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Home , Diminishing returns

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J.H. BURNS

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THE lAW OF DIfGNISHIHG RETURNS IN THEORY AND HRACTICE Of -t- V

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.r Cam. ecsonomic laws be classed vrith scientific lavTS? The answer is no, just as we must answer in. the negative any svich question, ast la a science? There is, after all, no such thing as an excep tion to a scientific law; whereas half the difficulty in understand ing the laws of political econonrr lies in the consideration of excep tions, modifications and qualifications. Even in the unreal psexjdo- scientific atmosphere of pure theory these exceptions beset tis» How much worse are they when we attempt to apply the theoretical prin ciples to the actual facts. But these difficulties need not make us doubt the usefulness of economic laws. If we forget the attempted "scientificization" of ec onomics, if we forget to call these principles "laws" at all, and rather regard them as statements of general tendencies, we shall find solid practical truth embodied in them. In the particular instance imder discvission, there are other dif ficulties off phraseology: •jpirst, "retvim" is apt to convey the idea of monetary , Ifhile in fact what is meant is the amount of pro duce in proportion to the productive power applied. Secondly, there is the all-inportant word diminishing. To attempt to give a final statement of the law would be most difficult, but it majr be noted here that retijms are said to diminish in that they don not increase in pro portion to the amount of labour and capital applied. In dealing with the theory of diminishing returns, it seems ad visable to consider not only the j^rinciple, •v#iich has remained essent ially the same, but its history, and the way in which various auth ors have dealt with it.

At first sight, nothing seems to be more easily placed in hist ory than the law of diminishing returns. It seems to appear quite suddenly about 1814, a time when controversy about agricultural mat ters was rife. But in his "Review of Economic Theory" Gannan quotes from a little-knovm work by Turgot, which enunciates the idea; again, Marx, in one of the bully footnotes to "Das Kapital" says the law was first published by James Anderson in the time of ; and in his recently published "English mainly since 1700", C.R. Pay speaks of the law's being foreshadowed in a Royal Societjr questionnaire of 1664i. He goes on to say; "In 1814-15 Maithus, Ricardo and Edward West made the three- cornered pronouncement^rom which it is usual to date the laws of rent and diminishing returns in agricultmre. .. .and it is symptomatic of the imscientific natire of economics itself that this trinity disputed for priority in the discovery of something wiiich derives plainly from a queationnaire of 150 years back." Nevertheless, it can truly be said that the lav/ was not estab lished as a definite part of economicc "S-octrine till the time of the aforesaid "trinity". Por one thing, yhe phrase "law of diminishing ret urn" was coined by Edward West. And with Ricardo, we find practically all that coxald be said on the law of diminishing returns in agricult- \u?e. What Ricardo said was practically what said after him, and indeed, as far as agricultiire is concerned, -vi^at every % one h.as )

one has said since. The statement was quite simply that lander static coiaditions and ai'ter a certain point, additional units of pTOducti^e power applied to land, or additional areas of land taken under cult ivation would yield a diminishing ret\ma. On the other hand, under what we now call dynamic conditions, this law does not apply. That is, improvements in agrictilture, or, as Mill said in a characteristic phraae, "the progress Of civilisation", may make increased returns possible - but only for a time. That was, and in all essentials is, the theory. Ricardo enunc iated it coiTiT^letely, and Hill repeated it at much greater length, add ing little new material except his famous dictum to the effect that the law was the most impottant in . Its practical applic ations and truth m'ust be discussed at a latei- stagej meanwiiile we muist follow the extension of the idea beyond tlie agricultural field. Mill, as has been said, added nothingt to the principle as applied to agricvilture. But he did fa.ce up to another aspect of the problem — the question oil diminishing returns in mining and other industries. Ricardo indeed included in his "Principles" a short chapter on the rent of mines; but he mad.e no definite statement about the returns ffom min It" ^; ing. The Classical School regarded mining as cognal-e with aigriculture, since both TOre concerned directly with the produce of the earth. This parallel is by no means exact. But Mill's remarks about mines are sound: He says, in effect that returns to minig diminish even more rap idly than in farming, but that improvements talce place to a greater deg ree. Yfith regard to manufactures. Mill believed that as much of their Vaw material is derived from agriculture, vdiich is sub.iect to dimin- Jibing returns, they also must be subject to that principle. That is not perhaps a well-founded argument. But he goes on to say that im- provements take place to such an extent in industry that the forces in- to diminished returns are far more than balanced by those tend- i ng ;o increased returns. Tnese views of the law of diminishing returns in agriciolture and industry have been held almost consistently since the days of Mill. But modern theorists have in some cases been more dogtaatic about the principle's application to manufactixres. Both Carman and Seli^nan, for instance, regard the law as universal: the first because of his idea of a point of ma:?:im'um returns in all industries, beyond which, ex h-gpothesj, returns will diminish; And the second because he relates the law of diminishing r'etums to the universal law of diminishing . On the whole it is perhaps most accurate to regard the law as a tendency which sooner or later operates in all industries, under static conditions. Practical consmderations oblige us to CaJce the law as a tendency, and it is these that must now be discussed.

