he very essence of
good management. Here, it will be observed, we are using language very
similar to that in which we described the principles which govern a
business man's expenditure. The resemblance is inevitable and
significant, for we are dealing here with what is essentially another
aspect of the same thing. The object is to secure that nowhere does
expenditure fail to yield a commensurate return. This we express, when
we consider a business in its aspect as a consumer, by saying that its
consumption of anything will not be carried beyond the point at which
the marginal utility exceeds the price it will have to pay. When we
consider it as a producer, we say that its production of anything will
not be carried beyond the point at which the marginal cost exceeds the
price it will obtain.
Sec.3. _The Dangers of Ignoring the Margin_. This at least is the general
rule. A business may decide deliberately to sell part of its output
below cost, because, for instance, this will serve as an
advertisement, bring it connections, and enable it to obtain a larger
profit at a later date, or immediately on other portions of its
sales. In so acting, it recognizes that the price obtained for a thing
may be an inadequate measure of the real return it yields. In the same
way, though for different reasons, a nationalized coal industry might
conceivably be justified in selling some coal below cost price,
because, let us say, it held that the price which the immediate
purchasers were willing to pay was an inadequate measure of the
utility of coal to the community as a whole. But in all such cases it
is essential to be very clear as to what exactly you are doing; so
that you may be at least moderately clear as to whether the policy is
well advised. It may be sound enough to lose on the swings and make
good this loss on the roundabouts, but only if your loss on the swings
_helps_ you to a larger profit on the roundabouts. If you would get
the same return on the roundabouts in any case, it would be better to
cut the swings out altogether. So, if you are directing the policy of
a nationalized coal industry, and decide to make a loss on a portion
of your sales, you will need to know that the indirect benefit which
the community will derive from this particular part of your coal
output is worth the loss which you incur. You will certainly come to
grief, if you pursue a vague ideal of lumping all results together,
and regarding a profit som
|