One more thing, What has your response to do with what I was attracking in the first place: Bastard’s comments:

“As the government doesn’t need to make a profit that dead weight loss doesn’t exist.”

And “Monopolies are actually more efficient than competition due to several factors: Economies of scale and having only to deal with itself and the customer (rather than several independent competitors and the customer) being the most notable.”

And “And my description of dead weight loss is spot on it is profit.”

“Finally, I wrote a post on your blog this morning pointing out the error in Matt’s reply to me which has yet to appear on your blogany chance of it being posted there???”

Can you repost? I don’t moderate comments at all, so if it hasn’t turned up then I guess its a technological problem which I can’t fix.

My critique of neoclassical pricing theory has been published in Physica A, long after that exchange with Auld. The maths passed the scrutiny of physicists, who leave economists in the dust when it comes to mathematical reasoning.

As usual, neoclassical economists refuse to acknowledge flaws in their own logic, and I’ve long ago given up trying to debate with them. Point blank, the Marshallian theory is mathematically false. I wish I’d get even one neoclassical economist to concede this, but while physicists confirm my maths is correct, neoclassicals refuse to even acknowledge the point.

Furthermore, though the Cournot-Nash is mathematically correct, the Nash equilibrium is meta-unstable: independent competitive behaviour will lead instrumental profit maximisers to diverge from it without collusion. The only way to maintain the equilibrium is to presume competitive firms have “perfect knowledge” of each other’s strategies, which makes a nonsense of the concept of competition to agree with.

Further furthermore, a myriad of empirical studies have found that marginal cost is constant or falling for 89-98% of firms (depending on the survey–see Alan Blinder’s Asking About Prices for the latest such research and Fred Lee’s Post Keynesian Pricing Theory for a comprehensive survey of the other 140 or so studies that have reached the same conclusion.

Neoclassical micro–especially as taught to undergraduates and as forms the basis of competition policy–is empirically irrelevant and intellectually defunct.

Finally, I wrote a post on your blog this morning pointing out the error in Matt’s reply to me which has yet to appear on your blog–any chance of it being posted there???

For those on this blog, what Matt wrote was:

“MR-MC = (n-1)/n * (P – MC)”

As perfect competition assumes “many firms” (read infinite) n-1 converges to n, implying that P=MR.”

This is the formula for an individual firm, not the economy as a whole. The convergence Matt notes applies because the firm output “q” in the MR formula for the single firm (MR(q)=P+q*dP/dQ) must go to zero if the number of firms in an industry goes to infinity.

I have computer simulation models in my paper where I have (say) 100 firms that are instrumental profit maximisers–vary output up or down and change direction if profit goes the wrong way–and those firms collectively converge to the “monopoly” output level rather than the alleged competitive output level.

Perfect competition is and always has been a crock that has stopped economists from actually confronting the real world. Though I despair of ever getting neoclassical economists to realise this, I hope that non-believers can appreciate this and start to ignore the irrelevant theories of neoclassical economists. If you want to read something useful on competition policy, read Michael Porter’s The Competitive Advantage of Nations.

I wonder if you’ve noted that the LSE’s answer to Her Majesty QEII’s question: “how did all this (i.e., the current global Depression) happen?” was: “hubris, ma’am”.

You’re right the reply was in wrong place, have reposted. Thanks.

The response to your D would be here.

In a nutshell, the mathematical argument behind the Marshallian argument in favour of competitive firms over monopolies is based on two mathematical fallacies.

The first is the proposition that a competitive firm faces a horizontal demand curve at the market price. The fallacy behind this under the conditions assumed in the Marshallian model was pointed out by George Stigler in 1953 (see PERFECT COMPETITION, HISTORICALLY CONTEMPLATED Vol 65 p. 8 footnote 31), but as usual:

(a) economists don’t refer to papers that contradict their beliefs; and

(b) Stigler, who was a staunch champion of neoclassical economics, believed that he found a way around this conundrum in any case in the argument to which the footnote was made–that though Price does in fact exceed Marginal Revenue for a competitive firm, the equating of Marginal Cost to Marginal Revenue means that Price will converge to Marginal Revenue as the number of firms rises towards infinity.

This argument is perfectly correct, but there’s a twee problem: the behaviour Stigler assumed, of equating Marginal Cost to Marginal Revenue, which economists call “Profit Maximising Behaviour” does not in fact maximise profits.

The actual profit maximising formula is:

MR-MC = (n-1)/n * (P – MC)

where n stands for the number of firms in an industry, and the other terms have the obvious meanings.

I’ve pointed this out in a number of academic papers that are available on my website, including:

(2004). “Deregulator: Judgment Day for Microeconomics’, Utilities Policy, 12: 109 125.
(2006) (with Russell Standish, UNSW) “Profit Maximization, Industry Structure, and Competition: A critique of neoclassical theory’, Physica A 370: 81-85.

The second fallacy is the one relating to comparing the aggregated marginal cost curves of a competitive industry to the marginal cost curve for a monopoly, something which neoclassical economists blithely do in their textbooks without ever asking themselves under which conditions such a correspondence would be true. Mathematically there are two cases where it will apply–where marginal costs are constant and identical, and where marginal cost is a function of the number of firms in an industry in such a fashion that a way that a small firm would actually have a cost advantage over a monopoly if it could produce at the same scale.

As pointed out in one study I cite in that Utilities Policy paper and referred to here, there are good reasons why a monopoly might be expected to have a lower marginal cost function than a number of smaller firms operating in its stead.