WEBVTT NOTE XVI. Prices (continued) 1 00:00:00.000 --> 00:00:04.240 4. Cost Accounting 2 00:00:04.240 --> 00:00:10.320 In the calculation of the entrepreneur, costs are the amount of money required for the procurement 3 00:00:10.320 --> 00:00:16.960 of the factors of production. The entrepreneur is intent upon embarking upon those business 4 00:00:16.960 --> 00:00:24.420 projects from which he expects the highest surplus of proceeds over costs, and upon shunning 5 00:00:24.420 --> 00:00:30.820 Projects from which he expects a lower amount of profit or even a loss. 6 00:00:30.820 --> 00:00:36.300 In doing this, he adjusts his effort to the best possible satisfaction of the needs of 7 00:00:36.300 --> 00:00:38.260 the consumers. 8 00:00:38.260 --> 00:00:44.060 The fact that a project is not profitable because costs are higher than proceeds is 9 00:00:44.060 --> 00:00:49.740 the outcome of the fact that there is a more useful employment available for the factors 10 00:00:49.740 --> 00:00:52.460 of production required. 11 00:00:52.460 --> 00:00:57.140 There are other products in the purchase of which the consumers are prepared to allow 12 00:00:57.140 --> 00:01:03.460 for the prices of the factors of production required, but the consumers are not prepared 13 00:01:03.460 --> 00:01:10.820 to pay these prices in buying the commodity the production of which is not profitable. 14 00:01:10.820 --> 00:01:16.340 Cost accounting is affected by the fact that the two following conditions are not always 15 00:01:16.340 --> 00:01:17.620 present. 16 00:01:17.620 --> 00:01:23.980 First, every increase in the quantity of factors expended for the production of a consumer's 17 00:01:23.980 --> 00:01:28.540 good increases its power to remove uneasiness. 18 00:01:28.540 --> 00:01:35.020 Second, every increase in the quantity of a consumer's good requires a proportional 19 00:01:35.020 --> 00:01:41.220 increase in the expenditure of factors of production, or even a more than proportional 20 00:01:41.220 --> 00:01:44.600 increase in their expenditure. 21 00:01:44.600 --> 00:01:51.920 If both these conditions were always and without any exception fulfilled, every increment Z 22 00:01:51.920 --> 00:01:59.320 expended for increasing the quantity M of a commodity G would be employed for the satisfaction 23 00:01:59.320 --> 00:02:06.200 of a need viewed as less urgent than the least urgent need already satisfied by the quantity 24 00:02:06.200 --> 00:02:09.460 M available previously. 25 00:02:09.460 --> 00:02:15.620 At the same time, the increment Z would require the employment of factors of production to 26 00:02:15.620 --> 00:02:21.920 be withdrawn from the satisfaction of other needs, considered as more pressing than those 27 00:02:21.920 --> 00:02:28.940 needs whose satisfaction was foregone in order to produce the marginal unit of M. On the 28 00:02:28.940 --> 00:02:34.820 one hand, the marginal value of the satisfaction derived from the increase in the quantity 29 00:02:34.820 --> 00:02:38.100 and the availability of G would drop. 30 00:02:38.100 --> 00:02:42.980 On the other hand, the costs required for the production of additional quantities of 31 00:02:42.980 --> 00:02:47.980 G would increase in marginal disutility. 32 00:02:47.980 --> 00:02:52.980 Factors of production would be withheld from employments in which they could satisfy more 33 00:02:52.980 --> 00:02:55.500 urgent needs. 34 00:02:55.500 --> 00:03:00.940 Production must stop at the point at which the marginal utility of the increment no longer 35 00:03:00.940 --> 00:03:06.900 compensates for the marginal increase in the disutility of costs. 36 00:03:06.900 --> 00:03:13.540 Now these two conditions are present very often, but not generally without exception. 37 00:03:13.540 --> 00:03:20.620 There exist many commodities of all orders of goods whose physical structure is not homogeneous 38 00:03:20.620 --> 00:03:25.100 and which are, therefore, not perfectly divisible. 39 00:03:25.100 --> 00:03:30.420 It would, of course, be possible to conjure away the deviation from the first condition 40 00:03:30.420 --> 00:03:42.620 One could say, half a motorcar is not a motorcar. If one adds to half a motorcar a quarter of 41 00:03:42.620 --> 00:03:49.600 a motorcar, one does not increase the quantity available. Only the perfection of the process 42 00:03:49.600 --> 00:03:55.940 of production, which turns out a complete car, produces a unit, and an increase in the 43 00:03:55.940 --> 00:03:58.500 and the quantity available. 44 00:03:58.500 --> 00:04:02.260 However, such an interpretation misses the point. 45 00:04:02.260 --> 00:04:08.940 The problem we must face is that not every increase in expenditure increases proportionately 46 00:04:08.940 --> 00:04:16.180 the objective use value, the physical power of a thing to render a definite service. 47 00:04:16.180 --> 00:04:21.180 The various increments in expenditure bring about different results. 48 00:04:21.180 --> 00:04:27.060 There are increments, the expenditure of which remains useless if no further increments of 49 00:04:27.060 --> 00:04:30.460 a definite quantity are added. 