Grid X: a 2d reconstruction of economicsABSTRACT
by J. Doug Ohmans
© 2005Supply is average cost, not marginal cost. SinceCHAP 1 - MARGINAL MAN
demand is average revenue, supply and demand can
be taught before marginalism. Since 1871 marginal
cost MC pricing has engendered inequality.
WELCOME, TEACHERS OF microeconomics. This little textbook that has fallen into your mouse hands is nevertheless a contribution to economic theory. Destiny and decisions placed me in a situation in which, were I not to write, the gods of solitude would be displeased. Grateful acknowledgment is due to the Colorado community colleges where I taught microeconomics: Red Rocks, Pikes Peak and Pueblo. Supply and demand are cost and benefit, whose price is average revenue, respectively. But there are two orthogonal realities which are conflated in standard textbooks: the first is the natural law that average revenue must exceed average cost. The second is the reality that "profit" is maximized by attending to marginal revenues and marginal costs. Money usually has straight-line functions: it is utility that undergoes diminishing returns. The supplier's utility however is money itself, not psychological benefit. She would rather cover MC than AC, although supply could be anywhere in between. However, demand as AR is already marginal benefit so MR, "the change in total revenue generated by an additional unit of output" (Krugman & Wells, Microeconomics, 2005, p.211) is a 2d order concept. On the other hand, a more fundamental critique of demand as downward-sloping comes from the Australian Steve Keen (Debunking Economics, 2011, p.208) where he claims, "research proved that a market demand curve derived from the preferences of individual consumers who in isolation obeyed the Law of Demand --i.e. they had 'downward-sloping demand curves'--will not itself obey the Law of Demand: a market demand curve can have any shape at all." Sometimes "indirect effects" overwhelm "direct effects." Marginal costs and marginal revenue can be understood as composites of marginalism in general plus cost and revenue, more than as discrete entities. Unfortunately, typical economics teaching puffs itself up with numerous concepts, useful perhaps, but teaching and learning microeconomics can be simplified a level. In an average micro textbook--Miller--the following concepts (among others) clog the glossary: total costs, total income, total revenues, average fixed costs, average physical product, average propensity to consume, average propensity to save, average tax rate, average total costs, long-run average cost curve, marginal cost pricing, marginal costs, marginal factor cost, marginal physical product, marginal physical product of labor, marginal propensity to consume, marginal propensity to save, marginal revenue, marginal revenue product, marginal tax rate, and marginal utility. These are mistakenly assumed to have unique substantive content, whereas the need is to comprehend the simple arithmetic concepts: total, average and marginal. Everyone is an economist. Each goes about weighing costs and benefits and deciding what to do. Some look at costs and benefits in total, and some consider them for the next step only (marginals). Most people understand the concepts, total and average, yet not marginals. True objectivity would be to look at averages. The interrelationships of all three are easy to understand if presented as such. See Grid X for Students (this is the only access to that). Simplification led to our discovery that the standard micro texts are unclear about a central issue, the supply curve. On a paper napkin in a restaurant one night we sketched:
Kenneth Boulding, Economic Analysis v.1, p.169 This diagram, christened Grid X, turned out to be a key to the moral universe as well as the microeconomic. The distinction between average cost AC and marginal cost MC is submerged in the pure competition ideal type. Profit appears when output is restricted, i.e. in oligopoly or monopoly. The textbooks carelessly assume that the supply curve is marginal cost: The Canadians Bade and Parkin depict perfect competition within monopoly as the intersection of marginal costs MC and average revenue D. Yet here price P is more than marginal revenue MR, unlike pure competition. Secondly, supply is nothing but price and quantity: a P on the demand curve that exceeds AC should elicit further output, even if returns are diminishing. Starting with pure competition, an equilibrium of MC and marginal benefit is established. MB or price is actually AR, is it not, so another symmetry is potentially AR=AC as a sustainable (socialist) ideal. When professor Parkin read this, he responded:
McConnell & Brue, Economics
Bade & Parkin, Foundations of Microeconomics
"D = MB and S = MC is the symmetry
For Perfect comp, P = AR = MR = MC = AC = S in LRE but not in SRE
For Monop (single price) P = AR > MR = MC > AC.
There is no symmetry with D = P = AR = S in all markets and circumstances."
(Private email from economist Michael Parkin, 4/12/2010). But demand as marginal benefit is AR, whereas his supply is MC, not AC. Symmetry is lost between consumption and production in an MC=AR "equilibrium." The standard diagrams are wrong or worse. Perfect competitors operate where AC=AR and MC=MR, monopolists where MC=MR and AR exceeds P. For their part, oligopolists (not to mention monopolistic competitors) might operate where MC=AR. According to one economist, variable costs VC are often substituted for MC:"In a product market, the supply curve (in orthodox econ, and it's not that different in Marxian econ. in the short run) is defined as nothing but the set of points corresponding to the amount that firms in an industry will supply at each price. Given a price, each firm decides how much to bring to the market. At that price, the industry supply is the sum of all the firm supply decisions. For a monopoly, price isn't _given_ by the market. Rather, it manipulates the amount on the market to determine this price (in order to maximize profits).In Alienation and the Soviet Economy Paul Craig Roberts says, "A hierarchy accomplishes its task by the coordination of the activities of those at the base of the pyramid... It follows that there is a definite limit to the number of tasks a hierarchy can achieve yearly" (New York, Holmes & Meier, 1990,c1971, pp.65-66). If hierarchy cannot abolish exchange value and commodity production, "in competitive theory the equating of marginal cost to price is the result of wealth-maximizing behavior; no one has as his conscious purpose to make marginal cost equal to price" (Ibid. p.96). Yet perhaps some might set their price equal to average variable cost. Ultimately, the average versus marginal supply curve conundrum can be resolved as follows. In Economics of Socialism (Books for Libraries, Freeport NY, 1971) Henry Dickinson wrote in 1939, "If goods are valued according to the cost of the marginal portion of supply...a surplus would emerge which could be treated as rent. If, however, goods were valued according to their average cost of production...then rent will be absorbed into cost. The question whether or not rent should be reckoned as a separate entity is thus seen to be identical with the problem whether goods should be valued according to marginal or average cost of production" (p.77). The micro debate around the nature of the supply curve, whether it should be average or be marginal costs, moves from economic truth to politics when socialism opts against purely short-term profit maximization at MC=MR and TR>TC in situations of decreasing costs. Dickinson (Ibid. p.108) recommends to socialists the use of a "Marginal Cost Equalization Fund, into which would be paid all positive rents arising from increasing-cost goods and out of which would be paid subsidies to maintain the production of diminishing-cost goods," which might reimburse producers of necessities for their expansion. The state of introductory microeconomics at the dawn of the Third Millennium is troubled. Traditional theory places the "perfect competition" intersection or equilibrium at that point where MC=AR. That is a deformation required to rationalize the capitalist mentality, yet not the only arguable point of view. The Polish socialist economist Oscar Lange wrote, "For the economy to be capitalist, according to our definition, money profit must be the sole objective of the units engaged in production. This excludes an economy in which the satisfaction of wants competes with the profit-making objective. A craftsman may refuse an opportunity of making an additional money profit because it is not worth the effort involved or because he prefers to devote his time to the satisfaction of specific wants, such as