Economics Dictionary of ArgumentsHome
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| Costs of production: Costs of production in economics refer to the expenses incurred by businesses to produce goods and services. These include fixed costs (e.g., rent, equipment) and variable costs (e.g., labor, raw materials). Total production costs affect pricing decisions, profitability, and supply in the market. Efficient management of production costs is crucial for business sustainability and competitiveness. See also Costs, Production, Factors of production, Production structure, Prduction theory._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
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Murray N. Rothbard on Costs of Production - Dictionary of Arguments
Rothbard III 340 Costs of production/Rothbard: (…) the cost, or "marginal" cost, of any decision is the next highest utility that must be forgone because of the decision. When a means M must be distributed among ends E1, E2, and E3, with E2 ranked highest on the individual's value scale, the individual attempts to allocate the means so as to attain his most highly valued ends and to forgo those ranked Iower, although he will attain as many of his ends as he can with the means available. If he allocates his means to E1 and E2, and must forgo E3, E3 is the marginal cost ofhis decision. Ifhe errs in his de- cision, and arrives at E3 instead of E2, then ex post - in retrospect - he is seen to have suffered a loss compared to the course he could have taken. Production: What are the costs involved in the decisions made by the owners of the factors? (…) these costs are subjective and cannot be precisely determined by outside observers or be gauged ex post by observing accountants.(1) Secondly, it is clear that, since such factors as land and the produced capital goods have only one use, namely, the production of this product (by virtue of being purely specific), they involve no cost to their owner in being used in production. By the very terms of our problem, the only alternative for their owner would be to let the land lie unused, earning no return. The use of labor, however, does have a cost, in accordance with the value of the leisure forgone by the laborers. >Marginal costs. Sale: (…) in most cases, the sale of the good at the market price, whatever the price may be, is costless, except for rare cases of direct consumption by the producer or in cases of anticipation of a price increase in the near future. This sale is costless from the proper point of view -the point ofview of acting man at the relevant instant of action. The fact that he would not have engaged in the labor at all if he had known in advance of the present price might indicate a deplorable instance of poor judgment, but it does not affect the present situation. At present, with all the labor already exerted and the product finished, the original - subjective - cost has already been incurred and vanished with the original making of the decision. Rothbard III 341 Price/production costs/Rothbard: (…) once the product has been made, "cost" has no influence on the price of the product. Past costs, being ephemeral, are irrelevant to present determination of prices. The agitation that often takes place over sales "below cost" is now placed in its proper perspective. It is obvious that, in the relevant sense of "cost," no such sales can take Place. The sale of an already produced good is likely to be costless, and if it is not, and price is below its costs, then the seller will hold on to the good rather than make the sale. That costs do have an influence in production is not denied by anyone. However, the influence is not directly on the price, but on the amount that will be produced or, more specifically, on the degree to which factors will be used. >Factors of production/Rothbard. Rothbard III 343 Price: (…) it is clear that the determinants of price are only the subjective utilities of individuals in valuing given conditions and alternatives. There are no "objective" or "real" costs that determine, or are co-ordinate in determining, price. Time/costs: There is another (…) element: present goods are being forgone in exchange for an expectation of return in the future. Time, therefore, is a critical element in production, and its analysis must pervade any theory of production. Rothbard III 347 For the case that all factors of production are only hired, see >Interest rates/Rothbard. Rothbard III 355 Money costs are the opposite of a basic, determining factor; they are dependent on the price of the product and on consumer demands. In the real world of uncertainty it is more difficult to see this, because factors are paid in advance of the sale of the product, since the capitalist-entrepreneurs speculatively advance money to the factors in the expectation of being able to recoup their money with a surplus for interest and profit after sale to the consumers.