L.S.E. Essays on Cost

Edited by: Buchanan, James M. and George F. Thirlby
(1919- )
CEE
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Editor/Trans.
First Pub. Date
1934
Publisher/Edition
New York: New York University Press
Pub. Date
1981
Comments
Collected essays, various authors, 1934-1973. First published as a collection 1973 for the London School of Economics. Includes essays by Ronald H. Coase, Friedrich A. Hayek, Lionel Robbins, and more.

1. [1] London 1932.

2. [2] Paul A. Samuelson, Foundations of Economic Analysis (Cambridge, Mass. 1947), p. 5. Samuelson's Nobel lecture provides evidence that his own position has not substantially changed. See 'Maximum Principles in Analytical Economics', American Economic Review, 62 (June 1972), pp. 249-62.

3. [3] Chicago 1969.

4. [4] R. H. Coase, 'The Problem of Social Cost', Journal of Law and Economics, 3 (October 1960), pp. 1-44.

5. [5] This summary of the impact of the London cost theory should include mention of G. L. S. Shackle. Although Shackle does not specifically present his ideas in opportunity-cost terms, his whole approach to decision is fully consistent with that developed by the London theorists. Shackle was both directly and indirectly associated closely with the London group. For Shackle's most appropriate treatment of decision, see his Decision, Order, and Time in Human Affairs, Cambridge 1961.

6. [6] See my Fiscal Theory and Political Economy (Chapel Hill, North Carolina 1960), pp. 27-30 for a summary treatment. One of my own unfinished projects is a critical analysis of Ferrara's work, with a view towards making his contribution more widely known to English-language readers.

7. [7] London 1910.

8. [8] For a detailed discussion of each of these attributes of opportunity cost see my Cost and Choice, chapter 3.

9. [9] I am indebted to my colleagues, Thomas Borcherding and Gordon Tullock for helpful comments.

Essay 2, Remarks upon certain aspects of the theory of costs

10. [10] 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.

11. [11] Ursprung and Hauptgesetze des wirtschaftlichen Werthers, pp. 146-70; Natural Value, pp. 171-214; Theorie der gesellschaftlichen Wirtschaft, pp. 61-4, 73-81, 142-6; also the juvenile work Über das Verhältnis der Kosten zum Wert ('Gesammelte Abhandlungen', pp. 377-404).

12. [12] 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.

13. [13] Pure Economics, p. 184.

14. [14] 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.

15. [15] 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.

16. [16] Common-sense of Political Economy, p. 382; cf. also, Rosenstein-Rodan, 'Grenznutzen' in Handworterbuch der Staatswissenschaften, 4, pp. 1198 ff.

17. [17] Journal of Political Economy, 36 (1928), pp. 353-70.

18. [18] Weltwirtschaftliches Archiv, 32, pp. 353-70, especially the note on p. 358.

19. [19] We can see this most clearly if we contemplate an extreme case. Suppose a state of affairs in which two commodities are produced by the aid of two classes of factors of production—the factors entering into the manufacture of the two commodities in proportions which are different for each commodity. (For example, PA involves 2x and 1y and PB 1x and 2y.) Now suppose a shift of demand. The relative scarcities of the factors and of the products will change. The cost of production (in money terms) of the commodity whose manufacture involves the higher proportion of the factor which has become relatively scarcer will rise. The cost of production of the commodity whose manufacture involves a higher proportion of the factor which has become relatively less scarce will fall. There is no movement of technical displacements which corresponds to this.

20. [20] P. Straffa, 'The Laws of Costs under Competitive Conditions', Economic Journal (1926), pp. 535, 550.

21. [21] I have attempted to indicate some of the more important of such cases in an article entitled 'On a Certain Ambiguity in the Conception of Stationary Equililibrium', Economic Journal (1930), pp. 194-214. The present paper is to be regarded as essentially a continuation of the same train of thought—but applied to a wider area than the simple analysis of final equilibrium.

22. [22] Papers Relating to Political Economy, 2, p. 32. Of course this usage of the integral curves, which assumes other commodities besides those registered on the coordinates to be produced in the economy under consideration, must be distinguished from the use of similar curves under the assumption that only two commodities are capable of coming into existence. There are objections to the use of such an apparatus, well known to all readers of Pareto, but it is arguable that if Marshall had proceeded on these lines he would have been much more reluctant to adopt his compromise constructions than in fact he was.

23. [23] See my Essay on the Nature and Significance of Economic Science, chapter vi, para. 2.

24. [24] Wealth and Welfare, pp. 172-9.

25. [25] Quarterly Journal of Economics, 27, pp. 676ff. See also Knight, 'Fallacies in the Interpretation of Social Cost', Quarterly Journal of Economics, (1924), pp. 218-29. Professor Pigou's retraction of his original proposition is to be found in the second edition of the Economics of Welfare, p. 194; Edgeworth's endorsement of this retraction in his review of this volume, 'The Doctrine of Social Net Product', Economic Journal (1925) pp. 30 ff.

26. [26] I ought perhaps to state explicitly that this is merely an interpretation. It is not a transmission of any esoteric oral tradition. My own views on these matters spring chiefly from reflections on the remarks on the variations of productivity in Taylor's Principles of Economics, pp. 141-2.

27. [27] The distinction between these two stages of the theory of variations is not often clearly recognized in the English and American literature. It is, however, very clearly stated by Pareto (Manual, p. 147), and it has recently been the subject of important studies by Mayer, Rosenstein-Rodan and Schams. See Mayer, 'Der Erkenntniswert der funktionellen Preistheorien', Wirtschaftstheorie der Gegenwart, 2, pp. 146-239; Rosenstein-Rodan, 'Das Zeitmoment in der mathematischen Theorie des wirtschaftlichen Gleichgewitchtes', Zeitschrift für Nationalökonomie, 1, pp. 129-42; Schams, 'Komparatives Statik', Zeitschrift für Nationalökonomie, 2, pp. 27-61. See also my article on Production in the Encyclopedia of the Social Sciences.

28. [28] Common-sense of Political Economy, 1, chapter ix.

29. [29] It is significant in this connection that historically the Austrian theories are said to have sprung from Menger's inability to explain the short-term fluctuations of produce and stock markets in terms of the classical generalizations. It is clear that for the most part the classical theories are to be regarded as theories of comparitive statics (in the sense explained above) with the differences between successive states of equilibrium explained in technical terms. The wage-fund theory in certain aspects has of course a more dynamic character.

30. [30] Principles, 8th ed., p. 370.

Essay 3, Economics and knowledge

31. [31] Or rather falsification. Cf. K. Popper, Logik der Forschung, (Vienna 1935), passim.

32. [32] A more complete survey of the process by which the significance of anticipations was gradually introduced into economic analysis would probably have to begin with Professor Irving Fisher's Appreciation and Interest (1896).

33. [33]I should like to make it clear from the outset that I use the term 'equilibrium analysis' throughout this paper in the narrower sense in which it is equivalent to what Professor Hans Mayer has christened the 'functional' (as distinguished from the 'causal-genetic') approach, and to what used to be loosely described as the 'mathematical school'. It is round this approach that most of the theoretical discussions of the past ten or fifteen years have taken place. It is true that Professor Mayer has held out before us the prospect of another, 'causal-genetic' approach, but it can hardly be denied that this is still largely a promise. It should, however, be mentioned here that some of the most stimulating suggestions on problems closely related to those treated here have come from this circle. Cf., H. Mayer, 'Der Erkenntniswert der funktionellen Preistheorien', Die Wirtschaftsheorie der Gegenwart, 2 (1931); P. N. Rosenstein-Rodan, 'Das Zeitmoment in der mathematischen Theorie des wirtschaftlichen Gleichgewichts', Zeitschrift für Nationalökonomie, 1, No. 1, and 'The Role of Time in Economic Theory', Economica N. S., 1 (1), (1934).

34. [34] Cf., on this point particularly L. Mises, Grundproblems der Nationalökonomis (Jena 1933), pp. 22 ff., 160 ff.

35. [35] It has long been a subject of wonder to me why there should, to my knowledge, have been no systematic attempts in sociology to analyse social relations in terms of correspondence and non-correspondence, or compatibility and non-compatibility, of individual aims and desires. It seems that the mathematical technique of analysis situs (topology) and particularly such concepts developed by it as that of homsomorphism might prove very useful in this connection, although it may appear doubtful whether even this technique, at any rate in the present state of its development, is adequate to the complexity of the structures with which we have to deal. A first attempt made recently in this direction by an eminent mathematician (Karl Menger, Moral, Wills und Weltgestaltung, [Vienna 1934]) has so far not yet led to very illuminating results. But we may look forward with interest to the treatise on exact sociological theory which Professor Menger has promised for the near future. (Cf., 'Einige neuere Fortschritte in der exakten Behandlung sozialwissens-chaftlicher Probleme', in Neuere Fortschritte in den exakten Wissenschaften (Vienna 1936), p. 132.)

36. [36] Cf. 'The Maintenance of Capital', Economica N. S., 2 (1935), p. 265.

