Real Cost

The neo-classical economist Alfred Marshall considered cost of production from a different angle. According to him, it is not the money cost but real cost of production which is important. In the production process, the factors of production receive their remuneration because they undergo different types of pain, sacrifice and hardships. Therefore real cost is the sum total of pain, sacrifice and toil undergone in producing a commodity by the different factors of production. For example, when labour works, he undergoes toil, trouble and hardship. This is called real cost. Similarly capital formation presupposes pain and sacrifice. Capital comes out of savings. Savings is possible by reducing current consumption. This involves sacrifice on the part of the savers. With the hope of getting more consumer goods in future, the consumers undergo pain and sacrifice of cutting down current consumption for generating savings. The interest paid by reducing current consumption. This involves sacrifice on the part of the savers. With the hope of getting more consumer goods in future, the consumers undergo pain and sacrifice of cutting down current consumption for generating savings. The interest paid by the entrepreneur to the owner of capital as remuneration is nothing but the compensation for abstinences required for capital formation. The money payment made in the form of remuneration to different factors of production process. According to Marshall, “the exertions of the different kinds of labour that are directly or indirectly involved in making it together with the abstinence or rather the wirings required for saving the capital used in making it; all these efforts and sacrifices together will be called the real cost of production of the commodity.”