company, entertainment, etc. A farmer may fail to maximize money profit because he prefers to consume some of his products instead of selling them" (Oscar Lange, "The Scope and Method of Economics" in Neel, Readings in Price Theory, 1973, p.14). In a nutshell, profit maximization occurs where MC=MR. But that point, though good for an individual, embodies inequality and therefore should be resisted (see An Intelligent Woman's Guide to Socialism by George Bernard Shaw, 1928). On the other hand, efficiency has its place. Nevertheless, the claims of everything average are worth exploring. The AC=AR utopia needs illumination to withstand the assault of widespread marginalist rationality. What good would be an economic theory which does not revolve around the point of actual (profit) maximizing behavior. It would be considered "normative" to hold out for an AC=AR equilibrium yet such a utopia unquestionably exists in concept. Yet suppliers' behavior may or may not oblige this preference. Probably price theorists sympathetic to capitalism--perhaps resource economists opposing "waste" and "inefficiency"--would not allow the non-monopolist (or the monopolist either) to incur a loss on marginal transactions. Yet in existence survival itself enforces the AC=AR identity. All microeconomics teachers must begin with a belabored distinction between X as citizen and X as economist. By applying the Grid X paradigm, the economist can swallow up the citizen, maintain exact thought and not forgo value judgments. Fair pricing (AC=AR) is easy to teach, because supply and demand can be introduced before marginalism. It could be ideological capitalist apologetics to call the marginalist equilibrium MC=AR the socially optimal price. Who is to say that "supply" must be marginal costs. That is not science. The library shelves are full of written works: it is simply a matter of mixing the epoxy compound of content with the liquid hardener of structure until the argument emerges. CHAP 2 - VIRTUAL SUPPLY Teachers of microeconomics, the supply curve is a vexed affair, but the so-called "demand curve" is easily understood, and should be our starting point. "Demand has two major parameters, magnitude and elasticity" (Kenneth Boulding, Economic Analysis, vol.1: microeconomics, 1966, p.538). While demand and diminishing returns are self-evident in the phenomenon of hunger, the "law of supply" is considerably more vexed. All we know of it to begin with is a set of "equilibrium" points on various demand curves: at such and such a price, a transaction occurred. In Understanding Microeconomics (Englewood Cliffs NJ, Prentice-Hall, 1984) Robert Heilbroner and Lester Thurow argue: "The point we must bear in mind is more than just a geometrical demonstration. It is that marginal costs, not average cost, determine most production decisions. When prices rise or fall, the change in quantity will reflect the ease or difficulty of adding to or diminishing production, as that ease or difficulty is reflected in the shape of its MC schedule" (p.166). Yet they say "We use average costs and average revenues to calculate profits" (p.169). At the same time, "We use marginal costs and marginal revenues to determine the point of optimum output" (Ibid). The two approaches co-exist uneasily. Technically "the pure monopolist has no supply curve. There is no unique relationship between price and quantity supplied for a monopolist. Like the competitive firm, the monopolist equates marginal revenue and marginal cost to determine output, but for the monopolist marginal revenue is less than price. Because the monopolist does not equate marginal cost to price, it is possible for different demand conditions to bring about different prices for the same output" (McConnell & Brue, Economics: principles, problems, and policies, 2005, p.446). As early as 1914, P. H. Wicksteed wrote of the supply curve, "I say it boldly and baldly there is no such thing.... What is usually called the supply curve is in reality the demand curve of those who possess the commodity" (quoted in T. H. Hutchison, Review of Economic Doctrines, 1870-1929, 1953, p.102). An average cost supply curve is not unheard of. 70 years ago, "an interesting deviation from the marginalist position was E. F. M. Durbin's argument for socialist economic planning based on the average cost concept. While he conceded that equalizing the marginal product in all possible uses might be desirable, he felt that price determination under socialism would at best be but roughly solved in this manner. Durbin questioned whether it would be possible to increase output until price was equal to marginal cost. In fact, where industries in a socialist society operated under conditions of increasing returns, the marginal cost pricing rule could not provide a suitable guide, since average cost would exceed marginal cost over a considerable output range. This could lead to a loss in income which would have to be covered by public subsidy. The best policy would be to abandon marginal cost as the pricing rule and turn to average cost" (Ben Seligman, Main Currents in Modern Economics, 1962, p.117). Seligman shows how Durbin argued, "there was no clear distinction between maintenance cost and marginal prime cost. Additionally, a socialist pricing mechanism based on average cost could simplify matters considerably, for it would allow plant managers to react independently to changes in market conditions and would avoid the complex system of subsidies and taxes required by the marginalist approach. Obviously, Durbin's solution was a matter of practicality, for while he conceded that the correct theoretical answer had been given by the marginalists, he felt that accounting along such lines would fail to show the proper responsibility since profits and losses would be determined by factors beyond a plant manager's control. Moreover, what really had to be taken into account was the anticipated future average cost. The relevant cost curves, both average and marginal, would have to be based on estimates of future costs, said Durbin. If the process of production was continuous, as it necessarily was in an advanced economy, all replacement costs would have to be met and accounted for in current costing procedures. But marginalist methods overlooked this element, argued Durbin, since the pricing technique that stemmed from its logic covered only the cost of hiring input factors which had alternative uses in the present. And this could lead to considerable price variation, an undesirable consequence. The fact was that all future payments were to be included in price estimates - long period, short period, fixed, variable and replacement, as well as current. This implied that output would have to be varied to cover average costs" (Ibid). Paul J. McNulty argues that "the single activity which best characterized the meaning of competition in classical economics--price cutting by an individual firm in order to get rid of excess supplies--becomes the one activity impossible under perfect competition" (McNulty, "Economic Theory and the Meaning of Competition" Q.J.E. v.82 no.4 Nov. 1968, in Neel, op.cit, p.303). The pure competitor can adjust only her quantity, not the price. "The conception," says McNulty, "has taken two basic, and fundamentally different, forms. On the one hand, it has been the 'force' which, by equating prices and marginal costs, assures allocative efficiency in the use of resources. Competition in this sense is somewhat analogous to the force of gravitation in physical science; through competition, resources 'gravitate' toward their most productive uses, and, through competition, price is 'forced' to the lowest level which is sustainable over the long run. Thus viewed, competition assures order and stability in the economic world much as does gravitation in the physical world. But competition has also been conceived of in a second way, as a descriptive term characterizing a particular (idealized) situation" (Ibid. p.297). Money unifies price and cost only under perfect competition: otherwise, excess profit separates price from value. Profitability and not some other values may determine what is the economically rational output, but a lack of symmetry is introduced that can make micro seem as dismal as applied economics, or macroeconomics. Mathematical economists (1950-2000) tell us that the slope is the first derivative of the total curve's equation. We, on the other hand, must take refuge in geometrical thinking:
"For a purely competitive market, in theory, the decision is made by setting marginal cost equal to the price (expanding output as long as the marginal benefit--equal to price--is greater than marginal cost and shrinking output if marginal benefit is less than marginal cost).
