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