Front Page Titles (by Subject) VII - Cost of Production and Price Over Long and Short Periods
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VII - Frank H. Knight, “Cost of Production and Price Over Long and Short Periods” 
Journal of Political Economy, April 1921, xxix, no. 4, pp. 304-335.
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The main conclusion which we have attempted in this paper to establish is that decreasing cost with increasing output is a condition incompatible with stable competition in the industry. A significant degree of the phenomenon is probably rare outside of industries which are both naturally monopolistic and greatly overbuilt in speculative anticipation of future growth in demand. The significance of fluctuations also is sure to be greatly overestimated. The effective physical mobility of capital and labor, considered as physical productive power, is probably great enough in our society to make possible a very close adjustment of production to demand under ordinary conditions. The changes which upset business relations and throw costs and prices out of correspondence are price phenomena, and are due to miscalculated speculative contracts and to changes in the value of the circulating medium. They affect business as a whole rather than the relations between different industries. Productive services as a class tend to be undervalued or overvalued relatively to finished goods. When the latter condition arises, industry has to stop and readjust itself, for under competition a business cannot operate unless it makes a pecuniary profit.
An error very different from that of treating price-determining cost as a decreasing function of output, but not unconnected with it and very common, is the exaggeration of the economy of large-scale production and our highly organized industrial system as a whole. A spectacular saving is effected in certain operations, such as spinning and weaving; even when the labor which makes and maintains the equipment is considered, it is very large. But to make that saving possible large organizations must exist and the cost of internal cohesion in large groups of men is very high. Material must be collected and goods distributed over a wide area and the incredibly wasteful methods of purchase and sale are the best so far devised. There is much food for reflection in the smallness of the difference in cost between a tailor-made and a factory-made suit of clothes and the fact that the housewife who does her own sewing can often make higher wages than are paid to her sister for making the garments by "modern" methods.
F. H. Knight
State University of Iowa