Constant Returns to Scale: Can the Neoclassical Economy Exist?

M. Shahid Alam ()

MPRA Paper from University Library of Munich, Germany

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.

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 (search for similar items in EconPapers)
JEL-codes: B0 B00 B1 B3 B4 B41 D5 (search for similar items in EconPapers)
Date: 2013-03-16
New Economics Papers: this item is included in nep-hme, nep-hpe, nep-mic and nep-pke
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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