Below is an email conversation I had today with JW Mason that I think will be useful to others. It concerns how the development of business enterprises and their cost structure creates room for socialization. One thing I mention briefly but don’t get into is how the accounting profession periodically responds to these socializing tendencies with increasingly costly and detailed accounting frameworks. The most notable recent example is activity based costing which tries to measure just how much of overhead costs a particular product line uses and allocate overhead costs accordingly. These systems have gotten some traction but they haven’t taken over even in places where they are most useful, such as hospital costing and pricing, because they are so incredibly costly. The main purpose of these systems is simply the more “accurate” allocation of cost-something you only need to do for pricing purposes. Hence the argument that at a certain point it would be easier for overhead costs to simply be paid for by governments. Anyway, enjoy the exchange.
NT: I listened to your left forum talk again. It reminded me to bring up something about your discussion of hospitals- I was somewhat confused by it. I'm not sure why a lot of "cross-subsidization" would make something not a commodity. a going concern's goal is net income as a whole, not net income on each specific product line. To the extent that providing a whole array of services is necessary to be a going concern, there's no necessary reason not to have a variety of profit margins, including notionally negative ones. Indeed overhead costs becoming a larger and larger percentage of total costs is almost a law of capitalist development- a point I'll return to.
One way to approach this is to say that as overhead costs become a larger and larger percentage of total costs, pricing becomes more strategic and the allocation of costs to specific product lines is more and more arbitrary. Thus from a socialist point of view, the development of industry towards more and more overhead costs is a case of socializing oneself as eventually it becomes more worthwhile for the state to simply pay overhead costs and have the business continue as before.
JM: The point I was trying to make is that healthcare doesn’t actually break down into specific products. There are a lot of people engaged in a lot of cooperative activity that, in the aggregate, lead to better health outcomes. But trying to assign specific costs to specific services is arbitrary and incoherent. Pretty much your second paragraph.
NT: Yeah the confusing part to me was just I'm so deep into the costing literature that this is just a general point about capitalist development. I guess hospitals are unique in the sense that it's very labor intensive and labor is an overhead cost in this instance (basically) so the arbitrary costs being assigned is much more directly related to human activity than in other cases (where the overhead cost is machinery or at least not especially labor). but I think we can press this point more generally.
have you ever read anything about activity based costing?
JM: I agree it’s a general tendency — that was actually my point. But I think that hospitals are particularly clear examples because the overhead component is unusually large and, especially, because the division of activity into commodities is arbitrary on the consumption side as well as on the production side. Transit let’s say has comparably high fixed costs but there is a distinct individual outcome of getting from point a to point b, which you do or don’t get from the system in a pretty unambiguous way. Whereas with health care better health outcomes are only weakly linked to the particular services the individual gets.
NT: Ahhhh now I understand what you were getting at. it's not just that you can't relate specific products to specific costs it's that you also can't relate specific outcomes to specific products. thus the relation of costs and outcomes is even more tenuous. I'm so used to thinking at this from the business side that I guess i missed the consumer point- it's clearer to me when i think of the health care services as intermediate inputs and health care outcomes as the final outputs.
NT: here's a piece on activity based costing in hospitals FYI