must find methods of distributing the indirect costs over the units produced. If this is well done, it will be of great value, not merely with respect to finding what costs have been, but also with respect to determining what costs ought to be.

Mr. F. M. Simons has outlined the functions of cost-accounting carried on within a plant as follows:

1. The records provide for following the material from the raw state until it is finished product and showing the actual costs of every act, direct or indirect, in the productive process.

2. A system of reports sets forth this information in such a way as to be available for one or more of the following uses:

a) The records account for all expenditures.

b) The records enable technical men to make comparisons which may lead to scientific or technical progress.

c) The records furnish data which guide the company in its policies and methods with respect to

(1) Estimating and bidding in other work.

(2) Price-fixing.

(3) Selecting best line to make.

(4) Making up new lines.

(5) Deciding whether to make or buy.

d) The records make possible the development of more complete execu

tive control by

(1) Comparison of actual costs with ideal standards.

(2) Discovery and explanation of wastes.

(3) Checking up performance of standards in use.

e) The records make possible the comparison of different periods of production to show the significance of

(1) Internal changes which have been made.

(2) External changes beyond the control of the company but bearing on the future of the industry.

5. Competition is not a satisfactory "law of trade" in complex industry, and the incentives to combination are exceedingly strong. The railroad industry again gives an excellent illustration:

If once a rate war breaks out there seems to be no stopping-place. The field cannot be abandoned, for the instrument can produce nothing but transportation, and a large part of the charges (e.g., interest on bonds) would accumulate even if not a train moved. If traffic falls off, costs will not fall proportionately. It follows, then, that a manager may go on for long periods "producing transportation" and collecting a rate which does not cover his total cost per unit,

provided the rate covers added cost per unit or more. As has been seen, he may produce at less than added cost per unit. In addition, since the costs are largely joint costs, it may be impossible to know definitely until after it is all over just where the line between "paying" and "losing" business is (a situation particularly true in the earlier days of our railroads). It is not surprising that we have "Cut-throat Competition" under such circumstances.

Competition does not necessarily mean the "survival of the fittest" in this industry. A bankrupt road, which has been repudiating some of its fixed charges and which is willing to skimp its maintenance for years; or a round-about road, subsisting largely on local traffic and hauling the added through traffic at a ridiculously low rate, may be more than a match for the solvent, direct route-as witness the differentials, many of which are allowed "weaker" roads to induce them to stop fighting the "stronger" ones. The ancient assumption that competition was a proper "law of trade," whatever that may mean, was based upon the assumption of a "normal" in which competitive forces had worked themselves into a state of equilibrium. Up to the present time machine industry has developed so rapidly that a "normal" has never been attained. The railway of today differs from that of 1830 as much as the early railway differed from the turnpike. On both the mechanical and the business sides, industry has undergone through constant development what has amounted to almost a revolution every few decades. As a consequence, the competitive equilibrium has been and seems likely to be of little significance in complex industry.

6. Problems connected with the social control of industrial affairs are very complex and baffling in machine industry. It is not merely that we "do not know." We do not know that we do not know. Our measures of control are largely based upon the hypotheses of simple industry. Through social inheritance the popular mind has been firmly established in the dogma of the infallibility of competition under any and all circumstances, so that our formal social control is organized on the assumption that price should correspond with cost and that this will come about when the "normal" has been worked out.

The situation is far from hopeless, however. We are doing much to improve our knowledge of the essential facts of the case, and here both technical schools and cost-accounting are rendering and will continue to render good service. Then, too, we are gradually coming

to a proper realization of the shortcomings of "free" competition as the law of trade in complex industry, and are coming to rely more and more upon formal social control in the guise of state action laying down the rules of the game under which our industrial operations must be performed. And we are making increasing use of informal social control. We are striving to develop codes of ethics and to bring home to the individual a sense of personal responsibility.

175. COMPLEX INDUSTRY IS DIFFICULT TO REGULATE1 Whatever might be the outcome of government regulation in this respect, there can be no doubt of the immense difficulty of just and efficient regulation of the prices or the profits of industrial combinations.

Consider for a moment the nature of the task which would confront such an administrative body. In the first place, it would have to possess at all times detailed information regarding all the concerns under its jurisdiction. It could not rest content with making special investigations from time to time on its own initiative or on complaint. Railroad rates and the charges of public-service corporations are ordinarily comparatively stable, and properly so; but the prices of many other commodities, if not of most, are necessarily variable. The costs of materials may change greatly and rapidly. The conditions of demand are changeable. Grave injury might be done to the public during the time required for securing information on which to base action if such information were not continuously in the possession of the regulating authority. Even annual reports would not usually be adequate; quarterly or monthly data would be required.