37. [37] This separation of the concept of equilibrium from that of a stationary state seems to me to be no more than the necessary outcome of a process which has been going on for a fairly long time. That this association of the two concepts is not essential but only due to historical reasons is today probably generally felt. If complete separation has not yet been effected, it is apparently only because no alternative definition of a state of equilibrium had yet been suggested which has made it possible to state in a general form those propositions of equilibrium analysis which are essentially independent of the concept of a stationary state. Yet it is evident that most of the propositions of equilibrium analysis are not supposed to be applicable only in that stationary state which will probably never be reached. The process of separation seems to have begun with Marshall and his distinction between long and short run equilibria. (Cf. statements like this: 'For the nature of equilibrium itself, and that of the causes by which it is determined, depend on the length of the period over which the market is taken to extend'. Principles, 7th ed., 1,6,p. 330.) The idea of a state of equilibrium which was not a stationary state was already inherent in my 'Das intertemporale Gleichgewichtssystem der Preise und die Bewegungen des Geldwerts' (Weltwirtschaftliches Archiv, 28 [1928]) and is of course essential if we want to use the equilibrium apparatus for the explanation of any of the phenomena connected with 'investment'. On the whole matter much historical information will be found in E. Schams, 'Komparative Statistik', Zsitschrift für Nationalökonomis, 2, No 1 (1930).

38. [38] Cf. particularly O. Morgenstern, 'Vollkommene Voraussicht und Wirtschaftliches Gleichgewicht', Zeitschrift für Nationalökonomis, 6, p. 3.

39. [39] Another example of more general importance would of course be the correspondence between 'investment' and 'saving' in the sense of the proportion (in terms of relative cost) in which entrepreneurs provide producers' goods and consumers' goods for a particular date, and the proportion in which consumers in general will at this date distribute their resources between producers' goods and consumers' goods. (Cf. my 'Preiserwartungen, monetäre Störungen und Fehlinvestitionen', Ekonomisk Tidskrift, 34, (1935) (French translation; 'Prévisions de prix, pertubations monétaires et paux investissments,' Revue des Sciences Economiques (October 1935) and 'The Maintenance of Capital', Economica N.S., 2, (1935), pp. 268-73.) It may be of interest in this connection to mention that in the course of investigations of the same field, which led me to these speculations, the theory of crises, the great French sociologist G. Tarde stressed the 'contradiction des croyances' or 'contradiction de jugements' or 'contradictions des aspérances' as the main cause of these phenomena (Psychologis économique (Paris 1902) 2, pp. 129-8; Cf. also N. Pinkus, Das Problem des Normalen in der Nationalökonomie (Leipzig, 1906), pp. 232 and 275.

40. [40] It is an interesting question, but one which I cannot discuss here, whether in order that we can speak of equilibrium, every single individual must be right, or whether it would not be sufficient if, in consequence of a compensation of errors in different directions, quantities of the different commodities coming on the market were the same as if every individual had been right. It seems to me as if equilibrium in the strict sense would require the first condition to be satisfied, but I can conceive that a wider concept, requiring only the second condition, might occasionally be useful. A fuller discussion of this problem would have to consider the whole question of the significance which some economists (including Pareto) attach to the law of great numbers in this connection. On the general point see P. N. Rosenstein-Rorlon, 'The Coordination of the General Theories of Money and Price', Economica, (August 1936).

41. [41] Or, since in view of the tautological character of the pure logic of choice, 'individual plans' and 'subjective data' can be used interchangeably, between the agreement between the subjective data of the different individuals.

42. [42] This seems to be implicitly admitted, although hardly consciously recognized, when in recent times it is frequently stressed that equilibrium analysis only describes the conditions of equilibrium without attempting to derive the position of equilibrium from the data. Equilibrium analysis in this sense would of course be pure logic and contain no assertions about the real world.

43. [43] The distinction drawn here may help to solve the old difference between economists and sociologists about the role which ideal types play in the reasoning of economic theory. The sociologists used to emphasize that the usual procedure of economic theory involved the assumption of particular ideal types, while the economic theorist pointed out that his reasoning was of such generality that he need not make use of any ideal types. The truth seems to be that within the field of the Pure Logic of Choice, in which the economist was largely interested, he was right in his assertion, but that as soon as he wanted to use it for the explanation of a social process he had to use ideal types of one sort or another.

44. [44] See N. Kaldor, 'A Classificatory Note on the Determinateness of Equilibrium', Review of Economic Studies, 1, No. 2, (1934), p. 123.

45. [45] On all this cf. Kaldor, 'A Classificatory Note....', passim.

46. [46] I am not certain, but I hope, that the distinction between the Pure Logic of Choice and economics as a social science is essentially the same distinction as that which Professor A. Ammon has in mind when he stresses again and again that a 'Theorie des Wirtschaftens' is not yet a 'Theorie der Volkswirtschaft'.

47. [47] Knowledge in this sense is more than what is usually described as skill, and the division of knowledge of which we here speak more than is meant by the division of labour. To put it shortly, 'skill' refers only to the knowledge of which a person makes use in his trade, while the further knowledge, about which we must know something in order to be able to say anything about the processes in society, is the knowledge of alternative possibilities of action of which he makes no direct use. It may be added here that knowledge, in the sense in which the term is here used, is identical with foresight only in the sense in which all knowledge is capacity to predict.

48. [48] That all propositions of economic theory refer to things which are defined in terms of human attitudes towards them, that is, that for instance the 'sugar' about which economic theory may occasionally speak, is not defined by its 'objective' qualities, but by the fact that people believe that it will serve certain needs of theirs in a certain way, is the source of all sorts of difficulties and confusions, particularly in connection with the problem of 'verification'. It is of course also in this connection that the contrast between the verstehende social science and the behaviourist approach becomes so glaring. I am not certain that the behaviouists in the social sciences are quite aware of how much of the traditional approach they would have to abandon if they wanted to be consistent, or that they would want to adhere to it consistently if they were aware of this. It would, for instance, imply that propositions of the theory of money would have to refer excusively to, say, 'round discs of metal, bearing a certain stamp', or some similarly defined object or group of objects.

49. [49] These conditions are usually described as absebce of 'frictions'. In a recently published article ('Quantity of Capital and the Rate of Interest'. Journal of Political Economy, 44, No.5 (1936), P.638) Professor F.H.Knight rightly points out that '"error" is the usual meaning of friction in economic discussion'.

50. [50]This would be one, but probably not yet a sufficient, condition to ensure that, with a given state of demand, the marginal productivity of the different factors of production in their different uses should be equalized and that in this sense an equilibrium of production should be brought about. That it is not necessary, as one might think, that every possible alternative use of any kind of resources should be known to at least one among the owners of each group of such resources which are used for one particular purpose is due to the fact that the alternatives known to the owners of the resources in a particular use are reflected in the prices of these resources. In this way it may be a sufficient distribution of knowledge of the alternative uses, m,n,o,...y,z, of a commodity, if A, who uses the quantity of these resources in his possession for m, knows of n, and B, who uses his for n, knows of m, while C who uses his for o, knows of n,etc., etc., until we get to L, who uses his for z, but only knows of y. I am not clear to what extent in addition to this a particular distribution of the knowledge of the different proportions is required in which different factors can be combined in the production of any one commodity. For complete equilibrium additional assumptions will be required about the knowledge which consumers possess about the serviceability of the commodities for the satisfaction of their wants.

Essay 4, The rationale of cost accounting

51. [51] In recent years however, there have been attempts to apply the technique of costing to the problems of distributors.

52. [52] There may of course be people who like to have information out of pure curiosity, regardless of whether it can influence policy. There is nothing irrational in this provided it is remembered that it is merely a way of consuming income and not adding to it.

53. [53] Carter, Advanced Accounts (1931), p. 851.

54. [54] Thus we are not concerned with 100 units at £2 9s od (£2.45) but with £95 only which takes account of the reduction in price of the first 3,000 units.

55. [55] It may be that taking on additional work raises the price at which a firm can obtain its factors of production (e.g. labour). If this happens then the firm has to take account not only of the rise in price of the labour for the additional work but also of the higher cost of all other work which has to pay more for labour.

56. [56] But see note 5 above.

57. [57] T. J. Kreps, 'Joint Costs in the Chemical Industry', Quarterly Journal of Economics (1929-30).

58. [58] T. H. Sanders, Cost Accounting for Control, p. 454.

Essay 5, Business Organization and the accountant

1. [1] R. S. Edwards, 'The Rationale of Cost Accounting', reprinted here, pp. 71-92.

2. [2] Edwards, 'The Rationale of Cost Accounting', p. 76.

3. [3] Edwards, 'The Rationale of Cost Accounting', p. 88.

4. [4] Edwards, 'The Rationale of Cost Accounting', p. 89.

5. [5] There followed a section in the original articles which illustrated the use of the concepts of marginal cost and opportunity cost by considering an electricity-supply undertaking which owned a coal mine and which discussed when the undertaking should buy coal on the open market [footnote added].

6. [6] A manufacturer of pig iron, who prefers to supply armament firms, might reckon his preference in money terms at 10s (50P) per ton. He would therefore add 10s (50P) per ton to his receipts when his pig iron is sold for this purpose.

7. [7] Originally published in the Accountant (2 July-24 September 1938) and reprinted in Studies in Accounting, ed. W. T. Baxter, pp. 227-320.

8. [8] There is of course no reason why some other date should not be chosen if it is thought that this will prove more convenient.

