Abstract
In December 1923, Clark published his Studies in the Economics of Overhead Costs.1 His interest in the nature of costs was first seen during graduate work at Columbia University, especially with his dissertation Standards of Reasonableness in Local Freight Discriminations (1910).2 In order to better understand the genesis and framework of Overhead Costs, it is necessary to examine Clark’s dissertation.
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Notes and References
Published by The University of Chicago Press, it remained in print for fifty years.
Ibid. Clark’s Master’s Essay foreshadowed the dissertation: “A Study of the Principles of Railway Rate-Making, with a view to ascertaining the possibility of establishing correct rates” (Unpublished Master’s thesis, Department of Economics, Columbia University, 1906). See also Chapter 1, above, for further background on his interest in the problem of railroads.
Standards of Reasonableness, 19.
Ibid., 20.
Ibid., 21. It could be asked whether the basic industries, transport, and wholesale and retail industries were, in this regard, fundamentally different from the railway sector. If not, they too could exert a similar power over the economy. In this context, it is not difficult to understand Clark’s interest in the social control of business enterprise.
See below. Clark refers to this as the gradual “discovery” of overhead costs.
Clark notes that Francis A. Walker made a similar distinction in the United States, and that Dionysius Lardner also distinguished fixed and variable expenses in his Railway Economy (1855).
Standards of Reasonableness, 24 (emphasis supplied).
Marshall later preferred the terms “common” or “allied” costs. “When two things, say locomotives and stationary engines, are made in the same works, and in a great measure by the same labour and plant, it is often said that their costs are ‘joint’; but, this term has a special historical association with groups of things, such as wheat and straw, which cannot be produced separately and it seems better to speak of such groups as having ‘common’ or ‘allied’ costs.” See his Industry and Trade (London: Macmillan, 1920), 193. Clark reviewed this volume in 1921; his copy was heavily marked.
In Overhead Costs, Clark indicated that he now preferred to use “joint cost” in the strict sense, as Marshall had done. Clark instead used “overhead costs” in a generic sense. See Overhead Costs, 58–59.
A.C. Pigou subsequently joined the debate (May, August 1913).
Standards of Reasonableness, 28–29; chapter 2. See also Overhead Costs, 58–59.
Standards of Reasonableness, 30. “Special” costs are, today, variable costs. In a modern formulation: “the optimal contribution to overhead will vary with the operating rate; actual pricing behavior looks not only to the short-run cost curves, but also reflects the relationship between the existing capital stock and the current rate of production.” See Otto Eckstein and Gary Fromm, “The Price Equation,” American Economic Review, 58 (December 1968), 1163.
Standards of Reasonableness, 40–41 (emphasis supplied).
Ibid., 41. Other portions of the dissertation will be considered in the next chapter on the social control of business.
Overhead Costs, ix, 1.
Overhead Costs, 90–91. George Stigler, for example, preferred to define capacity output as that output at which short-run marginal cost equals long-run marginal cost. See Stigler’s The Theory of Price, 3rd ed. (New York: Macmillan, 1966), 156–158. On the influence of scale, Clark shifted his emphasis further in his last book, Competition as a Dynamic Process. Here he wrote: The shape of the long-run cost curve, as presented in [orthodox] theory, becomes an issue because certain theories hinge on the use of a U-shaped curve with a definite optimum scale of production, and a curvature such that departures from this optimum in either direction entail materially increased costs. This is contrary to the limited available evidence, which seems typically to indicate no clearly marked and precise optimum scale of production. … the curve seems typically to flatten out over most of its length; and most of the productive capacity seems to be spread over a range in which.… trends traceable to scale of production are too small to be of controlling effect. See 60, and 58–59. (Emphasis supplied).
Overhead Costs, 1–2 (emphasis supplied). Morris A. Copeland, a student of Clark’s, put the matter in the following words: “A good deal of what has been written about the theory of the firm has assumed … two conditions that were closely approximated … [under the putting- out system]: zero costs when production is zero; and with only one product, no costs except those directly attributable to producing that product. When Clark spoke of the ‘gradual discovery of overhead costs’ he had in mind partly that we have come gradually to recognize the need to waive these two assumptions. But he had in mind also that as the domestic system has been replaced by highly integrated businesses with large capital investments, fixed and overhead costs have become more and more important.” See his Our Free Enterprise Economy (New York: Macmillan, 1965), 144–145.
Overhead Costs, 107. Adams helped found the American Economic Association and was the first statistician for the Interstate Commerce Commission. See Dorfman, Economic Mind, III, esp. 164— 174, passim. For a contemporary view of the “geometrical progression,” see Jay M. Gould, The Technical Elite (New York: Kelley, 1966).
