ABSTRACT
Professor Mathews and Mr Grant argue that historical-cost accounting and pricing are more expansionary than current-cost accounting and replacement-co st pricing in times of inflation. ‘With historical-cost accounting and pricing, aggregate demand in real terms will be higher than with current-cost accounting and replacement-cost pricing, to the extent that real consumption is greater because of lower prices’ (Mathews and Grant, 1958, p. 163). That is, if prices are cost-determined and there is excess demand in the economy, queues for goods are likely to be greater, at any moment of time, with historical-cost pricing and accounting than with current-cost accounting and replacement-cost pricing. Similarly, if prices are rising and there is unemployment, it is likely to be less with historical-cost pricing. With historical-cost pricing, the rate of change of prices is determined by the changes in costs of the preceding stock-turnover period; with replacement-cost pricing it is determined by the changes in costs of the current stock-turnover period. Therefore, if costs are rising, price levels will be higher, at any moment of time, with replacement-cost pricing. The purpose of this note is to derive these results from a combination of the models of profits and income under alternative pricing policies of Inflation and Company Finance and the model of The Accumulation of Capital (Mathews and Grant, 1958, pp. 165-6; Robinson, 1956, pp. 63-71).
