When therefore we are considering the broad results which the growth of wealth and population exert on the economies of production, the general character of our conclusions is not very much affected by the facts that many of these economies depend directly on the size of the individual establishments engaged in the production, and that in almost every trade there is a constant rise and fall of large businesses, at any one moment some firms being in the ascending phase and others in the descending.For in times of average prosperity decay in one direction is sure to be more than balanced by growth in another.
Meanwhile an increase in the aggregate scale of production of course increases those economies, which do not directly depend on the size of individual houses of business.The most important of these results from the growth of correlated branches of industry which mutually assist one another, perhaps being concentrated in the same localities, but anyhow availing themselves of the modern facilities for communication offered by steam transport, by the telegraph and by the printing-press.The economies arising from such sources as this, which are accessible to any branch of production, do not depend exclusively upon its own growth: but yet they are sure to grow rapidly and steadily with that growth;and they are sure to dwindle in some, though not in all respects, if it decays.
2.These results will be of great importance when we come to discuss the causes which govern the supply price of a commodity.
We shall have to analyse carefully the normal cost of producing a commodity, relatively to a given aggregate volume of production;and for this purpose we shall have to study the expenses of a representative producer for that aggregate volume.On the one hand we shall not want to select some new producer just struggling into business, who works under many disadvantages, and has to be content for a time with little or no profits, but who is satisfied with the fact that he is establishing a connection and taking the first steps towards building up a successful business; nor on the other hand shall we want to take a firm which by exceptionally long-sustained ability and good fortune has got together a vast business, and huge well-ordered workshops that give it a superiority over almost all its rivals.But our representative firm must be one which has had a fairly long life, and fair success, which is managed with normal ability, and which has normal access to the economies, external and internal, which belong to that aggregate volume of production; account being taken of the class of goods produced, the conditions of marketing them and the economic environment generally.
Thus a representative firm is in a sense an average firm.But there are many ways in which the term "average" might be interpreted in connection with a business.And a Representative firm is that particular sort of average firm, at which we need to look in order to see how far the economies, internal and external, of production on a large scale have extended generally in the industry and country in question.We cannot see this by looking at one or two firms taken at random: but we can see it fairly well by selecting, after a broad survey, a firm, whether in private or joint-stock management (or better still, more than one), that represents, to the best of our judgment, this particular average.
The general argument of the present Book shows that an increase in the aggregate volume of production of anything will generally increase the size, and therefore the internal economies possessed by such a representative firm; that it will always increase the external economies to which the firm has access; and thus will enable it to manufacture at a less proportionate cost of labour and sacrifice than before.
In other words, we say broadly that while the part which nature plays in production shows a tendency to diminishing return, the part which man plays shows a tendency to increasing return.The law of increasing return may be worded thus: -- An increase of labour and capital leads generally to improved organization, which increases the efficiency of the work of labour and capital.
Therefore in those industries which are not engaged in raising raw produce an increase of labour and capital generally gives a return increased more than in proportion; and further this improved organization tends to diminish or even override any increased resistance which nature may offer to raising increased amounts of raw produce.If the actions of the laws of increasing and diminishing return are balanced we have the law of constant return, and an increased produce is obtained by labour and sacrifice increased just in proportion.
