<h2>CHAPTER 30</h2>
<h3>COST OF PRODUCTION</h3>
<h4>§ 1. COST OF PRODUCTION FROM THE ENTERPRISER'S POINT OF VIEW</h4>
<div class="sidenote">The enterpriser's cost</div>
<p>1. <i>The task of the enterpriser is to get together the essential factors
to secure valuable products.</i> The enterpriser must first decide what
product he will endeavor to secure, and the kind, the place, the time,
the quantity, and the quality. He must then select in the right
proportion the materials, labor, plant, and machinery necessary for that
product. He must purchase these factors in the market at the lowest
price he can, unite them and sell the product to recover the expenses in
the selling price. A thousand items enter into the cost and perhaps a
single product emerges. What the business man thus pays out, expressed
in money form, are the costs that are here to be considered.</p>
<div class="sidenote">Several meanings of cost</div>
<p>2. <i>The term cost of production is used in several senses, the chief of
which are money cost, psychic cost, and alternative cost.</i> The ambiguity
of this term is a source of much confusion. <i>Psychic cost</i> is the pain,
fatigue, irksomeness of labor. This is not definitely measured except at
rare points. When the pain of work more than offsets the value of the
product, the worker who is free to determine the length of his own
working-day, stops. At that point the psychic cost and the utility of
the marginal unit are almost equal in intensity—the one as a positive,
the other as a negative quantity. But the value of the product as a
whole cannot be related to the psychic cost or sacrifice, and therefore
it cannot<span class="pagenum"><SPAN name="Page_274" id="Page_274">[Pg 274]</SPAN></span> serve as a measure of cost in every-day business.
<i>Alternative cost</i> is any good or gratification that must be given up
when any other good is chosen. One may stay at home and read a book or
go on a picnic; the pleasure of reading the book will cost the pleasure
of the picnic. A good dress may cost a happy vacation that must be given
up for it. In this sense, each thing is a cost of every other thing that
might be chosen in the place of it. Alternative cost is therefore
manifold and indefinite. The thought is significant at the moment of a
choice, but it is not constantly measurable for practical purposes. The
<i>money cost</i> is the practical cost generally implied in the term cost of
production. It expresses not the pain of the laborer in doing the work,
not the sacrifice of the owner of the capital in saving the money, but
merely the sum of money paid out by the producer. There is frequent
confusion of these ideas in economic discussion, few even of the leading
economists of the nineteenth century having quite escaped it.</p>
<div class="sidenote">The cost of the factors is their market price</div>
<p>3. <i>The enterpriser, looking upon the cost of most of the factors as
fixed, seeks to combine them as economically as possible.</i> Whether the
enterpriser is running a factory or a farm, is engaged in a retail or a
wholesale store, is conducting a school, or a railroad, he has to solve
much the same problem. By close attention, good judgment, skilful
bargaining, he may be able to buy slightly cheaper than his competitors,
and thus have an advantage over them at the outset. When he does this,
it is usually by searching out a better market in which to buy, buying
at a better time, and judging better than his competitors the quality of
goods. If, in a given market at a given time, goods are sold to one more
cheaply than to others, it is an act of generosity. Even the best buyers
pay nearly the prevailing market price for agents. The most successful
enterprisers are not found to be those paying lower wages or lower
ground-rent than their competitors. It must not be forgotten that the
main forces fixing the prices of agents are impersonal, and can be only<span class="pagenum"><SPAN name="Page_275" id="Page_275">[Pg 275]</SPAN></span>
slightly modified in most cases by a particular buyer. He looks
therefore upon the cost of the elements as an ultimate fact which he can
change little, if at all, and he shows his judgment chiefly in the
selection of quality. Cost determines and limits the extent of his
business and determines the price at which he sells.</p>
<div class="sidenote">The right proportioning of the factors</div>
<p>4. <i>The right proportioning and skilful substitution of the factors is a
delicate technical task for the enterpriser.</i> Good buying and good
selling must precede and follow the central part of the enterpriser's
task, that is, the combining of the various factors. Each factor is
applied, subject to diminishing returns, up to a point where its
addition will not secure the value attributed to it in its cost. The
enterpriser is constantly studying the question whether the application
of another unit of any one factor at the price will add to the value of
the product as much or more than the cost. This calculation is made for
every one of the minor factors entering into the business, and for the
business as a whole. The proper proportion varies at different prices,
or costs. If wages rise, "it pays" to get machinery; if wages fall, it
pays to let the machinery deteriorate and to do more by hand-labor.
