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Monday, February 14, 2011

The Law of Cost

For anyone who thinks that costs do not govern value and price, hear Philip Wicksteed, the British "Austrian," thoroughgoing subjectivist, and critic of Alfred Marshall (not to mention admired by Mises). From The Common Sense of Political Economy:
In no case can the cost of production have any direct influence upon the price of a commodity, if the commodity has been produced and the cost has been incurred; but in every case in which the cost of production has not been incurred, the manufacturer makes an estimate of the alternatives open to him before determining whether, and in what quantities, the commodity shall be produced; and the stream of supply thus determined on fixes the marginal value and the price. The only sense, then, in which cost of production can affect the value of one thing is the sense in which it is itself the value of another thing. Thus what has been variously termed utility, ophelemity, or desiredness, is the sole and ultimate determinant of all exchange values.

9 comments:

MBH said...

Not universally though. What, for instance, is the cost of a non-rival ubiquitous good?

Sheldon Richman said...

Like air? What do you mean by ubiquitous? Superabundant? Or do you mean a "public good" like defense? Please elaborate.

AGSCalabrese said...

I confess to being confused. RS .. Are you supporting and denying that costs govern price ?

Your fanboy
gus in denver 99gus

AGSCalabrese said...

I really butchered the former comment. I have been sick ..... so.

Sheldon
Are you supporting or denying that costs control price ?

gus in denver 99gus

Sheldon Richman said...

I am taking the Austrian (Bohm-Bawerk/Wicksteed) position that production costs (which are determined by subjective marginal utility) usually govern price. See my article here.

Michael Bruce Hill said...

Like air?

And Internet.

Sheldon Richman said...

Air doesn't count. Because of its superabundance, it is not an economic good, not an object of action. The Internet comprises hardware and software and people, so there are costs of production. And the basic service is priced through ISPs. I don't see why it would be exempt from Wicksteed's principle. The costs of the production will be governed by the marginal utility of the marginal products made from the factors of production. Those costs will then govern the price of the supra-marginal products.

MBH said...

Sheldon, I'm still chewing on this. There's a lot there. I mean, I see how you would say that breathing, for instance, is intransitive. But then action within an Open Source Ecosystem is intransitive as well -- since, say, intellectual property is superabundant. And that makes Open Source software and Internet-used-for-that-purpose into amplifiers of the superabundant ecosystem. So while the software and that specific use of the Internet aren't superabundant, they amplify something that is superabundant -- and so something that's intransitive. Are you comfortable treating turning-the-volume-up-on-something-superabundant as necessarily not intransitive?

Sheldon Richman said...

I'd have to spend some time thinking about it all plays out. But I don't see how it would affect Wicksteed's core point. Any costs of production that do exist will be governed by the marginal utility of alternative uses of the inputs, and those costs will govern the supply, value, and price of supra-marginal products.