50 00:04:30.460 --> 00:04:35.820 On the other hand, and this is the deviation from the second condition, an increase in 51 00:04:35.820 --> 00:04:42.100 physical output does not always require a proportionate increase in expenditure, or 52 00:04:42.100 --> 00:04:45.280 even any additional expenditure. 53 00:04:45.280 --> 00:04:52.080 It may happen that costs do not rise at all, or that their rise increases output more than 54 00:04:52.080 --> 00:04:54.080 proportionately. 55 00:04:54.080 --> 00:05:00.700 For many means of production are not homogeneous either, and not perfectly divisible. 56 00:05:00.700 --> 00:05:06.920 This is the phenomenon known to business as the superiority of big-scale production. 57 00:05:06.920 --> 00:05:13.920 The economists speak of the law of increasing returns, or decreasing costs. 58 00:05:13.920 --> 00:05:20.480 We consider as Case A a state of affairs in which all factors of production are not perfectly 59 00:05:20.480 --> 00:05:26.780 divisible in such a way that full utilization of the productive services rendered by every 60 00:05:26.780 --> 00:05:33.900 further indivisible element of each factor requires full utilization of the further indivisible 61 00:05:33.900 --> 00:05:38.160 elements of every other of the complementary factors. 62 00:05:38.160 --> 00:05:45.560 Then, in every aggregate of productive agents, each of the assembled elements, every machine, 63 00:05:45.560 --> 00:05:52.120 every worker, every piece of raw material, can be fully utilized only if all the productive 64 00:05:52.120 --> 00:05:57.280 services of the other elements are fully employed too. 65 00:05:57.280 --> 00:06:02.640 Within these limits, the production of a part of the maximum output attainable does not 66 00:06:02.640 --> 00:06:09.480 require a higher expenditure than the production of the highest possible output. 67 00:06:09.480 --> 00:06:17.100 We may also say that the minimum size aggregate always produces the same quantity of products. 68 00:06:17.100 --> 00:06:23.160 It is impossible to produce a smaller quantity of products even if there is no use for a 69 00:06:23.160 --> 00:06:25.020 part of it. 70 00:06:25.020 --> 00:06:31.440 We consider as case B a state of affairs in which one group of the productive agents, 71 00:06:31.440 --> 00:06:36.640 E is, for all practical purposes, perfectly divisible. 72 00:06:36.640 --> 00:06:42.760 On the other hand, the imperfectly divisible agents can be divided in such a way that full 73 00:06:42.760 --> 00:06:49.640 utilization of the services rendered by each further indivisible part of one agent requires 74 00:06:49.640 --> 00:06:56.840 full utilization of the further indivisible parts of the other imperfectly divisible complementary 75 00:06:56.840 --> 00:06:57.840 factors. 76 00:06:57.840 --> 00:07:04.160 Then, increasing production of an aggregate of further indivisible factors, from a partial 77 00:07:04.160 --> 00:07:10.760 to a more complete utilization of their productive capacity, requires merely an increase in the 78 00:07:10.760 --> 00:07:15.160 quantity of P, the perfectly divisible factors. 79 00:07:15.160 --> 00:07:21.960 However, one must guard oneself against the fallacy that this necessarily implies a decrease 80 00:07:21.960 --> 00:07:25.200 in the average cost of production. 81 00:07:25.200 --> 00:07:32.360 It is true that within the aggregate of imperfectly divisible factors, each of them is now better 82 00:07:32.360 --> 00:07:38.240 utilized, that therefore costs of production as far as they are caused by the cooperation 83 00:07:38.240 --> 00:07:45.160 of these factors remain unchanged, and that the quotas falling to a unit of output are 84 00:07:45.160 --> 00:07:46.960 decreasing. 85 00:07:46.960 --> 00:07:51.880 But on the other hand, an increase in the employment of the perfectly divisible factors 86 00:07:51.880 --> 00:07:58.580 The values of production can be attained only by withdrawing them from other employments. 87 00:07:58.580 --> 00:08:05.560 The value of these other employments increases, other things being equal, with their shrinking. 88 00:08:05.560 --> 00:08:11.560 The price of these perfectly divisible factors tends to rise, as more of them are used for 89 00:08:11.560 --> 00:08:17.480 the better utilization of the productive capacity of the aggregate of the not further divisible 90 00:08:17.480 --> 00:08:20.220 factors in question. 91 00:08:20.220 --> 00:08:25.340 One must not limit the consideration of our problem to the case in which the additional 92 00:08:25.340 --> 00:08:32.540 quantity of P is withdrawn from other enterprises producing the same product in a less efficient 93 00:08:32.540 --> 00:08:37.920 way and forces these enterprises to restrict their output. 