally advocate such interventions because they think it would be good to benefit one type of person at the expense of some other type, not because the lack of such interventions is inefficient. If you mean the practices neoclassical economics says are efficient are in fact a suboptimal equilibrium, but based on some optimality criterion other than efficiency, I don't think neoclassical economics takes any position at all on that. It isn't a theory of morality.

Those have been pretty-much standard elements of neoclassical economics since Keynes.

Sorry but you don't know what you're on about.

"We're all Keynesians now." -- Milton Friedman

I'm not seeing where the theory asserts an empirical falsehood...

The empirical falsehood is rising MC...

So help me out here. Where does neoclassical theory assert rising MC?

Worse, as Steve Keen puts it :

"If marginal returns are constant rather than falling, then the neoclassical explanation of everything collapses. Not only can economic theory no longer explain how much a firm produces, it can explain nothing else.

Take, for example, the economic theory of employment and wage determination. The theory asserts that the real wage is equivalent to the marginal product of labour. The argument goes that each employer takes the wage level as given since with competitive markets no employer can affect the price of his inputs. An employer will employ an additional worker if the amount the worker adds to output - the worker's marginal product - exceeds the real wage. The employer stops employing once the marginal product of the last one has fallen to the same level as the real wage.

This explains the predilection for blaming everything on wages being too high (neoclassical economics can be summed up, as Galbraith once remarked, in the twin propositions that the poor don't work hard enough because they're paid too much, and the rich don't work hard enough because they're not paid enough). The output of the firm is subject to diminishing marginal returns, and thus marginal product falls as output increases. The wage is unaffected by the output level of the firm. The firm will keep on hiring workers until the marginal product of the last worker equals the the real wage.

Since the rational employer stops at that point, the real wage - which the employer takes as given - determines how many workers this firm employs. If society desires a higher level of employment and output, then the way to get it is to reduce the real wage. The real wage in turn is determined by the willingness of workers to forgo leisure for income, so that ultimately the level of employment is determined by workers.

If in fact the output-to-employment relationship is relatively constant, then the neoclassical explanation of employment and output determination collapses. With a flat production function, the marginal product of labour will be constant and it will never intersect the real wage. The output of the firm then can't be explained by the cost of employing labour, and neoclassical economics simply explains nothing: neither the the level of employment, nor output, nor, ultimately, what determines the real wage."​

Huh? We were talking about marginal revenue and marginal cost. Why are you and Keen bringing up marginal returns and marginal product? Neoclassical theory doesn't assert that the real wage is equivalent to the marginal product. What the heck do "The real wage is equivalent to the marginal product of labour." and "The marginal product of the last one has fallen to the same level as the real wage." even mean? They're like "The temperature has fallen to the same level as the rainfall." The units are wrong. "The real wage" is in pounds Sterling. "Marginal product" -- "the amount the worker adds to output" -- is in units of output. It's measured in widgets, or whatever it is the firm makes. The entire argument appears to be a category error.

Is Keen perhaps taking for granted that the price of widgets is an unalterable constant, so he gets to treat his utterances as meaningful sentences simply by applying the known exchange rate between pounds and widgets, as if the problem were merely that a widget is a dollar rather than a pound? Price isn't constant, especially in a constant marginal product situation. When the marginal product is constant it's rational for the employer to increase production until the consequently falling price drives the marginal revenue down to the marginal cost.

Maybe Osborne just has slow reactions.

I'm happy to leave that "argument" standing on its merits.

It wasn't an argument, just a confession that I don't have ESP. If you have ESP, yay you. If the UK has another couple of years of zero inflation and Osborne is still pushing austerity, I'll suspect you're right about him. Either way it doesn't justify criticizing the rich for saving too much, because it isn't the average rich guy's fault that the government is pursuing austerity. Policy makers like Osborne pay no more attention to the opinion of the average rich guy than they pay to yours or mine.

 

[Crazy Eddie]

since you appear to have no objection to voters voting corruptly.

"Voting corruptly" is an oxymoron. The whole POINT of a democracy is that the will of the people is expressed in the aggregate of their votes. Corruption is the deliberate subversion of democracy for ones own personal gain.

And I'm assuming you're feigning naiveté because I cannot bring myself to believe you could possibly not be aware of this. If you actually BELIEVED that there is something ethically questionable about voters casting votes in their own best interests, I'd be forced to question your sanity.

No, it's an argument in favor of your outgroup practicing integrity statesmanship.

Since my "outgroup" is essentially "Everyone who isn't trying to fuck everyone else over for their own personal benefit" I don't see a huge problem with this.

my argument is not "bribery and voting are the same thing"

Right, you consider voting and CORRUPTION to be the same thing. I'll endeavor to be more precise next time.

 

[Canard DuJour]

And I still don't know where you get the idea that supply and demand curves crossing means MC=MR.

I think we already established that I was confusing some curves. Consider my statement withdrawn. Now what's the basis for your not-yet-withdrawn claim that Neoclassical theory needs rising MC?

The one I've spelled out in the last two posts. With flat MC and flat MR, profit-maximising firms should want to produce without limit, which they patently don't. But anything other than flat MR means you don't have price-taking firms, independent supply and demand curves, a single optimal equilibrium price and all the rest of it. Similarly, flat marginal labour productivity will never intersect flat MR. Without rising MC, marginalism can't explain production, prices or wages without undermining more basic tenets.