"That's it. But in most markets, especially in manufacturing, the best way that an economist or a firm can figure out the value of marginal cost is to look at average variable cost (average cost net of overhead). That's because marginal cost is often hard to calculate. It usually turns out that price is greater than measured marginal cost, however, suggesting that most firms have monopoly power" (Private email from economist Jim Devine, 6/8/2005).
"According to Kaleckian Keynesian economics, the supply curve in manufacturing, services, retail, etc. is the AC curve, usually determined by marking up the AVC. In the primary-product sector, on the other hand, MC is it" (Ibid. 4/1/2009).
Under pure competition, the demand curve seems horizontal to the individual producer. Exit and entry occur depending on whether AC is below or above MR=AR, respectively. The supply curve similarly seems horizontal to the individual consumer. What is the difference between the two: nothing at all. Both are simply a "concept" wherein an averages approach is indistinguishable from a marginal approach to pricing. Whether we call the "price line" demand or supply, it is erroneous to depict it as horizontal. Under perfect competition, the horizontal demand line represents price P = marginal revenue MR = average revenue AR. Average total cost, by the way, is average cost, not total cost (it is called ATC because it includes fixed and variable costs). The horizontal truly depicts price P. However, if the full length of the quantity Q axis could be seen, it would be found that MR diverges downward and is not equal to AR. Assuming them equal, we mistake the terms of our model (What is the supply curve of a perfect competitor: nothing more than the price. Whereas the supply curve of an industry as a whole must eventually be upward-sloping, due to diminishing returns). In the right panel, point 1 is our familiar intersection of average cost AC and average revenue AR. Point 2 is the profit-maximizing MC=MR output level. Now when the supply curve lifts itself up out of flatness, average cost spawns a secondary amount - marginal cost. Then is our focus on AR's trajectory intersecting AC, or is it on AR's intersection with MC. Focusing on MR profitability instead of AR sustainability here leads to an MC conception of the supply curve, because profitable output occurs where MC=MR. The claim is also made that therefore AC=AR pricing is wasteful of scarce factors, yet for the perfect competitor ideal, AC=AR and MC=MR are to some degree identical. CHAP 3 - STORY OF X
The history of economic thought provides many clues to the true nature of the supply curve. Drawing on Ben Seligman's ground-breaking tome, Main Currents in Modern Economics, it may be seen that there is more to microeconomics, economics teachers, than Jevons. According to John R. Hicks, "cost, revenue, and productivity in their marginal form are said to simplify economic thinking. Decision-making can be founded on marginal concepts even though total or average figures are not known" (Seligman, Ibid., p.102). Thus people asserting self-interest compute using marginals even though they may not know what sort of concept they are using. Republicans, so to speak, think maximizing profit trumps morality. They may even develop a bad conscience about acting unselfishly. Lange wrote, "Firms or business enterprises have as their objective one single magnitude, namely, money profit. In this they differ from households and public services. A household, for instance, desires to satisfy several wants, not to pursue merely one magnitude as an objective" (Lange, op.cit., p.13). If efficiency is that magnitude, as under Taylorism, "decisions on output and investment were to be made by plant managers on the assumption that resources would be utilized up to the point where marginal cost equaled price, that is, to the point at which the cost of producing an additional unit would just be covered by the prevailing unit return. The premise was that marginal cost would increase with further output, a seemingly reasonable surmise. Consequently, production beyond the equality of marginal cost to price would merely incur losses. This was, of course, the short-run view: in the long run, new investment would be undertaken if the return from the added output would be equal to or greater than the long period cost incurred" (Seligman, op.cit., p.109). Maurice Clark brought some of Durbin's point of view into the mainstream: "The cost curves theorists talked about were intended to isolate the effects of shifts in output. But Clark found that the short run cost curve usually represented operations at varying percentages of capacity, so that it was necessary to imagine a zone of cost rather than a line. Operations at a stated level of output were bound to differ with the length of time a plant remained at a given capacity rate. That is, changes to new output levels involved costs that had not been explained in theory. One also had to consider capital attrition, particularly when prices changed as capital replacements became due. Further, the utilization of 'standard' cost formulas raised the question of full cost pricing, under which prices were set to cover all costs. This, in effect, meant employing average rather than marginal cost as the major consideration, an approach which seemed quite characteristic of the business man's mode of thinking" (Ibid. pp.215-6). Underconsumptionist John A. Hobson (1858-1940) who inspired Lenin's Imperialism, also found a need for an average cost supply curve: "In defining the nature of productivity, Hobson argued that no separation could be made between cooperating factors; all were essential to produce goods and no specific productivity could be attributed to any single factor. He rejected, consequently, the theory of marginal productivity. What seemed more important to him was the average productivity of the group input factor" (Ibid. p.232). In Hobson's words, "Adding doses of labour and noting the increase in the aggregate product throws no serviceable light upon the determination of wages. The so-called marginal dose with its separate product, is only intelligible when regarded as an average dose in a fully equipped farm, factory, shop or other business: no separate dose has any separate product, and the only method of assigning it to any product is to divide the whole product equally among the constituent units, as if it represented the mere addition of their industrial productivity instead of their joint co-operative productivity" (John A. Hobson, The Industrial System, 1910, p.115). "The more important concept was average productivity which varied with the efficiency of the group and should be imputed in equal proportions among the members. As applied to labor, such a division supplied the upper limit of payments, just as alternative work opportunities supplied the lower limit. "Hobson went further, attacking the preconception of marginal utility itself with its proposition of fluidity in capital and labor, full knowledge of the market, and the like. In a society of imperfect competition, marginalism provided a false theory, said he (Hobson, op.cit. p.152). Insofar as price was concerned, changes were due to alterations in the average expense of the entire complex of factors. It was average costs that determined supply prices. "Hobson continued his attack on marginalist notions in his Free Thought in the Social Sciences (p.112). The 'dosing' method, he argued here, implied that there was no profit at the margin of capital and that therefore profit did not affect price. Such an error, said Hobson, could stem only from the improper treatment of one factor as fixed and the others as variable, thus revealing an erroneous application of the law of diminishing returns" (Seligman, op.cit. p.233). Economist Robert Gordon would add that the practical businessperson isn't necessarily a capitalist profiteer. "General experience," he says, "has indicated that businessmen will seek maximum sales, not profits, as the primary goal. Naturally, profit considerations are taken into account, but there is great reluctance to cut back on revenue. The pricing technique generally employed is a reasonable or customary markup on full average cost... "But quite simply, it is perfectly possible that maximum profit may not be the final aim; as Robert A. Gordon says, 'satisfactory' profits may be deemed sufficient. If