94 00:08:37.920 --> 00:08:43.660 It is obvious that in this case, competition between a more and a less efficient enterprise 95 00:08:43.660 --> 00:08:50.160 producing the same article out of the same raw materials, the average cost of production 96 00:08:50.160 --> 00:08:57.060 Education is decreasing in the expanding plant. A more general scrutiny of the problem leads 97 00:08:57.060 --> 00:09:03.120 to a different result. If the units of P are withdrawn from other employments in which 98 00:09:03.120 --> 00:09:09.120 they would have been utilized for the production of other articles, there emerges a tendency 99 00:09:09.120 --> 00:09:16.560 toward an increase in the price of these units. This tendency may be compensated by accidental 100 00:09:16.560 --> 00:09:38.520 Finally, we consider, as case C, a state of affairs in which the various imperfectly 101 00:09:38.520 --> 00:09:45.260 divisible factors of production can be divided only in such a way that, given the conditions 102 00:09:45.260 --> 00:09:51.800 of the Market, any size which can be chosen for their assemblage in a production aggregate 103 00:09:51.800 --> 00:09:57.680 does not allow for a combination in which full utilization of the productive capacity 104 00:09:57.680 --> 00:10:05.000 of one factor makes possible full utilization of the productive capacity of the other imperfectly 105 00:10:05.000 --> 00:10:07.540 divisible factors. 106 00:10:07.540 --> 00:10:12.200 This case C alone is of practical significance. 107 00:10:12.200 --> 00:10:17.800 How the cases A and B hardly play any role in real business. 108 00:10:17.800 --> 00:10:24.020 The characteristic feature of case C is that the configuration of production costs varies 109 00:10:24.020 --> 00:10:26.180 unevenly. 110 00:10:26.180 --> 00:10:33.240 If all imperfectly divisible factors are utilized to less than full capacity, an expansion of 111 00:10:33.240 --> 00:10:39.760 production results in a decrease of average costs of production, unless a rise in the 112 00:10:39.760 --> 00:10:46.880 The prices to be paid for the perfectly divisible factors counterbalances this outcome. 113 00:10:46.880 --> 00:10:53.200 But as soon as full utilization of the capacity of one of the imperfectly divisible factors 114 00:10:53.200 --> 00:11:00.840 is attained, further expansion of production causes a sudden sharp rise in costs. 115 00:11:00.840 --> 00:11:07.300 Then again, a tendency toward a decrease in average production costs sets in and goes 116 00:11:07.300 --> 00:11:13.820 is on working until full utilization of one of the imperfectly divisible factors is attained 117 00:11:13.820 --> 00:11:15.860 anew. 118 00:11:15.860 --> 00:11:22.180 Other things being equal, the more the production of a certain article increases, the more factors 119 00:11:22.180 --> 00:11:27.300 of production must be withdrawn from other employments in which they would have been 120 00:11:27.300 --> 00:11:30.260 used for the production of other articles. 121 00:11:30.260 --> 00:11:37.260 Hence, other things being equal, average production costs increase with the increase in the quantity 122 00:11:37.300 --> 00:12:07.300 The Planning Entrepreneur is always faced with the question, to what extent are the 123 00:12:07.300 --> 00:12:14.540 To what extent will the anticipated prices of the products exceed the anticipated costs? 124 00:12:14.540 --> 00:12:19.980 If the entrepreneur is still free with regard to the project in question because he has 125 00:12:19.980 --> 00:12:26.860 not yet made any inconvertible investments for its realization, it is average costs that 126 00:12:26.860 --> 00:12:28.880 count for him. 127 00:12:28.880 --> 00:12:34.740 But if he has already a vested interest in the line of business concerned, he sees things 128 00:12:34.740 --> 00:12:39.440 is from the angle of additional costs to be expended. 129 00:12:39.440 --> 00:12:46.400 He who already owns a not fully utilized production aggregate does not take into account average 130 00:12:46.400 --> 00:12:50.880 cost of production, but marginal cost. 131 00:12:50.880 --> 00:12:56.920 Without regard to the amount already expended for inconvertible investments, he is merely 132 00:12:56.920 --> 00:13:02.040 interested in the question whether or not the proceeds from the sale of an additional 133 00:13:02.040 --> 00:13:09.040 and the quantity of products will exceed the additional cost incurred by their production. 134 00:13:09.040 --> 00:13:15.160 Even if the whole amount invested in the inconvertible production facilities must be wiped off as 135 00:13:15.160 --> 00:13:22.360 a loss, he goes on producing, provided he expects a reasonable surplus of proceeds over 136 00:13:22.360 --> 00:13:25.240 current costs. 137 00:13:25.240 --> 00:13:30.480 Reasonable means in this connection that the anticipated returns on the convertible capital 138 00:13:30.480 --> 00:13:41.320 are at least not lower than the anticipated returns on its use for other projects. 139 00:13:41.320 --> 00:13:47.440 With regard to popular errors, it is necessary to emphasize that if the conditions required 140 00:13:47.440 --> 00:13:54.020 for the appearance of monopoly prices are not present, an entrepreneur is not in a position 141 00:13:54.020 --> 00:14:00.380 to increase his net returns by restricting production beyond the amount conforming with 142 00:14:00.380 --> 00:14:07.580 with Consumers Demand, but this problem will be dealt with later in Section 6. 