Marshall's "Principles of Economics" is pretty much the foundational textbook of neoclassical theory; it's got two whole chapters devoted to economies of scale.

All the weirder that he asserted rising MC then.

Cite?

(It should be noted, of course, that MC rises in the asymptotic limit simply due to physical limitations. You can't increase production of platinum beyond what's already present in the Earth unless you go into space to get it or you transmute something into it in a nuclear reactor, either of which will cost a bundle. No doubt there is some economist somewhere who said MC rises, purely based on that sort of theoretical consideration. That doesn't mean he was claiming MC rises for practical purposes when realistic amounts are being produced; it certainly doesn't mean neoclassical theory requires it.)

Profit-maximising firms should otherwise want to produce without limit - which they patently don't - unless MR were decreasing above some point. A reasonable assumption,

Well, yeah. How could MR not be decreasing above some point? ... All those other companies folded or went off to do something different because their marginal revenues kept going down faster than their marginal costs were going down.

Yep, and an equilibrium where firms produce at below capacity because they anticipate MR falling faster than MC is very different from one where price-taking firms stop producing when rising MC equals MR. That doesn't rescue neoclassical theory, it renders it nigh irrelevant. The former does not even tend toward the latter and the policy implications are nearly reversed.

Are you under the impression that neoclassical theory claims all firms are price-taking?

No, "all" would be a silly pedantic equivocation of the generalisation that "Separation of consumption and production decisions in the neoclassical framework requires the assumption of price-taking behaviour both by households and by firms" (The Theory of the Firm, Spulber, Camridge University Press).

In any event, there is no equilibrium in my industry -- Moore's Law pretty much guarantees that -- and it's not because of anticipation of falling MR that firms produce below capacity. It's because modern chip factories cost billions of dollars so there can only be a few of them, and you have to begin construction on them far in advance, before some of the photolithography equipment that will go in them has even been invented, so the executives who decide how much capacity to build have to guess how much production will cost and how much demand there will be years in the future; and building too little capacity is likely to be worse for your company's future than building too much.

Bingo, same in any industry I've worked in and exactly why Sraffa, Keynes and others argued that firms in an industrialised economy typically don't face rising MC. But then the question remains as to why price-taking firms aren't producing at capacity if they don't anticipate falling MR and profits are maximised when MC=MR. It makes sense if MC is rising, but real firms overwhelmingly have falling to flat MC.

Besides, so what if MC doesn't even tend toward MR?

No, I meant the one kind of equilibrium doesn't even tend towards the other.

but then MC=MR wouldn't necessarily maximise profits, you wouldn't have independent supply and demand curves, firms aren't price-takers etc.

Since when does neoclassical theory say MC=MR necessarily maximizes profits? It only maximizes profits when the market is competitive. That's why we have laws against price-fixing agreements, why we have government regulators supervising natural monopolies like utilities, and so forth.

You've apparently realised you're wrong here but your comment barely addressed the point anyway.

Well, I've realized I'm wrong here in the sense that neoclassical theory does say MC=MR implies a local profit extremum; but LD's argument nails you here every bit as much as it nailed me. "As long as MR>MC, an additional unit of output generates more in additional revenue than the additional cost of making it: profits increase." So what's your scenario for MR decreasing above some point causing MC=MR not to maximize profits? Do you have either theory or empirical evidence that shows some company with MR different from MC has in fact maximized profit?

Yup, as Sraffa et al pointed out, real firms and consumers can't abstract time like theory does. Say you're mass-producing widgets with flat MC - say $1.00 - and falling MR, and you produce enough that MR=MC. The consumer hasn't a clue whether she's buying widget number one or one million - a typically meaningless distinction anyway. All she knows is that widgets are so plentiful they can be had for $1.00. She wouldn't and couldn't say "Oh that's widget number 10 with a MR of $1.50, so that's what I'll pay". Producing until MC=MR would then reduce profit to zero.

As far as addressing the rest of the point goes, sorry, I thought you were deriving the rest of it from the initial premise that I misunderstood due to my aforementioned curve mix-up. My bad. So do you have any citation showing that neoclassical theory assumes independent supply and demand curves, and assumes firms are price-takers?

I don't see how the lack of such calculations matters any more than it matters that Beckham didn't do differential equations in his head in order to get his foot into the path of a ball -- he evidently used some method that got the same answer as solving the differential equation would have. ...

Well no, because when theoretical entities are translated into behaviour of real firms, they don't make the calculations imputed by theory...

Are you merely repeating a claim not in contention, or do you mean that whatever decision procedure real firms use doesn't get roughly the same answer as those calculations?

... and those calculations aren't necessarily profit-maximising under real conditions.

It is of course entirely possible for the MC or MR curve to be non-monotonic over a short range, which could lead to MR dropping below MC at two different production levels. So they could both be local profit maxima but only one is the global profit maximum. Is that the scenario you're talking about? That's much more likely to happen at a very small firm than at the large firms that make up the bulk of a modern economy. Do you have evidence that any large firm that has not profit-maximized is nonetheless at MC=MR?

If that's not the scenario you're talking about, what makes you think the calculations imputed by theory aren't necessarily profit-maximising under real conditions?

..which wasn't the point anyway. Whether an MC=MR equilibrium or not, it's a suboptimal one where the inefficiency might be mitigated by the kinds of interventions neoclassical economists claim cause inefficiency under rising MC. Works for me, but it's no accident that neoclassical theory continues to assert an empirical falsehood.