9. [9] In practice, since the interest rate would probably vary with the amount one lent or borrowed, there would not necessarily be a single rate.

10. [10] The other job may be a similar one at a later date or of quite a different character. The material displaced may actually be a less expensive one. Another cost that may have to be deducted is the expense of transforming the material in to the form in which it is required for the other job.

11. [11] The absolute movements in cost, assuming that selling expenses are unchanged, will be the same. But since in this case 'opportunity' costs is equal to the price minus the selling expense, the percentage variation in cost will be greater than the percentage variation in the price.

12. [12] H. R. Hatfield, 'What they say about Depreciation', Accounting Review (March 1936). Reprinted in Studies in Accounting, ed. W. T. Baxter, pp. 337-50.

13. [13] See The General Theory of Employment, Interest and Money, p. 53.

14. [14] Economica (November 1938), p. 384.

15. [15] W. W. Bigg, Cost Accounts (1932), pp. 84-5. A similar point is made in Wheldon, Cost Accounting and Costing Methods, pp. 128-9.

16. [16] Bigg, Cost Accounts, p. 82.

17. [17] Both are to be found in Wheldon, Cost Accounting and Costing Methods, p. 128.

18. [18] What follows was an attempt to answer criticisms of my approach which had been made in correspondence printed in the Accountant (footnote added).

19. [19] In a letter written by Mr W. W. Bigg, the Accountant (15 October 1938).

20. [20] This example had been discussed earlier in the original articles but this section has been omitted in this condensation [footnote added].

Essay 6, The subjective theory of value and accounting 'cost'

21. [21] Harry Norris. 'Notes on the Relationship between Economists and Accountants', Economic Journal 54, Nos. 215-16 (December 1944).

22. [22] G. F. Thirlby, 'The University Commerce Curriculum', Sociological Review, 34, Nos. 3 and 4 (July-October 1942).

23. [23] C. S. Richards, 'The Task before Us: with special reference to Industry', South African Journal of Economics, 12, No. 3 (September 1944).

24. [24] 'The conception of real costs as displaced alternatives is now accepted by the majority of theoretical economists'. L. Robbins, Introduction to Wicksteed, The Common Sense of Political Economy (London, 1933), p. xviii. It is significant that Professor Robbins adds to these words 'but...we are still a long way from making it part and parcel of our daily speculations on those problems to which it is most relevant', and that on a previous page (p. xv) he has stated that 'since the war [1914-18], there has appeared a great mass of literature on the cost question which, for all the awareness it displays of the essential problem at issue, might for the most part have been the same if Wicksteed had never written'.

25. [25] Cf. 'Resources and needs exist for practical purposes only through somebody knowing about them and there will always be infinitely more known to all the people together than can be known to the most competent authority'. Hayek, 'Scientism and the Study of Society', Economica N. S., 11, No. 41 (February 1944), p. 37.

26. [26] Fritz Machlup, 'Competition, Pliopoly and Profit', parts I and II, Economica N. S., 9, Nos. 33 and 34 (February and May 1942), part I, p. 9.

27. [27] Machlup, 'Competition, Pliopoly and Profit', part II, p. 156.

28. [28] Wicksteed, The Common-sense of Political Economy, p. 820.

29. [29] I propose to confine my discussion in this section to a single coordinated decision ex ante. It is my hope that this will be adequate to suggest that an understanding of this coordinated decision ex ante is the appropriate starting point for the development of a philosophy of modern large-scale business organization.

30. [30] The process would, I suppose, be commonly referred to as the planning of the acquisition (or retention) and use of short-term funds, or short-term capital, or working capital.

31. [31] This term is used by Brutzkus in Economic Planning in Soviet Russia.

32. [32] On the limitations of committee management, see Hayek 'Scientism and the Study of Society', p. 31, footnote 2.

33. [33] My abstract discussion is founded upon a section of a concrete discussion of Budgetary Control in Department Stores given some years ago by Professor Arnold Plant in his lectures on Business Administration.

34. [34] A term used by Machlup, 'Competition, Pliopoly and Profit', part II.

35. [35] Norris, 'Notes on the Relationship between Economists and Accountants' p. 376.

36. [36] That economists sometimes tacitly adopt the same sort of assumption is apparent in a definition of depreciation cost by Mr. Hawtrey which is criticised in G. F. Thirlby, 'Permanent Resources', Economica, N. S., 10, No. 39 (August 1943), pp. 247 ff.

37. [37] This implies that results of breaches of standing orders issued to executives and other people, and results of 'acts of God', are excluded from 'production'.

38. [38] I presume that Marx would have 'expired' units of 'labour' instead of units of money.

39. [39] 'The value of what you have got is not affected by the value of what you have relinquished or forgone in order to get it... You have the thing you bought, not the price you paid for it'. Wicksteed, The Common-sense of Political Economy, pp. 88-9.

40. [40] This cost might be of higher or lower significance to A than an amount of money—if he had it—equal to the amount 'attached' to the goods.

41. [41] I find that students under the accounting influence sometimes find it a little difficult to understand this, particularly if the goods are bought in one country and sold in another. I have taken to asking them the question 'If this is not so—if there is no ex ante coordination of the buying and selling markets—how does the buyer of a commodity know how much to buy? Is he indifferent as to whether he buys a collar-box full, enough to fill a fleet of ships, or a quantity given by a number drawn out of a hat?'

42. [42] See Thirlby, 'Permanent Resources'.

43. [43] Some evidence, if any is needed, is contained in the following extract from an article by Mr K. Lacey: 'There are many...types of business (e.g. those producing proprietary lines), the selling prices of whose products lag very far behind the movement of raw material prices, and tend rather to be based upon the average cost of their stocks on hand. The profits of such businesses on the first-in-first-out basis do not vary quite so greatly over the Trade Cycle, and the adoption of the last-in-first-out basis might have the unusual effect in some instances of making their profits more unstable from year to year than they are at present. There is a fallacy here however, and it must not be assumed that the earning of a reasonably stable profit is evidence that no self-deception exists and that no alteration in method is desirable. The position here is that sales are made at too low a price relative to replacement costs when market values are rising, and at too high a price relative to replacement costs when market values are falling' ('Commodity Stocks and the Trade Cycle', Economica N. S., II), No 41 (February 1944), (Mr Norris joined issue with Mr Lacey in the following August issue of Economica.) This article is further welcome evidence that accountants are becoming concerned about the effects of accounting practice.

44. [44] Wicksteed, The Common-sense of Political Economy, p. 387.

45. [45] See twelve articles by R. H. Coase in the English Accountant, 99.

46. [46] See Lacey, 'Commodity Stocks and the Trade Cycle'.

47. [47] E.g. where there is compulsory cartellization. On the association of cost-accounting with cartellization, see Burn, Economic History of Steel Making (Cambridge 1940), pp. 494-5.

Essay 7, The Ruler

48. [48] Read, in part, to the Cape Town branch of the Economic Society of South Africa on 11 October 1946. The final stimulus prompting me to write the paper was Mr. T. Wilson's 'Price and Outlay Policy of State Enterprise' Economic Journal, 55, No. 220 (December 1945). Originally it was a running commentary upon that note, elaborating criticism which Mr Wilson himself put forward, but eventually joining issue with him upon his own proposals.

49. [49] Accordingly, the paper has relevance to the prevalent idea that the efficiency of industries can somehow be judged by measuring their costs.

50. [50] Because his function is to measure.

51. [51] The fragments of information about the Cape Town and Wellington Railway are derived from minutes of evidence taken before Select Committees and other official documents. (See Votes and Proceedings of Parliament of the Cape of Good Hope from 1854 onwards, particularly two Reports of 1859, Appendix 2 [C.1 and A.6).]

52. [52] And the liability to be dismissed—by whom?

53. [53] Cf. Mr Wilson's suggestion that Mr Lerner has no time to spare, in his Economics of Control, for the 'other problem, which is also partly economic, of ensuring technical efficiency in the use of resources'. (T. Wilson, 'Price and Outlay Policy of State Enterprise'.)

54. [54] This statement is prompted by my own experience.

55. [55] It may be argued that the same, or a similar, lack of coordination can occur in a single mind. But I prefer to treat the matter as it appears in the form of the elusive 'diseconomy' of divided administration which 'budgetary' control may to some extent offset. Cf. G.F. Thirlby, 'The Subjective Theory of Value and Accounting "Cost"', reprinted here, pages 135-61.

56. [56] I suppose every spouse can recall some occasion on which he (or she) would have done something different had the other spouse told him (or her) something which she (or he) ought to have told him (or her). I doubt whether Wicksteed adequately treated this aspect of human affairs.

57. [57] It is difficult to believe that the railways could not have been more administratively effective in forecasting and appropriately responding to the effects of road motor competition.

58. [58] Fritz Machlup, 'Competition, Pliopoly and Profit', part II, Economica, N. S., 9, No. 34, (May 1942).

59. [59] See Appendix I.

60. [60] See Appendix I.

61. [61] See Appendix I.

62. [62] The 'long run' is precisely as long as a piece of string which is longer than a shorter piece.

63. [63] Mr Wilson queries this behaviour. In referring to the propensity to consider 'the operation of increasing returns industries... from a short-period point of view when a certain amount of fixed equipment is in existence...' he says that, 'in discussing this situation economists are able to make full use of their intriguing discovery that "bygones are bygones"...' 'Price and Outlay Policy of State Enterprise', (third section).

