Constant Returns to Scale: Can the Market Economy Exist?

Abstract

This note argues that the competitive paradigm of neoclassical economics breaks down in the presence of constant returns to scale (CRS). With CRS, all goods can be produced at identical costs by all economic agents, making 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 is the only option and the market economy ceases to exist.

Keywords: constant returns to scale, neoclassical economics, Austrian, efficiency, competitive paradigm, inconsistency, existence, second-best, Arrow, Adam Smith, Leon Walras, Pareto, ideology, free trade, Allyn Young, Kaldor, Samuelson, Stiglitz, Ricardo, market failure, behavioral economics, equilibrium

JEL Classification: B00, B13, B20, D50, D61, D62, F11