Cost-benefit analysis

“ Experience shows, that in very many cases the value of products is less than equivalent to the utility they bestow, because it is adjusted to the measure of the expense required for their production. Hence a great many theorists have concluded that value is not derived from utility, but is governed by another principle, viz., cost of production. ”

“ Benefits and costs should be measured and appropriately discounted over the full life cycle of each project. Such analysis will enable informed tradeoffs among capital outlays, operating and maintenance costs, and nonmonetary costs borne by the public. ”

“ But we must not therefore suppose it to be necessary that the supply should actually be either diminished or increased. Suppose that the cost of production of a thing is cheapened by some mechanical invention, or increased by a tax. The value of the thing would in a little time, if not immediately, fall in the one case, and rise in the other ”

“ But more to the point is the fact that, although one may calculate what a cost is, and of course all of our costs are carefully calculated, no one knows what a cost ought to be. One of the ways of discovering what a cost ought to be is to name a price so low as to force everybody in the place to the highest point of efficiency. The low price makes everybody dig for profits. We make more discoveries concerning manufacturing and selling under this forced method than by any method of leisurely investigation. ”

“ On the other hand, if any production cannot be largely extended so that the supply in market barely meets the requirements of purchasers, the tendency of normal values is toward the cost of the most costly part of the product required to meet wants. ”

“ To bring this equilibrium into the general scheme of the modern theory of costs, however, in terms precise enough to make a satisfactory theory of the value of money, is a thing which has not so far been done, and I do not have high hopes of its early accomplishment. In any case, such a theory must rest upon a positive theory of value. Cost doctrine is negative, and can never be fundamental. ”

“ Fluctuating scales of prices determined by fluctuating conditions of competition, supply and demand, and power of coercion, will give place to "the fair price" fixed by concerted community action and revised from time to time in order to preserve a right balance with the general scale of cost of raw materials and cost of living. ”

“ If you will take into account these various factors constantly operating toward a reduction of operating and general expense cost, and interest cost, the conclusion must necessarily be forced upon you that the price at which current can be sold at a profit to-day is in no sense a measure of the income per unit which it will be necessary for central station managers to obtain in the future. ”

“ Sometimes utility becomes the paramount element in determining value; but ordinarily it is subordinate to the cost of production. When the article is one for which there is a very great demand, and of which there is a great scarcity, the value may increase many times beyond the cost. ”

“ Hence the business man's view of the costs is that they determine value. It is true in the sense that the supply of a particular product in any market is at last limited by cost of marginal producers or of marginal portions of supply. But it is not true of all the units of product that costs determine, or equal, market price. There is a margin above costs to the successful enterpriser on a large portion of his output. ”

“ It belongs to the man who labours, or produces an article, estimating for himself, as we have seen, the amount of burden he has assumed, to fix the price measured by that burden or cost. He alone knows it, and he alone, therefore, can determine it. It belongs, on the other hand, to the purchaser to estimate for himself the value of the labour or commodity to him. He alone can do so in fact, for he alone knows the nature of his own wants. By the settlement of the first point—the cost to the producer—the price becomes a fixed sum. ”

“ The price paid by the public greatly exceeds the real cost of production. A very large proportion, often the greater part of the cost to the consumer, goes in railway and other rates and in middle-men's profits. ”

“ In the former respect, there is a beneficent principle of equalization or compensation which decreases the price-variations of money, no matter of what kind, in the necessity, when the number of business transactions remains the same and money becomes cheaper, to use more of it, and less when it becomes dearer.741 The supply of money is, in the long run, dependent chiefly on the cost of production. ”

“ We have never considered any costs as fixed. Therefore we first reduce the price to a point where we believe more sales will result. Then we go ahead and try to make the price. We do not bother about the costs. The new price forces the costs down. The more usual way is to take the costs and then determine the price, and although that method may be scientific in the narrow sense, it is not scientific in the broad sense, because what earthly use is it to know the cost if it tells you you cannot manufacture at a price at which the article can be sold? ”

“ Other experts, who reject the factor of interest unearned during the period of development, build their estimates of going value upon the cost of attaching new customers to the business, a cost not taken from the books, but merely presumed or estimated at widely variant amounts. ”

“ Now it is well known that under present conditions the retail price of any manufactured article comprises about one-third for actual cost of production, one-third for manufacturer's profits and accounting costs, and one-third for selling costs. In other words, every such article, when it reaches the ultimate consumer, is weighted down with a load of barnacles of trade-profits of innumerable middlemen, rents, dividends, cost of advertising, and other trade-getting devices, etc., etc. ”

“ Such is the cost of materials and labour at the present period; it is true that the above scale is drawn from "credit prices;" but let every part of a manufacturing concern be carried on for money only, which is rarely the case, still the deduction from the whole cannot be more than 71⁄2 per cent. ”

“ But the problems would have been easier to handle, if the public generally were a little less disposed to think in terms of averages, and a little more in terms of margins, if we all of us instinctively realized that the cost that really matters is the cost at which additional production is profitable under the conditions ruling at the time, or in the immediate future. ”

“ And it is evident that the higher cost of those things is not only no benefit to you, but takes so much more of the money you earn out of your pockets. When the same article which formerly cost $1 costs $2, then the same amount of wages for which you formerly could buy a full supply of those things will be sufficient to buy only half a supply, and you will have to go without the other half. ”