64. [64] For circumstances under which it will not have such a cost, see Hayek, The Pure Theory of Capital, (London 1941), and G. F. Thirlby, 'Permanent Resources', Economica, N. S., 10, No. 39 (August 1943).

65. [65] P. T. Bauer, 'Notes on Cost', Economica, N. S., 12 No. 46, (May 1945), p. 96. All uses, including the use for the unit of output under consideration, that are contemplated at any planning stage must, to a greater or leaser extent, be future uses. Some of them—uses for alternative purposes—may be contemporaneous with the use for the unit of output under consideration. Later uses also may be for alternative purposes. With these adjustments the expression quoted seems to be in order.

66. [66] It appeared to be necessary to make this matter quite clear because Mr Wilson ('Price and Outlay Policy of State Enterprise'), does not seem to have done so. Distinguishing it from the 'short-period' reckoning in which he more or less concedes that 'fixed' equipment cost is an irrelevant 'bygone', he conceives of the longer-period reckoning, that is to say, a reckoning in which 'fixed' equipment cost appears, as occurring when a decision is taken to install equipment.

67. [67] It is quite irrelevant to the present issue to point out that many businessmen do in fact judge that they will be the same tomorrow as they have been today. The relevant point is that somebody has to be presumed to be responsible for forecasting or for not bothering to forecast.

68. [68] There is implicit recognition of this fact in the discussion following Mr Wilson's suggestion that 'probably the only way to get at any sort of approximate answer [to the question whether a large "widening" of the capital structure should occur] would be to consider whether it would be possible to cover the total costs of the undertaking if it were run monopolistically'. ('Price and Outlay Policy of State Enterprise', p. 458). The force of his subsequent remarks upon the relative incompetence of 'socialist managers' of an 'undertaking run according to the rule' to pronounce upon 'what consumers would give for the product', and to determine investment policy, really depends upon the fact that the monopolist of whom he is thinking is, unlike the 'socialist managers', a person operating in the market with a constantly developing and revised understanding of the behaviour of the consuming public in the sphere in which he is operating. (I do not wish this remark to convey the impression that I think that 'socialist managers' could not be such persons—much less that I think that it would not be their function to employ this competence. The indispensability of business administration does not of course depend upon whether the industrial organization is 'socialistic' or 'capitalistic'. That this truth was discovered in Russia very soon after the 1917 revolution is apparent from the literature (e.g. Hubbard's Sovist Labour and Industry.)

69. [69] See Appendix I.

70. [70] 'The Subjective Theory of Value and Accounting "Cost"', reprinted here, pages 135-61, passim. If the fact that this model relates to a mercantile rather than to an industrial undertaking is disliked, the term 'buyer' may be changed to 'product-line superintendent', and the term 'merchandise manager' to 'general superintendent'. The administrative structure is then similar in the two cases. But in the industrial case it would be hard, with a clear conscience, to abstract from discussion of the disposal of the use of plant—e.g. the use of a common foundry disposed of by the general superintendent between the two product-line superintendents.

71. [71] See Appendix I.

72. [72] See my 'The Subjective Theory of Value and Accounting "Cost" '.

73. [73] In Appendix I, however, there is some deliberation on the margin.

74. [74] I should perhaps say here, what is implicit in the earlier part of my paper, that if the cost-revenue relationship that is to be scrutinized is the cost-revenue relationship of economics (or ought I to say of the Subjective Theory of Value?), it is the ex ante deliberations which have to be investigated, for only in them is there any indication of the displaced opportunities, the effect of the marginal variations from the proposed level of operations (see Appendix I) and the safety margins (allowances for uncertainty) which have to be understood if the decision is to be understood.

75. [75] Strictly, to the significance of the revenue. Revenue from saloon bars may not be as significant as an equal amount from railways.

76. [76] The difficulty or impossibility of extracting this evidence is understressed, perhaps by speaking of 'the administrator' instead of a number of people contributing to the conjuncture, certainly by speaking of a first-budgeting process and decision instead of to the conjuncture changing over time as anticipations change and rebudgeting occurs. What seems to be required for a perfect scrutiny is a perpetual record of the budgetary thoughts of every person with discretionary responsibility in the undertaking—and capacity in the Ruler to deal with it with less fallibility than that of the administrator! But to what extent and how often administrators would have their thoughts scrutinized, it is for the advocates of the rule, and not for me, to say.

77. [77] Or, what amounts to the same thing, achieving the additional revenue (equal to the displaced alternative revenue thought likely to accrue from investing the extra resources—required to make the works 'heavier'—elsewhere, in or outside the railway undertaking.)

78. [78] To say that 'the state' is responsible is to avoid the whole issue: 'the state' has to be given content by an exegesis of the devolution of administrative responsibility upon persons.

79. [79] In his deliberations on the Administration Chart in Some Modern Business Problems (ed. Plant (London 1937)) Mr Paul Wilson suggests that an administrative officer should be subordinated to that higher administrative officer who will stand to suffer most by his likely errors. It is ideas of this kind that should be taken into account in considering the relationship between the Ruler and the administrator and the incidence of sanctions for error.

80. [80] It should be clear that this budget would not include any outlay which would necessarily measure the value of resources in their best alternative use. It might include, e.g. anticipated objective 'interest' payments on money to be borrowed for a railway undertaking, but these 'interest' payments could not be presumed to measure the yield that would have been expected from borrowing the same money and investing it in a chain of saloon bars.

81. [81] Machlup, 'Competition, Pliopoly and Profit', part II.

82. [82] Cf. Mr T. Wilson's suggestion 'Price and Outlay Policy of State Enterprise', that the principle of covering total costs could not be enforced every year, which seems to imply that some other people think it could be. (This suggestion is specially treated in Appendix II.)

83. [83] This matter of calculating the money value of residual assets is much the same as that of enterprise valuation, which has received much attention by Bonheight and others. A subjectivist, after working round to the attitude that to get at the value of the enterprise it is necessary to discover what the future revenues (less outlays) are expected to be, must, I think, conclude that 1) to get at these in turn it is necessary to ask the particular administrator of the enterprise what he thinks they will be; 2) that what they are likely to be may depend very much upon the enterprise being run by the particular administrator; 3) that the appropriate 'rate' at which the future figures should be 'discounted' depends, too, upon his views.

84. [84] On 'charging depreciation', see Appendix III.

85. [85] This addendum to the rule may possibly be implied in the idea that if 'the manager' disobeys the order to observe the rule he should be 'dismissed': I do not know. But it certainly is not implied in the mere injunction that cost and revenue should be equal.

86. [86] I believe I am indebted to Mr Shackle for this phrase.

87. [87] Subject to the limitations (e.g. by the acquisition of specificities) that he has already imposed upon himself. His later knowledge might suggest that he ought to have adopted a different technical structure (e.g. a different route for a railway), but it does not follow that he ought then to change it.

88. [88] If perpetual submission is conceived of, so that all alterations in plans are approved before being executed, the eventual account must, I think, be identical to the approved revised budgets—if we abstract from the results of 'acts of God', breaches of standing orders, and any variations allowed to sub-administrators, executives and operatives by standing orders (e.g. a standing order to buy a material at a certain rate per unit of time so long as the price did not vary outside certain defined limits). Cf. my 'The Subjective Theory of Value and Accounting "Cost"', reprinted here, pages, 135-61.

89. [89] On the introduction of safety margins into estimated profit calculations, see Machlup, 'Competition, Pliopoly and Profit', part II.

90. [90] Abstracting from the time at which the marginal unit will emerge.

91. [91] Since decimalization 5p = 12d.

92. [92] Strictly, the relative significance of the displaced marginal revenue.

93. [93] It might, of course, be retorted that at this stage it would be a fairly simple matter for the ruler to calculate what extra 'costs' and what extra revenue would have been involved in the production of an additional 'unit'. But this retort is unsound. Calculations of this kind could not be accepted as satisfactory without allowing for imponderable subjective or administrative elements. An alternative retort might be that the ruler would get his results by experimenting: changing the output and watching the results. But obviously this method is not generally satisfactory either, not only because the administrative imponderables might be overridden, but also because the different outputs would be produced at different times. It cannot be assumed that the circumstances affecting 'costs' and revenue are the same at different times. The overriding of the administrative imponderables is easily illustrated. Illustration. In response to a request from the ruler, who wishes to observe the results of increasing the output of a particular product of a particular firm, the general manager of the firm issues a peremptory order to increase output by twenty-five per cent. (He would not be likely to behave in this way in the ordinary course of business: it is for the purpose of demonstration that I assume that he does so.) The Ruler, subsequently passing through the firm's premises, encounters the sales manager and the production manager. A discussion ensues in which the sales manager informs the ruler that he could have told him in advance what the approximate effect of the increased output on revenue would be: it was his job to be able to do that. The production manager tells him that the stepping-up of output involved delaying the execution of a remunerative order, which required the use of the same machines. The sales manager tells him that this order has now been cancelled. (Surely the loss of this job is a cost element—but it will not appear in objective outlays).

94. [94] T. Wilson, 'Price and Outlay Policy of State Enterprise', section 2 (d).

