The Cost Theories (continued). Interest as an Element of Cost In calculating the cost value of his products every undertaker, in addition to the value of the capital consumed, includes interest upon the whole capital sunk and bound up in the production, even on that which remains unconsumed, for the period during which the capital must remain sunk. It is a matter of familiar observation that the exchange value of products, in so far as it is influenced by costs, expresses also the interest thus calculated. If the production of one article costs merely labour and circulating capital, while that of another requires, in addition to the same expenditure of labour and circulating capital, a large outlay of fixed capital, the second product (neglecting, of course, the quota for amortisation) will be considered the more valuable by the interest on the whole fixed capital. The question now arises whether we have, in this circumstance also, a phenomenon of natural value; whether it is in the interest of society generally, or merely in that of the individual undertaker, that interest should be calculated among costs, and whether this principle would require to be observed in the communistic state also.
There is something that strikes one as peculiar in the idea of including interest among costs. Torrens' objection is well known. Interest, he says, is profit, and must first be earned through production as the surplus of return over costs. Thus it is impossible to reckon it among costs.
From the point of terminology Torrens' objection is certainly justified. If we wish, on the one hand, to fix the net return, we shall not impute interest to costs, but if, on the other hand, we are seeking for the cost value of products, interest must be included. In these two cases the term "costs" is used in an entirely different sense. And this is an error in so far as the double meaning remains unnoticed, and is, in any case, a misfortune, whether noticed or not. It would be better to have a second name for the second use of the term.
When we put the name on one side, and examine the actual matter of Torrens' objection, we come to a different conclusion.
Here the objection entirely breaks down. It proves too much. It is not only interest that is derived from the return and its value, but the value of capital itself. Torrens' argument expanded runs thus: -- the value of products is first; interest, capital value, the value of production goods generally, second.
Right enough up to this point we have come to the same conclusion, and argued from it that production goods have, as against products, no independent power to create value. On the other hand, we have acknowledged that they do possess the power to equalise the value of products. In virtue of this power, and of no higher one, do they influence cost value generally, and this power cannot be denied to interest, on account of its origin in the return, so far, that is to say, as the conditions in this case are similar to those which hold as regards the elements of costs hitherto considered.