this be so, then the average concept rather than the marginal one may be appropriate.... Moreover, marginal computations in a multi-process plant are difficult, if not impossible, so that price determination on the basis of average total cost for some normal or usual output may be a more useful procedure" (Ibid. p.364). For Leon Walras (1834-1910) "marginal utility was of course a mathematical concept. In fact, Walras may be considered as one of the discoverers of this central idea. Labeled by him as rareté, it was a decreasing function of the quantity consumed, and was proportional to the price paid. Marginal utility was attained when the last units of expenditure in the consumer's scale of preferences (given the available income) yielded equivalent satisfactions to the point of equilibrium. Utility was maximized when these conditions prevailed. Mathematically, it was measured by the derivative of total utility, thus tying together not only the quantity of a good and its utility but also indicating the rate of change in utility for each unit of the good" (Ibid. p.374). When Paul Samuelson wrote Economics in 1948, his "neoclassical synthesis" updated Alfred Marshall's classical synthesis from 1890, Principles of Economics. Marshall had seen that "in the long run, price tended to gyrate about cost as the forces of supply and demand played out their skein. In the short run, prices would not fall below prime costs; in the long run, both prime and overhead, or supplementary, costs would have to be covered" (Ibid. p.469). Seligman asks, "What then happened to supply in the long run. Some commentators have felt that the latter simply disappeared and the long run became nothing more than a series of little short runs. If this is a valid criticism, it may very well be charged that the entire Marshallian time analysis has fallen to the ground" (Ibid. p.470). One difference between the long and the short runs is that elasticity is less in the short run. A. Marshall not only synthesized the labor and utility value theories, he synthesized the theoretical and practical/ business points of view. "Through his graphical analysis he was able to show how a monopolist could limit supply and so set the price of a good. But he wondered whether some monopolists might not consider an increase in consumers' surplus just as desirable as a monopoly profit (Alfred Marshall, Principles of Economics, p.487). This implied that instances might occur when it would pay for monopolies to sell at prices lower than their market position could permit them to dictate. It thus might be reasonable for a railroad to build up a community with a view toward future business. This was not a matter of altruism; it was merely foresight. Furthermore, greediness might generate public hostility and legal action" (Seligman, op.cit. pp.474-5). Arthur Cecil Pigou was from that era but lived until 1959. His welfare economics included the view that "under competitive conditions, supply price equalled both marginal and average cost in the long run.... Industries with decreasing supply price were more apt to wind up in monopoly, since marginal cost could be less than average cost over a fairly wide range of output, thus strengthening Pigou's argument for limited intervention.... In this model, an ever expanding economic universe was not possible because the supply of land was limited, enforcing diminishing returns. The latter eventually affected all other factors as well so equilibrium finally was reached" (Ibid. pp.484-6). Sir Dennis Robertson, however, suggests how diminishing returns can be averted for a long time. "Increased gains, Robertson suggested, did not always stem from external economies: many could be traced to internal elements, so that increased output over time might be explained more simply by decreased cost per unit" (Ibid. p.499). NYU professor emeritus William Baumol wrote, "It does seem, after all, that the businessman's primary concern is 'sales maximization subject to a minimum profit constraint' (W. J. Baumol, Business Behavior, Value and Growth, 1959, p.49). Output which maximizes sales is determined at the point where marginal revenue is zero, Baumol has said. A profit maximizing output, therefore, is necessarily less than a sales maximizing output" (Seligman, op.cit. p.514). Sales are linked to AC=AR. Writing at the end of the 19th century, the Swede Knut Wicksell put utility theory on a subjective yet mathematical basis. "While scarcity was conceded to be a significant element, it was marginal utility that was deemed crucial. No longer was there need to feel that what one party gained in an exchange, the other lost: both were winners. Wicksell did admit some relationship between value and cost, but this was essentially peripheral. Utility was defined in its strictest sense as a mathematical function of the quantity of a good, with marginal utility as the first derivative of total utility. Marginal utility, therefore, was a measure of the rate of change in total utility" (Ibid. p.544). Frank H. Knight (1885-1972) contributed an analysis of long-term supply which came down to more objective factors than subjective demand. "Even for the long run, Knight rejected the idea of supply as a function of price, for with constant costs price could easily adjust to shifts in demand. With decreasing cost, monopoly would tend to rear its head and again output would be independent of price. Nor was supply the obverse of demand, as in the theory of reservation prices, since production was undertaken for sale; and even when the goods could not be stored or moved to another market, producers were in no position to consume their own output. The supply curvewas essentially a cost of production curve, showing costas a function of output. Such a long period analysis,said Knight, would suggest to producers that with decreasing costs less output would be forthcoming at higher prices than at lower ones. This paradox proved to Knight that decreasing cost as a long-run tendency was impossible under competitive conditions, for, given the latter, costs would be quickly adjusted for all producers" (Ibid. p.653). The author knew Kenneth Boulding, the long- and grey-haired stuttering genius from Boulder. He was prolific and unerring. Here he points out that theory and practice are different things: "The information system [of the firm] reveals average costs, it reveals sales, production, inventory, debt and other figures in the balance sheet and income statements. It does not, however, generally reveal marginal costs and still less does it reveal marginal revenues. If the firm cannot know when it is not maximizing profits, therefore, there is no reason to suppose that it maximizes them" (Boulding, 'Implications for General Economics of More Realistic Theories of the Firm,' AEA Proceedings, May 1952, p.36). Seligman admits "The 'Reconstruction of Economics' containing Boulding's major technical contributions, unfortunately has not received the attention it merits" (Seligman, op.cit. p.684-7). Boulding wanted economists to look at wealth, a stock, and not only income, a flow. Grix X is a "reconstruction" in that it refuses to find equilibrium at P=AR=MC. Now when Piero Sraffa had completed his ten-volume edition of Ricardo, he could credibly argue that "an industry could not be in equilibrium if external economies governed its flow of output.... The only way to solve the problem, said Sraffa, was to drop the assumption of free competition and to move in the direction of an analysis of monopoly.... It blew the older theory virtually to bits" (Ibid. p.714-5). Writing in Germany in the 1930's, Heinrich von Stackelberg made several advances towards developing a supply curve. Stackelberg saw that "in pure competition, equilibrium was established by the intersection of the supply and demand curves, with lags explained by cobweb movements around the point of equilibrium.... And the divergence of marginal revenue from average revenue could be measured by dividing price by the elasticity of demand, a relationship that described monopoly price" (Ibid. p.726). Keynes belongs to British macroeconomics, from the era of Joan Robinson and the American Edward Chamberlain's theories of oligopoly. For Keynes, "total employment is created by expected total proceeds from forthcoming production. This was aggregate demand. The cost of producing total output was called aggregate supply. Now, it should