Likewise there is constant substitution of the various materials. The
right proportions change constantly with inventions. A model factory is
so proportioned that the buildings hold the right number of machines,
with the right amount of space for the workmen, and the right amount of
power. If there is more of a single factor than the ideal proportion, it
is an unnecessary cost. Even the model factory begins to be out of date
almost as soon as the walls are dry, and the latest method is to build
as nearly as possible on the unit system, so that new parts may be added
without the loss of harmony and proportion.</p>
<div class="sidenote">Pressure of price toward cost at certain points</div>
<div class="sidenote">The enterpriser in contact with costs</div>
<p>5. <i>The enterpriser's costs determine the lowest price at which he can
continue to sell, but if successful he may have a wide margin of
profits.</i> New factories are constantly arising with new and better
adjustments. In industries of<span class="pagenum"><SPAN name="Page_276" id="Page_276">[Pg 276]</SPAN></span> competing products, also, the processes
are changing. Hence there is always a pressure of competition on some
enterprisers who constantly complain that they must sell below the cost
of production. The organizers of a trust always declare, some no doubt
truly, that they have been selling below the cost of production.
Business men say that competition is destructive, and it certainly does
destroy the less favorably situated enterprises. Each enterpriser's
price is the highest he can get in the market for his product; it may
far exceed his costs; it may even fall below them, but only temporarily,
for if sales continue to encroach on capital, the sheriff soon closes
the doors. Successful competitors are constantly pressing upon the
marginal enterpriser, fixing a price that leaves themselves a profit,
but is below his cost. Even the most successful enterpriser comes into
contact with cost, and seems to be compelled by it. He reaches out for
trade, and sells some (not all) goods at a price which leaves him no
profit. He enlarges his factory and ships goods farther, paying the
freight, which means a lower price at the factory. The expanding
business, therefore, comes at length to the point where it cannot go
farther at the prevailing prices. 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. The margin may be narrow or wide, according
to the business. The margin is "profit," or the gain of the enterpriser.</p>
<h4>§ II. COST OF PRODUCTION FROM THE ECONOMIST'S STANDPOINT</h4>
<div class="sidenote">Money cost not the ultimate explanation of value</div>
<p>1. <i>The economist should view money cost as an intermediate and not as
an ultimate explanation of value.</i> The<span class="pagenum"><SPAN name="Page_277" id="Page_277">[Pg 277]</SPAN></span> value of all things must be
traced back to gratification, to the relation of goods with psychic
income. This being true, the value of the factors which the enterpriser
uses must be derived from the value of the products, and not the
reverse. This does not mean that the business man is deceived into the
belief that he has in cost of production a final explanation of value.
He simply is not interested in that question. He knows that there are
many influences determining the cost of the factors he buys, but they
are distant; he cannot influence them, and in the single stage of his
production they seem to fix the price. In some purchases, and on the
stock exchange, a marvelous recognition and analysis of the most distant
influences is necessary; but in general a superficial view of value is
taken in business; it does not pay to do other. The logical treatment,
however, must go deeper into the question and trace the cost of agents
back to the ultimate cause of value, that is, to want-gratifying power.
To say that the price of a product is determined by the money cost, or
price, of the factors is simply to postpone the answer to the question
of value; one has still to ask, What determines the money cost, or
price, of those factors themselves?</p>
<div class="sidenote">The cost of agents is fixed by their marginal utility in
alternative uses</div>
<p>2. <i>The demand for any factor entering into products is reflected, in an
increased price, to its cost in all competing products.</i> Figuratively
speaking, products compete with each other for the factors that enter
into them. According to location, quality of the soil, and improvements,
a certain area of land has various rival uses. These uses bid for the
land, or put in an economic claim for it. Products of a higher value
outbid and exclude those of a lower. If fine wine can be raised on a
piece of land, potatoes ordinarily will not be planted in it. But if
there is such a supply of that quality of land that it continues to be
used side by side for both products, it will have the same value and
yield the same rental in both uses. The least utility yielded by any
portion of the supply fixes the value of all the units.<span class="pagenum"><SPAN name="Page_278" id="Page_278">[Pg 278]</SPAN></span> Machines are
usually made for some product determined in advance, but often they are
only partially specialized and within limits they can be adapted.
