Discussion of Costs Resumed

Partial Accounting: Another spurious “cost” often used as a basis for policy appears as a result of partial accounting. An urban public transport service might be reduced or eliminated on the grounds that the costs of the service are nowhere near covered by passenger fares, and that costs can be reduced and the nation or city thereby enriched by cutting the service.

The error here is that all that is taken into account is the money laid out by the government on the service. This money comes from the community by way of taxes. These taxes would reduce if the service were withdrawn, but other costs to the community would increase if the buses or trains stopped running.

These costs are, for example:

  • The increased depletion rate of fossil fuel resulting from increased use of cars.
  • The increased money cost of cars being run more than they would otherwise be.
  • Upward pressure on wages because car ownership and use has become that much more obligatory.
  • Downward pressure on employment, particularly at the lower skill levels, caused by the upward pressure on wages.
  • Increased resource consumption and money outlay associated with more frequent repair and more extensive building of roads and car parks.

A public transport service described as “uneconomic” because fare revenue falls short of money outlay is probably far more economic than the real alternative to running it.

A better answer to the money-losing problem of the service would be to make it more expensive in cash, and more difficult to bring private cars into high-density central business districts. This could be done by levying a large tax on petrol; restricting car parks in the high density areas, and increasing fees for their use; giving buses priority lanes on some roads in the district and right-of-way in all parts of the district. The patronage for public transport would be boosted while fares could still be increased. The greatly increased use of public transport would reduce costs for the whole community by reducing resource depletion and private and public money outlays, relieve upward pressure on wages, and thereby save jobs.

One might argue that the increased money expense of private motoring into the high-density area would result in upward pressure on wages and downward pressure on employment. But obviously in this case people would have a choice – to use public transport instead. If public transport is eliminated, there is no choice but increased use of private cars.

Transference of Throughput

Another error related to partial accounting arises when throughput is transferred from one part of the economy to another with little or no net change in throughput, but only the throughput “debit” to one part of the economy is recorded as a so-called “cost” to the whole without taking account of the “credit” to the other part of the economy.

An example of this is the holding of an election. Much money is spent on campaigning, advertising, salaries for electoral officers, ballot papers, and so on. If as often happens in some countries, an election is called ahead of time to give the party in power some advantage, the opposition makes an issue out of the supposed “costs” of the election to the country. The entire money outlay associated with the election is described as a cost to the taxpayer. In fact all that is happening is a transfer of throughput from some economic channels to others.

The effect on total throughput is indirect and may be to increase or decrease it, according to whether the transfer worsens or alleviates any ratio distortion that may exist. During the Great Depression the holding of an election every three months might have been beneficial to economic activity.

There may be no actual cost involved in the election, in terms of extra resource depletion. The extra resource throughput during the elction will be counterbalanced by slower throughput in other areas from which throughput was transferred.

Summary

Any net depletion of resources is a cost. An episode of activity that depletes resources less than an alternative episode is less costly than the alternative.

Any reduction in throughput rate, or suspension of throughput in any part of the economy, is a gain, not a cost.

Exchange of money between one part of the economy and another is a loss of throughput to one and a gain to the other. It is not in itself a cost to the economy as a whole. It may result in an increase or decrease in the total throughput rate of the economy, depending on the effect, if any, on the relative proportions of money flowing through different economic channels. Thus the original exchange may directly lead to a cost (increased throughput of resources that either starts or accelerates their depletion) or a gain (reduced throughput) to the economy as a whole. Note the contradiction to current thinking in the last sentence.

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