95. [95] Incidentally it would often be difficult to distinguish with any exactness the effect of the general fluctuation from the effect of a particular fluctuation.

96. [96] 'Price and Outlay Policy of State Enterprise', in the remainder of his section 2 (d).

97. [97] It should be clear that these anticipated objective outlays are different from cost in the proper sense, which would include, for example, the value of existing equipment in an alternative use. That Mr Wilson has in mind (as 'costs', excluding the 'fixed interest obligation') something over and above anticipated objective outlays is apparent from his analogy with private enterprise in which he includes 'interest on the scrap value of the equipment' in what a private firm will require to be covered by revenue. The 'capital of the industry' would not be entirely written off unless it were anticipated objective outlays which were to be (only just) covered by revenue.

98. [98] Let revenue (r) minus cost in the proper sense (c) be x, and let c minus anticipated objective outlays (a) on the same budget (excluding, of course, those outlays which are already contractual obligations) be y, so that anticipated objective surplus on the budget is (r-c)+(c-a)=r-a=y+x.

Then Mr Wilson's 'total costs' appears to mean either c, if the 'capital of the industry' is written down to y, or c+x, if the 'capital of the industry' is written down to y+x.

But x (and, of course y, a, c and r) will be different according to what output is planned.

99. [99] 'Price and Outlay Policy of State Enterprise', in section 2 (e).

100. [100] Cf. a discussion of 'depreciation' in section III of my 'Permanent Resources'.

101. [101] In order, we may assume, not to maximize net revenue, but to make outlays and revenue equal.

102. [102] I do not of course wish to suggest that this method exhausts accounting methods of 'charging depreciation'. I wish only to suggest that all 'objective' methods—all methods which do not involve appeal to the administrator's calculation of the money value of the residue of the asset—are unsatisfactory.

103. [103] I might well have added that if such accounting apportionments of outlays (or charges for 'depreciation') were conventionally adopted, the administrator knowing in advance that they would be, and knowing that he would be required to have made his 'costs' (including such apportionments) and revenue equal in the interim account, would be likely to try to adjust his ex ante plans accordingly. (In the above example he probably would not have bought the asset at all, because, in order to come out in the end, he would, on the assumptions made, have been faced with having to show a 'profit' in the first four years and a 'loss' in the fifth.) Production would be distorted by the adoption of an accounting convention: technical specialism would be cutting across, or imposing a rigidity upon, administration. (If it were urged that the imposition of this convention amounted to the laying down of a standing order by a higher authority, and that 'the accountant' was therefore taking part in administration. I should probably accept the correction. But it would still be open to economists to consider the effect of such a standing order upon production.)

Essay 8, The economist's description of business behaviour

1. [1] I say 'nearly' because we say that 'marginal cost equals marginal revenue' only when we forget 1) that the position of equality is a position of indifference and 2) the minimum sensible. In administrative theory both these things are important.

2. [2] On this, see Mises, Human Action (1949).

3. [3] Cf. Hayek: 'Economics and Knowledge', reprinted here, pages 43-68.

4. [4] This does not contradict my assertion, below, that costs are not necessarily actor prices.

5. [5] A term I have taken from Bradley.

6. [6] Professor H. A. Simon uses the expression 'composite decision'. This is equivalent to the expression 'coordinated decision ex ante' which I have used elsewhere. (See H. A. Simon, Administrative Behavior (1947), and my 'The Subjective Theory of Value and Accounting "Cost"', reprinted here, pages 135-61.

7. [7] If there is any profound reason why this implies that the man will not be able to carry out his plan, I should like to point out that I have not anywhere stated that be will be able to carry out his plan.

8. [8] Reprinted here, pages 21-41.

9. [9] 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.

10. [10] It should be noticed that, because the maximization of the surplus of money revenue over money cost is the man's single end, he will, apparently, reserve to himself 'leisure' and resources for food and other personal consumption only in so far as he thinks that to do so will indirectly increase the size of his ultimate money surplus.

11. [11] I should have no objection to allowing cost to mean the 'worst' (or some other) revenue, instead of the 'next best' revenue, and so making sense of the expression 'maximize the surplus of revenue over cost'. (And if one of the alternative behaviours were holding idle, the expected outcome being money so held idle, I should of course be willing to include this outcome in the list of alternative revenues, and should have no objection to regarding it as cost.) I should have no objection to this provided that everybody agreed that 'cost' did still mean revenue (or the idle money outcome) and not the resources that the man has at the outset, as such.

It would be possible to go further and allow cost to mean these resources as such. I should have no objection to this either, provided that everybody agreed that cost did mean this, and that nobody then tried to subtract cost from revenue to give profit or net revenue or income. The resources never are homogeneous: the man has at least himself as well as any money he may have. To begin to 'price' the resources in order to make them summable, is to begin to convert them into the money yield (revenue) that the man thinks he could get for them. It is either this or much-practised pseudo-objective nonsense!

12. [12] Or values or satisfaction or utility or ophelimity or something like that.

13. [13] Or values or satisfaction or utility or ophelimity or something like that.

14. [14] Or values or satisfaction or utility or ophelimity or something like that.

15. [15] See Mises, Human Action.

16. [16] See Mises, Human Action.

17. [17] For a fuller discussion of 'identification' see H. A. Simon Administrative Behavior.

18. [18] Fortunately for us it has not been possible to put organizations into lunatic asylums.

19. [19] This cannot be avoided by a directive which simply allows so much money to be allotted to undefined 'welfare'. Under such a directive the administrator could define 'welfare' as putting the money into his own pocket.

20. [20] This is not to say that there cannot be a considerable degree of common understanding of what policy is, even though no explicit policy statements or directives are issued: no doubt a man joining a business firm assumes that it is there largely to make money. The point is rather this. When the number of members is large, it becomes difficult to get and maintain common consent to a common policy which binds members to pursue a common end. But if the many try to leave policy determination to the few, the moral issue arises. When I say that policy-making (as distinct from administration) cannot be delegated, I mean that A who directs B to pursue A's ends for him cannot be presumed not to have defined or determined those ends, and valued, approved of or accepted moral responsibility for those ends as fit to be pursued. (If A were a group, perhaps including B, I should say this of each person in the group. This personal responsibility cannot, I suggest, be eliminated simply because the persons have formed an organization.)

21. [21] To assume that the board is the policy-maker (and consequently that the shareholders are infants without moral responsibility) does not dispose of the issue in question, but only shifts its locus to the relationship between the board and the subordinates to whom the board delegates administration.

22. [22] If economists want to study organization pathology, they should go about it in the right way, and not be too ready to scrap principles of their own which some of them have ceased to understand.

23. [23] Economists, who appreciate the abstraction of a 'market price', should have no difficulty in grasping the idea of a composite decision as a similar abstraction.

24. [24] 'The Subjective Theory of Value and Accounting "Cost" ', reprinted here, pages, 135-61.

25. [25] Whether or not this view is correct, it should be clear that administrative behaviour should be coordinated to secure that all administrators are working to the same range of preference regarding the dates at which revenue is to accrue or be maximized: otherwise an administrator of one section of the total plan might be working to maximize at the day after tomorrow, while another was working to maximize ten years later.

26. [26] The influence of G. L. S. Shackle in these last few paragraphs will be apparent. Professor Shackle, who kindly read this paper in draft, suggested that the illustration of the distinction between administrative decisions and policy-making decisions might be compared with the distinction, in his Expectation in Economics, (1949), between deciding on the shape of a 'potential surprise curve', and choosing between two points on a 'gambler-indifference map'.

27. [27] For helpful comment on the draft of this paper, I should like to thank particularly Mr Jack Wiseman and Professors G. L. S. Shackle, H. A. Simon and H. M. Robertson.

Essay 9, Uncertainty, costs, and collectivist economic planning

28. [28] Such an economy will be referred to hereafter as a 'liberal collectivist' economy.

29. [29] While the argument presented is related to the functioning of a liberal collectivist economy, it has a direct bearing on problems arising in a 'mixed' society such as our own. It is relevant, for example, to a consideration of the pricing policy of public utilities which is normally discussed in relation to similar rules. This is a question the writer hopes to take up in a later paper.

30. [30] Much of the early discussion has been brought together in two sets of reprints of relevant articles: Collectivist Economic Planning, ed. F. A. Hayek (which includes L. von Mises's pioneer article, 'Economic Calculus in the Socialist Commonwealth') and On the Economic Theory of Socialism, ed. Benjamin E. Lipincott (which includes reprints of articles by O. Lange and F. M. Taylor suggesting and elaborating the use of marginal criteria). A number of other papers on the subject were published in the Economic Journal and Review of Economic Studies during the 1930s, and a marginal 'rule' was elaborated by (inter alia) A. P. Lerner in Economics of Control (1944).

31. [31] An economy of this kind is discussed (e.g.) by A. P. Lerner, Economics of Control, and E. F. M. Durbin, Problems of Economic Planning.

32. [32] e.g. Lerner, Economics of Control, formulates five conditions relating marginal private and social benefit, cost, etc. Durbin, Problems of Economic Planning, (paper VIII), has suggested the use of marginal-value products. These differences do not affect the substance of the argument.

