Popular Science Monthly/Volume 79/December 1911/A Bugbear of Economics
|A BUGBEAR OF ECONOMICS|
IT seems to be peculiarly difficult for men, whether in science, politics or religion, to give up a law or doctrine which has become a slogan to them, after it can no longer be justified. This is true of the law of diminishing returns which economists have considered to be fundamental to much of their reasoning. I have been able to find but one prominent economist of the present day who has made any definite attack upon this "law."
Simon N. Patten, in the "New Basis of Civilization" says:
Professor Patten does not follow this statement with a specific discussion as to his reasons, although his whole book is based on the principle of increasing returns.
I have looked through many books of modern writers on economics and find that all lay much emphasis on this law. The following are typical definitions from prominent economists. Seligman in his "Principles of Economics" says that "The law of diminishing returns is. . . the foundation of the law of rent. A farmer will some time reach a point where it will not pay him to add another laborer or another machine to his land because beyond the margin of profitable expenditure every additional 'dose' of capital or labor will mean a return insufficient to cover cost. . . . The law of diminishing returns is universal and applies to everything that possesses value." Professor Seager in his "Introduction to Economics" says, "After a certain point has been reached in the cultivation of an acre of land or exploitation of a mine increased applications of labor and capital yield less than proportionate returns in product, it being understood, of course, that no important change is made in the method of cultivation or exploitation." Carver in his "Distribution of Wealth" goes more into detail and proves the law with mathematical exactness. In fact, he is so clear that he seems to be proving the obvious. However, he offers as an excuse that such proof would not be needed "had not certain writers seen fit to deny it because it did not harmonize with their views of economics, and certain would-be reformers to ignore it because its recognition would interfere with the acceptance of their reforms."
Such a reformer, I suppose, he would call Wm. H. Allen, of New York, who said in a recent article in the Annals of The American Academy that "When John D. Rockefeller said to the world, 'There will never be enough money to do the world's uplift work,' he started in motion forces and doubts and compromises that will do vastly more harm to the south than the hookworm." The reason Mr. Rockefeller made such a statement was that he was biased by the law of diminishing returns which closes the door of hope, because, as Patten indicates, hopelessness is inherent in a world of diminishing returns. Many who argue for the truth of this law quote not only men of success like Mr. Rockefeller, but any business man or farmer who finds himself face to face with the law. The difficulty in both cases is that the individual is looking at production from his personal point of view, and not from the point of view of production as a whole. The economists, however, ought to see principles in the large.
Scientific laws are much like creeds. Some one has an insight which he formulates, and for him and some of his successors the formulation seems to satisfy the conditions and the needs. So an economic law is the classification of a group of facts as some one's insight sees them; but as with the creed, men may make the fatal mistake of thinking it an eternal truth. There was a time when belief in hell fire was an incentive to morality, but now many of us succeed in getting a degree of morality when in the state of mind of the small son of a famous modern philosopher who asked his mother what hell was. She described it to him and at the close added, "But there are some who do not believe this." The boy replied, "Mamma, I am one of those." There was a time when the law under discussion had a vital meaning to the race, but I am one of those who think that a new formulation is in place, that here is a case where orthodoxy does not mean clear thinking.
The fallacy common to Seligman, Seager, Carver and the others is that of emphasizing archaic conditions. Seligman, for example, was talking about equal "additional doses" of capital and labor; and Seager at the close of his definition said, "it being understood, of course, that no important change is made in the method of cultivation or exploitation." Now of what earthly good is a law for such conditions? If there is any indisputable fact in the world it is that important changes are being made in the methods of cultivation and exploitation, and as for equal "doses" of capital and labor, who is so simple as to think of adding them? The question is not that of adding another cartload of the old fertilizer to a wheat field, but of adding some new fertilizer, exactly fitted to the wants of the crop, by which it may be doubled in quantity. It is not a question of adding a man with a sickle, but of adding a man with a modern harvester; not of sowing the old seed to yield tenfold, but the new seed to yield an hundredfold. Capital is multiplying so rapidly that it worries some people, at least, to know what to "dose," and invention multiplies the units of labor so fast that they outstrip even our imagination. Now, to be sure, individual farmers must have practical methods of directing the expenditure of what capital and labor they have, and the law applies to them since an individual is more or less in an eddy, just as I am in the matter of capital. I have little more than I had before the last multiplication of the capital of the world, but I am not so personal as to deny the increase. I claim to be part of the age of airships, though I have never seen one, and am no nearer an automobile than a state of covetousness. I try not to be like the woman in a small town who came to me after a lecture in which I had said that, since three fourths of the women in that village bought their bread from bakeries where it was made by men, they could retain their power over bread making only by voting, she confidentially told me that she made her own bread, and hence did not see any need for women's voting. It seems to me that an economic law ought to be comprehensive enough to summarize the individual cases. Professor Carver shows conclusively that in an individual case the law of diminishing returns may work exactly. He even shows that large-scale production does not overthrow the principle; but he does not consider the pertinent fact of modern industry, that invention, organization and efficiency make constantly changing conditions, and that "equal doses" are out of date. He admits that the law is more evident when applied to