8.The elasticity of the notion of diminishing return cannot be fully considered here; for it is but an important detail of that large general problem of the economic distribution of resources in the investment of capital, which is the pivot of the main argument of Book V and indeed of a great part of the whole Volume.But a few words about it seem now to be called for in this place, because much stress has recently been laid on it under the able and suggestive leadership of Professor Carver.(19*)If a manufacturer expends an inappropriately large amount of his resources on machinery, so that a considerable part of it is habitually idle; or on buildings, so that a considerable part of his space is not well filled; or on his office staff, so that he has to employ some of them on work that it is not worth what it costs; then his excessive expenditure in that particular direction will not be as remunerative as his previous expenditure had been: and it may be said to yield him a "diminishing return."But this use of the phrase, though strictly correct is apt to mislead unless used with caution.For when the tendency to a diminishing return from increased labour and capital applied to land is regarded as a special instance of the general tendency to diminishing return from any agent of production, applied in excessive proportion to the other agents, one is apt to take it for granted that the supply of the other factors can be increased.That is to say, one is apt to deny the existence of that condition -- the fixedness of the whole stock of cultivable land in an old country -- which was the main foundation of those great classical discussions of the law of diminishing return, which we have just been considering.Even the individual farmer may not always be able to get an additional ten or fifty acres adjoining his own farm, just when he wants them, save at a prohibitive price.And in that respect land differs from most other agents of production even from the individual point of view.This difference may indeed be regarded as of little account in regard to the individual farmer.But from the social point of view, from the point of view of the following chapters on population it is vital.Let us look into this.
In every phase of any branch of production there is some distribution of resources between various expenditures which yields a better result than any other.The abler the man in control of any business, the nearer he will approach to the ideally perfect distribution; just as the abler the primitive housewife in control of a family's stock of wool, the nearer she will approach to an ideal distribution of wool between the different needs of the family.(20*)If his business extends he will extend his uses of each requisite of production in due proportion; but not, as has sometimes been said, proportionately; for instance the proportion of manual work to machine work, which would be appropriate in a small furniture factory would not be appropriate in a large one.
If he makes the best possible apportionment of his resources, he gets the greatest (marginal) return from each appliance of production of which his business is capable.If he uses too much of any one he gets a diminishing return from it; because the others are not able to back it up properly.And this diminishing return is analogous to that which a farmer obtains, when he cultivates land so intensively that he obtains a diminishing return from it.If the farmer can get more land at the same rent as he has paid for the old, he will take more land, or else lie open to the imputation of being a bad business man: and this illustrates the fact that land from the point of view of the individual cultivator is simply one form of capital.
But when the older economists spoke of the Law of Diminishing Return they were looking at the problems of agriculture not only from the point of view of the individual cultivator but also from that of the nation as a whole.Now if the nation as a whole finds its stock of planing machines or ploughs inappropriately large or inappropriately small, it can redistribute its resources.It can obtain more of that in which it is deficient, while gradually lessening its stock of such things as are superabundant: but it cannot do that in regard to land: it can cultivate its land more intensively, but it cannot get any more.And for that reason the older economists rightly insisted that, from the social point of view, land is not on exactly the same footing as those implements of production which man can increase without limit.
No doubt in a new country where there is an abundance of rich land not yet brought under cultivation, this fixedness of the total stock of land is not operative.American economists often speak of the value, or rent, of land as varying with the land's distance from good markets, because even now there is a great deal rather than with its fertility; of rich land in their country which is not fully cultivated.And in like manner they lay but little stress on the fact that the diminishing return to labour and capital in general applied to the land by discreet farmers, in such a country as England, is not exactly on the same footing as the diminishing return to an inappropriate investment of their resources by indiscreet farmers or manufacturers in a disproportionately large number of ploughs or planing machines.
It is true that when the tendency to diminishing return is generalized, the return is apt to be expressed in terms of value, and not of quantity.It must however be conceded that the older method of measuring return in terms of quantity often jostled against the difficulty of rightly interpreting a dose of labour and capital without the aid of a money measure: and that, though helpful for a broad preliminary survey, it cannot be carried very far.