be clear that if production is to occur, total expected proceeds must cover costs" (Ibid. p.738). Marshall's diagrams were in plane geometry. By the 20th century, more sophisticated "grids" could be modeled Neumann's and Morgenstern's game theory, for instance, explored how "when both strategies coincided, that is, when both the maximin and the minimax were found in the same cell or element of the matrix, a 'saddle point' or equilibrium had been achieved.... This was the sort of game that began to approach the character of an economic situation, as in labor relations or oligopoly.... Game theory has not been completely successful. But at least the point has been emphasized, one that has not always been obvious to economists, that maximization is not necessarily the essence of economic existence. Lacking control of all the variables that affect a payoff, players may be satisfied with more modest results" (Ibid. pp.776-7). "Thus recent theory," says Seligman (1962) "has supplied us with minimax man, simulating man, potential surprise man, sequential decision-making man, satisficing man, and heroic man, as well as attempting from time to time to resuscitate self-centered, greedy economic man. Minimax man, whom we have already met, is a worrier, not overly aggressive, preferring the safe and sane way, very much like executives in the middling reaches of the corporate milieu. Simulating man, completely undecided as to what to do, feeds information into a digital computer to help make up his mind. The sequential decision-maker, equally uncertain, equally cautious, addresses himself to the unknown contingencies of nature and society with a slide rule in order to see whether he can continue the even tenor of his ways before making good on some collosal error. Potential-surprise man is willing to gamble on a single throw of the dice in the hope of making a fat killing. Satisficing man isn't interested in optimal behavior at all. Something of a second cousin to minimax man, he is content merely with satisfactory results. Most challenging of all is Boulding's heroic man whose ethic is an expression of those noneconomic drives that give meaning to existence" (Ibid. pp.785-6). "Indeed," says Seligman, "the whole theory of the competitive economy, curious model that it is, has been turned into little more than a value judgment" (Ibid. p.788). Our Grid X paradigm, on the other hand, is formally undeniable and encompasses both competition and monopoly. "Whatever the method employed--verbal, mathematical, statistical, historical, econometric--the crucial matter is the choice of the problem" (Ibid. p.790). Grid X is true insofar as it assumes: a) only price and quantity, b) only price and quantity of cost and revenue, and c) only price and quantity of cost and revenue between their average and marginal extremes (which becomes a normative scale). CHAP 4 - PROFIT DEFLATION A myth entered earlier with the assumption that one must maximize profit. The linguist George Lakoff writes, "There is a myth that comes down from the Enlightenment, and it goes like this. It is irrational to go against your self-interest, and therefore a normal person, who is rational, reasons on the basis of self-interest. Modern economic theory and foreign policy are set up on the basis of that assumption. The myth has been challenged by cognitive scientists such as Daniel Kahneman (who won the Nobel Prize in economics for his theory) and Amos Tversky, who have shown that people do not really think that way. Nevertheless, most of economics is still based on the assumption that people will naturally always think in terms of their self-interest" (Don't Think of an Elephant, 2004, p.18). The marginalists' insight--the exact determination of individual self-interest--may have had a corrosive effect upon organic solidarity. Yet the Enlightenment mentality cannot seem to resist the social efficiency argument, that it would be wasteful to produce at a loss. Purchasers situated between the average cost price and the marginal cost price are those who lose out. To complete "Grid X" to the limits of its explanatory power, one would have to deal systematically with permutations of eight additional situations, four for supply and four for demand: these are designated "backward-rising", "forward-falling" and "forward-rising", "backward-falling" (Nicholas Kaldor, Essays,1960, p.26). Backward-rising supply, I imagine, is what economists call backward "bending" supply of e.g. labor. To reduce both costs and revenues to money is valid at the point where price and quantity on both curves converge, while just a phantasm at other points. For that is where the deal was struck. From any point, an X-like grid can be posited and identified. The intersection may be where AC=AR or where MC=MR or where MC=AR or (unlikely) where AC=MR.
The difference between operating where MC=MR (point 2 depicted above) and where AC=AR (point 1) is of course a matter of price and quantity: in the former, price is going to be at point 5. Point 2 may be the most profitable, yet it is not really optimal. Why not. Because its very profitability implies a wide gap at that quantity between demand price (point 5) and supply price (arguably point 6) which puts stress on social distribution issues. The optimal quantity occurs where AC=AR (point 1) and there are factor returns but no profits. It may be point 1 is equivalent to a long-term perfect competition equilibrium (the textbooks locate it at point 3 however). If price and quantity were to settle at point 3 (or MC=AR) under perfect competition, the amount recouped would exceed average cost (point 4) by a rectangle whose height is the distance between points 3 and 4. Is this not instead the oligopolist's privilege, to share in a certain constriction of supply but not to the full extent of the excess profit-maximizing monopolist. The oligopolist therefore can cut off production so that marginal costs are fully covered, and the cost of the initial widgets produced more than paid for. "Among the welfare critics of imperfect competition, there is no agreement on the rule which should be followed for raising output, though one widely accepted rule would have it increase until the industry's long-run marginal cost becomes equal to price" (Donald Dewey, The Theory of Imperfect Competition: a radical reconstruction, New York, Columbia University Press, 1969, pp.25-6 ). The perfect competitor, on the other hand, will find that new entrants have driven the price down to where AC=AR (point 1). The monopolist restricts quantity and raises price, exploiting inelasticity. The exact point is theoretically available as that where MC=MR, while price is still determined along the demand curve AR. Price often exceeds average and even marginal costs of production. The whole static approach can break down, as Kenneth Boulding says: "There is an implicit assumption in equilibrium theory...that if the existing price structure is not in equilibrium, relative to existing demand and supply functions, then the only forces operating are those which change prices in directions that make them conform to the equilibrium set, with supply and demand functions remaining unchanged. We must now introduce the possibility that a disequilibrium price structure may also change the supply and demand functions themselves" (Boulding, op.cit., 1966, pp.280-81). Short of such a dynamic function is the simple possibility-- sometimes probability--of increasing returns to scale, i.e. a downward-sloping supply curve, be it AC or MC. As Piero Sraffa (1898-1983) said, "Business men, who regard themselves as being subject to competitive conditions, would consider absurd the assertion that the limit to their production is to be found in the internal conditions of production in their firm, which do not permit of the production of a greater quantity without an increase in cost. The chief obstacle against which they have to contend when they want gradually to increase their production does not lie in the cost of production--which, indeed, generally favours them in that direction--but in the difficulty of selling the larger quantity of goods without reducing the price, or without having to face increased marketing expenses" (Hutchison, op.cit., pp.311-12). Earlier, F. Y. Edgeworth "went so far as to argue that in a regime of general monopoly (and, presumably, of oligopoly) 'abstract economists would be deprived of their