Sorry, Michael. I used the term "fixed cost function" to refer to a cost
function that is fixed. When people use the term "fixed cost," they
practically always assume that the cost function is fixed because they
are practically always referring to a static setting. If the cost
function is variable, as it would be if technology is changing, the
fixed cost is like to vary as well, which makes the idea of fixed cost
rather irrelevant to the analysis you seem to be using. If these words
sound like nonsense, it is because I am trying to follow your lead of
using static-analysis words to describe a dynamic situation. Just as we
would not ordinarily do this, I find your use of the term "fixed cost"
in a description of a dynamic setting to reveal confusion. But let me go on.
Your dynamic analysis, as I read it, suggests that entrepreneurs would
be afraid to invest because future costs of production are lower than
existing costs of production. Of course, this is possible. But if it
were true of every entrepreneur, there would be no investment at all.
But there is a more important issue, it seems to me. Assuming that there
is likely to be some investment and technological change, there is no
public policy that would resolve this problem of high startup or
overhead costs. A government could itself pay the startup or overhead
costs. This could encourage investment. But technological change would
make the government subsidy just as wasteful as the entrepreneur's
investment. Surely, the economists of the era did not systematically
make this mistake in reasoning.
Let me repeat that the American economists of the era who I read were
concerned with economies of scale and with combinations of, takeovers
of, or predation on firms producing the same good or service. They were
not concerned with Marshallian fixed cost. Perhaps you have a reference
that could demonstrate the naivety of my interpretation? Or perhaps some
economist of the era used the term "fixed cost" to refer to startup
costs or to overhead costs in relation to the monopoly problem or
economic inefficiency. I remain to be persuaded.
With respect,
Pat Gunning
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