Relative Costs, Not Absolute Costs Determine Profits
It is the buyer and not the seller, then, who has the final word concerning prices. Even so, does not the individual seller have much to do with fixing costs and thus regulating profits? Not so much as one might think. As a rule, many manufacturers are competing for the same raw materials and the same workmen. Together, as buyers of commodities and of labor, they determine what prices and what wages are actually paid. The individual manufacturer, except in unusual cases and for short periods, must pay the prices and the wages thus determined, or stop producing. He has no range of choice comparable to that of the final consumer.
In any event, it is not absolute costs that have most to do with his profits. It is the relation of his costs to the costs of his competitors; and over the costs of his competitors he seldom has any control. For example, three companies produced a certain machine, A at a lower cost than B, and B at a lower cost than C. As buyers cared nothing about production costs, but paid the same price to all three producers, A made a profit of twelve per cent, B made a profit of two per cent, and C suffered a loss of three per cent. Since it is relative costs that have most to do with profits, a producer may gain in efficiency and yet suffer losses, or he may lose in efficiency and yet realize profits. His own high profits may be due chiefly to the incompetence and consequent high costs of others.
To be sure, it is possible for him to reduce his own efficiency, in order to bring his profits down to the average; but this would hardly appeal to him, or to anybody else, as a service to society. It would not help consumers, for it would neither increase supplies nor decrease prices. Indeed, it usually has exactly the opposite effect. As in the case of automobiles, so in general, lower prices result from mass production by the most competent enterpriser.
The point to remember -- for we shall make use of it presently -- is that for no two producers of the same article, cars or copper, cotton cloth or cabbages, is the cost of production by any chance exactly the same.