¥e may ask first vdiether actual agricultural experience bears out the idea of diminishing returns to additional units of productive poiver. And the natural inclination is to fall back on reductio ad absurdum, sayingt the principle is obviously true in practice because otherwise no farm need be increased beyond one acre; this area, with sufficient productive powei- appdied, would, produce all that was necessary. Birt on consideration, roductio ad dbnurdun But on consideration, reductio ad absurdum seems, as always, an unfaif nuBthod of resoning. It is based on carrying a thing to its log ical conclusion - a dangerous practice* Apart from such unrealities, how. ever, experience shows the f'undaraental truth of the law of diminish ing returns. I say experience, not experiment, PolT thou^ experiments in this subject have been made at Rothamsted ans elsewiiere, thes$ in my opinion. Are just as far removed from reality as the ratiocinations of theor ists, Experimental farming is not, cannot be, normal practical farm ing, It may become so in the futmre, but it can tell us nothing of ex isting conditions, ¥/hen we turn to these everyday conditions, we find one fact of enormous importance: It has been stated that experience bears out the law, but this fact must al?/ays be bome in raind - the law applies only \mder statie conditions. And in the long run, conditions are not stat ic but dynamic. For example, a century and a iquarAer ago itjwas quite clear to all save the pessimistic political thatretums to British agriculture inthe preceding century had not dimini^ed but greatly increased. Only a little consideration sufficed to demonstrate the absurdity of any such idea as that the law of diminishing returns had been "in force" from the dawn of ; and Mill eagerly dis sociated himself from this notion. On the other hand, the qualification that conditions must be static is far from invalidating the general idea of the law. Dynamic con ditions do indeed prevail on the long view; but improvements in agri culture do not in general take place rapidly or at frequent inter vals, and there are, as a result, many periods when conditions may be taken as static. It is in such static and compscratively short periods that we find the law of diminishing returns to be a practical truth. It is quite clear, for example, that British farmland could be more intensively cultivated than it actually is. The devotion of the Chinese peasant to "the good earth" and the almost incredible care with which he tills it are -well-known phenome na. And naturally, if the same care were bestopred on British land, the amounjr of produce would be vastly increased. But in fact such care is not besto-wed on our land, and for an excellent reason - it would not be profitable. Why then is it profitable for the Chinese peasant? The ans-wer to this lies in the fundamental difference bet-ween the Chinese and the British farm. The ordinary Ohinese farmer is producing his own food - he is carrying on subsistence agric\ilt-ure. The ordinary British farm, on the other hand,, is a profit-making concern (or at least a concem that attempts to make profit), Tjp,us the Chinaman, vdiose holding of laM is small, but whose family isgenerally large, and -whose requirements in food, even -with a low living-standard, are consequently large also, must cult ivate his land intensiveljr (and it may be noted that the extensive principle also applies —all land, if accessible, must be usedj^ no mat ter how infertile it is),The British farmer, on the contrary, -will only expend on his land just as moh as he hopes to be able to recover by selling the produce. This is not to say that he will stop adding pro ductive power as soon as returns begin to diminish; it may still be profitable, in , to continue, but he -will certainly not cultiv ate his land as intensiveily as he might. The important poi nt is that the law of diminishing returns app lies to botht the Chinaman cultivates his land to the last ounce of effort, not becanse he gets a more proportionate rettm than would the British farmer, but because it is for him a vital necessity. Y/hen we turn to the practical applications of the law to industry, we find more difficulties in our path. Ithink it must be admitted that in the last resort the principle aipplies here also? not for the reasons adduced by Mill and alred^dy mentioned here, but simply beoatise it is incredible that returns to additional productive power should be in an ever increasing ratio,, or even that they should continue in the same ratio, in accordance with the so-called law of constant return. But how to accoimt for the fact that most industries have shown and do show a tendency to increasing retiAms? How can we explain, the increases in the numbers of workers, in the amount of machinery, in capi tal - all apparently with profitable results? Is it not possible that this paradox may be resolved bjponsidering once more the question of static or dynamic conditions? It seems to me that static conditions have never in fact existed in industry during the modem period of history; that the has been a continuous rapid process. Nor cacwe say that the process is over. Par from it. Indeed, it has in recent years, entered on a new phase,, with the ever more common use of electrical power by mean^f the "grid" system. Nevertheless it is fairly clear that there mist come a time when this revolutionary process will stop, or at least, will considerably slacken its speed. And when that comes about there will Be periods of static conditions long enouf^ for it to become clear that the law of diminishing returns is at work, and that it is in practice, as in the ory, a universal principle.

List of Books Consulted.

Carman; Review of Economic Theory " r Wealth Ricardo: Principles of Political Economy and Taxation Mill: Principles of Political Economy Marshall: Principles of Economics Seligman: Principles of Economics Pay: English Economic History mainly since 1700