143 00:14:07.580 --> 00:14:13.280 That a factor of production is not perfectly divisible does not always mean that it can 144 00:14:13.280 --> 00:14:18.100 be constructed and employed in one size only. 145 00:14:18.100 --> 00:14:24.860 This of course may occur in some cases, but as a rule it is possible to vary the dimensions 146 00:14:24.860 --> 00:14:31.540 of These Factors. If out of the various dimensions which are possible for such a factor, for 147 00:14:31.540 --> 00:14:38.120 example, a machine, one dimension is distinguished by the fact that the costs incurred by its 148 00:14:38.120 --> 00:14:44.500 production and operation are rendered lower per unit of the productive services than those 149 00:14:44.500 --> 00:14:51.380 for other dimensions, things are essentially identical. Then the superiority of the bigger 150 00:14:51.380 --> 00:14:57.620 The bigger plant does not consist in the fact that it utilizes a machine to full capacity, 151 00:14:57.620 --> 00:15:04.340 while the smaller plant utilizes only a part of the capacity of a machine of the same size. 152 00:15:04.340 --> 00:15:09.880 It consists, rather, in the fact that the bigger plant employs a machine which operates 153 00:15:09.880 --> 00:15:15.460 with a better utilization of the factors of production required for its construction and 154 00:15:15.460 --> 00:15:22.000 Operation than does the smaller machine employed by the smaller plant. 155 00:15:22.000 --> 00:15:27.700 The role played in all branches of production by the fact that many factors of production 156 00:15:27.700 --> 00:15:31.780 are not perfectly divisible is very great. 157 00:15:31.780 --> 00:15:36.460 It is of paramount importance in the course of industrial affairs. 158 00:15:36.460 --> 00:15:43.260 But one must guard oneself against many misinterpretations of its significance. 159 00:15:43.260 --> 00:15:48.460 One of these errors was the doctrine according to which in the processing industries there 160 00:15:48.460 --> 00:15:55.780 prevails a law of increasing returns, while in agriculture and mining a law of decreasing 161 00:15:55.780 --> 00:15:58.260 returns prevails. 162 00:15:58.260 --> 00:16:02.460 The fallacies implied have been exploded above. 163 00:16:02.460 --> 00:16:07.780 As far as there is a difference in this regard between conditions in agriculture and those 164 00:16:07.780 --> 00:16:13.580 in the processing industries, differences in the data bring them about. 165 00:16:13.580 --> 00:16:18.700 The immobility of the soil and the fact that the performance of the various agricultural 166 00:16:18.700 --> 00:16:24.860 operations depends on the seasons make it impossible for farmers to take advantage of 167 00:16:24.860 --> 00:16:31.860 the capacity of many movable factors of production to the degree which conditions in manufacturing 168 00:16:31.860 --> 00:16:34.620 for the most part allow. 169 00:16:34.620 --> 00:16:40.820 The optimum size of a production outfit in agricultural production is, as a rule, much 170 00:16:40.820 --> 00:16:44.420 smaller than in the processing industries. 171 00:16:44.420 --> 00:16:50.420 It is obvious, and does not need any further explanation, why the concentration of farming 172 00:16:50.420 --> 00:16:56.860 cannot be pushed to anything near the degree obtaining in the processing industries. 173 00:16:56.860 --> 00:17:03.660 However, the inequality in the distribution of natural resources over the earth's surface, 174 00:17:03.660 --> 00:17:08.300 which is one of the two factors making for the higher productivity of the division of 175 00:17:08.300 --> 00:17:15.760 labor puts a limit to the progress of concentration in the processing industries also. 176 00:17:15.760 --> 00:17:21.900 The tendency toward a progressive specialization and the concentration of integrated industrial 177 00:17:21.900 --> 00:17:28.820 processes in only a few plants is counteracted by the geographical dispersion of natural 178 00:17:28.820 --> 00:17:30.780 resources. 179 00:17:30.780 --> 00:17:37.380 The fact that the production of raw materials and foodstuffs cannot be centralized and forces 180 00:17:37.380 --> 00:17:43.340 people to disperse over the various parts of the earth's surface enjoins also upon 181 00:17:43.340 --> 00:17:48.680 the processing industries a certain degree of decentralization. 182 00:17:48.680 --> 00:17:54.460 It makes it necessary to consider the problems of transportation as a particular factor of 183 00:17:54.460 --> 00:17:56.740 production costs. 184 00:17:56.740 --> 00:18:02.100 The costs of transportation must be weighed against the economies to be expected from 185 00:18:02.100 --> 00:18:05.500 more thoroughgoing specialization. 186 00:18:05.500 --> 00:18:11.840 While in some branches of the processing industries, the utmost concentration is the most adequate 187 00:18:11.840 --> 00:18:14.420 method of reducing costs. 188 00:18:14.420 --> 00:18:20.760 In other branches, a certain degree of decentralization is more advantageous. 