Which interventions are you talking about? Deficit spending and public works during recessions?

Those and, more generally, stuff which increases wage share/flattens income distribution. Not that each and every intervention helps (for I hear the rustle of straw..) but that laissez-faire begets a sub-optimal equilibrium over the long run.

Are you suggesting that neoclassical theory claims that laissez-faire begets an optimally efficient equilibrium over the long run, Mr. rustle of straw?

Under competitive conditions, yes. But the reality suggests a demand-constrained, below-capacity equilibrium regardless.

Laissez-faire begets price-fixing arrangements. When has neoclassical theory ever endorsed restraint of trade or rejected interventions requiring producers to compete with one another?

Beside the point.

As far as interventions to increase wage share and flatten income distribution are concerned, what evidence do you have that those interventions don't cause inefficiency? People normally advocate such interventions because they think it would be good to benefit one type of person at the expense of some other type, not because the lack of such interventions is inefficient. If you mean the practices neoclassical economics says are efficient are in fact a suboptimal equilibrium, but based on some optimality criterion other than efficiency, I don't think neoclassical economics takes any position at all on that. It isn't a theory of morality.

No I mean in terms of production, consumption and employment.

Those have been pretty-much standard elements of neoclassical economics since Keynes.

Sorry but you don't know what you're on about.

"We're all Keynesians now." -- Milton Friedman

I'm not seeing where the theory asserts an empirical falsehood...

The empirical falsehood is rising MC...

So help me out here. Where does neoclassical theory assert rising MC?

Worse, as Steve Keen puts it :

"If marginal returns are constant rather than falling, then the neoclassical explanation of everything collapses. Not only can economic theory no longer explain how much a firm produces, it can explain nothing else.

Take, for example, the economic theory of employment and wage determination. The theory asserts that the real wage is equivalent to the marginal product of labour. The argument goes that each employer takes the wage level as given since with competitive markets no employer can affect the price of his inputs. An employer will employ an additional worker if the amount the worker adds to output - the worker's marginal product - exceeds the real wage. The employer stops employing once the marginal product of the last one has fallen to the same level as the real wage.

This explains the predilection for blaming everything on wages being too high (neoclassical economics can be summed up, as Galbraith once remarked, in the twin propositions that the poor don't work hard enough because they're paid too much, and the rich don't work hard enough because they're not paid enough). The output of the firm is subject to diminishing marginal returns, and thus marginal product falls as output increases. The wage is unaffected by the output level of the firm. The firm will keep on hiring workers until the marginal product of the last worker equals the the real wage.

Since the rational employer stops at that point, the real wage - which the employer takes as given - determines how many workers this firm employs. If society desires a higher level of employment and output, then the way to get it is to reduce the real wage. The real wage in turn is determined by the willingness of workers to forgo leisure for income, so that ultimately the level of employment is determined by workers.

If in fact the output-to-employment relationship is relatively constant, then the neoclassical explanation of employment and output determination collapses. With a flat production function, the marginal product of labour will be constant and it will never intersect the real wage. The output of the firm then can't be explained by the cost of employing labour, and neoclassical economics simply explains nothing: neither the the level of employment, nor output, nor, ultimately, what determines the real wage."​

Huh? We were talking about marginal revenue and marginal cost. Why are you and Keen bringing up marginal returns and marginal product?

Huh? Why wouldn't we?

Neoclassical theory doesn't assert that the real wage is equivalent to the marginal product.

WIKI : "In the neoclassical theory of competitive markets, the marginal product of labor equals the real wage."

Sorry, but you don't know what you're on about.

What the heck do "The real wage is equivalent to the marginal product of labour." and "The marginal product of the last one has fallen to the same level as the real wage." even mean? They're like "The temperature has fallen to the same level as the rainfall." The units are wrong. "The real wage" is in pounds Sterling. "Marginal product" -- "the amount the worker adds to output" -- is in units of output. It's measured in widgets, or whatever it is the firm makes. The entire argument appears to be a category error.

Doesn't even address the argument. The bit you're objecting to is pretty standard exposition of neoclassical theory. If the quantities aren't commensurable, then it's nonsense to say the wage equals the worker's marginal revenue product, which is implicit in marginal product assuming flat MR. Also, the nominal wage is £ sterling; the real wage means the quantity of goods and services it can buy.

Is Keen perhaps taking for granted that the price of widgets is an unalterable constant,

No, and nothing in the above should lead you to think so. Flat MR doesn't mean constant prices it means prices unaffected by a firm's output level. You are by now attacking what you purport to defend without even addressing the criticism of it.

so he gets to treat his utterances as meaningful sentences simply by applying the known exchange rate between pounds and widgets, as if the problem were merely that a widget is a dollar rather than a pound? Price isn't constant, especially in a constant marginal product situation. When the marginal product is constant it's rational for the employer to increase production until the consequently falling price drives the marginal revenue down to the marginal cost.

Maybe Osborne just has slow reactions.

I'm happy to leave that "argument" standing on its merits.

It wasn't an argument, just a confession that I don't have ESP. If you have ESP, yay you. If the UK has another couple of years of zero inflation and Osborne is still pushing austerity, I'll suspect you're right about him. Either way it doesn't justify criticizing the rich for saving too much, because it isn't the average rich guy's fault that the government is pursuing austerity. Policy makers like Osborne pay no more attention to the opinion of the average rich guy than they pay to yours or mine.