33. [33] e.g. Lange (in On the Economic Theory of Socialism pp. 89-90,) Durbin (Problems of Economic Planning, p. 50), P. M. Sweezy, Socialism, p. 231.

34. [34] A decision to build a particular type of bridge over a river, for example, is likely to mean that alternative plans concerned with other types of bridges, considered ex ante, will never be implemented.

35. [35] This formulation is based upon that used by G. F. Thirlby, 'The Ruler', reprinted here, pages 163-98.

36. [36] i.e. no relation between total revenues and total outlays is postulated (see section VI).

37. [37] Cf. H. D. Dickinson, 'Price Formation in a Socialist Economy', Economic Journal (December 1943), and The Economics of Socialism, pp. 104-5, and M. Dobb, Political Economy and Capitalism, chapter VIII. Dobb advocates such a scheme in preference to the competitive solution using a marginal rule; Dickinson merely suggests it as a possible practical alternative.

38. [38] i.e. if no plan considered is expected to yield a surplus of revenues over outlays.

39. [39] I leave aside the question of where these managers come from, and whether they can interpret the marginal rule, if they are expected to follow it.

40. [40] e.g. Durbin appears to envisage 'planning' of this kind being taken care of by extension of the Civil Service: Problems of Economic Planning, paper VI.

41. [41] A valuation problem similar to this arises, of course, in a market economy. In either economy there is more possibility of an approximate check than was the case with the marginal rule, since wide fluctuations in successive valuations of particular assets appear reasonably clearly and need to be explained.

42. [42] It also depends upon a reasonably satisfactory solution of the valuation problem, which is still relevant (see note 15 above).

43. [43] Where, in the nature of things, competition cannot function (e.g. for technological reasons), revenue maximization with detailed regulation may be unsatisfactory; a combination of regulation and some given net-revenue objective might operate more efficiently. This is the public utility pricing problem of the market economy.

44. [44] I am particularly indebted to the valuable suggestions and criticisms of Mr G. F. Thirlby, and to my colleagues who commented on the article in draft.

Essay 10, The theory of public utility price—an empty box

45. [45] There is a good deal of literature on this subject. For a useful first list the reader is referred to the end of the lucid survey of the topic by Professor E. H. Phelps Brown in chapter viii of his book, A Course in Applied Economics. Cf. also G. F. Thirlby, 'The Ruler', reprinted here, pages 163-98; William Vickrey, 'Some Objections to Marginal Cost Pricing', Journal of Political Economy, 56 (1948); Gabriel Dessus, 'The General Principles of Rate Fixing in Public Utilities', International Economic Papers, No. 1 (translation of a report presented to the Congress of the Union Internationale des Producteurs et Distributeurs d'Énergie Électrique, 1949); and T. Wilson, 'The Inadequacy of the Theory of the Firm as a Branch of Welfare Economics', Oxford Economic Papers (February 1952). This list is not comprehensive.

The historical development of the rules and their analytical origins is set out in two articles by Nancy Ruggles: 'The Welfare Basis of the Marginal Cost Pricing Principle' and 'Recent Developments in the Theory of Marginal Cost Pricing', Review of Economic Studies, Nos. 42 and 43, (1949-50).

Specific references have been given in the text only where articles are of particular relevance to the issue concerned.

46. [46] The scepticism is by no means universal: e.g. The Report of the Committee on National Policy for the use of Fue! and Power Resources (Cmd. 8647), 1952 (Ridley Report), considered the question of whether coal should be priced at marginal cost, and half the members of the Committee in fact favoured the use of some form of marginal-cost pricing.

47. [47] This assumption is of course highly unrealistic; there are also tenable arguments for the view that it is internally inconsistent (cf., e.g., my 'Uncertainty, Costs, and Collectivist Economic Planning', reprinted here, pages 227-43. For the purposes of this article, the model is accepted for the present and criticism is developed within its assumptions. Section III discusses the consequences of relaxation of the foresight assumption.

48. [48] For a critique of this collectivist 'rule' and of the model from which it derives, cf. my 'Uncertainty, Costs and Collectivist Economic Planning'.

49. [49] H. Hotelling, 'The General Welfare in Relation to Problems of Taxation and of Railway and Utility Rates', Econometrica, (1938). Hotelling's paper was stimulated by the much earlier work of Dupuit, around 1844. The relevant papers have been collected and reprinted with comments by Mario di Bernardi and Luigi Einaudi, 'De l'utilite et de sa mesure', La Riforma sozials (Turin 1932). One of the most interesting papers, 'On the Measurement of Utility of Public Works', Annales des Ponts et Chaussees, (1844), is published in translation in International Economic papers, No. 2.

50. [50] Cf. (inter alia) J. E. Meade, 'Price and Output Policy of State Enterprise', Economic Journal (1944), pp. 321-8, and 'Rejoinder' pp. 337-9; P. A. Samuelson, The Foundations of Economic Analysis, p. 240; R. H. Coase, 'The Marginal Cost Controversy', Economica, N. S. (1946), pp. 169-82; H. P. Wald, 'The Classical Indictment of Indirect Taxation', Quarterly Journal of Economics (1945), pp. 577-97; I. M. D. Little, 'Direct v. Indirect Taxes', Economic Journal (1951), pp. 577-84.

51. [51] There is implicit in Hotelling's argument (and in that of writers who have supported him) the view that the welfare criteria can be extended to cover situations involving changes in the distribution of income. Some attempt has been made to support this position by reformulating the compensation principle (that a decision about a particular measure can be made only if all who would lose by it can be, and in fact are, compensated for their loss) in such a way that only the possibility and not the fact of compensation is necessary for an economic policy to be accepted as beneficial. However, it has been amply demonstrated that interpersonal comparisons cannot be avoided in this way (cf. M. W. Reder, Studies in the Theory of Welfare Economics; I. M. D. Little, Critique of Welfare Economics; W. J. Baumol, Welfare Economics and the Theory of the State, and the references cited therein). The debate will not be discussed in the text; all that has to be established is that the simultaneous decisions referred to therein are unavoidable, and that the welfare criteria provide guidance about only one of these decisions.

52. [52] The distinction between this type of indivisibility and technical indivisibility is not always made clear in the literature (for a clear separation, cf. e.g. Phelps Brown, A Course in Applied Economics, and Coase, 'The Marginal Cost Controversy').

In contrast with the present section, the discussion of the club principle in Section II will be conducted with reference mainly to technical indivisibility. Such indivisibility amounts to no more than the fact that the whole of a productive factor must be employed in order to obtain any part of the total product of that factor, so that if the factor is an economic good it must have current alternative uses, and therefore a price (e.g. if a railway carriage can be attached to different trains, opportunity costs are incurred in attaching it to any one train. But no opportunity costs may be incurred in allowing one more passenger to travel once the carriage is attached).

53. [53] Dupuit's argument against bridge tolls ('De l'utilité et de sa mesure') is the locus classicus of this argument.

54. [54] Cf. T. Wilson, 'The Inadequacy of the Theory of the Firm as a Branch of Welfare Economics'.

55. [55] It will be appreciated that arguments based on technical indivisibility raise similar considerations.

56. [56] In the competitive market case all consumers are faced with the same system of prices: in Wicksteed's phrase, the 'terms on which alternatives are offered' are the same for all. In the other, since discrimination is admitted, each individual is considered to be faced with a different price for the purpose of deciding whether or not to make the investment. If such prices were subsequently charged, they would involve a change in the distribution of real income, and would fall under the same strictures about interpersonal comparison as the marginal-cost rule. That is, a decision taken in accordance with the investment principle might be considered as being partly concerned with the consequences for consumption of the public-utility product in question of a change in the distribution of real income. But it appears that in this respect, as with the advocacy of marginal-cost pricing, the income redistribution is treated as a problem separable from, and in some way inferior to, that of income size (as expressed in the welfare 'ideal').

57. [57] An illustration may help to make the point clear: A government, having decided to build a bridge out of revenue raised by taxation, might offer the services of the bridge free and ignore the source of the initial revenues in framing subsequent tax policy. Alternatively it might decide to charge tolls for (say) twenty years, accepting the reduction in use (i.e. in total income) in the interests of compensating those who had to make the initial sacrifice, or it might decide upon some other combination of current financing and compensation. The economist is without adequate criteria to judge between these alternatives.

58. [58] There could of course be more than two parts, depending upon the nature of the fixed factors. To introduce more simply adds complexity without affecting the logic of the argument.

59. [59] A model used by R. H. Coase, 'The Marginal Cost Controversy', gives the essentials of the argument very clearly. The model is concerned with current (technical) indivisibility only, problems of time and of common costs being abstracted therefrom. In the model a number of roads radiate from a central market and there is one consumer on each road. All costs are assumed to be currently incurred, and each consumer purchases a combination of the market product and the transport service necessary to deliver it. Transport units are sufficiently large to carry any one consumer's requirements. Thus, while the transport service is indivisible, in that extra units of product can be carried without cost, there are no common costs since one van serves only one customer and the transport cost is attributable to that consumer. In these conditions, Coase argued, the price charged should comprise a fixed charge for the transport service and a price per unit for the product. Total costs are then covered, and the additional payment for extra consumption is equal to the price of the product only (i.e. to marginal cost).

60. [60] Indivisibility need not imply the existence of such costs, though their presence must imply indivisibility.