189 00:18:20.760 --> 00:18:26.160 In the servicing trades, the disadvantages of concentration become so great that they 190 00:18:26.160 --> 00:18:31.700 almost entirely overweigh the advantages derived. 191 00:18:31.700 --> 00:18:35.200 Then a historical factor comes into play. 192 00:18:35.200 --> 00:18:41.020 In the past, capital goods were immobilized on sites on which our contemporaries would 193 00:18:41.020 --> 00:18:42.980 not have set them. 194 00:18:42.980 --> 00:18:49.020 It is immaterial whether or not this immobilization was the most economical procedure to which 195 00:18:49.020 --> 00:18:53.260 which the generations that brought it about could resort. 196 00:18:53.260 --> 00:18:58.700 In any event, the present generation is faced with a fait accompli. 197 00:18:58.700 --> 00:19:04.140 It must adjust its operations to the fact, and it must take it into account in dealing 198 00:19:04.140 --> 00:19:08.460 with problems of the location of the processing industries. 199 00:19:08.460 --> 00:19:12.500 Finally, there are institutional factors. 200 00:19:12.500 --> 00:19:15.460 There are trade and migration barriers. 201 00:19:15.460 --> 00:19:21.460 There are differences in political organization and methods of government between various countries. 202 00:19:21.460 --> 00:19:30.460 Vast areas are administered in such a way that it is practically out of the question to choose them as a seat for any capital investment, 203 00:19:30.460 --> 00:19:35.460 no matter how favorable their physical conditions may be. 204 00:19:35.460 --> 00:19:43.460 Entrepreneurial cost accounting must deal with all these geographical, historical and institutional factors. 205 00:19:43.460 --> 00:19:51.460 But even apart from them, there are purely technical factors limiting the optimum size of plants and firms. 206 00:19:51.460 --> 00:19:59.460 The greater plant or firm may require provisions and procedures which the smaller plant or firm can avoid. 207 00:19:59.460 --> 00:20:08.460 In many instances, the outlays caused by such provisions and procedures may be overcompensated by the reduction in costs 208 00:20:08.460 --> 00:20:16.460 costs derived from better utilization of the capacity of some of the not perfectly divisible factors employed. 209 00:20:16.460 --> 00:20:20.460 In other instances, this may not be the case. 210 00:20:20.460 --> 00:20:29.460 Under capitalism, the arithmetical operations required for cost accounting and the confrontation of costs and proceeds 211 00:20:29.460 --> 00:20:35.460 can easily be effected, as there are methods of economic calculation available. 212 00:20:35.460 --> 00:20:41.780 However, cost accounting and calculation of the economic significance of business projects 213 00:20:41.780 --> 00:20:48.420 under consideration is not merely a mathematical problem, which can be solved satisfactorily 214 00:20:48.420 --> 00:20:53.380 by all those familiar with the elementary rules of arithmetic. 215 00:20:53.380 --> 00:20:58.620 The main question is the determination of the money equivalents of the items which are 216 00:20:58.620 --> 00:21:01.900 to enter into the calculation. 217 00:21:01.900 --> 00:21:08.620 It is a mistake to assume, as many economists do, that these equivalents are given magnitudes 218 00:21:08.620 --> 00:21:13.060 uniquely determined by the state of economic conditions. 219 00:21:13.060 --> 00:21:19.860 They are speculative anticipations of uncertain future conditions, and as such depend on the 220 00:21:19.860 --> 00:21:24.600 entrepreneur's understanding of the future state of the market. 221 00:21:24.600 --> 00:21:31.060 The term fixed costs is also in this regard somewhat misleading. 222 00:21:31.060 --> 00:21:36.660 Every action aims at the best possible supplying of future needs. 223 00:21:36.660 --> 00:21:43.580 To achieve these ends, it must make the best possible use of the available factors of production. 224 00:21:43.580 --> 00:21:49.500 However, the historical process which brought about the present state of factors available 225 00:21:49.500 --> 00:21:51.820 is beside the point. 226 00:21:51.820 --> 00:21:58.500 What counts and influences the decisions concerning future action is solely the outcome of this 227 00:21:58.500 --> 00:22:05.660 This Historical Process, The Quantity and the Quality of the Factors Available Today. 228 00:22:05.660 --> 00:22:11.660 These factors are appraised only with regard to their ability to render productive services 229 00:22:11.660 --> 00:22:15.080 for the removal of future uneasiness. 230 00:22:15.080 --> 00:22:22.020 The amount of money spent in the past for their production and acquisition is immaterial. 231 00:22:22.020 --> 00:22:28.180 It has already been pointed out that an entrepreneur who by the time he has to make a new decision 232 00:22:28.180 --> 00:22:33.980 has expended money for the realization of a definite project, is in a different position 233 00:22:33.980 --> 00:22:37.340 from that of a man who starts afresh. 234 00:22:37.340 --> 00:22:43.220 The former owns a complex of inconvertible factors of production which he can employ 235 00:22:43.220 --> 00:22:45.780 for certain purposes. 