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Constant Returns to Scale: Can the Neoclassical Economy Exist?

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  • Alam, M. Shahid

Abstract

Constant returns to scale (CRS) is one of the corner-stones of the competitive general equilibrium paradigm of neoclassical economics. This note argues that the equilibrium solutions of this paradigm are not compatible with CRS. CRS implies that all producers (whatever their scale of production) can produce goods at the same unit costs: and this makes self-production a feasible alternative to market production. In the event, an infinite number of equilibria become possible with a mix of markets and self-production. If labor is the only factor of production, self-production becomes the only option: and the market economy ceases to exist.

Suggested Citation

  • Alam, M. Shahid, 2013. "Constant Returns to Scale: Can the Neoclassical Economy Exist?," MPRA Paper 45153, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:45153
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    File URL: https://mpra.ub.uni-muenchen.de/45153/1/MPRA_paper_45153.pdf
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    References listed on IDEAS

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    1. Tobin, James, 1985. "Neoclassical Theory in America: J. B. Clark and Fisher," American Economic Review, American Economic Association, vol. 75(6), pages 28-38, December.
    2. Young, Allyn A., 1928. "Increasing Returns and Economic Progress," History of Economic Thought Articles, McMaster University Archive for the History of Economic Thought, vol. 38, pages 527-542.
    3. Joseph E. Stiglitz, 2002. "Information and the Change in the Paradigm in Economics," American Economic Review, American Economic Association, vol. 92(3), pages 460-501, June.
    4. M. Shahid Alam, 2000. "Poverty from the Wealth of Nations," Palgrave Macmillan Books, Palgrave Macmillan, number 978-0-333-98564-9, December.
    5. J. M. Low, 1952. "An Eighteenth Century Controversy in the Theory of Economic Progress," Manchester School, University of Manchester, vol. 20(3), pages 311-330, September.
    6. Kaldor, Nicholas, 1972. "The Irrelevance of Equilibrium Economics," Economic Journal, Royal Economic Society, vol. 82(328), pages 1237-1255, December.
    7. R. G. Lipsey & Kelvin Lancaster, 1956. "The General Theory of Second Best," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 24(1), pages 11-32.
    8. Axel Leijonhufvud, 1973. "Life Among The Econ," Economic Inquiry, Western Economic Association International, vol. 11(3), pages 327-337, September.
    9. Hicks, John, 1989. "The Assumption of Constant Returns to Scale," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 13(1), pages 9-17, March.
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    Cited by:

    1. Kakarot-Handtke, Egmont, 2013. "Understanding Profit and the Markets: The Canonical Model," MPRA Paper 48691, University Library of Munich, Germany.
    2. M. Shahid Alam, 2016. "Commodities in Economics: Loving or Hating Complexity," Economic Thought, World Economics Association, vol. 5(1), pages 1-1, March.
    3. Dominique, C-Rene, 2015. "How Market Economies Come to Live and Grow on the Edge of Chaos," MPRA Paper 65945, University Library of Munich, Germany.

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    More about this item

    Keywords

    Constant returns to scale; competitive paradigm; neoclassical economics; second-best; Lipsey; Lancaster; Samuelson; Arrow; Debreu; Kaldor; Allyn Young; general equilibrium; increasing returns to scale; existence; uniqueness; equilibrium; classical economics; Adam Smith; Ricardo; Pareto-optimality; John Bates Clark; Wicksteed; Mirowski; Austrian;
    All these keywords.

    JEL classification:

    • B0 - Schools of Economic Thought and Methodology - - General
    • B00 - Schools of Economic Thought and Methodology - - General - - - History of Economic Thought, Methodology, and Heterodox Approaches
    • B1 - Schools of Economic Thought and Methodology - - History of Economic Thought through 1925
    • B3 - Schools of Economic Thought and Methodology - - History of Economic Thought: Individuals
    • B4 - Schools of Economic Thought and Methodology - - Economic Methodology
    • B41 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Economic Methodology
    • D5 - Microeconomics - - General Equilibrium and Disequilibrium

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