..I'm happy to leave that standing on its merits too.

 

[Bomb#20]

"Voting corruptly" is an oxymoron. The whole POINT of a democracy is that the will of the people is expressed in the aggregate of their votes. Corruption is the deliberate subversion of democracy for ones own personal gain.

And I'm assuming you're feigning naiveté because I cannot bring myself to believe you could possibly not be aware of this. If you actually BELIEVED that there is something ethically questionable about voters casting votes in their own best interests, I'd be forced to question your sanity.

As a rule, whenever you feel forced to choose between assuming the guy you're talking to is insane and assuming he's feigning disbelief and actually secretly agrees with whatever unprovable metaphysical opinion you hold to be a self-evident truth, it's generally wiser to assume he's insane. In the first place, you're more likely to be right. And in the second place, it will often subsequently turn out that he has better arguments against believing your premise than you have for believing it; when that happens you don't come out looking like a jerk. When you decide your own certainty about the thing you believe in gives you privileged insight into some other person's thought processes, you are behaving like the Christians who wrote this:

"For the wrath of God is revealed from heaven against all ungodliness and unrighteousness of men, who by their unrighteousness suppress the truth. For what can be known about God is plain to them, because God has shown it to them. For his invisible attributes, namely, his eternal power and divine nature, have been clearly perceived, ever since the creation of the world, in the things that have been made. So they are without excuse." - Romans I, 18-20​

Those people were intellectually dishonest jerks. Don't emulate them.

"Voting corruptly" is an oxymoron. The whole POINT of a democracy is that the will of the people is expressed in the aggregate of their votes.​

isn't the sort of thing one can "be aware of", like the sky being blue. It's either an expression of personal ideology -- your way of saying "A majority vote gives me a warm fuzzy feeling and I name it 'the will of the people' in an attempt to induce the same warm fuzzy feeling about it in others" -- or else it's just metaphysical mumbo jumbo. You might as well tell me God is Love and tell me you cannot bring yourself to believe I could possibly "not be aware of this".

Democracy is not the sort of thing capable of having a "the whole point". "The whole point" of a thing is the goal it's inventor had in mind when he created it. Democracy wasn't invented by anyone. It gradually evolved by a long process of power struggle and compromise. Each little step on the convoluted path to democracy typically had one point to a guy who proposed it, a different point to a guy who popularized it, and a still different point to a guy who agreed to yield a bit of his power to it. Repeat on the next little step, with different points. And if that weren't enough, there is no such thing as the will of the people. "The will of the people" is a propaganda phrase. There is only the will of the majority and the will of the minority. To suppose that something being the will of the majority literally makes it the will of the people is to believe that the minority don't count as people.

The only "whole point"s that an uninvented abstraction like democracy can reasonably be said to have are the various purposes it serves in the minds of people who favor it. If the reason you favor democracy over alternative systems is because you're a near-Christian who accepts the central principle of Christian morality which is that "moral" means "giving the Supreme Wisher whatever he wants", and you disagree with Christians merely on the detail of exactly who the Supreme Wisher is, then it would be reasonable to describe that opinion by saying that the will of the majority whom you label "the people" getting measured by the aggregate of their votes and put into effect is the whole point of a democracy, to you.

But democracy can have a different point to a different person. To Winston Churchill and me, the point of a democracy is that all the other forms of government that have been tried are even worse, most of the time. To somebody else, the point may be to prevent every disaffected hothead with a militia from deluding himself that he can win because the people are on his side, and starting a civil war. None of our various respective points are any more the objective "whole point" than the other people's points; rather, each person is correct about what the point of democracy is to him. Points are observer-relative.

Corruption is the deliberate subversion of democracy for ones own personal gain.

When it was the will of the people, expressed in the aggregate of their votes, that non-whites be segregated and subjected to Jim Crow laws, mixed-race people who "passed" were subverting democracy for their own personal gain. Was that corruption?

When it's the will of the people, expressed in the aggregate of their votes, that Pakistani Sikhs pay the jizya, those who evade paying are subverting democracy for their own personal gain. Is that corruption?

When it was the will of the people, expressed in the aggregate of their votes, that Rwanda be ruled by a regime committing genocide, the Tutsis who overthrew the regime by force were subverting democracy for their own personal gain. Was that corruption?

If you actually BELIEVED that there is something ethically questionable about voters casting votes in their own best interests, I'd be forced to question your sanity.

Not being a near-Christian, I don't believe in the Supreme Wisher. What I actually believe is that it's monumentally brain-damaged to imagine that "The majority is always right" is a principle of ethics deserving the slightest bit more respect than "God is always right", or, for that matter, "Comrade Napoleon is always right." The white people who voted for segregation thought it was in their own best interests. The Muslims who voted for discriminatory taxes on non-Muslims thought it was in their own best interests. The Hutus who voted to put mass murderers in power thought it was in their own best interests. If you actually believe that there is nothing ethically questionable about voters casting votes for segregation or jizya or genocidal rulers, I am forced to question your sanity.

Note, however, that I don't assume you are feigning disagreement with me as to whether there is something ethically questionable about voters casting votes in their own best interests. People believe weird stuff. Deal with it. If you can't deal with infidels not sharing your metaphysical first principles, why the heck do you want to hang out in a forum for freethinkers?

No, it's an argument in favor of your outgroup practicing integrity statesmanship.

Since my "outgroup" is essentially <rabid character assassination of outgroup snipped> I don't see a huge problem with this.