236 00:22:45.780 --> 00:22:51.280 His decisions concerning further action will be influenced by this fact. 237 00:22:51.280 --> 00:22:57.780 But he appraises this complex not according to what he expended in the past for its acquisition. 238 00:22:57.780 --> 00:23:03.780 He appraises it exclusively from the point of view of its usefulness for future action. 239 00:23:03.780 --> 00:23:09.780 The fact that he has spent more or less for its acquisition is insignificant. 240 00:23:09.780 --> 00:23:19.780 This fact is only a factor in determining the amount of the entrepreneur's past losses or profits and the present state of his fortune. 241 00:23:19.780 --> 00:23:25.500 It is an element in the historical process that brought about the present state of the 242 00:23:25.500 --> 00:23:32.480 supply of factors of production, and as such it is of importance for future action. 243 00:23:32.480 --> 00:23:38.340 But it does not count for the planning of future action and the calculation regarding 244 00:23:38.340 --> 00:23:40.100 such action. 245 00:23:40.100 --> 00:23:46.100 It is irrelevant that the entries in the firm's books differ from the actual price of such 246 00:23:46.100 --> 00:23:49.700 Inconvertible Factors of Production 247 00:23:49.700 --> 00:23:56.060 Of course, such consummated losses or profits may motivate a firm to operate in a different 248 00:23:56.060 --> 00:24:00.620 way from which it would if it were not affected by them. 249 00:24:00.620 --> 00:24:05.980 Past losses may render a firm's financial position precarious, especially if they bring 250 00:24:05.980 --> 00:24:12.020 about indebtedness and burden it with payments of interest and installments on the principal. 251 00:24:12.020 --> 00:24:18.420 However, it is not correct to refer to such payments as a part of fixed costs. 252 00:24:18.420 --> 00:24:22.660 They have no relation whatever to the current operations. 253 00:24:22.660 --> 00:24:29.060 They are not caused by the process of production, but by the methods employed by the entrepreneur 254 00:24:29.060 --> 00:24:35.260 in the past for the procurement of the capital and capital goods needed. 255 00:24:35.260 --> 00:24:39.980 They are only accidental with reference to the going concern. 256 00:24:39.980 --> 00:24:46.060 But they may enforce upon the firm in question a conduct of affairs which it would not adopt 257 00:24:46.060 --> 00:24:48.860 if it were financially stronger. 258 00:24:48.860 --> 00:24:55.540 The urgent need for cash in order to meet payments due does not affect its cost accounting, 259 00:24:55.540 --> 00:25:01.780 but its appraisal of ready cash as compared with cash that can only be received at a later 260 00:25:01.780 --> 00:25:03.280 day. 261 00:25:03.280 --> 00:25:09.180 It may impel the firm to sell inventories at an inappropriate moment, and to use its 262 00:25:09.180 --> 00:25:14.360 It's durable production equipment in a way that unduly neglects its conservation for 263 00:25:14.360 --> 00:25:16.520 later use. 264 00:25:16.520 --> 00:25:22.080 It is immaterial for the problems of cost accounting whether a firm owns the capital 265 00:25:22.080 --> 00:25:27.840 invested in its enterprise or whether it has borrowed a greater or smaller part of it and 266 00:25:27.840 --> 00:25:33.880 is bound to comply with the terms of a loan contract, rigidly fixing the rate of interest 267 00:25:33.880 --> 00:25:38.520 and the dates of maturity for interest and principal. 268 00:25:38.520 --> 00:25:44.620 The costs of production include only the interest on the capital which is still existent and 269 00:25:44.620 --> 00:25:47.200 working in the enterprise. 270 00:25:47.200 --> 00:25:54.460 It does not include interest on capital squandered in the past by bad investment or by inefficiency 271 00:25:54.460 --> 00:25:58.380 in the conduct of current business operations. 272 00:25:58.380 --> 00:26:04.400 The task incumbent upon the businessman is always to use the supply of capital goods 273 00:26:04.400 --> 00:26:11.600 now available in the best possible way for the satisfaction of future needs. 274 00:26:11.600 --> 00:26:18.760 In the pursuit of this aim he must not be misled by past errors and failures, the consequences 275 00:26:18.760 --> 00:26:21.920 of which cannot be brushed away. 276 00:26:21.920 --> 00:26:27.240 A plant may have been constructed in the past which would not have been built if one had 277 00:26:27.240 --> 00:26:30.600 better forecast the present situation. 278 00:26:30.600 --> 00:26:34.240 It is vain to lament this historical fact. 279 00:26:34.240 --> 00:26:40.640 The main thing is to find out whether or not the plant can still render any service, and, 280 00:26:40.640 --> 00:26:46.460 if this question is answered in the affirmative, how it can be best utilized. 281 00:26:46.460 --> 00:26:52.360 It is certainly said for the individual entrepreneur that he did not avoid errors. 282 00:26:52.360 --> 00:26:56.440 The losses incurred impair his financial situation. 283 00:26:56.440 --> 00:27:03.340 They do not affect the costs to be taken into account in planning further action. 