“The traditional version of the classical theory of the firm calls for no direct influence of the size of the capital stock on short-run, profit-maximizing, price-output decisions; the capital stock makes itself felt through the short-run cost curve.” See Eckstein and Fromm, “The Price Equation,” 1163.
Overhead Costs, 2.
Economics (1896), 151–154. Quoted in Overhead Costs, 12. Hadley’s volume was one of the texts used by Clark as an undergraduate. On Hadley see Dorfman, Economic Mind, III, 259–264.
Overhead Costs, 13.
Ibid.
Ibid., 17–18.
Ibid., 18–19 (emphasis added).
The combination of technological exigencies and fluctuations in demand characteristically result in excess capacity in the industrial system, in Clark’s view. These fluctuations in demand are the usual state of affairs, however, and are not to be thought of as only originating with business depressions; except in so far as business fluctuations are thought to be the usual state of affairs. Thus E.H. Chamberlin, for instance, missed the mark when he wrote that Clark “is concerned, for the most part… with the phenomena of the business cycle …” See The Theory of Monopolistic Competition (Cambridge, Mass.: Harvard University Press, 1956 [1933], 109.
A loss in the sense of an opportunity cost. Clark referred to H.J. Davenport’s use of the term “opportunity cost” in The Economics of Enterprise (1913). Overhead Costs, 49.
Overhead Costs, 416.
Ibid., 433 (emphasis supplied).
Ibid., 417. Joan Robinson, for instance, gives a summary of the standard view: “Under conditions of perfect competition price discrimination could not exist even if the market could be easily divided into separate parts. … But if there is some degree of market imperfection there can be some degree of discrimination.” The Economics of Imperfect Competition (London: Macmillan, 1954 [1933]), 179, 180.
Ibid., 24, 417–418.
“ ‘Administered Prices’ in their Relation to Competition and Monopoly,” in Administered Prices: A Compendium on Public Policy, Subcommittee on Antitrust and Monopoly, Committee on the Judiciary, U.S. Senate, 88th Congress, 1st session (Washington, D.C.: U.S. Government Printing Office), 90–91 (emphasis added). While to Clark differences in quality, brands and so on were part of the competitive structure, to E.H. Chamberlin they were indicative of “monopolistic competition.” Chamberlin also wrote: “Large numbers are a sufficient requirement for the market to produce competitive results [one price], without retarded action or any other type of imperfection.” See his Monopolistic Competition, 49–50. Clark’s interest in product quality persisted throughout his life. At least one of his Ph.D. students did a dissertation on the subject. See Lawrence Abbott, Quality and Competition: An Essay in Economic Theory (New York: Columbia University Press, 1955). Eckstein and Fromm noted: “some elements of locational or product differentiation attach to the sales of most companies in sufficient degree to create some uncertainty in pricing. When operating rates are high, a firm can feel more confident that an increase in price will not be able to establish new supply connections and will therefore be more likely to pay the higher prices.” Eckstein and Fromm, “The Price Equation”, 1163–64.
Overhead Costs, 419–420.
Clark pointed here to Jacob Viner’s Dumping: A Problem in International Trade (Chicago: The University of Chicago Press, 1923).
Ibid., 424. Further work by Clark on the basing point system will be considered below in Chapter 5.
Ibid., 431–432.
Ibid., 432–433.
Overhead Costs, 434–435.
Ibid., 140.
Ibid., 142, 147.
Ibid., 144–146.
Ibid., 444. Clark pointed here to the elder Clark’s The Control of Trusts (1901) which contained “an early discussion of the force of potential competition.”
Ibid., 445 (emphasis supplied).
Ibid., 445–446; 447.
Ibid., 156–157, 166, 386. Clark illustrated: “It would typically be more expensive to run a plant where the output constantly fluctuated between 60 per cent and 120 per cent of its normal capacity than to run steadily at about 90 per cent.” Ibid., 94.
In a note, Clark wrote: “If the reader wishes to make a thorough study of this subject, he cannot adopt a better guide than W.C. Mitchell’s Business Cycles. This book not only marks an epoch in the study of the business cycle but is a landmark in the progress of inductive methods of economic study.” Overhead Costs, 386, 387. Clark first met Mitchell in 1913. Mitchell’s influence on Clark is also discussed below. See the “Memorial Address” by Clark in Wesley Clair Mitchell: The Economic Scientist, edited by A.F. Burns (New York: National Bureau of Economic Research, 1952), 140.
“Business Acceleration and the Law of Demand: A Technical Factor in Economic Cycles,” Journal of Political Economy 25:3 (March 1917), 217–235; reprinted in Preface to Social Economics, 327–354 (which includes an additional note by Clark in 1936).