The nature of the complications caused by common costs can be illustrated by replacing Coase's road-system (note 15 above) by a ring road, with the market at the centre and one van serving a number of customers around the circumference, which the van can join at any point. Clearly the pricing problem now becomes much more complex.

61. [61] In the conditions of the modification of the Coase model (note 16 above), these limits (for any one consumer) would be the total cost of providing the service ('indivisible' transport cost plus cost of goods purchased), on the one hand, and the cost of the goods alone on the other. If there were also variable costs associated with the transport service (e.g. petrol cost), then the lower limit would have to be increased by the minimum cost of transport between the consumer in question and the next nearest consumer.

62. [62] The problem becomes even more intractable if time is introduced into the analysis, so that the 'common costs' being considered can become past outlays on temporally indivisible assets. This kind of question cannot suitably be discussed without relaxing the assumptions of the competitive model. The present section therefore ignores these questions of time, which are more fully treated in the following section of the article. It will be appreciated that the criticisms of the two-part tariff and the 'club' principle in the present section are in no way invalidated by this simplification.

63. [63] The 'club' argument might indeed be stated in the form that there is some distribution of income, different from the existing one, which would induce consumers to cover the costs of the utility without the need for differential charges, and that this distribution must be superior to the existing one because consumers will 'voluntarily' bring it about if allowed to do so. This form of statement brings out the similarity between the 'club' principle and the investment criterion and compensation principle (note 7 above) discussed earlier; it is therefore not surprising to find that they have similar weaknesses.

64. [64] An illustration used by Phelps Brown (A Course in Applied Economics, p.260) makes the point very well; poor families in an area may be willing to pay more towards the provision of a playground than richer families in the same area, but there is no presumption that a government will agree that they should. The welfare criteria provide no guidance in such cases since they offer no means of choice between income distributions.

65. [65] These criticisms are the more striking when the restrictive assumptions of the analysis are recalled; the 'offers' made by consumers must be quite independent, since otherwise there may be no possibility of an 'agreed' set of prices because 'club' members insist on relating their own offers to the amounts others will be expected to pay. Further, there is no logical reason why only one system of prices should satisfy the 'club' principle; what happens, e.g. if the amounts offered to meet standing charges are greater than the total of common costs, but only total cost is to be recovered? In these cases, where more than one set of prices would satisfy the conditions, someone will have to choose between them. Value judgements must be made in the process, and it is difficult to understand why the government should accept those of the utility as superior to its own.

The false plausibility of the argument for voluntary redistribution through the 'club' arises from the application of a logical system concerned solely with individual choice and taking no account of the existence of a government with coercive powers, to a situation where governments have to take decisions involving economic matters outside the scope of individual choice. Some attempt has indeed been made to 'fit' the behaviour of the public economy into the individual choice (welfare) analysis, by treating the whole of the economy as a 'club'. This brings out the weakness and unrealism of the 'club' argument even more forcefully than the discussion above; it leads to advocacy of an 'ethically neutral' system of government income and expenditure, such that the size of the taxes paid and the public services consumed by individuals would be determined by the free agreement of the citizens (taxpayers and consumers) themselves, and to the suggestion that those unwilling to pay such taxes should be treated as 'pathological' (see F. Benham, 'Notes on the Pure Theory of Public Finance', Economica, (1934), pp.453-4, and, for a critical discussion, Musgrave, 'The Voluntary Exchange Theory of the Public Economy', Quarterly Journal of Economics (November 1949).

66. [66] If, for example, a man wishes to fly to Scotland to visit a sick relative, but cannot quite afford to charter an aeroplane at £30 for the trip, it may be possible to find a prospective rail traveller who is willing to pay £10 to share the air trip. The same (physical) service thus costs each traveller a different amount, but each prefers to make the payment and take the service rather than take the services to be obtained by using the market in any other way.

67. [67] e.g., in the illustration given (note 22 above) the travellers could themselves decide whether to travel separately or together, could choose between a variety of competing means of transport, and could decide between various offers of aeroplanes for hire.

68. [68] A good example is given in part III (pp. 94-145) of R. S. Edwards, Co-operative Industrial Research. Here the common service is research for a group of firms with a common interest in the results. Firms can, within broad limits, control the direction of research activity, the distribution of benefits between members, and the methods by which common costs are covered. There is also a possibility of using the market as an alternative to the 'club'. But it is also not without interest, in view of the earlier argument about the role of government (see p. 259), that a decision had to be made as to whether membership should be made compulsory, because the benefits of the cooperative research are not always easily confined to members of the 'club'.

69. [69] The difference between the two types of 'club' might be put in this way: in the second type, unlike the first, the members of the 'club' are not automatically members of the committee, although they are still in a strong position to influence its decisions.

70. [70] The method of analysis adopted in this section is similar to that used by G. F. Thirlby, 'The Ruler'. Cf. also T. Wilson, 'The Inadequacy of the Theory of the Firm as a Branch of Welfare Economics', and my 'Uncertainty, Costs and Collectivist Economic Planning'.

71. [71] It is not suggested that the unsatisfactory treatment of uncertainty is the only reason for objection to the perfectly competitive model and to the welfare criteria. In particular, there has been considerable and cogent criticism of the validity of the simple welfare model as an explanation of the process and nature of individual choice (cf. e.g. I. M. D. Little, Critique of Welfare Economics, and W. J. Baumol, Welfare Economics and the Theory of State). However, such criticism need not concern us here. There is still point in discussing the use of resources in terms of choice, and the logic of the 'rules' can be destroyed even accepting the conceptions of the simplest welfare analysis.

72. [72] For further discussion of this cf. T. Wilson, 'The Inadequacy of the Theory of the Firm as a Branch of Welfare Economics.,' and 'Price and Outlay Policy of State Enterprise', Economic Journal, (December 1945), G. F. Thirlby, 'The Ruler', and my 'Uncertainty, Costs and Collectivist Economic Planning'.

73. [73] In general the desire of governments to give this type of encouragement seems likely to be greater the longer the relevant planning period and the more random and imprecise the distribution of the benefits and losses concerned.

An example of a suitable case might be a change of a permanent nature in the geographical environment, as through the diversion of a river.

74. [74] A question of this inevitably arises, e.g. when a utility ceases to be able to cover costs at its present size as a consequence of changes in the economic environment, so that a decision has to be taken as to whether it should be subsidized, or should simply cease to be treated as a public utility at all, and competition allowed to determine its future size and operations. This is perhaps a not unrealistic way of describing the current position of the British railway industry.

75. [75] Cf., e.g., J. Margolis, 'A Comment on the Pure Theory of Public Expenditures', Review of Economics and Statistics, (November 1955).

76. [76] The preceding analysis would appear to furnish sound arguments, for example, for treating British public utility pricing policy as part of indirect tax policy, and (possibly), for providing opportunity for review and discussions of the policies of important utilities along with the rest of tax policy at the time of the annual budget.

I am grateful to Professor H. G. Johnson, to Mr T. Wilson and to colleagues at L.S.E. for reading and criticizing drafts of this article.

Essay 11, Economists' cost rules and equilibrium theory

77. [77] 'The Ruler', reprinted here pages 163-98.

78. [78] Latterly in J. Wiseman, 'The Theory of Public Utility Price: An Empty Box', reprinted here, pages 245-71.

79. [79] Particularly Lionel Robbins, The Nature and Significance of Economic Science, 2nd ed (1935); Lionel Robbins, 'Remarks upon Certain Aspects of the Theory of Costs' reprinted here, pages 19-41; F. A. Hayek, 'Economics and Knowledge' reprinted here, pages 43-68 F. A. Hayek, 'Scientism and the Study of Society', Economica (August 1942, February 1943 and February 1944).

80. [80] 'The Subjective Theory of Value and Accounting "Cost"', reprinted here, pages 135-61.

81. [81] Cf. Lionel Robbins, The Nature and Significance of Economic Science, p. 18.

82. [82] It is so adjusted in the following statement, 'It may be irrational to be completely consistent as between commodities...just because the time and attention which such exact comparisons require are (in the opinion of the economic subject concerned) better spent in other ways. In other words, there may be an opportunity cost of "internal arbitrage" which, beyond a certain point, outweighs the gain' (Robbins, The Nature and Significance of Economic Science, p. 92). This opportunity cost of 'internal arbitage', which is introduced to limit the pursuit of maximization, is referred to alternatively as 'the marginal utility of not bothering about marginal utility'.

83. [83] Robbins appears to switch to this view of rationality in giving an instance of inconsistency which can be shown up by economics: the inconsistency of wishing to satisfy consumers' demands fully and at the same time wishing to impede the import of foreign goods by tariffs, (Robbins, The Nature and Significance of Economic Science, p. 92.) He refers to this as irrationality. It would seem to be open to an advocate for the person having these inconsistent wishes to plead that the person had not the knowledge to show that the wishes were inconsistent, that he preferred (to the marginal utility of the extra knowledge) the marginal utility of not bothering about it, and that consequently he was rational according to Robbins's earlier view. (See note 6 above.) At least we may say that if in this instance the behaving subject is irrational through ignorance, rationality implies knowledge greater than the behaving subject possesses, and consequently we are able to call a man rational or irrational according to which of Robbins's conceptions we use.