That's pretty much how everybody who holds his ingroup and his outgroup to different standards views what he's doing. The details of the character assassination don't really matter all that much.

my argument is not "bribery and voting are the same thing"

Right, you consider voting and CORRUPTION to be the same thing. I'll endeavor to be more precise next time.

Endeavor harder. I do not consider voting and corruption to be the same thing. I consider voting for something to be an action like any other action; it may be subjected to moral judgment like any other action. Whether trying to make something happen is corrupt or not depends primarily on what you're trying to make happen; it typically doesn't depend on whether the method by which you try to make it happen is voting for it. Therefore a subset of voting is a subset of corruption. The voting circle and the corruption circle overlap on the Venn diagram. That is not the same thing as "voting and corruption are the same thing."

As far as I can tell, denying that voting can ever be corrupt is the same thing as believing the majority is the Supreme Wisher.

 

[Bomb#20]

Now what's the basis for your not-yet-withdrawn claim that Neoclassical theory needs rising MC?

The one I've spelled out in the last two posts. With flat MC and flat MR, profit-maximising firms should want to produce without limit, which they patently don't. But anything other than flat MR means you don't have price-taking firms, independent supply and demand curves, a single optimal equilibrium price and all the rest of it. Similarly, flat marginal labour productivity will never intersect flat MR. Without rising MC, marginalism can't explain production, prices or wages without undermining more basic tenets.

Are you saying "price-taking firms" is one of the most basic tenets of neoclassical economics?!? If MC is falling and just keeps falling then you're probably in an industry that's a natural monopoly, not one that tends toward having thousands of small suppliers. I don't recall an Econ textbook claiming there are no natural monopolies.

Yep, and an equilibrium where firms produce at below capacity because they anticipate MR falling faster than MC is very different from one where price-taking firms stop producing when rising MC equals MR. That doesn't rescue neoclassical theory, it renders it nigh irrelevant. The former does not even tend toward the latter and the policy implications are nearly reversed.

Are you under the impression that neoclassical theory claims all firms are price-taking?

No, "all" would be a silly pedantic equivocation of the generalisation that "Separation of consumption and production decisions in the neoclassical framework requires the assumption of price-taking behaviour both by households and by firms" (The Theory of the Firm, Spulber, Camridge University Press).

So that would imply that firms in natural-monopoly lines of work would be well-advised not to separate their consumption and production decisions. I'm not clear on why the neoclassical framework would founder on that reef. Many firms that separate consumption and production decisions are probably doing so because it makes management easier, or because their executives lack the vision to take on a huge corporate growth project, or because they can't persuade investors to share that vision, or because they're too risk-averse, or whatever, so they persist in price-taking behavior even when it's suboptimal. And many other firms don't act like price-takers. Perfect competition is an idealization that happens to be a decent approximation in some industries and not others; it's not a basic tenet.

Bingo, same in any industry I've worked in and exactly why Sraffa, Keynes and others argued that firms in an industrialised economy typically don't face rising MC. But then the question remains as to why price-taking firms aren't producing at capacity if they don't anticipate falling MR and profits are maximised when MC=MR. It makes sense if MC is rising, but real firms overwhelmingly have falling to flat MC.

What's the evidence that price-taking firms that aren't producing at capacity don't anticipate falling MR? MR can fall for other reasons than rising supply. If I were running a bakery and sales were booming this year I wouldn't automatically hire more staff and buy more equipment -- I'd be concerned there might be a recession next year and I'd have to sack people and keep making payments on empty ovens.

Besides, so what if MC doesn't even tend toward MR? MR tends toward MC.

No, I meant the one kind of equilibrium doesn't even tend towards the other.

I'm not following. What other type of equilibrium are you talking about besides MR=MC? Or do you mean MR doesn't tend toward MC? If that's what you mean, I don't see how it's possible. At some point you have to run out of new customers.

So what's your scenario for MR decreasing above some point causing MC=MR not to maximize profits? Do you have either theory or empirical evidence that shows some company with MR different from MC has in fact maximized profit?

Yup, as Sraffa et al pointed out, real firms and consumers can't abstract time like theory does. Say you're mass-producing widgets with flat MC - say $1.00 - and falling MR, and you produce enough that MR=MC. The consumer hasn't a clue whether she's buying widget number one or one million - a typically meaningless distinction anyway. All she knows is that widgets are so plentiful they can be had for $1.00. She wouldn't and couldn't say "Oh that's widget number 10 with a MR of $1.50, so that's what I'll pay". Producing until MC=MR would then reduce profit to zero.

You're making exactly the same mistake I made a few posts ago. See how easy it is? When widgets are so plentiful they can be had for $1.00, that's when the demand curve hits MC; but the MR curve is steeper than the demand curve so it hits MC earlier than that. Producing until MC=price reduces profit to zero; producing until MC=MR reduces marginal profit to zero; i.e. profit has reached its maximum.

..which wasn't the point anyway. Whether an MC=MR equilibrium or not, it's a suboptimal one where the inefficiency might be mitigated by the kinds of interventions neoclassical economists claim cause inefficiency under rising MC. Works for me, but it's no accident that neoclassical theory continues to assert an empirical falsehood.

Which interventions are you talking about? Deficit spending and public works during recessions?

Those and, more generally, stuff which increases wage share/flattens income distribution. Not that each and every intervention helps (for I hear the rustle of straw..) but that laissez-faire begets a sub-optimal equilibrium over the long run.