occupation, the investigation of the conditions which determine value. There would survive only the empirical school, flourishing in a chaos congenial to their mentality'. This is Edgeworth's version of Mill's dictum that 'only through the principle of competition has political economy any pretension to the character of a science' (Ibid. p.112). In his famous 1945 essay, "In Defense of Monopoly," Boulding maintained "that in the absence of a more adequate solution of the problem (which [he] believes to be possible through governmental fiscal and monetary policy), monopolistic organization and restriction of some kind is the only device which is available to particular groups within society to isolate themselves from the deflationary pressure characteristic of any economy in an advanced stage of capitalist accumulation" (Boulding, op.cit., 1971, p.171). "Workers, businessmen, and farmers know from experience that periods of falling prices and falling money incomes are disastrous to all concerned" (Ibid. p.177). "The 'spiral' effect, whether inflationary or deflationary, depends on the assumption that the demand for the commodity whose prices are changed is relatively inelastic" (Ibid. p.179). "The decline in prices makes production unprofitable, for profits are obtained through a rise in the value of assets" (Ibid. p.183). The advent of capitalism out of feudalism may have been caused by paying attention to profit instead of hierarchy. Previous unities of traditional behavior were dissolved into every smaller units, each of whose profit was maximized by setting MC=MR. Before that the serf and even the lord of the manor took the bitter with the sweet, losing some transactions but coming out even on the average. "But generally, the more narrowly economic reasoning on behalf of the competitive market consisted of nothing more complex and penetrating than the simple principle that where there was free exchange there could be no robbery, but rather there must be some advantage to both parties" (Hutchison, op.cit., p.282). Until the immortal Jevons comprehended marginalism 125 years ago, idealism had a fighting chance in the economic world. By now, we microeconomics teachers are resigned to the existence of purposeful persons cutting off their contribution when MC exceeds MR in the broad sense. Corporations do it too. However, already according to J. B. Clark in Philosophy of Wealth (1885): "Competition is no longer adequate to account for the phenomena of social industry.... Competition of the individualistic type is rapidly passing out of existence (p.147).... Individual competition the great regulator of the former era, has, in important fields, practically disappeared. It ought to disappear; it was in its latter days, incapable of working justice. The alternative regulator is moral force, and this is already in action (p.148).... The present state of industrial society is transitional and chaotic" (Hutchison, op.cit., p.254). The intersection of supply and demand, thus focusing on average and marginal, cost and revenue, is only one of various perspectives - even in microeconomics. As well as exchange, Boulding identified hierarchy and grants as major non-market types. Too many microeconomists think that those can be subsumed into the Neo-Classical "selfish" model. In the classic "labor theory of value," the supply curve has "average labor" hours, not price, on the vertical axis. Marginalism, however, maintains that "the exchange-value of a commodity...is identical with the marginal utility which a unit of the commodity has to every member of the community who possesses it, expressed in terms of the marginal utility of some concrete unit conventionally agreed upon" (Philip H. Wicksteed, The Alphabet of Economic Science: elements of the theory of value or worth, New York, Kelley & Millman, 1955, p.93). Mysterious marginal utility is revealed by the commodity's simple exchange value. In Marx's version, the main component of demand is for the means of subsistence. Distribution at the production point, roughly the degree of exploitation, resembles the difference between the marginals and the averages. Kenneth Boulding has shown that Marx erred to equate a widget's value to the buyer with its value to the seller. According to economic Utilitarianism, commodities are paid for with labor, which Jevons says, is "any painful exertion of mind or body undergone partly or wholly with a view to future good" (Jevons, op.cit., 1957, p.168). He writes, "it is possible that the true solution will consist in treating labour as a case of negative utility, or negative mingled with positive utility.... In a happy life the negative balance involved in production is more than cleared off by the positive balance of pleasure arising from consumption" (Ibid. p.169f). Sometimes Jevons seems to settle for a one-sided solution: "Labour in the economic sense of the term is essentially disutility, because it involves painful exertion; it is that which we give in production in order to obtain commodities. The labour given is painful to the giver, pleasurable in its results" (W. S. Jevons, Principles of Economics, 1905, p.135). But as a youth Jevons had already understood that "labor will be exerted both in intensity and duration until a further increment will be more painful than the increment of produce thereby obtained is pleasurable. Here labor will stop, but up to this point it will always be accompanied by an excess of pleasure" (W. S. Jevons, "Brief Account of a General Mathematical Theory of Political Economy" 1862, my italics). William S. Jevons, who drowned in 1882 at age 47, incorporates time into his mechanistic, Ricardian apparatus as follows: "Whatever improvements in the supply of commodities lengthen the average interval between the moment when labour is exerted and its ultimate result or purpose accomplished, such improvements depend on the use of capital. And I would add that this is the sole use of capital" (Jevons, op.cit., 1957, pp.228-9). With both the LTV and the utility models, another theoretical concern is whether they are static or "dynamic." However, a paradigm based upon a center of gravity equilibrium point tends to be static. One whose dimension is time would keep changing the equilibrium, and be harder to specify. Some of the first Utilitarians were Jeremy Bentham and John Stuart Mill. The first believed that we, society, should maximize the quantity of our pleasure received. Bentham was the first welfare economist (Wesley C. Mitchell, "Bentham's Felicific Calculus" 1937). That is, "practical conclusions regarding what ought to be done were the chief product of Bentham's science." It was up to Mill to say that pleasure quality was important too. The pursuit of maximization of pleasure has morphed from the constitutional "pursuit of happiness" to the equation of goods with utility and work with pain (and not only at the margin). For a study of how averages and marginals are scrambled with Marxism, see our paper at: webshells.com/jdoug/Saving_Marxism.txt. The reality is simple enough, we hope, to take on an existence of its own. To be a capitalist is to adhere to profit maximization as a goal, which indubitably would tie us to marginal cost pricing. That only works in the short term, and fails if the long term is anything but a succession of short terms, i.e. if equality and sustainability replace short-term profitability. Demand is always average revenue AR, with "consumer surplus" accounting for positive though diminishing marginal benefit in excess of price. The non-monopolist supplier must take her place at an equilibrium point along this AR line. Why should the Grid X paradigm have been tortured out of shape to place the "perfect competition" equilibrium at the intersection of average revenue and marginal cost, AR=MC. All the benefits of symmetry in the paradigm are lost. The supply curve to be preferred is an average cost curve. Obviously, the solution is breaking social production loose of the MC=MR identity. We teachers of microeconomics must assail the profit-making imperative with the dubious LTV for all it is worth. If people are thrown out of work, how can value be said to be increased. Now in 1909, radical economist Thorstein Veblen wrote in "The Limitations of Marginal Utility" (Journal of Political Economy XVII #9 November) that marginal-utility theory's range is largely limited to "some formulation of the pecuniary