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11 paragraphs found in the 1 Book listed below
L.S.E. Essays on Cost; Edited by: Buchanan, James M. and George F. Thirlby
11 paragraphs found.
Robbins, Remarks on certain aspects

I start, then, with fundamentals. The conception of costs in modern economic theory is a conception of displaced alternatives: the cost of obtaining anything is what must be surrendered in order to get it. The process of valuation is essentially a process of choice, and costs are the negative aspect of this process. In the theory of exchange, therefore, costs reflect the value of the things surrendered. In the theory of production they reflect also the value of alternative uses of productive factors—that is, of products which do not come into existence because existing products are preferred. *10 Such is the conception of costs first systematically developed by Wieser *11 and made familiar in English-speaking areas by Green, Wicksteed, Davenport, Knight and Henderson. *12 Following the usage of Pantaleoni *13 and many others, we may refer to it for short as Wieser's Law.


It is probably true to say that at the present day the broad outlines of this conception are generally acceptable. *14 The work of Wieser's successors in this field—in particular the various writings of Professor Mayer—have brought home to us all its central importance as a unifying principle in the structure of modern analysis. And, in the sphere of applied economics, it becomes more and more clear that many of the most urgent problems of the day can be understood only in the light of the knowledge that it furnishes. *15


But there is one matter on which there is not yet full agreement. It relates to the precise mode in which the displaced alternatives are to be conceived. Wieser's usage is clear. They are to be conceived in terms of values—in terms of the values of the goods of the first order displaced. 'The cost of production of one thing', said Wicksteed, 'is the marginal value of another thing.' *16 This is the sense in which it has usually been understood. In recent years, however, it has been suggested in some quarters that they should be conceived in terms of technical quantities-in terms of the quantities (as distinct from the values) of the goods of the first order which might have been produced. This is the procedure suggested by Professor Knight in his 'Suggestion for Simplifying the Statement of the General Theory of Price'. *17 He invokes Adam Smith's parable of the beaver and the deer and concludes: 'In sum, the cost of beaver is deer and the cost of deer is beaver, and that is the only objective and scientific content of the cost notion.' The same procedure is adopted by Dr Haberler in his recent article on the theory of comparative cost. *18


According to Wieser's Law, costs of production under competitive conditions are a reflection of the value of the alternatives which are displaced in order that the goods in that line of production may be produced and appropriated by the ultimate consumers. That is to say, they are essentially a reflection of the strength of excluded demands—demands both for the specific factors specialized to such lines of production and the non-specific factors capable of employment elsewhere. It seems to follow that, in the normal case, at the point of equilibrium, just as demand price will be decreasing, so will cost be increasing. This is quite obvious in the case of equilibrium of two commodities. To push production beyond that point would involve a product of diminishing relative utility—that is, a sacrifice of increased relative utility. I do not think that the situation is fundamentally changed when we consider many commodities. Nor do I think that in this connection it is necessary to take account of the possibilities of unusual utility functions. To move in any direction from a position of equilibrium is to encounter increased resistance: this is the fundamental conception.


For if we look more closely at the constructions in question, it becomes fairly clear that they are appropriate to the investigation of fundamentally separate problems. The general propositions regarding costs which spring from Wieser's Law are essentially a description of the conditions of equilibrium. They answer the question, what would happen to costs if, from a position of equilibrium- other things remaining equal-it were attempted to increase or diminish production in any particular line of industry. The constructions which we associate with particular equilibrium analysis, on the other hand, deal with what would happen if other things were varied; i.e. if production were to be increased in response to an increase in demand. That is to say, that they are essentially germane to a theory of variations. They relate not to forces which maintain equilibrium once it is established, but rather to the differences between one equilibrium position and another.


There is therefore no fundamental incompatibility between the implications of Wieser's Law and the constructions of 'particular equilibrium' cost analysis. But it still remains to decide what degree of validity is to be attributed to these constructions in the actual connections in which they are most frequently employed.