Are you suggesting that neoclassical theory claims that laissez-faire begets an optimally efficient equilibrium over the long run, Mr. rustle of straw?

Under competitive conditions, yes. But the reality suggests a demand-constrained, below-capacity equilibrium regardless.

Laissez-faire begets price-fixing arrangements. When has neoclassical theory ever endorsed restraint of trade or rejected interventions requiring producers to compete with one another?

Beside the point.

I don't see how that's beside the point. If the theory is only claiming laissez-faire begets an optimally efficient equilibrium "under competitive conditions, yes", then how does an observation of demand-constrained inefficient equilibrium caused by falling MC conflict with the theory? Falling MC is exactly the sort of thing that causes conditions to become noncompetitive.

As far as interventions to increase wage share and flatten income distribution are concerned, what evidence do you have that those interventions don't cause inefficiency? People normally advocate such interventions because they think it would be good to benefit one type of person at the expense of some other type, not because the lack of such interventions is inefficient. If you mean the practices neoclassical economics says are efficient are in fact a suboptimal equilibrium, but based on some optimality criterion other than efficiency, I don't think neoclassical economics takes any position at all on that. It isn't a theory of morality.

No I mean in terms of production, consumption and employment.

You mean interventions to increase wage share and flatten income distribution will stop producers from producing below capacity and cause them to employ more people? How does that work? The usual intervention -- raising the minimum wage -- seems likely to have the opposite effect.

"If marginal returns are constant rather than falling, then the neoclassical explanation of everything collapses. Not only can economic theory no longer explain how much a firm produces, it can explain nothing else.

Take, for example, the economic theory of employment and wage determination. The theory asserts that the real wage is equivalent to the marginal product of labour. The argument goes that each employer takes the wage level as given since with competitive markets no employer can affect the price of his inputs. An employer will employ an additional worker if the amount the worker adds to output - the worker's marginal product - exceeds the real wage. The employer stops employing once the marginal product of the last one has fallen to the same level as the real wage.

This explains the predilection for blaming everything on wages being too high <snip>"[/I]

Huh? We were talking about marginal revenue and marginal cost. Why are you and Keen bringing up marginal returns and marginal product?

Huh? Why wouldn't we?

Um, because evidence against "the real wage is equivalent to the marginal product of labour" isn't evidence against MC=MR?

Neoclassical theory doesn't assert that the real wage is equivalent to the marginal product.

WIKI : "In the neoclassical theory of competitive markets, the marginal product of labor equals the real wage."

Sorry, but you don't know what you're on about.

Sorry, but anybody can write into a Wikipedia page and the author of that sentence didn't know what he was on about. What page did you get the quote from?

What the heck do "The real wage is equivalent to the marginal product of labour." and "The marginal product of the last one has fallen to the same level as the real wage." even mean? They're like "The temperature has fallen to the same level as the rainfall." The units are wrong. "The real wage" is in pounds Sterling. "Marginal product" -- "the amount the worker adds to output" -- is in units of output. It's measured in widgets, or whatever it is the firm makes. The entire argument appears to be a category error.

Doesn't even address the argument. The bit you're objecting to is pretty standard exposition of neoclassical theory. If the quantities aren't commensurable, then it's nonsense to say the wage equals the worker's marginal revenue product, which is implicit in marginal product assuming flat MR.

Oh, have you and Keen and the unidentified Wiki guy all been mixing up marginal product with marginal revenue product? Yes, in the neoclassical theory of competitive markets, in the equilibrium state the marginal revenue product of labor equals the real wage.

That's not a harmless typo. When we make that substitution, Keen's argument falls apart. It turns into:

If in fact the output-to-employment relationship is relatively constant, then the neoclassical explanation of employment and output determination collapses. With a flat production function, the marginal revenue product of labour will be constant and it will never intersect the real wage.​

But a constant "marginal revenue product of labor" in no way follows from a constant output-to-employment relationship; only a constant "marginal product of labor" follows. Keen needed to mix up MRPL with MPL in order to reach his conclusion; that makes his argument an equivocation fallacy.

Also, the nominal wage is £ sterling; the real wage means the quantity of goods and services it can buy.

I have no problem with making that substitution if you wish. Pick whatever basket of goods and services you please to measure the wage's buying power in; my argument will go through unaffected unless the employee spends his whole wage on widgets. The critical point is that marginal product isn't measured in the same kind of units as wages; it follows that "the real wage is equivalent to the marginal product of labour" can't be other than a category error.

Is Keen perhaps taking for granted that the price of widgets is an unalterable constant,

No, and nothing in the above should lead you to think so. Flat MR doesn't mean constant prices it means prices unaffected by a firm's output level. You are by now attacking what you purport to defend without even addressing the criticism of it.

But the situation we're talking about is precisely one where prices are affected by a firm's output level. My hypothesis about what he was taking for granted may have been too broad, but what Keen really was taking for granted was plenty broad enough to spoil his argument.

 

[Canard DuJour]

The one I've spelled out in the last two posts. With flat MC and flat MR, profit-maximising firms should want to produce without limit, which they patently don't. But anything other than flat MR means you don't have price-taking firms, independent supply and demand curves, a single optimal equilibrium price and all the rest of it. Similarly, flat marginal labour productivity will never intersect flat MR. Without rising MC, marginalism can't explain production, prices or wages without undermining more basic tenets.

