Marginal cost and price

James V. DeLong has a column up at TCS criticizing the ridiculous notion that the "price of a good should equal its marginal cost." Such a viewpoint completely ignores the underlying capital investment costs necessary for production to occur. [Found via The American Mind]

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The Left is going to

The Left is going to complain no matter what. If companies did sell at marginal cost (i.e. Wal-Mart) then the outcry would be that small businesses are hurt. Not to mention the innovation that would be lost if all companies only sold at marginal cost.

He is totally and completely

He is totally and completely wrong. His first problem is the conflating of moral goodness with economic efficiency.

Second, the academics doing work in this area are NOT advocating removing intellectual property rights, but changing how the work so that a more socially desireable outcome can result.

He's a clueless hack.

The most interesting points

The most interesting points DeLong made were on price equaling marginal cost, and that's what Jonathon and I (on my weblog) pointed out. DeLong did something important in the study of economics. He saw a weakness in a theoretical concept and showed how it's prevented better policy. That's far from being a "clueless hack."

Okay, not a clueless hack.

Okay, not a clueless hack. I think outright liar is much more accurate.

DeLong did something important in the study of economics. He saw a weakness in a theoretical concept and showed how it's prevented better policy.

Two points.

1. It isn't economist, contrary to his claim, that are talking about stripping property rights. Basically he is lying about that.

2. Price being equal to marginal cost (P=MC) is a result that rarely applies in the real world. Most economists know this. The assumptions that have to be met are quite strenuous. Further, I'd argue many economists are even aware that simply moving closer to this "ideal" isn't necessarily an improvement in terms of overall efficiency.

His real beef is with lawyers:

Generations of antitrust lawyers have regarded themselves as the guardians of marginal cost pricing, and view real world departures from it as temporary aberrations in need of correction. This results in blackly humorous interactions between them and businessmen who know, inarticulately, that the standard is impossible to meet, but must pretend to be with the program. They cannot confess that they actually spend all their time scheming how to acquire market power so they will not get caught in the death spiral of marginal cost pricing.

Of which, idiot-boy is one himself.

His screed can be summarized thusly:

Idiot lawyers and judges have simplified economic theories and principles to the point of non-sense.

Economists do differentiate between short-run and long-run marginal costs. Economists are also aware that short-run and long-run don't have to be the same in different areas.

Economists do not use words like moral or immoral (generally speaking) when discussing economic efficiecy.