Knowledge And Decisions

Low incremental costs are also no defense in antitrust prosecutions alleging sales “below cost” to “unfairly” drive out competitors. The U.S. Supreme Court, in a noted Sherman Antitrust Act case, ruled against a firm whose “price was less than its direct cost plus an allocation for overhead”¹ even though overhead is not part of incremental cost. In this, as in many other antitrust cases, injury to an incumbent competitor was equated with injury to the competitive process, which the antitrust laws are supposed to protect.

Consumers are equally well protected against low prices based on low incremental costs in a number of other government-controlled areas, such as various agricultural markets. The government itself has an “almost universal avoidance”² of incremental cost pricing for public goods and services, such as the Post Office or toll roads and bridges. Toll charges, in fact, typically are highest for those who create the least cost and lowest for those who create the most. The capacity of a highway or bridge is usually based on the volume of rush-hour traffic, so that the costs of building and expanding the facility are due to rush-hour users. The incremental cost of other people’s using it during nonrush hours, when it has idle capacity, are far less and perhaps virtually zero. Yet discount books of toll coupons are likely to be made available on terms which make them attractive only to regular rush-hour users, not to occasional users who are more likely to be nonrush-hour users. However economically perverse, this pricing method makes political sense to elected officials, because regular users are more easily organized into political pressure groups. That is, regular users’ costs of organization are spread over more units of benefit, so that a rational equation of their individual costs and benefits leads them to more political activity per person, as well as in the aggregate, compared to sporadic users.

The growth of regulatory agencies, the expansion of antitrust laws by legislative enactment and judicial interpretation, and increasing government control of pricing in a variety of ways and areas all put lower limits on price fluctuations, among many other effects that they have. The question is, what effect does this have on the transmission of knowledge? It overstates the actual cost of many goods and services, leading some consumers to do without, even though they are willing and able to pay enough to induce the producers to make more of those goods and services, if the producers were free to accept their offers. Knowledge is distorted in the transmission, due to the use of force by third parties — in this case, various organs of government.

While government actions inhibit or prevent the transmission of knowledge in the summarized form of price fluctuations, the government substitutes its own decisions in the form of more explicitly articulated knowledge, in either words or statistics. Articulation, however, can lose great amounts of knowledge. The continuously adjusting process of decision making through transient subjective estimates of prospects is not recorded or available in verifiable form to third parties. Retrospective data generated by this prospective process are fragmentary artifacts analogous to bits of broken pottery or remnants of clothing, from which an anthropologist tries to reconstruct the life process of prehistoric peoples. The anthropologist has no choice but to infer what he can from whatever he finds, but no one would prefer such inferences to the knowledge of someone who actually lived in prehistoric societies, if such people were available. A similar disparity of knowledge is involved when decisions are forcibly transferred from those who are part of an ongoing process to third-party observers of statistical artifacts. Such statistical artifacts are not merely incomplete but often positively misleading, by being cast in terms wholly different from those of the process they seek to depict. For example, we have already seen in Chapter 4 that the subjective “time horizon” is not indicated by objective data on remaining life span; babies have notoriously short time horizons. Similarly, the averaging of fixed “overhead” costs over output provides a categorical, retrospective picture of a prospective, incremental process of decision making. The social utilization of idle or only partly utilized resources — electricity generating capacity during off-peak hours, half empty airplanes, factories operating below capacity, etc. — is inhibited when effective knowledge of such low cost opportunities is distorted by forcibly preventing low prices from reflecting low incremental costs.