Are you saying "price-taking firms" is one of the most basic tenets of neoclassical economics?!?

What I said, price-taking firms being a necessary condition. If you hope to take one phrase out of context and misinterpret it, no-one's interested.

If MC is falling and just keeps falling then you're probably in an industry that's a natural monopoly, not one that tends toward having thousands of small suppliers. I don't recall an Econ textbook claiming there are no natural monopolies.

..has nothing to do with it. We're talking about 90 odd percent of firms with falling to constant MC.

Yep, and an equilibrium where firms produce at below capacity because they anticipate MR falling faster than MC is very different from one where price-taking firms stop producing when rising MC equals MR. That doesn't rescue neoclassical theory, it renders it nigh irrelevant. The former does not even tend toward the latter and the policy implications are nearly reversed.

Are you under the impression that neoclassical theory claims all firms are price-taking?

No, "all" would be a silly pedantic equivocation of the generalisation that "Separation of consumption and production decisions in the neoclassical framework requires the assumption of price-taking behaviour both by households and by firms" (The Theory of the Firm, Spulber, Camridge University Press).

So that would imply that firms in natural-monopoly lines of work would be well-advised not to[..etc]

..has nothing to do with it.

Bingo, same in any industry I've worked in and exactly why Sraffa, Keynes and others argued that firms in an industrialised economy typically don't face rising MC. But then the question remains as to why price-taking firms aren't producing at capacity if they don't anticipate falling MR and profits are maximised when MC=MR. It makes sense if MC is rising, but real firms overwhelmingly have falling to flat MC.

What's the evidence that price-taking firms that aren't producing at capacity don't anticipate falling MR?

Same as evidence that bachelors are unmarried. Price-taking firms by definition don't anticipate falling MR. Sorry, but you don't know etc

MR can fall for other reasons than rising supply. If I were running a bakery and sales were booming this year I wouldn't automatically hire more staff and buy more equipment -- I'd be concerned there might be a recession next year and I'd have to sack people and keep making payments on empty ovens.

..has nothing to do with it.

Besides, so what if MC doesn't even tend toward MR? MR tends toward MC.

No, I meant the one kind of equilibrium doesn't even tend towards the other.

I'm not following. What other type of equilibrium are you talking about besides MR=MC? Or do you mean MR doesn't tend toward MC? If that's what you mean, I don't see how it's possible. At some point you have to run out of new customers.

An efficient one where price-taking firms stop producing/employing when rising MC = constant MR vs an inefficient one where demand-constrained firms with constant MC produce/employ at below capacity. As I said.

So what's your scenario for MR decreasing above some point causing MC=MR not to maximize profits? Do you have either theory or empirical evidence that shows some company with MR different from MC has in fact maximized profit?

Yup, as Sraffa et al pointed out, real firms and consumers can't abstract time like theory does. Say you're mass-producing widgets with flat MC - say $1.00 - and falling MR, and you produce enough that MR=MC. The consumer hasn't a clue whether she's buying widget number one or one million - a typically meaningless distinction anyway. All she knows is that widgets are so plentiful they can be had for $1.00. She wouldn't and couldn't say "Oh that's widget number 10 with a MR of $1.50, so that's what I'll pay". Producing until MC=MR would then reduce profit to zero.

You're making exactly the same mistake I made a few posts ago. See how easy it is? When widgets are so plentiful they can be had for $1.00, that's when the demand curve hits MC; but the MR curve is steeper than the demand curve so it hits MC earlier than that.

Nope, the demand curve has nothing to do with quantity produced, and if the MR curve is anything other than flat, you don't have price-taking firms, independent supply and demand curves, a single optimal equilibrium price etc.

Producing until MC=price reduces profit to zero; producing until MC=MR reduces marginal profit to zero; i.e. profit has reached its maximum.

And I've just explained why producing until falling MR = constant MC would effectively be producing until MC=price (bugger all to do with your earlier mistake).

..which wasn't the point anyway. Whether an MC=MR equilibrium or not, it's a suboptimal one where the inefficiency might be mitigated by the kinds of interventions neoclassical economists claim cause inefficiency under rising MC. Works for me, but it's no accident that neoclassical theory continues to assert an empirical falsehood.

Which interventions are you talking about? Deficit spending and public works during recessions?

Those and, more generally, stuff which increases wage share/flattens income distribution. Not that each and every intervention helps (for I hear the rustle of straw..) but that laissez-faire begets a sub-optimal equilibrium over the long run.

Are you suggesting that neoclassical theory claims that laissez-faire begets an optimally efficient equilibrium over the long run, Mr. rustle of straw?

Under competitive conditions, yes. But the reality suggests a demand-constrained, below-capacity equilibrium regardless.

Laissez-faire begets price-fixing arrangements. When has neoclassical theory ever endorsed restraint of trade or rejected interventions requiring producers to compete with one another?

Beside the point.

I don't see how that's beside the point. If the theory is only claiming laissez-faire begets an optimally efficient equilibrium "under competitive conditions, yes", then how does an observation of demand-constrained inefficient equilibrium caused by falling MC conflict with the theory? Falling MC is exactly the sort of thing that causes conditions to become noncompetitive.

I'm not suggesting any such causation and I've repeatedly explained how flat MC conflicts with theory.

