The Law of Cost, cont’d.

More from Philip Wicksteed, The Common Sense of Political Economy:

We can now see how "cost of production," which is simply and solely "the marginal significance of something else," directly affects the quantity of anything produced, and thereby indirectly affects its price, so that there is a constant tendency for prices to conform to cost of production; that is to say, for the price of the thing I make and the price of the thing I might have made instead of it to coincide….

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.

TGIF: Value, Cost, Marginal Utility, and Bohm-Bawerk

Does cost of production determine price or does price determine cost of production? In the world of economic caricatures, the classical economists (Smith, Ricardo, et al.) took the former position, the Austrians the latter. Specifically, the Austrian view supposedly is that that demand driven by marginal utility determines the price of consumer goods, which is then imputed backward to the factors of production.

But like all caricatures, the picture is an imperfect reflection of reality.

The rest of TGIF is here.