“ The cost which requires 25s. is incurred for the sake of fifty quarters alone: the first hundred might have continued forever to be produced at the original cost, and with the benefit, on that quantity, of the whole rise of price caused by the increased demand: no one, therefore, will incur the additional expense for the sake of the additional fifty, unless they alone will pay for the whole of it. ”

“ While, also, the rates for the low-value articles may not cover every item in the so-called cost of service, they do contribute to the revenue an amount which might otherwise have to be made good by the fixing of higher rates on goods in other classes. ”

“ Price changes, which may be traced to an increased gold supply and the consequent depreciation of the dollar, react upon the cost of living only as certain reciprocal advantages and disadvantages are shifted among persons whose money incomes rest upon actual or implied contractural relations extending over the period of price change. For this reason, advancing prices are peculiarly advantageous to the debtor class, composed mainly of bonded business corporations, virtually discounting their obligations at an annual rate commensurate with the increase in prices. ”

“ Value runs from finished product to agents of production, labor, and instrumental goods, and land. Avoiding needless complications from a discussion of interest as a factor in cost—a doctrine on which the Austrians, say Wieser and Böhm-Bawerk, are not agreed,—it is enough to point out that high wages or high rents, which limit production in any given industry or establishment, are high because the land and labor in question have alternative uses, because other industries, or other [Pg 71] competitors in the same industry, bid for them. Cost-curves, then, are reflections of demand-curves. ”

“ In fixing a uniform price for identically the same labor or material, whether on a small poverty-stricken road or a main trunk line, no serious injustice is done, provided the price fixed is one which, from a strictly engineering standpoint, is a reasonable figure for cost of reproduction. The differences in class are due, not to special differences in cost of physical property, but rather to differences in earning ability on account of good or poor territory served, efficient or inefficient management, or other reasons not connected with the physical structure ”

“ Low prices, according to all standard writers on political economy, are the direct results of a contracting currency, and a consequent increasing scarcity of money, and the cost of production is not only greatly increased by inability of the producer to obtain money except at high rates of interest, but the terms upon which money can be had at all are often so exacting as to discourage permanent improvement. ”

“ If it is strong and increasing, he will feel sure that the consumers will repay the whole cost of production, interest and capital included, and in addition the legitimate profit attached to the business. ”

“ Moreover, the results of efficiency methods, within the writer’s knowledge, are sufficient to convince him that their general adoption would so increase the purchasing power of the employe, by increasing his wages and decreasing the cost production, as to have a markedly beneficial and steadying effect upon the business of the country. ”

“ If we attempt to ascertain the changes in the cost of production of any commodity from the changes in its money price, the conclusion will require to be corrected by the best allowance we can make for the intermediate changes in the cost of the production of money itself. ”

“ Most manufacturing and contracting concerns have at all times a more or less constant volume of work in various stages of completion. At the close of the fiscal period when results are summarized, the proper treatment of this uncompleted work is an important matter. The general principles governing the valuation of this work were discussed in Chapter XIII where it was pointed out that in the main conservative business policy demands that work in progress be included in the inventory at full cost, which is to include both prime cost and an equitable share of burden accrued to date. ”

“ The cost of production, prompt information as to the cost of transprotation, are legitimate subjects of inquiry and knowledge in any industry. So likewise is the production of the commodity in that industry, the aggregate surplus stock, and the prices at which the commodity has actually been sold in the usual course of business. ”

“ We have seen that the larger the town the greater the velocity of circulation of bank deposits. § 11 XII.99 Throughout this book we have aimed at explaining the general purchasing power of money, not its purchasing power over any particular goods or class of goods. The problem of the rise in "the cost of living" is partly a general problem of the purchasing power of money, and partly a special problem of the prices of food, clothing and other costs of "living." ”

“ Finally, a circumstance should be borne in mind which bears not only upon the intrinsic desirability of a regulative plan, but also upon the attitude of the general public and the consequent political and industrial possibilities. Economists are familiar with the difference between the phrase which they use in describing the new conditions, and that which is current in popular discussion. The economists speak of the "rise in prices"; the general public speaks of the "high cost of living." ”

“ Because business must figure in these losses as part of the cost of doing business, the price of their products or services must increase accordingly to all the people who avail themselves of these goods or services. ”

“ Now these rates of wages and profit can be expressed in terms of money, and may be designated, Expenses of production. following Marshall, the expenses of production as distinguished from the real cost. The real cost of production would on analysis consist of a confused unworkable mass of “efforts and abstinences,” or “disutilities,” and the relation of these mental strains to their material rewards is the problem of wages and profits. But for the purpose of relative values it is not necessary to push the analysis so far ”

“ Further argument for the inclusion of interest as an item of cost is the fact that in numerous processes time is an important element. Thus, the smelting of ore, the tanning of leather, the curing of tobacco, the seasoning of lumber, etc., are examples of relatively lengthy processes the cost of which should include interest on the capital invested. ”

“ The newly rich pay and do not feel it. But what can the poorer unorganized buyer do when retail prices are raised? What can he do if his meat bill, or his plumbing-repairs bill, rises enormously? The extravagance of the rich has increased the cost of traveling, the rates at hotels, the fees, the luxury of steamships and automobiles, the consumption of fruits and vegetables out of season once never thought of, and has generally raised the standard of expenditure. Those of smaller income find they also must pay the higher prices. ”