distribution of consumption goods." He faults marginalism because it is inapplicable to production and ignores side effects. "The technological advance of the past two centuries...the growth of the industrial arts...the pecuniary relations of modern life...institutional facts...credit extension: marginal-utility theory does not bear on these." Veblen complains that marginalism "confines the inquiry to generalizations of the teleological or 'deductive' order...instead of being drawn in terms of cause and effect." Neither under realism nor materialism nor idealism can one deduce institutional facts, for which a process philosophy might be better (Speculative Philosophy : a study of its nature, types, and uses, by Andrew J. Reck, 1972). However, what if the purpose of the theory were not to depict empirical reality, but to provide a general template for rational decision-making. If so, profit maximization is a general approach involving the insight that maximizing the difference between two totals is equivalent to minimizing the difference between the marginals as a means to optimize. CHAP 5 - MACRO KEYS The analysis with Grid X has done away with the separate frameworks for the individual versus the market, which underlies also the difference between microeconomics and macroeconomics. To resolve the bifurcation between labor or production cost theories of value and psychological utility models, our Grid X analysis utilizes costs and benefits (average revenue) in both their average and marginal forms at the same time Does macroeconomics have microfoundations. A rhetorical question. Kenneth Boulding suggests "we might distinguish the following subordinate ends of economic policy: (1) the rate of economic progress, (2) the short-run stability of employment, incomes, or prices, (3) equality in the distribution of income, (4) absence of waste in the allocation of resources among different industries and occupations, (5) width of freedom of personal choice in regard to commodities, occupations, or modes-of-life, (6) the degree of satisfaction with the human relations involved in economic processes" (Kenneth Boulding, Economic Analysis, vol.2: macroeconomics, 1966, p.253). Most of these goals are approached through maximizing profit by setting MC=MR. Yet Boulding's sixth value, a high degree of satisfaction from the economy, cannot co-exist with profits from prices that exceed marginal costs (as monopoly prices do). They result in painful inequality. Profit-making if not macroeconomics does have microfoundations. The business cycle exhibits what Kenneth Boulding called the "continuous boomerang...such as the pendulum in physics or the accelerator-multiplier system in economics. It is characteristic of the dynamics of an equilibrium system in which the movement toward equilibrium produces acceleration which drives the system beyond equilibrium, but in which the further the system diverges from equilibrium, the stronger is the force operating in the direction of equilibrium. There are many examples of such systems in economics, and the key to their analysis is the search for accelerators" (Boulding, op.cit. v.2, p.219). Of the accelerator, Boulding says "suppose that 1 machine produces 10 widgets, and lasts for 5 years. If the annual output of widgets is 100, there will be 10 machines, 2 of which will be replaced each year. Now suppose that the output of widgets increases to 120. In the year of the increase 12 machines will be needed, so that the output of machines must jump from 2 to 4." In other words, "the increase in the stock necessitates a temporary increase in the output of equipment proportionally greater than the increase in the final product" (Ibid. p.181). "In fact," writes Boulding, "the smoother life tables of reality operate to dampen and smooth out these oscillations. Nevertheless, it remains true even in the general case that fluctuations in the output of machine tools are greater than fluctuations in the output of machines, and fluctuations in the output of machines are greater than the fluctuations in the output of the commodities which they make. This principle is called the acceleration principle because the demand for machines depends not so much on the demand for their products as upon the rate of change in the demand for the product" (Ibid. pp.198-99). For the time being, we should relegate theory to microeconomics. The history of thought reveals the shape of macroeconomics. Its study is justified by Kenneth E. Boulding in a famous essay (webshells.com/cemetery/keb/samkb.htm). The Classical three factors of production and their corresponding returns were: workers/wages, landlords/rent and owners/interest. To these Boulding adds entrepreneurs/profit. The idea of "rent" as a separate category became controversial with the advent of marginalism, when economists like Frank Fetter (1863-1949) asserted the absurdity of excluding it from the cost of production. Conceptualizations such as these might be combined in an algebraic model with one or more independent variables programmed in a function to deliver up a dependent variable. For example, a consumption function could be c = a + MPC x yd (with 'a' being autonomous consumer spending and 'yd' being disposable income). MPC refers back to the famous Keynesian "multiplier." Programming could also be used instead to build an input-output model. Finally, one can approach aggregate data in a third way: as pure statistics. Between linear regression and independence testing, statistics provides tools for revealing information hidden in data. Macroeconomics like micro uses supply and demand, which is cost and benefit, or expenditures and revenue. Namely, the demand curve is simultaneously marginal benefit and average revenue. Meanwhile, the macroeconomics long-run aggregate supply curve is vertical while short-run supply is not. The supply and demand framework is not rejected. On the contrary, aggregate demand becomes a consuming mystery rather than simple hunger in the individual, and aggregate supply has to split into two fundamental parts as mentioned: short-term and long-term. William Jennings Bryan orated in 1896 against being crucified on a "Cross of Gold," and was in favor of more abundant silver. The cross today's economists bear is the so-called Keynesian Cross. Paul Krugman says, "The term 'macroeconomics' appears to have been coined in 1933" (Krugman & Wells, Macroeconomics 2006, p.416) and Keynes' "General Theory" was published in 1936. Paul Samuelson, the author of the famous mid-century synthesis, "Economics," invented the Keynesian Cross, say Krugman (Ibid.) and Robin Wells. It is to macro what diminishing returns are to micro, i.e. the explanatory key. The Keynesian Cross may be seen as an alternative to the aggregate supply (short- and long-term) and demand model. The AS-AD model refers back to microeconomic foundations which leads into questions of market structure and marginalism. The former, on the other hand, is conceptually linked to the multiplier - that in turn explains money, and the MPC and MPS. In microeconomics one looks at elasticity and profit, while in macro we study, for example, the effect on a single variable (e.g. aggregate quantity demanded) of one or more causes. Great mental leverage exists when the non-45º line is incremented or decremented and the equilibrium is tracked. For example a consensus exists, according to Krugman, that recessions are primarily caused by downward changes in investment spending (Ibid. p.276). These are, so to speak, multiplied and accelerated by the economy. On the KC diagram, a single point is determined to serve as a benchmark: the economic input and output corresponding to expectations. Anything else--increased output to the right of the equilibrium, or decreased output to the left--needs to be explained exogenously. There is no turtle for the elephant to stand on, e.g. X prefers A to B. She prefers C to A, yet prefers B to C. Another macroeconomic model central to an overarching unity--such as is marginalism for microeconomics--is the British John Hicks' IS-LM framework. Observing interest rates' effects on the product market and the finance market, Hicks could perhaps detect today's ever-increasing elasticity and diminishing consumer surplus. Socio-political-economic issues are many. Labor is primary. This is because the marginalist theory of value is that utility is purchased at the expense of leisure, or