CHAPTER IV.

INVESTMENT OF RESOURCES FOR A DISTANT RETURN. PRIME COST AND TOTAL COST.

capital.

§ 1. LET us suppose a man to build a house for himself on Motives deter- land, and of materials, which Nature supplies mining the ingratis, and to make his implements as he goes; vestment of the labour of making them being counted as part of the labour of building the house. He would have to estimate the efforts required for building on any proposed plan; and to allow almost instinctively an amount increasing in geometrical proportion (a sort of compound interest) for the period that would elapse between each effort and the time when the house would be ready for his use. The utility of the house to him when finished would have to compensate him not only for the efforts, but for the waitings'.

This case illustrates the way in which the efforts and sacrifices which are the Real cost of production of a thing, underlie the expenses which are its Money cost. But the modern business man commonly takes the payments which he has to make, whether for wages or raw material, as he finds them; without staying to inquire how far they are an accurate measure of the efforts and sacrifices to which they correspond. His expenditure is generally made piece-meal; and the longer he expects to wait for the fruit of any outlay, the richer must that fruit be in order to compensate him. The anticipated fruit may not be certain; and in that case he will have to allow for the risk of failure. After making that allowance,

1 See above Book IV. Ch. VIII. § 6.

the fruit of the outlay must be expected to exceed the outlay itself by an amount which, independently of his own remuneration, increases at compound interest in proportion to the time of waiting'.

§ 2. At the beginning of a business an estimate is made of the profits likely to be earned in it. The The Law of undertaker is continually comparing the efficiency Substitution. and the supply prices of different factors of production which may be used in obtaining the same result, so as to hit upon that combination which will give the largest incomings in proportion to any given outlay; or, in other words, he is ceaselessly occupied with the Law of Substitution".

chosen in ob

Every locality has incidents of its own which affect in various ways the methods of arrangement of every class of business that is carried on in it. But even in the same place and the same trade no two persons pursuing the same aims will adopt exactly the same routes. The tendency Different to variation is a factor of progress; and the abler routes are are the undertakers in any trade the more power- taining the ful is this factor likely to be. In some trades, same end. as for instance cotton-spinning, the possible variations are confined within narrow limits: no one can hold his own at all who does not use machinery, and very nearly the latest machinery, for every part of the work. But in others, as for instance in some branches of the wood and metal trades, in farming, and in shopkeeping there can be great variations. For instance, of two manufacturers in the same trade, one will perhaps have a larger wages bill and the other heavier charges on account of machinery; of two retail dealers one will have a larger capital locked up in stock, and the other will spend more on advertisements and other means of building up the immaterial capital of a profitable trade connection. And in

1 The analysis indicated in this Section is worked out fully in Principles V. IV. 1, 2.

2 Book V. Ch. III. § 3.

minor details the variations are numberless. Each man's actions are influenced by his special opportunities and resources, as well as by his temperament and his associations.

But each man, taking account of his own means, will push the investment of capital in his business in each several direction until what appears in his judgment to be the margin The margin of of profitableness is reached; that is, until there profitableness. seems to him no good reason for thinking that the gains resulting from any further investment in that particular direction would compensate him for his outlay. The margin of profitableness is not to be regarded as a mere point on any one fixed line of possible investment; but as a boundary line of irregular shape cutting one after another every possible line of investment.

§ 3. When investing his capital in providing the means of carrying on a business, the undertaker looks to being recouped by the price obtained for its various products; and he expects to be able under normal conditions to charge for each of them a price that will cover not only its (Money) Special, Direct or PRIME COST; i.e. expenses which he

Prime Cost.
Supplemen-

tary and Total
Cost.

incurs directly and specially for it, but also a share of the general expenses of the business, which we may call its SUPPLEMENTARY COST. These two elements together make its (Money) TOTAL COST. The term Prime Cost is used in different ways in different businesses. But it will be best to take it here in a rather narrow sense, which includes nothing but the (money) cost of the raw material used in making the commodity and the wages of that part of the labour spent on it which is paid by the day or the week. The salaries of the upper employés are excluded, partly because the time which they have devoted specially to it cannot always be easily ascertained, and partly because the charges to which the business is put on account of their salaries cannot be adapted quickly to changes in the amount of work there is for them to do.

This is the Prime cost which a manufacturer has commonly in view when, trade being slack, he is calculating the lowest price at which it would be worth his while to accept an order, irrespectively of any effect that his action might have in spoiling the market for future orders. In trades which use very expensive plant, the Supplementary cost of goods is a large part of their Total cost; and an order at much less than their normal price may leave a large surplus above their direct, special or Prime cost.

But, as will be more clearly seen in the next Chapter, every class of business must afford, in the long run, prices that cover the Supplementary as well as the Prime costs of the things produced by it; otherwise capital and labour will tend to leave the trade. And the income which in the long run covers Supplementary costs, and thus enters into normal Profits, will be found to have some resemblance to Rent for problems that deal only with short periods.

CHAPTER V.

EQUILIBRIUM OF NORMAL DEMAND AND SUPPLY, CON

TINUED. THE TERM NORMAL WITH

LONG AND SHORT PERIODS.

REFERENCE TO

§ 1. WHEN it is said that the price of wool on a certain day was abnormally high though the average price for the year was abnormally low, that the wages of coal-miners were abnormally high in 1872 and abnormally low in 1879, that the

Elasticity of

the term normal.

(real) wages of labour were abnormally high at the end of the fourteenth century, and abnormally low in the middle of the sixteenth, everyone understands that the scope of the term normal is not the same in these various cases,

But though applications of the term Normal are thus Long and short elastic', and capable of being extended gradually period normal from very short to very long periods; yet these prices. periods may be divided roughly into two classes. In the first class there is time for the supply of those things which are used in producing the commodity (or in other words, its factors of production), to adapt itself to the demand; in the second class there is not.

1 Compare above Book 1. Ch. VI. § 5. The economist merely brings to light difficulties that are latent in the common discourse of life, so that by being frankly faced they may be thoroughly overcome. For in ordinary life it is customary to use the word Normal in different senses, with reference to different periods of time; and to leave the context to explain the transition from one to another. The economist follows this practice of every day life: but, by taking pains to indicate this transition, he sometimes seems to have created a complexity, which in fact he has only revealed.