"An overwhelming majority of the entrepreneurs thought that a price based on full average cost (including a conventional allowance for profit) was the 'right' price, the one which 'ought' to be charged...These findings motivated Milton Friedman in his badly-argued work on methodology.
...the procedure can be not unfairly generalized as follows: prime (or 'direct') cost per unit is taken as the base, a percentage addition is made to cover overheads (or 'oncost' or 'indirect' cost), and a further conventional addition (frequently 10 per cent.) is made for profit. Selling costs commonly and interest on capital rarely are included in overheads; when not so included they are allowed for in addition for profits." -- R. L. Hall and C. J. Hitch, "Price Theory and Business Behavior", Oxford Economic Papers, (May 1939): 12-45
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12 years ago
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And it should be mentioned that all the empirical research subsequent to that has confirmed the finding that price formation does not happen as neo-classical economics assumes...
Steve Keen summarises it in Debunking Economics
Iain
An Anarchist FAQ
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