284 00:27:03.340 --> 00:27:08.780 It is important to stress this point because it has been distorted in the current interpretation 285 00:27:08.780 --> 00:27:12.460 and justification of various measures. 286 00:27:12.460 --> 00:27:19.700 One does not reduce costs by alleviating some firm's and corporation's burden of debts. 287 00:27:19.700 --> 00:27:27.100 A policy of wiping out debts, or the interest due on them totally or in part, does not reduce 288 00:27:27.100 --> 00:27:28.100 costs. 289 00:27:28.100 --> 00:27:32.060 It transfers wealth from creditors to debtors. 290 00:27:32.060 --> 00:27:38.020 It shifts the incidence of losses incurred in the past from one group of people to another 291 00:27:38.020 --> 00:27:43.980 group, for example, from the owners of common stock to those of preferred stock and corporate 292 00:27:43.980 --> 00:27:45.940 bonds. 293 00:27:45.940 --> 00:27:52.300 This argument of cost reduction is often advanced in favor of currency devaluation. 294 00:27:52.300 --> 00:27:57.280 It is no less fallacious in this case than all the other arguments brought forward for 295 00:27:57.280 --> 00:27:59.560 this purpose. 296 00:27:59.560 --> 00:28:06.160 What are commonly called fixed costs are also the costs incurred by the exploitation of 297 00:28:06.160 --> 00:28:12.560 the already available factors of production, which are either rigidly inconvertible or 298 00:28:12.560 --> 00:28:19.060 can be adapted for other productive purposes only at a considerable loss. 299 00:28:19.060 --> 00:28:24.880 These factors are of a more durable character than the other factors of production required, 300 00:28:24.880 --> 00:28:26.800 but they are not permanent. 301 00:28:26.800 --> 00:28:33.580 They are used up in the process of production. With each unit of product turned out, a part 302 00:28:33.580 --> 00:28:40.660 of the machine's power to produce is exhausted. The extent of this attrition can be precisely 303 00:28:40.660 --> 00:28:48.540 ascertained by technology and can be appraised accordingly in terms of money. However, it 304 00:28:48.540 --> 00:28:55.300 is not only this money equivalent of the machine's wearing out which the entrepreneurial calculation 305 00:28:55.300 --> 00:29:01.460 Man has to consider. The businessman is not merely concerned with the duration of the 306 00:29:01.460 --> 00:29:08.380 machine's technological life. He must take into account the future state of the market. 307 00:29:08.380 --> 00:29:14.560 Although a machine may still be technologically perfectly utilizable, market conditions may 308 00:29:14.560 --> 00:29:22.240 render it obsolete and worthless. If the demand for its products drops considerably or disappears 309 00:29:22.240 --> 00:29:28.140 all together, or if more efficient methods for supplying the consumers with these products 310 00:29:28.140 --> 00:29:33.560 appear, the machine is economically merely scrap iron. 311 00:29:33.560 --> 00:29:40.020 In planning the conduct of his business, the entrepreneur must pay full regard to the anticipated 312 00:29:40.020 --> 00:29:42.680 future state of the market. 313 00:29:42.680 --> 00:29:48.800 The amount of fixed costs which enter into his calculation depends on his understanding 314 00:29:48.800 --> 00:29:50.720 of future events. 315 00:29:50.720 --> 00:29:55.600 It is not to be fixed simply by technological reasoning. 316 00:29:55.600 --> 00:30:01.800 The technologist may determine the optimum for a production aggregate's utilization. 317 00:30:01.800 --> 00:30:07.680 But this technological optimum may differ from that which the entrepreneur, on the ground 318 00:30:07.680 --> 00:30:15.240 of his judgment concerning future market conditions, enters into his economic calculation. 319 00:30:15.240 --> 00:30:20.600 Let us assume that a factory is equipped with machines which can be utilized for a period 320 00:30:20.600 --> 00:30:29.200 of Ten Years. Every year, ten percent of their prime costs is laid aside for depreciation. 321 00:30:29.200 --> 00:30:35.120 In the third year, market conditions place a dilemma before the entrepreneur. He can 322 00:30:35.120 --> 00:30:40.740 double his output for the year and sell it at a price which, apart from covering the 323 00:30:40.740 --> 00:30:47.400 increase in variable costs, exceeds the quota of depreciation for the current year and the 324 00:30:47.400 --> 00:30:51.520 and the present value of the last depreciation quota. 325 00:30:51.520 --> 00:30:57.200 But this doubling of production trebles the wearing out of the equipment and the surplus 326 00:30:57.200 --> 00:31:03.160 proceeds from the sale of the double quantity of products are not great enough to make good 327 00:31:03.160 --> 00:31:09.040 also for the present value of the depreciation quota of the ninth year. 328 00:31:09.040 --> 00:31:14.780 If the entrepreneur were to consider the annual depreciation quota as a rigid element for 329 00:31:14.780 --> 00:31:20.900 For his calculation, he would have to deem the doubling of production as not profitable, 330 00:31:20.900 --> 00:31:25.360 as additional proceeds lag behind additional cost. 331 00:31:25.360 --> 00:31:31.220 He would abstain from expanding production beyond the technological optimum. 