In the second place, the amount of detail involved would be enormous. A proper fixing of prices would require complete knowledge of the costs of production and of the amount of investment. In order to make sure of obtaining accurate information, the government would have to prescribe the methods of accounting. It would be impossible to prescribe uniform methods, as is done by the Interstate Commerce Commission in the case of the railroads. The bewildering variety of conditions in the different industries would have to be provided for. On the basis of accounting methods thus prescribed, detailed reports would have to be made to the government

Taken by permission from E. D. Durand, The Trust Problem, pp. 51-55. (Harvard University Press, 1915.)

and these would have to be scrutinized and studied with utmost care. The federal government particularly would have to employ a vast corps of expert accountants, statisticians, and specialists familiar with the peculiar conditions in the different industries.

The difficulties of cost-accounting are so great that many even of the largest business concerns have found it impossible to ascertain the costs of their products on scientific principles, or at any rate have considered it not worth while to incur the necessary expenses for that purpose. The business concern can get along without accurate knowledge of its own costs. Its prime interest is in demand and in profits. The government, however, in fixing prices, must know all about costs-both operating costs and capital charges. They are the very things which primarily determine the reasonableness of prices. The limiting of profits would require somewhat less detailed information than the limiting of prices, but would still require a vast mass of data.

In the third place, the determination of costs and of investment for the purpose of fixing prices or profits would involve immensely difficult problems of judgment. The judgment of the regulating body would be constantly challenged by the combinations, and the probable result would be endless litigation. The proper allowance for depreciation and obsolescence, the proper apportionment of overhead charges among different products and services, the proper methods of valuing the different elements of investment-these and similar matters would have to be passed upon by the regulating authority. Such problems are difficult enough as they confront the Interstate Commerce Commission, which has to deal with one kind of business only. They would be far more difficult for a body dealing with multifarious combinations in widely differing industries.

Even if the regulating authority should succeed in working out a satisfactory determination of costs of production and value of investment, it would still be beset with troubles in fixing prices or limiting profits. Demand for goods is variable even in non-competitive industries. Even if the combinations should be protected against competition from domestic concerns, foreign concerns would have to be reckoned with. Unchanging prices or prices bearing an unchanging relation to costs would not be practicable in mining, manufacturing, and mercantile business. A combination might at times be justified in reducing prices and consequently profits below a normal level in order to stimulate demand and keep its force employed, or in

order to meet foreign competition. The government would have then to determine to what limit prices or profits could subsequently be advanced in order to offset these reductions. In other words, the government would be dealing with a constantly changing problem of demand, just as the manager of any private business does.

Particularly difficult would be the fixing of proper prices for products produced at joint cost. Take petroleum, for example. A wide variety of commodities are derived from the one raw material, crude oil. Some of these are in so little demand that they must be sold for less than the price of crude oil itself. Others are in great demand and can be sold for high prices. It is impossible to use cost as a basis for determining prices of the specific products. The relative demand for the several products varies from day to day. For a regulating body to determine the proper relationship of the prices of these joint products is virtually impossible. This and several other important industries would have to be regulated, if at all, by limiting profits rather than prices.

It is sometimes suggested that the same problem of joint costs confronts the Interstate Commerce Commission with respect to the relative freight rates on different commodities. It should be noted, however, that after making due allowance for actual and measurable differences in the cost of transporting different commodities, the Commission could, without actually destroying railroad business, fix precisely the same rate per unit for every class of commodities. Such a policy is by no means unthinkable and might be better than the often extraordinary differences which now exist. For petroleum products, on the other hand-and the same is true of a great many other products produced under joint cost-flat prices would be absolutely impossible. Furthermore, it cannot be said that the Interstate Commerce Commission has satisfactorily solved the problem of fixing relative rates on different commodities. It has in fact left that problem almost untouched, and if it ever does enter seriously upon it the Commission may find difficulties practically insuperable.

One could continue almost indefinitely setting forth the complexities and difficulties of government regulation of the prices and profits of combinations. Most people feel that for the government actually to fix definite prices for a multitude of industries, or even to limit their profits specifically, would be impracticable.