The argument itself falls into seven theses, which may be condensed as follows:
I. While increased output in general may or may not bring economy, "off-peak" business nearly always does; its "differential cost" is extremely low, and an increase in this class of business brings substantially no increase in interest, depreciation, and many expenses of operation.
II. Efficiency requires putting any "idle overhead" (unused capacity) to work, whenever the product is worth its differential or variable cost.
III. The apparent volume of variable costs in industry is deceptive, on account of what may be called the "shifting and conversion of overhead costs." The cost of steel to the purchaser is a "variable charge" of so much per ton, but the cost of producing the same steel may be largely constant, regardless of output. This is a typical case. The process may be reversed, and variable costs may be converted into constant, though far less frequently. In either case the discrepancy between real and apparent costs may give rise to waste.
IV. The amount and behavior of overhead costs borne by any one business depends on the kind of contracts it makes in buying and selling, and therefore is "a matter of human institution," alterable by agreement and subject to control.
V. Most of the costs of industry are constant, with reference to the business cycle. Where the alternative is idleness, the differential costs properly chargeable to additional output are next to nothing.
VI. There are some costs and damages which industry is not required to compensate at all, and a complete social accounting must include these as a form of "unabsorbed burden." The amount of this burden is to some extent subject to control by the community, which has it in its power to improve the allocation of its overhead costs.
VII. In the interests of collective efficiency, the costs of industry should be laid, either upon those responsible, or upon whatever persons and in whatever ways may best serve as incentives to economize those costs and utilize to the utmost the potential values resulting. This calls for important changes in the customary forms of financial obligations.
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Sunday, October 9, 2011
From J.M. Clark's "Some Social Aspects: An Application of Overhead Cost to Social Accounting"
The following is the summary John Maurice Clark presented in his 1923 paper, presented to the thirty-fifth annual meeting of the American Economic Association.
Posted by Sandwichman at 2:18 PM