As far as interventions to increase wage share and flatten income distribution are concerned, what evidence do you have that those interventions don't cause inefficiency? People normally advocate such interventions because they think it would be good to benefit one type of person at the expense of some other type, not because the lack of such interventions is inefficient. If you mean the practices neoclassical economics says are efficient are in fact a suboptimal equilibrium, but based on some optimality criterion other than efficiency, I don't think neoclassical economics takes any position at all on that. It isn't a theory of morality.

No I mean in terms of production, consumption and employment.

You mean interventions to increase wage share and flatten income distribution will stop producers from producing below capacity and cause them to employ more people? How does that work?

By unconstraining demand i.e. putting money at the disposal of people who spend it on consumption. C'mon.. you knew that even if you dispute it.

The usual intervention -- raising the minimum wage -- seems likely to have the opposite effect.

Not in a demand-constrained economy. And MW is only a small measure with a negligible effect. Productivity growth and capacity utilisation in the US were never higher than back in the days of steeply progressive taxation and big powerful unions - and nearly everywhere negatively correlated with inequality. Contrary to the efficiency-equality tradeoff posited by neoclassical economists.

"If marginal returns are constant rather than falling, then the neoclassical explanation of everything collapses. Not only can economic theory no longer explain how much a firm produces, it can explain nothing else.

Take, for example, the economic theory of employment and wage determination. The theory asserts that the real wage is equivalent to the marginal product of labour. The argument goes that each employer takes the wage level as given since with competitive markets no employer can affect the price of his inputs. An employer will employ an additional worker if the amount the worker adds to output - the worker's marginal product - exceeds the real wage. The employer stops employing once the marginal product of the last one has fallen to the same level as the real wage.

This explains the predilection for blaming everything on wages being too high <snip>"[/I]

Huh? We were talking about marginal revenue and marginal cost. Why are you and Keen bringing up marginal returns and marginal product?

Huh? Why wouldn't we?

Um, because evidence against "the real wage is equivalent to the marginal product of labour" isn't evidence against MC=MR?

Um, sure it is if MC supposedly rises with diminishing marginal labour productivity.

Neoclassical theory doesn't assert that the real wage is equivalent to the marginal product.

WIKI : "In the neoclassical theory of competitive markets, the marginal product of labor equals the real wage."

Sorry, but you don't know what you're on about.

Sorry, but anybody can write into a Wikipedia page and the author of that sentence didn't know what he was on about. What page did you get the quote from?

I'm happy to leave that "argument" standing on its merits. (https://en.wikipedia.org/wiki/Marginal_product. ..took seconds to google this time and last)

What the heck do "The real wage is equivalent to the marginal product of labour." and "The marginal product of the last one has fallen to the same level as the real wage." even mean? They're like "The temperature has fallen to the same level as the rainfall." The units are wrong. "The real wage" is in pounds Sterling. "Marginal product" -- "the amount the worker adds to output" -- is in units of output. It's measured in widgets, or whatever it is the firm makes. The entire argument appears to be a category error.

Doesn't even address the argument. The bit you're objecting to is pretty standard exposition of neoclassical theory. If the quantities aren't commensurable, then it's nonsense to say the wage equals the worker's marginal revenue product, which is implicit in marginal product assuming flat MR.

Oh, have you and Keen and the unidentified Wiki guy all been mixing up marginal product with marginal revenue product?

No.

Yes, in the neoclassical theory of competitive markets, in the equilibrium state the marginal revenue product of labor equals the real wage.

That's not a harmless typo. When we make that substitution, Keen's argument falls apart. It turns into:

If in fact the output-to-employment relationship is relatively constant, then the neoclassical explanation of employment and output determination collapses. With a flat production function, the marginal revenue product of labour will be constant and it will never intersect the real wage.​

But a constant "marginal revenue product of labor" in no way follows from a constant output-to-employment relationship; only a constant "marginal product of labor" follows. Keen needed to mix up MRPL with MPL in order to reach his conclusion; that makes his argument an equivocation fallacy.

Yeah it does follow, assuming constant MP and constant MR (per Keen) since MRP is simply MP x MR. And even if MP isn't constant (per neoclassical theory), MRP is implicit in MP assuming constant MR. Neither Keen, Wiki, nor countless other expositions are making any category error, equivocation or typo. You just don't know what you're on about.

Also, the nominal wage is £ sterling; the real wage means the quantity of goods and services it can buy.

I have no problem with making that substitution if you wish. Pick whatever basket of goods and services you please to measure the wage's buying power in; my argument will go through unaffected unless the employee spends his whole wage on widgets. The critical point is that marginal product isn't measured in the same kind of units as wages; it follows that "the real wage is equivalent to the marginal product of labour" can't be other than a category error.

Is Keen perhaps taking for granted that the price of widgets is an unalterable constant,

No, and nothing in the above should lead you to think so. Flat MR doesn't mean constant prices it means prices unaffected by a firm's output level. You are by now attacking what you purport to defend without even addressing the criticism of it.

But the situation we're talking about is precisely one where prices are affected by a firm's output level.

The situation Keen's talking about is the one assumed by neoclassical theory : flat MR. Competitive firms per neoclassical theory means firms whose output doesn't affect prices. If the 90 odd percent of real firms with flat MC have falling MR, then neoclassical theory is just an irrelevant abstraction.

My hypothesis about what he was taking for granted may have been too broad, but what Keen really was taking for granted was plenty broad enough to spoil his argument.

Are you sure you weren't just making the common mistake of thinking constant MR meant constant prices? Sure sounded like it. You're now conflating theory and counterargument without making a dent in either.