332 00:31:31.220 --> 00:31:36.960 But the entrepreneur calculates in a different way, although in his accountancy he may lay 333 00:31:36.960 --> 00:31:41.780 aside the same quota for depreciation every year. 334 00:31:41.780 --> 00:31:46.860 Whether or not the entrepreneur prefers a fraction of the present value of the ninth 335 00:31:46.860 --> 00:31:52.860 year's depreciation quota to the technological services which the machines could render him 336 00:31:52.860 --> 00:32:00.560 in the ninth year depends on his opinion concerning the future state of the market. 337 00:32:00.560 --> 00:32:06.740 Public opinion, governments and legislators, and the tax laws look upon a business outfit 338 00:32:06.740 --> 00:32:09.660 as a source of permanent revenue. 339 00:32:09.660 --> 00:32:15.100 They believe that the entrepreneur who makes due allowance for capital maintenance by annual 340 00:32:15.100 --> 00:32:21.900 depreciation quotas will always be in a position to reap a reasonable return from the capital 341 00:32:21.900 --> 00:32:26.140 invested in his durable producers' goods. 342 00:32:26.140 --> 00:32:28.620 Real conditions are different. 343 00:32:28.620 --> 00:32:34.580 A production aggregate such as a plant and its equipment is a factor of production whose 344 00:32:34.580 --> 00:32:40.060 His usefulness depends on changing market conditions and the skill of the entrepreneur 345 00:32:40.060 --> 00:32:45.500 in employing it in accordance with the change in conditions. 346 00:32:45.500 --> 00:32:51.420 There is in the field of economic calculation nothing that is certain in the sense in which 347 00:32:51.420 --> 00:32:56.240 this term is used with regard to technological facts. 348 00:32:56.240 --> 00:33:04.320 The essential elements of economic calculation are speculative anticipations of future conditions. 349 00:33:04.320 --> 00:33:10.620 Commercial usages and customs and commercial laws have established definite rules for accountancy 350 00:33:10.620 --> 00:33:12.260 and auditing. 351 00:33:12.260 --> 00:33:15.600 There is accuracy in the keeping of books. 352 00:33:15.600 --> 00:33:20.000 But they are accurate only with regard to these rules. 353 00:33:20.000 --> 00:33:25.500 The book values do not reflect precisely the real state of affairs. 354 00:33:25.500 --> 00:33:30.980 The market value of an aggregate of durable producers' goods may differ from the nominal 355 00:33:30.980 --> 00:33:33.380 figures the books show. 356 00:33:33.380 --> 00:33:40.620 The proof is that the stock exchange appraises them without any regard to these figures. 357 00:33:40.620 --> 00:33:46.480 Cost accounting is therefore not an arithmetical process which can be established and examined 358 00:33:46.480 --> 00:33:49.220 by an indifferent umpire. 359 00:33:49.220 --> 00:33:55.580 It does not operate with uniquely determined magnitudes which can be found out in an objective 360 00:33:55.580 --> 00:33:56.940 way. 361 00:33:56.940 --> 00:34:02.260 Its essential items are the result of an understanding of future conditions. 362 00:34:02.260 --> 00:34:09.740 Necessarily always colored by the entrepreneur's opinion about the future state of the market. 363 00:34:09.740 --> 00:34:16.580 Attempts to establish cost accounts on an impartial basis are doomed to failure. 364 00:34:16.580 --> 00:34:22.300 Calculating costs is a mental tool of action, the purposive design to make the best of the 365 00:34:22.300 --> 00:34:26.460 available means for an improvement of future conditions. 366 00:34:26.460 --> 00:34:30.480 It is necessarily volitional, not factual. 367 00:34:30.480 --> 00:34:35.900 In the hands of an indifferent umpire, it changes its character entirely. 368 00:34:35.900 --> 00:34:39.120 The umpire does not look forward to the future. 369 00:34:39.120 --> 00:34:45.200 He looks backward to the dead past and to rigid rules which are useless for real life 370 00:34:45.200 --> 00:34:46.880 and action. 371 00:34:46.880 --> 00:34:49.580 He does not anticipate changes. 372 00:34:49.580 --> 00:34:55.880 He is unwittingly guided by the prepossession that the evenly rotating economy is the normal 373 00:34:55.880 --> 00:35:00.460 and most desirable state of human affairs. 374 00:35:00.460 --> 00:35:03.180 Profits do not fit into his scheme. 375 00:35:03.180 --> 00:35:10.620 He has a confused idea about a fair rate of profit or a fair return on capital invested. 376 00:35:10.620 --> 00:35:13.860 However, there are no such things. 377 00:35:13.860 --> 00:35:18.420 In the evenly rotating economy, there are no profits. 378 00:35:18.420 --> 00:35:24.500 In a changing economy, profits are not determined with reference to any set of rules by which 379 00:35:24.500 --> 00:35:29.540 they could be classified as fair or unfair. 380 00:35:29.540 --> 00:35:32.380 Profits are never normal. 381 00:35:32.380 --> 00:35:38.740 Where there is normality, that is, absence of change, no profits can emerge.