FINANCE AND COMMERCE

Nelson Evening Mail, Volume LXIV, 15 January 1931, Page 7

FINANCE AND COMMERCE

REDUCTION OF COSTS THE PRESENT POSITION CHAMBER OF COMMERCE BULLETIN ! Prepared by the Department- of Economics of Canterbury College. BULLETIN NO. 72 The seventy-second bulletin prepared by the Department of Economics of Canterbury College and issued by the Canterbury Chamber of Commerce, deals with reduction of costs. The bulletin is considerably longer than usual, and the first section was published yesterday. (Part IT.) In a time of declining national income, the first- source of income to suffer reduction is profits. Even in good times, some businesses make losses, and in average years a considerable proportion of businesses are losing while others are 'gaining. With present prices and costs, there can be very little pastoral farming that is paying bare costs of production, the greater part must be either drawing oil reserves or on credit, and both of these must, sooner or later, be exhausted unless costs are reduced. In other businesses, though it is not practicable to estimate present or prospective losses, ■ some indication can be given. In almost every country share prices, which depend mainly on prolitearnin'g capacity, have fallen heavily during the past year. A list of twentytwo variable shares has been examined for New Zealand, the prices being taken from the New Zealand Stock Exchange Gazettes for November, 1929 and 1930. The fall in prices during the year ranges from 8 to 66 per cent-., and averages 30. j per cent. This indicates the loss of capital to investors in those shares.

There has undoubtedly been much over-capitalisation in the Dominion since tho war. But over-capitalisation is often only nominal, since the real capital value of a business is determined by the amount upon which it can earn fair rates of interest. There has been much writing-down of capital in recent years, and more will certainly have to bo written off if capital is to earn reasonable rates of interest in the future. Further, most capital is fixed, and must be used to earn what it can. Share capital charges, if considered as a cost of production, are therefore much move elastic than -most other costs. Rent and interest payments are less flexible, since thev usually depend on specific contracts. In times of rising prices tenants and borrowers adhere to j.-he contract rates, though they may gain greatly. In times of falling prices it is equitable that they should still adhere to their contracts, even though they lose. Nevertheless, it is plain that some at least will be unable to do so in the near future and that some postponement or remission of rent or interest and probably some readjustment of contracts as well, cannot be avoided. But’ conditions differ very widely amongst particular cases, and such adjustments can best be left .to private arrangement between the parties concerned. The suggestion of voluntary tribunals to arbitrate in such matters has much to commend it.

REDUCED NATIONAL INCOME When the national income is declining and in consequence the individuals composing the nation suffer reductions of income and have economy forced upon them, the natural result is seen in a declining yield of taxation, and it is equitable and necessary that public authorities should also economise. If the public authorities exact the same amount of revenue, they take a greater proportion of the reduced national income, and the community suffers first from the reduced national income, and second from the greater proportion taken from them in taxation. In New Zealand the public authorities have ’gone farther; they have increased State taxation abo,ut 17 per cent, since 1928, and are pursuing policies which can result only in heavy further increases. Ordinary humanity demands that the wages of the lowest-paid sections of the community should he maintained as far as possible in times of depression. But it is often forgotten that wages, like all other prices, are determined in markets where goods and services are bought and sold. If the price fixed for labour be such that it cannot be naid, together with other costs, out of the price the market will give for its product, then labour will be unemployed. The prevalence of unemployment during recent years lias shown clearly that all the available labour supply cannot be absorbed at the prices fixed, and the recent increases of unemployment, which threaten further expansion unless the situation is righted, indicate that the mal-adjustmenfc of labour supply, demand, and price is growing worse. Labour costs bulk so large in total costs that thev cannot be regarded as permanently fixed, and there is much scope for their reduction and adjustment not in wage rates alone hut also in the removal of restrictions on the employment and the output of labour. It is quite conceivable that the purchasing power of wages might be maintained, though the monetary cost of labour per unit of output must undoubtedly be reduced. Tn the higher salary grades rates are more flexible; some have already been reduced, and others can he reduced. But in the lower wage grades, general standards are very rigid owing to the Arbitration Court awards, and labour costs are kept high by the minute regulation that- awards impose. Economies of labour organisation, which might lessen the extent of necessary wage adjustments, together with wage adjustments themselves, are impossible while these awards remain.

NO GENERAL PLAN APPLICABLE

In view of the present levels of export prices, which average about the level of 1914, and the high level of the internal prices which constitute costs of production, the necessity for cost reduction in all directions cannot be questioned. But the conditions, the extent, and the manner of cost reduction differ so widely from one individual case to another that no general plan is likely to bn found applicable. The necessary' adjustments can probably bo effected most quickly and most conveniently if left to the individuals directly concerned to arrange amongst themselves. Arbitration tribunals, set up for the purpose by the parties, may be necessary in some cases, agreements between individuals may be reached in others, and the wider the general admission of the necessity to co-operate in cost reduction the better for all concerned. But New Zealand has become accustomed to look to the Government for direction and help in time of crisis. The Government can take the people s money and spend it, often less wisely than the people would themselves spend it; it can impose restrictions on action; or give to a group what it takes from the whole community. But it can do very little to effect the full co-operation of .ill parties, the maintenance and ex-

pension of production, upon which our standards of life depend, and the adjustment of costs, without which neither production nor standards can be maintained, and which present conditions make so necessary. These are things the people must do for themselves; at best the Government can encourage and assist. In the present instance it appears that it can give the greatest practical assistance to the community, first by introducing the greatest economy into the affairs it administers and so reducing its exactions from the reduced national income, and second, by removing the unnecessary and cost-increasing restrictions that are preventing necessary adjustments. ADJUSTMENT OF LEVELS If the Government will do this, it will help the community to adjust its own affairs. The adjustment to lower levels of costs necessitated by declining world prices is difficult and painful enough at any time. It has already been deferred too long, and can be made only more difficult by further postponement. In some quarters it has already begun, and many people have suffered substantial reductions both of income and capital. As yet, however, the burden of income reduction is_ unevenly distributed, and its wider distribution is inevitable. In the case of labour the money income of some workers has been maintained, but the real earnings of workers as a whole have been reduced by unemployment. It is easy to fix wage rates and labour conditions, but if these be fixed uneconomically they result in more loss than gain to the workers themselves. Moreover, conditions which are economic at. one pi-ice level may be quite uneconomic at another. The same reasoning applies to factors in production other than labour. But the losses of monetary income need mean no general loss of purchasing power. Even though the prices of the future are substantially lower than in the recent past, the standards of purchasing power and of life throughout the Dominion might well be maintained or improved once costs,, and conditions are adjusted to the new price levels. But they can be maintained only by the maintenance of the volume of production, out of which all the means to live must come, and neither full production nor full employment of our human and material productive power can be secured without equilibrium of costs and prices. .