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Popular Science Monthly/Volume 80/May 1912/The Price Fallacy of High Costs

THE PRICE FALLACY OF HIGH COSTS
By RALPH H. HESS, Ph.D.

UNIVERSITY OF WISCONSIN

THE synonymous use of the terms price and cost, in their relation to the acquisition of things which may constitute a living, is responsible for a large factor of error in popular discussion and opinion concerning the so-called "high cost of living." Because statisticians have discerned a rise of approximately forty per cent, in the average of commodity prices within the decade, it is being taken for granted that the cost of living has advanced coextensively; and this conclusion has, in turn, become the premise of serious projects in contemplation of social and economic reform.

Although price and cost may, in conventional phrasing, be interchangeable without confusion of ideas, the discussion of changing commodity prices and concurrent costs of living necessitates a discriminating use of the terms. As a matter of fact, an increase in the average of prices may be no proof of change in the average cost of living during the same period; and, in any case, price changes offer only indirect evidence and unreliable criteria of cost factors and movements.

The price of an article merely indicates its money-value—its market equivalent in terms of the standard metal. The cost of an article, however, is the measure of conscious effort and sacrifice necessary to gain its possession—the exertion of labor, the discomfort of abstinence, and the forfeiture of time and resources essential to its production or acquisition. Prices are paid out of income; but income is conditioned only indirectly upon the backache and brain-fag of labor, and the time consuming and capital-wearing processes of industry—these latter constitute real costs. Since both income[1] and prices are commonly expressed in terms of the dollar, it is necessary to consider the possible correlation of the two in any instance if one would arrive at an accurate understanding of the costs of living. Likewise, price-changes, during any period, must be measured against income-changes for the same period before a conclusion may be Justified regarding changing costs of living. The problem is to trace the successive relations of economic effort to consequent income, of income to prices, and of prices paid to the subsequent utilities which constitute a living.

If the industrial, commercial and leisure classes of the population are collectively considered, total income and aggregate prices are subject to similar concurrent changes. It is a truism, often overlooked, that the sum of prices paid constitutes the total of wages, interest, rents and profits which compose the money-income of society and, per se, the direct means of acquiring the necessities and comforts of life. The measuring and estimating of changes in the cost of living, therefore, is resolved into a comparative study of incomes and expenditures. If incomes, expressed in terms of money, are found to increase more rapidly than contemporary expenditures or to decrease less rapidly, costs of living may be said to be declining; if converse relations exist, virtual costs are advancing.

It is doubtful whether a careful comparison of aggregate income and expenditure in the United States, during the regime of advancing prices following the depression of 1897, would show any considerable differential in their relative changes or any remarkable increment in the average cost of living. But it is quite possible that aggregates and averages may remain unchanged while a radical readjustment of incomes and costs is effected among individuals or among the differently circumstanced groups which compose the social organism. Indeed, it is quite plain that a readjustment of respective shares in the distribution of the total income among the different classes of the population is the raison d'être of present economic discontent, and a careful analysis of the apportionment of the "national dividend" affords a key to the current problems of living costs. If an increased proportion of the social income finds its way into the pockets of fortunate individuals and favored classes of society, other persons and groups must suffer a relative decrease in purchasing power. Since all buy in the same market, a part of the population possesses an increased proportion of cash to the prices which must be paid, and the exchequers of the less fortunate are inversely affected. In other words, persons identified with one economic class may experience an actual decrease in their cost of living, despite rising prices, while others must carry an increased burden, and, possibly, a third group may be affected not at all.

Space forbids an analytic treatment of the factors which have contributed to the unusual price movement of the last twelve years; they include such industrial and social phenomena as have affected the relative supply of and demand for the standard metal, on the one hand, and the supply of and demand for the things which make up a living on the other. That the unprecedented increase of the gold supply is a potent factor can not be denied; that there are other factors of equivalent significance is quite certain. Among the latter, are such socio-economic tendencies as effect a relative or per capita decline in the annual supply of the necessities and comforts of life and a consequent increased social cost of production, as well as an advanced scale of prices.

