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|L.S.E. Essays on Cost; Edited by: Buchanan, James M. and George F. Thirlby|
11 paragraphs found.
|Buchanan, Introduction, L.S.E. cost theory in retrospect|
Prices tend to equal marginal opportunity costs in market equilibrium. But costs here are fully analogous to marginal benefits. Only prices have objective, empirical content. Neither the marginal valuations of demanders nor the marginal costs of suppliers can be employed as a basis for determining or setting prices. The reason is that both are brought into equality with
prices by behavioural adjustments on both sides of the market. Prices are not brought into equality with some objectively measurable phenomena on either the demand or supply side.
|Robbins, Remarks on certain aspects|
Once this is realized the apparent contradiction which we have been considering vanishes. If other things do not change and it is attempted to increase the supply of a certain product, from the point of equilibrium, then it is natural that costs should rise, for the increase must be brought about by the use of factors which are more urgently demanded elsewhere. But if other things change—if, for instance, there is an increase in the demand for this line of product—then an increase of production to meet it need not encounter such an increased resistance. The change in the data which is characterized by the increase in demand here must be accompanied by a diminution of demand elsewhere, and this may be such as to release factors of production in such measure as to permit the necessary extension at constant, or even at diminishing cost. Once the data change, there is no presumption that an increase in output of a particular kind must be accompanied by more than proportionately increased outlay.
If what I have been urging is correct, it seems clear that we cannot regard the Marshallian supply curves as serving the exact purposes of any causal explanation. They are rather to be regarded as providing schemata of certain possibilities of price variation.
If the demand varies in this way and
if the cost varies in this way, then it is implicit in these assumptions that the price will change in this way. They provide, as it were, a convenient shorthand note of different ways in which particular changes may be regarded. According to Edgeworth, 'movement along a supply and demand curve of international trade should be regarded as attended with rearrangements of internal trade: as the move
ments of the hand of a clock corresponds to considerable unseen movements of the machinery'.
It is the implication of what I have already said, that this too must be the way in which we should view the supply curves of the theory of domestic values, if our usage is not to be out of harmony with the more precise implications of general-equilibrium analysis. They are notes of the implications of given changes of the general conditions of demand
and supply, even though one curve is not shifted.
A simple example will make this clear. In the analysis of monopoly, for certain purposes the apparatus of intersecting demand-and-supply curves provides first approximations which are acceptable. But in any attempt to discover the significance for the economic system as a whole of monopoly in any line of industry it is open to very grave objections. For the assumption on which it proceeds—the assumption that other things remain equal—is incompatible with the most obvious implication of monopolistic restrictions; namely, the assumption that, since the number of factors employed in the monopolized industry is different from what would otherwise have been the case, their productivity in price terms
must necessarily be different. It is illegitimate to argue that this change is of the second order of smalls. It may be of the second order of smalls for the monopolist's price policy. It may be
of the second order of smalls in each of the other branches of industry affected; but for all the other branches of industry taken collectively it must be of a magnitude comparable in the universe of discourse—the 'social' effect of the policy—with the magnitude of the primary variation. The objection, it will be noted, is almost exactly symmetrical with the fundamental objection to the use of the concept of consumers' surplus.
There is no need for me to detain the reader with an examination of those variations of technical productivity which lead to increasing supply price. This is one of those parts of economic analysis where there is little ground for disagreement on purely analytical considerations. Dr Sraffa, who is sceptical of the importance of the conception, bases his scepticism avowedly upon empirical grounds. Cases where one line of production utilizes so large a proportion of the total supply of any factor of production that changes in the demand for the product will bring about changes in its price, he thinks, are rare. This view is apparently shared by Professor Knight. Whether or not one regards this as having
prima facie plausibility, depends in part, I think, upon one's view on the classification of the factors of production. It sounds much more plausible if one thinks of two factors of production than if one thinks of many. But, in any case, no analytical issue is at stake.
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
can doubt that the main instrument of explanation in this field has already been devised.
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'.
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.
See D. L. Green, 'Opportunity Cost and Pain Cost',
Quarterly Journal of Economics (1894), pp. 218-29; P. H. Wicksteed,
The Common-sense of Political Economy, p. 373; Davenport,
Value and Distribution, pp. 551-2;
The Economics of Enterprise, pp. 106-49; Knight,
Risk, Uncertainty and Profit, p. 92; 'Fallacies in the Interpretation of Social Cost',
Quarterly Journal of Economics (1924), p. 582; Henderson,
Supply and Demand, p. 162.
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.
|Thirlby, The Ruler|
It may be suggested that the problem of settling the railway route to which I have referred is one special to railway undertakings and has little relevance to other undertakings. This is certainly not true. The connection will be more obvious if the problem is thought of as analogous to that of settling the location, rather than the layout, of a different kind of industrial plant: the
location problem is one of judging the strength of conflicting pulls, some of them different factor supply prices, some of them different product demand prices, at different geographical points and—when changes over time are being forecasted—at different points of time. The other matter—choice of equipment—is a question which in many industrial plants is likely to be constantly recurring, not only when new (or renewed) equipment is required, but also when projected changes in kind or quantity of output raise the question of what old or new equipment to use.
|Thirlby, The economists description of business behaviour|
Neither is it intended to belittle the significance of estimating future factor prices and calculating variations in prices and their sums which would be expected to accompany variations in planned production processes and outputs (production functions). Quite the contrary. But it is intended to take care of the situation in which the business man's cost calculation with respect to a particular product is not completed until he has looked at his
alternative product demand curves as well as his factor supply curves, and calculated all the revenue he expects to lose by devoting resources (total or marginal) to this product instead of doing something else with them. It incidentally takes care of all interdependencies, including interdependencies of demand curves.