Basil S. Yamey LONDON SCHOOL OF ECONOMICS AND POLITICAL SCIENCE
COMMON COSTS AND BUSINESS DECISIONS: AN HISTORICAL NOTE
Decision-making in business depends in part on a knowledge of costs and their structure and behaviour. Yet in the literature of eco-nomics the analysis of costs in relation to business decisions does not go back far in time. The business man would have looked in vain in Adam Smith's The Wealth of Nations, 1776, for any helpful consideration of the issues involved. The intellectual sparring be-tween economists and accountants on the nature of costs and their significance for business decisions began only in recent decades— on such matters as the indivisibility of certain costs and their allo-cation among activities; the relevance of marginal rather than of average costs; the distinction between escapable and inescapable costs; and the significance of thinking in terms of opportunities foregone rather than of money costs incurred.
Almost contemporaneously with The Wealth of Nations, a treatise on bookkeeping and accounts was published which shows a lucid awareness of several of these critical issues, especially of the fu-tility of attempting to allocate common or joint costs or of treating as a separate "profit centre" an activity which is inflexibly and in-separably linked with other activities. This book is Robert Hamil-ton's An Introduction to Merchandise . . ., 2nd edition, 1788, of which Parts IV and V relate to bookkeeping and accounts. The au-thor, then professor of philosophy in the Marischal College, Aber-deen, was also known for his contributions to political economy. He clearly had an intimate knowledge both of economic problems and also of business and accounting practice.
The interest of Hamilton's discussion of the treatment of costs in accounts has been recognized in the literature on the history of accounting. Nevertheless it is worth recounting again what he said on the subject, by noting three examples, (a) He explains that "when the American trade was open," ships built in the northern provinces were bought by English merchants, who usually after one or more voyages brought them to England for sale. Hamilton ob-