(2) Whether they do so or not depends on their foresight regarding the state of consumer demand and the future prices of consumers’ goods. In the real world of immediate market prices, of course, the existence of entrepreneurial profit and loss will always prevent costs and receipts, cost and price, from being identical, and it is obvious to all that price is solely determined by valuations of stock - by “utilities” - and not at all by money cost. But although most economists recognize that in the real world (the so-called “short-run”) costs cannot determine price, they are seduced by the habit of the individual entrepreneur of dealing in terms of “cost” as the determining factor, and they apply this procedure to the case of the ERE (Evenly Rotating Economy) and therefore to the inherent long-run tendencies of the economy. >Evenly Rotating Economy/Rothbard. Rothbard III 360 This is not to deny, and the Austrians never did deny, that subjective costs, in the sense of opportunity costs and utilities forgone, are important in the analysis of production. >Opportunity costs/Rothbard. Rothbard III 357 Costs of production/Alfred Marshall/Rothbard: The enormous advance provided by the Austrian School, on this point as on others, was blocked and reversed by the influence of Alfred Marshall, who attempted to rehabilitate the classicists and integrate them with the Austrians, while disparaging the contributions of the latter. >Classical economics, >Austrian School. It was unfortunately the Marshallianand not the Austrian approach that exerted the most influence over later writers. This influence is partly responsible for the current myth among economists that the Austrian School is effectively dead and has no more to contribute and that everything of lasting worth that it had to offer was effectively stated and integrated in Alfred Marshall’s Principles. >Alfred Marshall. Producion costs/Marshall/Rothbard: Marshall tried to rehabilitate the cost-of-production theory of the classicists by conceding that, in the “short run,” in the immediate market place, consumers’ demand rules price. But in the long run, among the important reproducible goods, cost of production is determining. According to Marshall, both utility and money costs determine price, like blades of a scissors, but one blade is more important in the short run, and another in the long run. Marshall: (…) concludes that „as a general rule, the shorter the period we are considering, the greater must be the share of our attentionwhich is given to the influence of demand on value; and the longer the period, the more important will bethe influence of cost of production on value. . . . The actual value at any time, the market value as it is often called, is often more influenced by passing events and by causes whose action is fitful and shortlived, than by those which work persistently. Rothbard III 358 But in long periods these fitful and irregular causes in large measure efface one another’s influence; so that in the long run persistent causes dominate value completely.“(3) RothbardVsMarshall, Alfred: Marshall’s analysis suffers from a grave methodological defect - indeed, from an almost hopeless methodological confusion as regards the “short run” and the “long run.” He considers the “long run” as actually existing, as being the permanent, persistent, observable element beneath the fitful, basically unimportant flux of market value. He admits (p. 350) that “even the most persistent causes are, however, liable to change,” but he clearly indicates that they are far less likely to change than the fitful market values; herein, indeed, lies their long-run nature. He regards the long-run data, then, as underlying the transient market values in a way similar to that in which the basic sea level underlies the changing waves and tides. For Marshall, then, the long-run data are something that can be spotted and marked by an observer; indeed, since they change far more slowly than the market values, they can be observed more accurately. Marshall’s conception of the long run is completely fallacious, and this eliminates the whole groundwork of his theoretical structure. Rothbard III 359 The long run, by its very nature, never does and never can exist. This does not mean that “long-run,” or ERE (Evenly Rotating Economy), analysis is not important. >Evenly Rotating Economy/Rothbard. Prices/costs/RothbardVsMarshall: The fact that costs equal prices in the “long run” does not mean that costs will actually equal prices, but that the tendency exists, a tendency that is continually being disrupted in reality by the very fitful changes in market data that Marshall points out.(4) 1. Cf. the excellent discussion of cost by G.F. Thirlby, “The Subjective Theory of Value and Accounting ‘Cost,’” Economica, February, 1946, pp. 33 f.; and especially Thirlby, “Economists’ Cost Rules and Equilibrium Theory,” Economica, May, 1960, pp. 148 - 53. 2. Cf. Menger, Principles of Economics, pp. 149ff. 3. Alfred Marshall, Principles of Economics (8th ed.; London: Macmillan & Co., 1920), pp. 349 ff. 4. On this error in Marshall, see F.A. Hayek, The Pure Theory of Capital (Chicago: University of Chicago Press, 1941), pp. 21, 27 - 28._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
Rothbard II Murray N. Rothbard Classical Economics. An Austrian Perspective on the History of Economic Thought. Cheltenham, UK: Edward Elgar Publishing. Cheltenham 1995 Rothbard III Murray N. Rothbard Man, Economy and State with Power and Market. Study Edition Auburn, Alabama 1962, 1970, 2009 Rothbard IV Murray N. Rothbard The Essential von Mises Auburn, Alabama 1988 Rothbard V Murray N. Rothbard Power and Market: Government and the Economy Kansas City 1977 |
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> Counter arguments against Rothbard
> Counter arguments in relation to Costs of Production
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