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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.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 45153.

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Date of creation: 16 Mar 2013
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Handle: RePEc:pra:mprapa:45153

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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;

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  1. Tobin, James, 1985. "Neoclassical Theory in America: J. B. Clark and Fisher," American Economic Review, American Economic Association, American Economic Association, vol. 75(6), pages 28-38, December.
  2. Axel Leijonhufvud, 1973. "Life Among The Econ," Economic Inquiry, Western Economic Association International, vol. 11(3), pages 327-337, 09.
  3. Hicks, John, 1989. "The Assumption of Constant Returns to Scale," Cambridge Journal of Economics, Oxford University Press, Oxford University Press, vol. 13(1), pages 9-17, March.
  4. Young, Allyn A., 1928. "Increasing Returns and Economic Progress," History of Economic Thought Articles, McMaster University Archive for the History of Economic Thought, McMaster University Archive for the History of Economic Thought, vol. 38, pages 527-542.
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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.

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