Sewing-machine factories were readily turned to the making of bicycles
at the time of greatest demand, and bicycle factories later were used
for the making of automobiles. Thus, in general, machinery is used for
the product to which it contributes the most value. Any enterpriser
seeking it for any other use finds its "cost" affected by its various
alternative uses. The same is true of all the materials and of all the
grades of labor entering into products. The enterpriser's <i>cost</i> is
therefore the reflection of the want-gratifying power of the productive
agent in all its other uses as well as in the particular product he
desires. To the enterpriser, cost seems the cause of the value of a
product. To the economist it should be clear that the utility found in
the various products is the basis of value in the factors, <i>i. e.</i>, of
the costs.</p>
<div class="sidenote">A single source of a single product</div>
<p>3. <i>The genealogy of value may thus be traced through the various
intermediate products to consumption goods.</i> A single product having a
single source of supply shows most clearly the reflection of value
directly from the product. The discovery of a mineral spring or of a
good quality of building-stone on worthless land, will cause a value to
attach at once to the source of supply. When a great singer like Adelina
Patti commands several thousand dollars for each appearance in concert,
the source is the magical throat of the singer, and the salary reflects
the utility of the music in the minds of delighted hearers.</p>
<div class="sidenote">One source of several products</div>
<p>When the one source of supply yields several different kinds of products
there is just one new condition which confuses the thought and suggests
the error that value begins in the source (with costs therefore) and not
in the product. Looking at the products severally, no one of them
explains the value of the source, and, on the contrary, each one is seen
to have a value independent of the particular use to which it is put. To
make the illustration most simple: a savage finds<span class="pagenum"><SPAN name="Page_279" id="Page_279">[Pg 279]</SPAN></span> in a wreck on the
coast a number of bars of iron. His fellows wish them for various
purposes: to make arrow heads, spears, knives, hatchets, hoes,
ornaments, nails, needles, etc. Value is in this case derived in part,
through the source, from the alternate uses. Taken jointly and
considered as one sum, the value of the various products accounts as
completely and exclusively for the value of the source as if they were
merged into one product. The source (<i>S</i>) is distributed to each of the
products in accordance with their marginal utility, and therefore the
value of the various products from any source of supply constantly tends
to equality. Any unit of product sought for any purpose must be paid for
according to a marginal utility determined in all the applications. The
genesis of the value is in the utility of the product; the value of the
source is derived.</p>
<div class="figcenter"> <ANTIMG src="images/i279.jpg" width-obs="500" height-obs="471" alt="" /> <span class="caption"><i>1. A single Product</i><br/>
<i>2. Several Products from one Source</i></span></div>
<div class="sidenote">Complex conditions with intermediate products</div>
<p>In actual life the problem is far more complex, and yet, through its
settlement runs just the same principle. There is constant bidding for
materials, and through their price the claims of rival products are
adjusted. A point is reached where it does not pay to use any more of an
agent in a certain industry; the production of another unit results<span class="pagenum"><SPAN name="Page_280" id="Page_280">[Pg 280]</SPAN></span> in
a loss. There is a most complex relation among many different industries
using the same factors, the value of a unit of product (at <i>a</i>) being
reflected up to the source, and through successive links to the most
distant product (<i>z</i>). The effect of this is to reduce the sale (of <i>z</i>)
and correspondingly the use made of the agent in question. A higher
price of leather, due to the increased use of shoes, raises the value of
hides and cattle (this increasing the extent of cattle raising) and
raises thus the cost of carriage-trimmings, pocket-books, foot-balls,
leather belts, and every other leather product. As the price rises,
substitutes for leather, and imitations of it, are used for such of the
products as cannot bear the increased cost of leather.</p>
<div class="figcenter"> <ANTIMG src="images/i280.jpg" width-obs="500" height-obs="456" alt="" /> <span class="caption"><i>3. Complex Relations Through Intermediate Products</i></span></div>
<div class="sidenote">The enterpriser the medium of price movements</div>
<div class="sidenote">Costs are an expression of consumers' estimates</div>
<p>4. <i>The enterpriser does not fix the value of products or of agents, but
is the medium through which consumers express their estimates.</i> The
enterpriser who anticipates aright and satisfies the public taste is the
good medium. He readily transmits and accurately focuses the rays of
public judgment. One that misjudges is a poor medium. The enterpriser is
himself the servant of costs. Laborers sometimes<span class="pagenum"><SPAN name="Page_281" id="Page_281">[Pg 281]</SPAN></span> assume that the
employer can dictate wages, prices, and markets, can rule things with a
lordly hand. With rare exceptions the ultimate control in these matters
by business men is very slight. In the main the enterpriser masters the
situation only by bowing to it, just as the scientist and the engineer
gain mastery over nature because they know when to bend and how to obey.
The consumer, by deciding to buy this or that product, sets in motion
waves of value. The consumers of products are the true purchasers of
labor, materials, and uses of agents. The enterpriser must conform
closely to cost, to the price prevailing for the moment, or his
competitors in this day of narrow margins will seize the opportunity.
The enterpriser is merely the distributor or equalizer of cost among all
the different products for which different agents can be used. If he
acts efficiently, profits arise.</p>
<hr class="chap" />
<p><span class="pagenum"><SPAN name="Page_282" id="Page_282">[Pg 282]</SPAN></span></p>
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