The following may be properly enumerated as characteristic attributes of social and industrial evolution which may contribute to changing costs:

First. Over-intensity of industry, nationally considered, thus passing the "summit" of maximum per capita productivity.
Second. Aspiration to ultra-standards of living, thus stimulating consumption regardless of productive efficiency.
Third. Centralization of industrial and commercial control resulting in suppressed output and monopoly-price.
Fourth. The accumulation of private fortunes and the consequent appearance of a leisure class and its concomitant of unsocial labor, capital and natural resources.

Among the above causes of changing values, there are certain items which exert a noteworthy influence in the readjustment of fundamental costs and incomes which is vastly more important than any question of prices. There are statistical data of unquestioned reliability which clearly demonstrate the course, although they do not afford an exact measure of the extent, of important kaleidoscopic changes in the distribution of income and the coextensive shifting of economic benefits among different classes of the population. It is this arbitrary shifting of cost-burdens, coincident with recent price fluctuations, that accounts for the prevailing outcry against advancing costs of living. Naturally, individuals and groups who fare badly in the process of pecuniary readjustment are prone to complain, and those who account an accelerating balance of income over costs are sanguine.

Whether the United States has reached or passed the industrial condition of maximum per capita productivity is a mooted question; some who have given much study to the problem of production are inclined to support an affirmative conclusion. That the multiplication of population and the exhaustion of natural resources have carried certain nations of Europe and Asia beyond the summit of production is well known. The Malthusian principle is inexorable, and when population threatens to overrun the natural springs of subsistence, the normal resultant is a scale of high prices and the exaction of excessive industrial costs in exchange for the means of living. Whatever may be the present relation of population to productivity in the United States, the cosmopolitan nature of modern trade and the fact that other countries have amassed populations in excess of their means to provide an average of comfortable living, have potential significance in problems of costs and subsistence. The further observation that the migration spillway of Europe conveys the surplus increment of prolific and improvident races to the United States at a rate of half a million a year, to be nurtured by "high-tariff wages" and the "fruits of abundant resources," suggests a factor of no mean proportions among the determinants of costs of living in America.

Advancing standards of living are properly considered as indicative of social progress; but economic limitations of social evolution are omnipresent, and there is good reason to believe that current price movements portend an imminent check to the development and satisfaction of extravagant social desires. Collectively and individually, we are living better than ever before. We are working shorter hours, occupying better homes and cleaner cities, wearing better clothing, eating better food and being better educated—not only is this true of the wealthy and well-to-do, but of the poor and the indigent as well. But this rational form of "consuming-power" should not be confused with improvidence, or what has been associated in some minds with the alleged engulfing "cost of high living." Eational standards of living are justified by coextensive industrial efficiency. Progressive well-being tends to affect consumption and production in direct proportion; indeed, the stimulus to increased production normally exceeds the desire to spend, and no lasting influence towards advancing prices or costs results. If, however, expenditures are permitted to infringe upon the capital of the country, or of any particular group of the population, or even upon the rate of accumulation of savings, the effect on prices and costs will be immediate.

The centralization of industrial control, resulting in "wide-scale" enterprise and exclusive "occupation of the field," tends to eliminate output and advance costs. It makes little difference whether the differential advantage of centralization is of the nature of special privilege or superior efficiency of organization. In either case, industrial rivalry is forced from the field and, in the absence of official restraint, the exaction of monopoly charges is inevitable. The consequent shifting of the incidence of industrial returns may be ascertained by enumerating the respective beneficiaries and exploitees of the profit-taking process—the trade advantages of the one class measure the economic disability of the other class; and the attenuation of the incomes of the less favored, as a means to augment the profits of the more favored, is a significant attribute of changing social costs.

By the grace of strategic advantages of occupation and centralization, persons deriving incomes through proprietorship in relatively highly organized and capitalized industry are the recipients of differential gains which tend always to transcend price increments. Such persons are secure in the realization of a progressive ratio of purchasing power to prices. The so-called industrial and transportation trusts, the banking rings and investment pools, the labor unions and cooperative societies, and the associations of commission men and retail merchants are simply concerned in seeking to acquire the advantages of exclusion and organization. In each instance, united action for the elimination of waste and competition is the initial motive. "Cooperative efficiency in production" is the shibboleth of industrial organization; but one seldom fails to observe the tendency to a gradual metamorphosis of successful "cooperation" into monopoly, and the simultaneous exchange of the ideal of efficiency in production for the slogan of ability in acquisition.