that work--at least beyond a certain limit--carries a negative sign. In the "issues" world, the supply curve for labor may be backward-bending, or supply itself downward sloping. The microeconomic Neo-Classical model works best when supply and demand are of opposite slopes. The Keynesian Cross provides insight as to the dynamics when curves of common sign intersect. Usually this refers to so-called economies of scale. In the previous "grid," as always profit is maximized where MC=MR: giving the monopolist's price. Average revenue AR, however, exceeds average cost AC right up to quantity Qf, and so the "fair-return price" can be Pf. Profit accrues to the entrepreneur who re-arranges the circular flow, according to Schumpeter. However, the capitalist captures more than her share. "Interest acts as a tax upon profit" (Joseph A. Schumpeter, The Theory of Economic Development, 1934, p.175). Average cost and marginal costs may be two versions of the supply function, where AC is by definition more long-term. In Keynesian macroeconomics, long-run aggregate supply is vertical, and short-run aggregate supply SRAS is upward- sloping. Krugman asserts "a positive relationship in the short run between the aggregate price level and the quantity of above aggregate output supplied. That is, a rise in the aggregate price level leads to a rise in the quantity of aggregate output supplied, other things equal; a fall in the aggregate price level leads to a fall in the quantity of aggregate output supplied, other things equal" (Ibid. pp.237-38). In the short-run, the AS-AD model resembles the familiar supply and demand framework from microeconomics. In micro only the right side upward-sloping segment of MC is considered the supply curve. But economies of scale may be so significant and ongoing that AC is downward-sloping in the relevant quantity range, and MC is downward-sloping in most of it, as above. Apparently the economy cannot break into the framework of the AS-AD model, which perhaps was Keynes' point. The socially optimal price that would be achieved by perfect competition, bargaining price down to MC, is insufficient to cover average cost, i.e. unprofitable in the long-run. Kenneth Boulding wrote "In Defense of Monopoly" webshells.com/cemetery/keb/deflkb.htm in recognition of this problem. He cites J. R. Hicks' Value and Capital (1939, 1974) where the following three points are made: a) "The transition" from microeconomics to macroeconomics "is made by using the simple principle, already familiar to us in statics, that the behavior of a group of individuals, or group of firms, obeys the same laws as the behavior of a single unit" (p.245). However, "the main problems where it is necessary to consider more than one 'week' are those where we are specially interested in the consequences of accumulation or decumulation of capital" (p.247). b) Securities hold a different position than money in a dynamic apparatus. "Supposing that there are n-I sorts of commodities (real goods and services not including securities or money), then we have each of us n prices to determine (the money prices of the n-I commodities, and one rate of interest)" but with additional equations for securities, and for money, the solution is determinate. However, that is "subject to the condition that elasticities of expectation are unity" (p.255). Thus "Wicksell's price-system," for example (ignoring money supply) "consists of a perfectly determinate core--the relative prices of commodities and the rate of interest--floating in a perfectly indeterminate aether of money values. Since the money- price level is so utterly arbitrary, any slight and temporary disturbance of data may shift it about to a large extent" (p.253). c) The connective tissue is expectations. "A system with elasticities of expectations greater than unity, and constant rate of interest, is definitely unstable," writes Hicks. He explains, "If elasticities of expectations [our emphasis] are generally greater than unity, so that people interpret a change in prices, not merely as an indication that they will go on, but as an indication that they will go on changing in the same direction, then a rise in all prices by so much percent (with constant rate of interest) will make demands generally greater than supplies, so that the rise in prices will continue" (p.255). The macroeconomic problem may be this, that whatever frame of reference model is adopted, the macro-economy transcends it by one dimension. Some macroeconomic issues such as the minimum wage (a price floor) and rent control (a price ceiling) are largely agglomerations of individual behavior and thus are successfully approached via microeconomic analysis. Using the multiplier and the accelerator, we can jack our way into the heaven of mental power over reality - fiscal policy. Once there, microeconomics teachers want to complete the picture, and understanding develops under the title of monetary policy. Monetary policy may be the domain of insight, while fiscal policy is rather dull. Fiscal policy works, however, since big numbers are used. In microeconomics price is actually one of two dimensions, whereas for macroeconomics the price level is a superfluous inconvenience. In the aggregate supply-aggregate demand model, equilibrium at full employment may be wishful thinking. It is easier to obtain the equilibrium of the Keynesian Cross, the coincidence of expectations with eventualities, depicted as a 45-degree straight line. Hicks and Hansen developed an equilibrium concept involving income flow and the interest rate, between the goods market (IS) and the money market (LM). According to Charles Baird, "once the price of bonds is determined the interest rate is determined," upon which "money supply and demand both depend" (Charles W. Baird, Macroeconomics: an integration of monetary, search, and income theories, SRA, 1973, p.3). The historical explanation captures the innovation in our critique: Rousseau's "noble savage" shared what she had, with no concept of profit - like truth, survival kept its own accounts. William Stanley Jevon's Theory of Political Economy, first published in 1871, virtually mechanized the hitherto subtle art of profit-making. A perfect competitor seeking MC=MR is the same as one seeking AC=AR. An oligopolist must respond to AR demand yet, claiming rationality, abandons the AC supply curve for higher MC. The monopolist's price is even higher. When the latter sets MC=MR, TR miraculously exceeds TC by the maximum amount. Thus the question of the supply curve has morphed into a choice between socialism and capitalism. Macroeconomics then, comes in two varieties depending on whom is in control of pricing, and whether they have a view toward the average cost in any situation, or are more concerned with short-term profits. Microeconomics undergirds even socialist macroeconomics. Socialism and average cost pricing are synonymous. Marginal cost pricing is more profitable, except when they --marginal costs--are diminishing. Here subsidies from the Marginal Cost Equalization Fund would encourage state monopolies to make cost-cutting innovations. Who is going to deny MC pricing in everyday existence: its logic is inexorable and inevitable. It is considered shameful when costs are rising to continue to charge the average cost AC. Carl Menger (Principles of Economics) joined Jevons in 1871 in precipitating doctrinaire marginalism, and since then the future and its "float" has been drained away. Nevertheless, the nightmare of capitalism may be a misunderstanding: according to Henry Dickinson, "the beautiful systems of economic equilibrium described by Böhm-Bawerk, Wieser, Marshall, and Cassel are not descriptions of society as it is, but prophetic visions of a socialist economy of the future" (F. von Wieser, Natural Value, bk.ii ch.vi is cited by Dickinson, op.cit. p.205. Also Roberts, op.cit. p.102 cites Dickinson). The Stanford University political theorist Charles Drekmeier, following Marcuse, has defined "Eros" as the principle of ever greater and greater unities. He relates it to "trust." A unified market with less inequality--a good thing in most theories--is logically obtained without profit-maximizing economics. Perhaps economics seems to be a "dismal science" because the state of the world encountered in an issues approach is so full of good things disappearing, along with a slowness to detect what is good hidden in the new.