It is not necessary in this connection to expatiate on the significance of the Austrian contribution to this theory. It is clear that, in the characteristically Austrian constructions, we have a technique which is pre-eminently suited to the explanation of the phenomena of movement. On the demand side, the conception of the dependent use ( abhängige Nutzen); on the supply side, the conception of the displaced alternative—here we are dealing with elements which are the actual focus of attention of the economic subjects through whom changes come about. No one who has followed Wicksteed's exposition of the continuous relevance of Wieser's Law to the explanation of change *28 can doubt that the main instrument of explanation in this field has already been devised. *29


The Marshallian doctrine of short and long period price is essentially an attempt to provide a theory of price change in terms of the length of time which is taken to overcome various technical obstacles on the supply side. The relative specificity—to use Wieser's term—of productive factors means that the immediate response to a change in the conditions of demand or supply is not necessarily a response to an ultimate equilibrium position. To take Marshall's own example: in the short period, a change in the demand for fish will be met by an increased output from existing fishermen and a more intensive use of fishing gear already in existence. In the long period, however—I use Marshall's own words—'the normal supply price... is governed by a different set of causes, and with different results'. *30 Capital and labour come into the industry or leave it; the fixed equipment involved is augmented or depleted. In the sphere of cost theory this leads to the distinction between prime and supplementary expenses; in the sphere of distribution theory, to the distinction between quasi-rents and interest.

This somewhat roundabout way of putting matters is deliberate. The money costs of production in any line of industry are a reflection of 1) the value of factors of production wholly specialized to that line of production (Wieser's 'specific' factors) and 2) the value of transferable ('non-specific') divisible factors in other uses. It is in regard to these latter ingredients that Wieser's propositions have special relevance.
It is sometimes held that Wieser's Law is only true of a state of affairs in which the supplies of the factors of production are fixed. If these supplies are flexible, it is urged, then the disutility principle—the concept of real cost as real pains and sacrifices—comes into its own as an independent principle of explanation. (See Edgeworth, Papers Relating to Political Economy, 3, pp. 56-64; Robertson, Economic Fragments, p. 21; Viner, 'The Theory of Comparative Costs' in Weltwirtschaftliches Archiv, 36, pp. 411 ff.). The objection is plausible but it is not ultimately valid. Even when we are contemplating a situation in which the total supplies of the factors actually used in production are flexible, it is quite easy to show that Wieser's Law is still applicable. Variations in the total supply of labour in productive industry are accompanied by variations in the amount of time and energy which is available for other uses. Variations in the supply of land in production are accompanied by changes in the supply of land put to consumptive uses. Variations in the supply of capital are accompanied by variations in present consumption. All economic changes are capable of being exhibited as forms of exchange. And hence, as Wicksteed has shown, they can be exhibited further as the resultant of demand operating within a given technical environment. (See Wicksteed, Common-sense of Political Economy, especially I, chapter ix; also F. X. Weiss, 'Die moderne Tendenz in der Lehre vom Geldwert', Zeitschrift für Volkswirtschaft, Socialpolitik, und Verwaltung, 19, p. 518; and Wicksell, Vorlesungen, 1, p. 159). It has been said that this becomes impossible if account be taken of the so-called other advantages and disadvantages of different occupations. Professor Viner in the article cited above has urged this particular objection. The difficulty however seems to be capable of a simple solution. If the other advantages and disadvantages are treated as joint products, the Wicksteed constructions can still be maintained.
An example should make this quite plain. The introduction of improved methods of production sometimes has the effect of causing the price of the particular line of product concerned to fall below costs of production; and observation of this fact has often led to the belief that therefore the mechanism of free markets is incapable of dealing with the effects of scientific invention. But what does such a situation imply? Prices are below costs; the products fetch less than the amounts which have to be paid for the factors which produce them. But why is this? If the factors were completely specialized to the line of production in question—i.e. if they had no mobility—then in a free system their prices would fall automatically with the fall in the prices of their products. There could be no lasting disparity between prices and money costs. But the costs of transferable factors, according to Wieser's Law, are a reflection of their value in other possible uses. If therefore in one line of production costs of production are higher than prices, this means under our assumptions that there are factors of production in that line which are more urgently demanded elsewhere—that the change in technique creates a new equilibrium of factors. As the transfer takes place under the pressure of the costs disparities, there will be movements of prices and costs tending to a restoration of profitability. It follows therefore that, if technical progress is accompanied by more extensive disequilibrium, the causes must be sought outside the area covered by our assumptions; the market is not free, the monetary mechanism is not functioning properly. There is nothing in the institutions of exchange as such which makes technical progress necessarily self-frustrating. This conclusion, which follows directly from Wieser's Law, is surely a conclusion of considerable practical importance.