Economically considered, America has, until recently, been thoroughly democratic; that is to say, despite tendencies to social class and caste, the population has shared without essential discrimination in industry and production. But in late years possessors of the great fortunes which have been in the building for a half-century have begun seriously to devote themselves to leisure. In so doing, they have not only subtracted their own energies from the productive forces of the country, but they have increased their sumptuary demands and have alienated a host of laborers and a vast capital from the production of the necessities and comforts of plain living in order that a few may indulge an epicurean taste for the costly objects of vain and selfish desire. This tendency to luxury is leading students of market and industrial conditions to characterize the high bidding of wealthy and profligate spenders and of their improvident imitators as a significant cause of high prices; but a deeper analysis reveals the more vital phenomenon of intensified social costs attendant upon a relative reduction of the effective labor power of society and the subversion of a considerable part of the nation's capital. In this very dynamic aspect of modern life, one observes a tremendous increase in demand for the costly and enervating indulgencies of conspicuous expenditure and a more than proportionate decrease in the productive powers which contribute to the synchronous supply of the staples of life. Here, indeed, resides a fundamental problem in national cost accounting. The passing of the millionaire captains of exploitation and industry is imminent, and there is no more disconcerting contingency in the nation's future than the probable succession of a less hardy and energetic generation to their proprietary trusteeship of the country's wealth.

Price changes, which may be traced to an increased gold supply and the consequent depreciation of the dollar, react upon the cost of living only as certain reciprocal advantages and disadvantages are shifted among persons whose money incomes rest upon actual or implied contractural relations extending over the period of price change. For this reason, advancing prices are peculiarly advantageous to the debtor class, composed mainly of bonded business corporations, virtually discounting their obligations at an annual rate commensurate with the increase in prices. It is likewise obvious that expected returns to creditors and investors on securities bearing fixed rates of income are proportionately reduced. Wage earners and salaried persons are subject to a like disadvantage. Wage and salary scales are not readily readjusted and, especially, in their upward movements, show a considerable "lag" behind prices. Because of the prevalence of a customary charge for many forms of professional service, such professions as medicine, dentistry and law may fail to command an increase in income sufficient to keep pace with advancing prices.

To avoid the popular error of attributing an increased cost of living to all persons under a regime of rising prices, and to reveal the actual effect of prices on costs, it is necessary to determine whether the majority of the population is included among those whose incomes have failed to respond to advanced charges or among the beneficiaries of high prices.

In the less fortunate class, which undoubtedly carries an increased burden of living costs, may be enumerated the following: (1) investors in fixed-income securities such as mortgages, bonds and life insurance; (2) unorganized wage earners; (3) salaried persons; (4) members of most professions; (5) proprietors of small-scale industrial and commercial enterprises; (6) middle-men and tradesmen not sufficiently organized to advance and maintain their charges coextensively with price movements.

In the more fortunate class, whose incomes bear a progressive ratio to prices and whose cost changes are, therefore, inversely proportional to price movements, we may expect to find: (1) proprietors of mortgaged and bond-issuing commercial and industrial enterprises; (2) proprietors of highly capitalized and centralized industries not subject to public control; (3) employers of unorganized labor and salaried persons; (4) members of highly organized trades and occupations; (5) grantees of public-service privileges whose net earnings support an advance in "franchise values" during the period; (6) proprietors of natural resources and recipients of tariff protection so circumstanced as to advance prices at will through a monopolistic control of supply.

There is an intermediate zone of economic condition which is practically free from the characteristic attributes described above. This neutral condition may be attributed to those whose incomes and expenditures are alike correlated with current prices, and is doubtless realized by a much larger proportion of the population than may at first appear. Many persons are so identified in their business interests with both characteristic groups as to realize no net change as a result of the advantage of either. Moreover, in so far as business is subject to competitive self-regulation and to reasonable official regulation, there may be a wearing away of economic inequalities of changing prices and a constant recruiting to the normal average of welfare.

The chief consideration involved in the question of prices and the cost of living is not the numerical measure of price changes nor the aggregate number of persons affected thereby; but rather the changing incidence of the burdens of life upon individuals and classes, and the logical results of disturbed economic stress upon the social structure.

  1. "Income" is here used in the sense of periodically accruing purchasing-power.