Overhead Costs, 389. “Clark became explicit on the acceleration principle in good part through his reading of Wesley C. Mitchell’s Business Cycles (1913). In a letter to Mitchell, 24 January 1915, Clark wrote that the book had helped him in the analysis of why costs vary and the true order of events as shown by the figures. Mitchell, in turn, accepted Clark’s principle as one of the strands in his own later discussion of how prosperity brings a recession.” Joseph Dorfman, Economic Mind, V, 452.
Overhead Costs, 390–393; “Business Acceleration,” in Preface to Social Economics, 330–334. Clark mentioned most of the now familiar qualifications and restrictions: time required to produce equipment; limited capacity of producers’ goods industry; varying rates of depreciation; producers’ expectations; size of inventories; role of autonomous investment; changes in the capital-output ratio; and so forth. These assumptions were further clarified in response to criticism by Simon Kuznets and others. See “Additional Note on ‘Business Acceleration and the Law of Demand’” in Preface to Social Economics, 349–354. For additional references to the acceleration principle, see Readings in Business Cycle Theory, edited by Gottfried Haberler, et al. (Homewood, Ill.: Irwin, 1951), 460–462.
Overhead Costs, 396–397; 400–401.
Ibid., 398–399.
Ibid., 26.
Ibid., 27, (emphasis supplied).
Ibid.
Ibid., 32, (emphasis supplied).
For a stimulating account of the shifting of business costs onto third parties and society at large, see K. William Kapp, The Social Costs of Private Enterprise (New York: Schocken, 1971 [1950]). The volume is explicitly indebted to Clark’s works; Clark read portions of the manuscript.
Overhead Costs, 28–29.
Ibid., 29.
Competition as a Dynamic Process, 435–438. In 1946, Clark noted in a letter: “I have not read it [Overhead Costs] myself for many years, but I seem to recall that I expressed more confidence in flexible pricing as a means of insuring full employment than I would be inclined to feel at the present time.” Clark to Paul A. Samuelson, 4 October 1946. Copy in J.M. Clark Papers.
Overhead Costs, 29.
Ibid., 408.
“Some Social Aspects of Overhead Costs,” The American Economic Review (Supplement) 13 (March 1923), 50–59. Here Clark went much further than the proposal made by Edward A. Ross in 1918 that workers should be given only two weeks severance pay. See Edward Alsworth Ross, “A Legal Dismissal Wage,” The American Economic Review, Supplement, 9 (March 1919): 132–136.
Overhead Costs, 370. On labor as a supplementary (fixed) cost, see Alfred Marshall, Principles, 360–361.
Overhead Costs, 372.
Ibid., 156–157.
Ibid., 365–366.
Ibid., 31–32.
Ibid., 30.
Ibid., 410.
Clark wrote Wicksteed in 1915 that he had a geometric proof of Euler’s theorem. But Wicksteed’s response to Clark, dated 14 February 1916, indicated that Wicksteed no longer considered the marginal productivity theory a sufficient explanation of distribution. See Joseph Dorfman, “Wicksteed’s Recantation of the Marginal Productivity Theory,” Economica, New Series, 31 (August 1964), 294–295. Clark’s proof is in the J.M. Clark Papers.
Overhead Costs, 413–411. In his review of Clark’s book, F.Y. Edgeworth continued his questioning of Euler’s Theorem by devoting most of his comments to criticism of Clark’s position that “If all costs were variable… the sum of the marginal products of the different factors … (each multiplied by the amount of the factor) would always equal the whole product.” (Ibid., 471–472). Edgeworth wrote: No doubt there is a point of view from which, the entrepreneur’s service being regarded as a factor of production and his remuneration as a portion of the cost, the… statement is admissible … But here, where we are considering an entrepreneur or Directorate marshalling the factors of production so as to realise the greatest possible difference between the produce of those factors and their cost, it would not be proper to treat that difference as an element of the subtrahend cost. See his review in the Economic Journal, 35 (June 1925), 245–251.
Overhead Costs, 479, (emphasis supplied).
“The Uses of Diversity: Competitive Bearings of Diversities in Cost and Demand Functions,” The American Economic Review, Supplement, 48 (May): 476; emphasis supplied.
In the Spring of 1918, Clark began teaching a course in the Social Control of Business at Chicago.
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© 1997 Laurence Shute
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Shute, L. (1997). The Emergence of Overhead Costs. In: John Maurice Clark. Contemporary Economists. Palgrave Macmillan, London. https://doi.org/10.1007/978-1-349-25579-5_3
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