The Indianapolis times. [volume] (Indianapolis [Ind.]) 1922-1965, 1934-12-06
OLD ECONOMIC
IDEA REFUTED
BY EXPERIENCE
Theory That Costs Set
Prices Now Held
Erroneous.
BY JULES BACKMAN AND
A. l.. JACKSON

Ntce-PresidentS. Economic statistics. Inc
NEW YORK, Dec. Gone of the
errors in economic reasoning which
still is cropping up on all sides is
the theory that prices are deter
mined by the cost of production. We
find this idea expressed in one of
the planks of the National League
for Social Justice, in which it
pledges the farmer a price equal to
his cost Of production plus a fair
profit. and it was very prevalent in
number of the codes in connection
with various price fixing attempts.
This theory had its origin with
the classical economists, starting
with Adam Smith. The theory is
that the price Of any goods should
be equal to its cost of production.
This theory considers only the costs
(supply) involved and pays no at
tention to the demand for the COM
modify. Further development in
the science of economics has indi-
Gated the fallaciousneSS of this idea.
Economists today think of prices as
being the result of both supply and
demand.
Fallacy illustrated
A simple illustration brings home
the fallacy of the cost of produc-
ton theory. Suppose we established
an ice plant at the North Pole in
order to sell ice. 1t is obvious that,
despite the fact that we may have
q rf n
setting up that plant, nobody would
be willing to pay anything for the
ice.
Because costs are undergone, it
does not necessarily follow that
these costs must be covered in the
price. There may have been wastes,
inefficiency and so forth, involved
in the production, or, as in the case
of the ice plant mentioned above,
there may have been no demand for
the product.
The confusion about this problem
arises in a failure to ditferentiate
between the longtime and the short
time situation. The economist
points out that over long
period prices will tend to equal
cost of production. The theory
in back of this generalization is that
if producers continuously receive a
price that is not sufficient to cover
their cost, they will be forced out of
business.
Demand Important
1t is obvious that if the product
is not wanted by consumers there
will be few, if any sales, regardless
of how costs are, and practically
all of the producers will be forced
out of business. On the other hand,
if prices are very much in excess
of costs, because of larger demand
than supply, new producers will be
attracted into the field and the COM
petition of their offerings will force
the price down to the cost of pro-
duction.
In the cost of production econo-
miStS include the entrepreneur'
profit and, therefore, the theory
that the price tends to equal the
costs of production over long pc
Rod of time does not presuppose
that no profits will be made.
Short Term Different
On the other hand, in the Short
time period these relationships do
not hold. For a short period of
time a producer will be able to sell
below cost, because he may have
built up a surplus some time in the
past, or he may sell below his cost
because of a desire to earn some
portion of his overhead expenses,
which expenses must be paid
whether the business is in operation
or not.
Or, on the other hand, prices may
remain above the cost of production
for short period of time until new
producers finally are able to come
into the field. 1t is the failure to
distinguish between the short time
period effects and the longer period
relationships that leads to the one
sided theory of value and price
formation held by many of our
panacea economists.