84. [84] The fact is of course that the assumption of perfect rationality in the sense of complete consistency is simply one of a number of assumptions of a psychological nature which are introduced into economic analysis at various stages of approximation to reality. The perfect foresight, which it is sometimes convenient to postulate, is an assumption of a similar nature; and 'Rationality in choice is nothing more and nothing less than choice with complete awareness of the alternatives rejected'. (Robbins, The Nature and Significance of Economic Science, pp. 93-4, and p. 152 respectively.)

85. [85] And possibly, confused the rationality of the behaving subject with the rationality of an observing economist, who was assumed to be omniscient. See Hayek's discussion of the confusion about the data, or facts, of the demand schedules, where he raises 'the question whether the facts referred to are supposed to be given to the observing economist, or to the persons whose actions he wants to explain, and if the latter, whether it is assumed that the same facts are known to all the different persons in the system, or whether the "data" for the different persons may be different' (F. A. Hayek, 'Economics and Knowledge', p. 52).

86. [86] Which, if 1) the entrepreneur were allowed to be considering the production of a second product, besides the alternative of disposing of his resources in the resource markets, and 2) cost were regarded as being the best of the rejected alternatives, could be the contemplated revenue from one of the products. Further, if the calculations were marginal calculations (which might incidentally lead to the selection and subsequent production of some of each product, so that the entrepreneur became a 'multi-product' entrepreneur), marginal cost could be the contemplated (extra-) marginal revenue from one of the products.

87. [87] Space does not permit me to enlarge either upon how this replacement might be permissible as a conceivable limiting case, or upon the necessity for rejecting the money input concept on the ground that money is not the entrepreneur's only resource.

88. [88] My account of the transition from 1) the isolated producer's end-product value, regarded as cost, to 2) the entrepreneur's money input or factor prices, regarded as cost, and regarded also as something which reflects the value of excluded products, is offered as a fair statement of what occurs in Robbins's 'Remarks upon Certain Aspects of the Theory of Costs', section 1, pp. 22-7. I cannot accuse him of actually calling the value of the excluded products a social cost, but the suggestion seems to be there, particularly, perhaps, in his insistence that the excluded products themselves, as distinct from their values, are not to be regarded as cost. For doubt cast upon the validity of the method of transition from the individual situation to the social situation, see Hayek's discussion in which he stated he had 'long felt that the concept of equilibrium itself and the methods which we employ in pure analysis have a clear meaning only when confined to the analysis of the action of a single person, and that we are really passing into a different sphere and silently introducing a new element of altogether different character when we apply it to the explanation of the interaction of a number of different individuals', and in which he stated that 'the data which formed the starting point for the tautological transformations of the Pure Logic of Choice...meant...only the facts...which were present in the mind of the acting person...But in the transition from the analysis of the action of an individual to the analysis of the situation in a society the concept [of "datum"] has undergone an insidious change of meaning' (Hayek, 'Economics and Knowledge', pages 47 and 51 respectively.)

89. [89] My comments in this paragraph are supposed to reflect fairly upon Robbins's discussion of the conditions of equilibrium in the 'Remarks upon Certain Aspects of the Theory of Costs', but are not supposed to suggest that he is oblivious of time and uncertainty, either elsewhere in that paper, or in The Nature and Significance of Economic Science. In The Nature and Significance uncertainty appears, e.g. in references to the theory of profit. In the 'Remarks...', it appears to belong to references to disequilibrium and equilibration (and to criticisms of Marshall), rather than to the discussion of the theory of costs in its competitive-equilibrium setting. (And it was surely competitive equilibrium that set the standard for the special rules about the cost/revenue relationship.)

90. [90] And, where the cost referred to in the rule is a marginal cost, whether we are referring to either of these or to the money input concept. Cf. 'The Ruler', page 191.

91. [91] The significance of it will not be fully realized unless it is seen that the period of time between the rational choice and the achievement of the outcome of the accepted course of action may be, not just a minute or less, but anything between a minute or less and ten years or more. The degree of uncertainty will often be extremely high.

92. [92] It should be clear that this obstacle to implementation would remain if the meaning of cost were money (or other) resource input. However short the period of time between the cost calculation and the occurrence of the events which were the subject of it, the cost calculation would be uncertain and a matter of subjective opinion. While, in pure equilibrium analysis, 'it is simply assumed that the subjective data coincide with the objective facts' (Hayek, 'Economics and Knowledge' page 56.

93. [93] Ibid. And see also his, in many ways, supporting series of articles, 'Scientism and the Study of Society'.

94. [94] It is significant that in his criticism of the pure equilibrium analysis, Hayek remarks: 'It seems that that skeleton in our cupboard, the "economic man", whom we have exorcised with prayer and fasting, has returned through the back door in the form of a quasi-omniscient individual' (Hayek, 'Economics and Knowledge', page, 58). In his restatement he said: 'It is important to remember that the so-called "data" from which we set out in this sort of analysis are (apart from his tastes) all facts given to the person in question, the things as they are known to (or believed by) him to exist, and not in any sense objective facts' (page 48). The 'data', distinguished from 'the objective real facts' as supposed to be known by the omniscient economist (page 52), are to be conceived of 'in the subjective sense, as things known to the persons whose behaviours we try to explain' (page 52). 'Subjective data' and 'individual plans' can be used interchangeably (note 11. page 56.)

95. [95] Cf. note 12 above.

96. [96] 'Since equilibrium is a relationship between actions, and since the actions of one person must necessarily take place successively in time, it is obvious that the passage of time is essential to give the concept any meaning' ('Economics and Knowledge', page 49).

97. [97] 'The equilibrium relationship comprises only his actions during the period during which his anticipations prove correct'. ('Economics and Knowledge', page 49).

98. [98] For a society then we can speak of a state of equilibrium at a point of time—but it means only that compatibility exists between the different plans which the individuals composing it have made for action in time', 'Economics and Knowledge', page 53).

99. [99] 'It [equilibrium] will continue... so long as the external data [the objective real facts] correspond to the common expectations of all the members of society', ('Economics and Knowledge', page 53).

I should like to add here that presumably a firm would begin to replan as soon as it began to anticipate that its original anticipations would, for one reason or another, be falsified—and then act according to the revised plan. So perhaps we can speak of its being out of equilibrium with respect to its old plan and in equilibrium with respect to its revised plan. With this adjustment, the Hayekian notions here expressed supply an amenable milieu—or containing theory—for my own view that the firm's account (which I regard as a counterpart statement of realized or actual events) always agrees, or ought to agree, with its revised budget (which I regard as its statement of anticipated events, or its plan) though not necessarily with its earlier, or original, budget. See my 'The Ruler', pp. 189-90, note 39, and my 'Notes on the Maximization Process in Company Administration', Economica, (August 1950), pp. 268-9 (particularly footnotes) and p. 278.And see the connection between my view and the modern question of what plans of the directors of large organizations should be submitted to the stockholders before they are put into operation ('Notes on the Maximization Process in Company Administration', pp. 276-7, particularly footnotes).

100. [100] In both 'Economics and Knowledge', and 'Scientism and the Study of Society'.

101. [101] I hope to attempt in a subsequent paper a reconciliation of this restatement. and some other aspects of my paper, with certain modern administrative theory.

102. [102] That total cost (in some sense) should be equal to total revenue is one of the rules (or part of one).

103. [103] There is a rule (or part of one) that where marginal revenues differ from price, output should be extended to that point at which marginal cost (in some sense) is equal to price. This rule, I believe, falls away with the 'perfect competition' which is the ground on which it is based. However, with cost defined as I have defined it, it appears to fall away for another reason too. With cost so defined, marginal cost is always displaced alternative marginal revenue, and, consequently, from the point of view of the rule advocates, open to the same stricture as is the selected marginal revenue itself: to get a marginal cost which was independent of autonomous pricing, we should be driven back on to marginal money input.

104. [104] i.e. there is no 'cost'/revenue equality in this sense.

105. [105] The statements in this paragraph and the preceding one represent the principles behind the model (in which, however, the entrepreneur is converted into an organization) in my 'The Subjective Theory of Value and Accounting "Cost"'. See note 30 below.

106. [106] This is the conversion that I effected in 'The Subjective Theory of Value and Accounting "Cost" '. See note 29 above.

107. [107] It seems to me that common-goal orientation is silently—and perhaps unconsciously—assumed in the economists' practice of using the same cost/revenue diagrammatic apparatus to represent the behaviour of 'the firm' regardless of whether the firm is a one-man or a multi-man set-up.

108. [108] Hayek, condemning 'an illegitimate use of anthropomorphic concepts', adds in a footnote, 'What is said in the text does of course not preclude the possibility that our study of the way in which individual minds interact may reveal to us a structure which operates in some respects similarly to the individual mind' (Hayek, 'Scientism and the Study of Society' part II, p. 45 and footnote).

109. [109] The process is illustrated in my 'The Subjective Theory of Value and Accounting "Costs" '.

110. [110] For an illustration of what elements would have to be disclosed, see, again, the model in my 'The Subjective Theory of Value and Accounting "Cost" '.

111. [111] For this expression, see Carl J. Friedrich, 'Authority, Reason, and Discretion', in Authority, ed. Carl J. Friedrich, (1958).

End of Notes

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