Prime cost

“ Among these stresses is the gradual increase in the costs of doing business. The decline in supplementary costs per unit of output ceases when enterprises have once secured all the [Pg 657] business they can handle with their standard equipment, and a slow increase of these costs begins when the expiration of old contracts makes necessary renewals at the high rates of interest, rent, and salaries which prevail in prosperity. Meanwhile prime costs, wages and raw materials, rise at a relatively rapid rate. ”

“ To quote Mitchell again, "The net resultant of these processes is to increase profits. Of chief importance is the fact that supplementary costs rise slowly in comparison with the physical volume of business.... In many instances prime costs also lag behind selling prices on the rise...." ”

“ 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. ”

“ I shall show that the quantity theory conflicts with most of our doctrines of prices, as worked out in our systems of economics. I shall show that, in important cases, the quantity theory conflicts with the law of supply and demand, with the doctrine of cost of production, with the capitalization theory, and with the doctrine of imputation as worked out by the Austrians, whereby the prices of labor, land, and other agents of production rise or fall with the prices of the consumption goods which they produce. ”

“ What is the ultimate regulator of its value? The value of freely-produced commodities is—according to the ordinary theory of economists—determined by their “cost of production,” or, where the article is produced at different costs, by the cost of production of the most costly portion. We have now to consider how far this theory applies to the special case of money. Gold and silver, the principal materials of money, are the products of mines, and are produced at different costs; therefore the cost of the part produced at greatest cost ought to determine their value. ”

“ 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. ”

“ To be properly remunerative to the State, as to a private individual, the price at which a commodity is sold must be sufficient to pay interest on the capital invested in the business, that is to say, to pay for the use of the property which must be used in producing the commodity, as well as to pay the more immediate cost of its production in wages and materials. ”

“ 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. ”

“ 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. ”

“ 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 ”

“ Professor Adams establishes his annuity on the depreciated value, rather than on the cost, or the reproduction cost, which, in the speaker's opinion, does not determine the proper annuity or reasonable fixed charges to be deducted from net income before net surplus is established. Bonds are generally sold at a considerable discount, and represent the full cost plus this discount, consequently, the interest on bonds or fixed charges will be greater than an annuity established on cost, "reproduction cost," or "present value." ”

“ But if the cost-curve is rising because of a fall in the value of money, then the demand-curve will be rising also, and production will not be checked. The general law as to the relation of cost to demand and supply assumes a fixed value of the unit of cost, the dollar.
To the Austrian economists we owe a rational theory of costs which gives the money-outlay concept more than a merely empirical basis. First, they see in costs not causes, but results. Value causation comes ultimately, not from the side of supply, but from the side of demand. ”

“ 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. ”

“ The calculation of the true depreciation cost by the sinking fund principle is the reason for including this method in the compound interest type. The problem to be solved is the determination of the [Pg 168] price to be paid for an asset at a given time so that the cost of each unit of product turned out during its remaining service life shall be the same as the cost of each unit of product turned out during the spent portion of its service life. ”

“ It is this marginal cost which just gives the rates of remuneration to labour and capital which suffice to keep up the continuous supply of the requisite factors of production. If a commodity is produced according to the law of diminishing return, or, what is the same thing, if the supply can only be increased after a certain point at an increasing cost per unit, then the marginal portion just pays its expenses and the previous portions yield a differential remuneration which constitutes economic rent. ”

“ It might be supposed at first sight that when the exchange is unfavorable, or, in other words, when bills are at a premium, the premium must always amount to a full equivalent for the cost of transmitting money. ”

“ Cost of operation constantly is compared with fixed charges, the interest with the capital investment. Expensive improvements on railroads, the straightening of curves, the tunneling of mountains, the reducing of grades, the replacement of lighter by heavier rails, have been made possible by a fall in the rate of interest. A fall in the rate of interest disturbs the equilibrium that has been arrived at, between the cost of operation, the amount paid for wages, coal, etc., and the income on permanent investment. ”

“ Cost of production can have nothing to do with deciding the value of the associated commodities relatively to each other. It only decides their joint value. Cost of production does not determine their prices, but the sum of their prices. A principle is wanting to apportion the expenses of production between the two.
Since cost of production here fails us, we must revert to a law of value anterior to cost of production, and more fundamental, the law of demand and supply. ”

“ If, without increase of population, the money of a country be increased from, say, $1,000,000,000 to $2,000,000,000, the effect would be not to add to the aggregate value of the money of the country, but to decrease the value or purchasing power of each unit of the money, so that it would take ten dollars to buy what had before cost but five. ”

“ If the mean term, which we are searching for, between an infinite value and no value at all is expressed in the case of every product, by the amount of time and expense which the product cost, a poem which has cost its author thirty years of labor and an outlay of ten thousand francs in journeys, books, &c., must be paid for by the ordinary wages received by a laborer during thirty years, plus ten thousand francs indemnity for expense incurred. ”

“ Its proportion to their number, and the resulting worth of currency, are calculable; but its proportion to their will for labour is not. The worth of the piece of money which claims a given quantity of the store is, in exchange, less or greater according to the facility of obtaining the same quantity of the same thing without having recourse to the store. In other words it depends on the immediate Cost and Price of the thing. We must now, therefore, complete the definition of these terms.
59. All cost and price are counted in Labour. ”

“ The price which governs, cost or selling, will depend upon the nature of the property. As a general rule, it is the cost price. For goods which cannot be readily or advantageously reproduced, like cereals and cotton, the adjustment basis is the local open market price prevailing immediately before the fire. In adjusting values, adequate depreciation allowance is made not only for ordinary wear and tear, but also for losses incidental to changes of fashion, demand, etc. ”

“ Cost being only in uncertain equivalence with sacrifice or discomfort, as between different persons, the factor of cost falls into the background; and the process of bargaining, which is in the foreground, being a process of valuation, a balancing of individual demand and supply, it follows that a law of reciprocal demand comes in to supplant the law of cost. In all this the proximate causes at work in the determination of values are plainly taken account of more adequately than in earlier cost-of-production doctrines ”

“ The cost of promoting the enterprise, the discount on the hazard, the loss of interest during its infancy, the labor of building up the undertaking—these are all real elements of cost, and may remain in the property as value, but, like all other items of cost, they have their reasonable limits, which, in each individual case, can be determined within narrow bounds. ”

“ 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." ”

“ To-day, however, these contributions, which occur every year, are booked either to the general expenses account or the wages account—for they are, in fact, a part of wages—and they are naturally calculated as part of the cost of production, and eventually appear in the price of the goods, though perhaps not to the full extent in times of bad trade. ”

“ 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. ”

“ 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. ”

“ 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. ”

“ A great majority of those who advocate valuation say that they should be based on the cost of the service. The proper method, then, would be to ascertain the exact cost of hauling each commodity and then base rates on these ascertained costs, making them just high enough to allow the road a fair return. ”

“ The marginal cost of producing twenty-three and twenty-two hundredths grains of gold will always be a dollar, however the dollar may vary in value. Indeed, in general, the assumption of a constant value of the money-unit is implied in the monetary cost concept. Cost curves are supply-curves and the reasoning already given as to the need for assuming constant value for money in the supply and demand concept will apply here. Costs function in value-determination only [Pg 70] by checking supply. Rising costs tend to mean a lessened supply. ”

“ 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. ”

“ When a renewal or replacement is made, it becomes necessary to determine whether the cost of the renewal or replacement is more than the cost of the part or the whole replaced. For example, if an asset costing originally $1,000 is replaced by one costing $1,200, there has manifestly been an addition of $200 to the value of the asset. ”