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Date: | Mon Jan 29 08:27:03 2007 |
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Thanks, Michael, for the quotation. I think that I understand the source
of my difficulties with your previous post about fixed cost.
You opined about Wells:
> In short, Wells realized that competitive forces would not allow
> producers to recover their investments in fixed capital. As a result,
> the market would self-destruct. He recommended that industry be
> allowed to organize itself into trusts, monopolies and cartels.
> Nothing could be further from the teachings of Adam Smith and the
> merchants!
In your quote, there is only one use of the term "fixed." It is in this
quoted statement. I am sure that you will agree that Wells seems to be
referring to sunk costs, rather than fixed costs as they are presented
in the modern textbooks.
Wells' claim, on the basis of your words, is that entrepreneurs are too
stupid to avoid incurring sunk costs. He does not consider the
possibility of preventing them from being stupid. Instead, he believes
that the government should allow them to make up for their mistakes by
improving their positions through trusts, monopolies and cartels.
In explaining this view, you refer to another dubious view held by Wells
that the problem faced by the entrepreneurs was occurring during of an
"overproduction crisis" that causes the prices of capital goods to fall.
The entrepreneurs apparently made another mistake of not anticipating
the "overproduction crisis."
To me, Wells' reasoning is very strange. It raises more questions than
it answers. Can we trust the entrepreneurs or not? What is the cause of
an overproduction crisis? How does falling prices of capital goods
destroy industries?
On the surface, Wells seems like an advocate of laissez faire who does
not understand free enterprise. But I will have to wait until I look
more thoroughly at your book to understand the context of Wells' remarks..
Pat Gunning
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