stationary civilization, saying, "If civilization should remain stationary while population increases in density there would be a smaller per capita production because of the law of diminishing returns. The terrible reality of this law is witnessed by the overcrowding of those populations where, as in the unchanging east, civilization has become stationary." I reply, "to be sure," but modern economics is neither history nor anthropology, and what should be taught in our colleges and to business men is a principle that applies to a progressive civilization. Again Carver says, "but with respect to the livelihood of a complex population considering all its industries in a mass, the operation of the law is not so clearly perceived." Again I say, "to be sure," because under such conditions it is not operating. And at the end of his long chapter, considering the relative productiveness of different sorts of labor, he states, "that nothing could prevent its (the former of the cited classes of labor) declining relatively to that of the latter class except a radical change in the system of industry, which would call for more than a proportional increase in the former class." The contention of this article is that there has been this radical change in the system of industry, that increases are becoming more than proportional and that we are not yet even in sight of the beginning of the end. I am perfectly willing to admit that the law of diminishing returns has an illustrative value, but it is taught in many courses and economic articles as though the world in which we live were about to suffer from its "terrible reality" as it would in a world of stationary civilization. At a recent large gathering of economists there were but two expressed exceptions to the opinion that immigration was about to become dangerous because the additional numbers would make competition too keen. They thus implied the fear that this bugbear law of diminishing returns will soon deprive us of enough to eat. The whole difficulty is a mistaking of unjust and unequal distribution of wealth for an application of the law of diminishing returns. I presume that Mr. Rockefeller's difficulty arises from the fact that any other method of distribution than that which has been contributory to his own success is inconceivable. But economists ought to be able to see production and distribution at the same time and in their totality.
The law of diminishing returns is intimately related to another famous and equally archaic economic law, viz., Malthus's law of population. The substance of this law is that population tends to increase faster than the means of subsistence. There is something in this. It works in determining the number of wolves, but the last census report does not show human population in America confirming it. It is always a great satisfaction to find a single principle which will explain a condition; but we are becoming more and more convinced that social phenomena are the product of numerous forces and are not reducible to a single law. Malthus's law does not care whether a single family has many or few children, but whether population is increasing or decreasing. So the law of diminishing returns ought not to be limited to individual production, but extended to production as a whole. It is quite true that the surface of the earth is limited in extent, and that the population of the earth is multiplying; but it is likewise true that the sun is losing its heat, and that some time the earth will be uninhabitable. Any physicist might logically teach his classes the desirability that the human race accustom itself to the idea of being frozen out. But whatever the logic of the question, it would and should make very little impression on the average healthy-minded individual. Our problem presents a very similar situation in which we may justly question whether a healthy-minded person should have any fear about the exhaustion of the proper number of food units that may be required, even if he is as far sighted as a conservation congress.
Soon after Malthus had written his book, his theory fell into disrepute because of the opening of the great interior plain of the United States. But thinkers soon saw that the principle was just as true as before, though the pressure of conditions was temporarily postponed. But now that we have come practically to the end of free land we seem to be nearer than ever to the threshold of the catastrophe. Even such a good thinker as Joseph L. Lee, the Boston philanthropist, feels it, for in speaking about immigration he says:
Land, however, is only one of the three factors in production. The incalculable additions to labor and capital in the last generation are so much greater contributions than more land could be that we are getting farther and farther away from, rather than nearer to, the catastrophe. To return to the analogy of the sun's heat: it is of course true that the sun can not continue to give off heat forever and remain as hot as before. But we have an interesting condition arising from the fact that though the sun is radiating its heat and thus diminishing its potential energy, yet the process of contraction which is taking place within the sun causes it to generate heat as rapidly as it is losing it, and while this is not a perpetual-motion machine, for the purposes of giving continuity of heat to the earth it is a perfectly satisfactory arrangement.
In like manner it makes no difference whether we get more land, or more productivity from the same land. Malthus found that population tended to multiply by geometrical progression, while the means of subsistence multiplied by arithmetical progression. This is true so long as the process is on an "equal dose" basis. But the conspicuous fact of modern times is that means of subsistence are multiplying at a rate which makes the multiplication of population look like the pace of the historic tortoise compared to that of Achilles, whom logic tried to keep from catching up. The logic of the law of diminishing returns is of the same type. Professor Carver shows that on a certain area of land twenty men can produce more per man than fifty, though the total production of the twenty men is but 380 bushels compared with 650 bushels produced by the fifty men. As a matter of fact, in spite of Zeno's logic we know that Achilles could overtake the tortoise, and we likewise know that the 650 bushels are being produced, and that everybody has more to eat than formerly. If pragmatism is justified anywhere it is in such considerations.
A farmer recently told me that his father paid for his farm, fifty years ago, by carrying the mail from Jackson to Grand Rapids, Mich., one hundred miles, taking just a week for the round trip. All the information he carried could now be transmitted by wire in three minutes and the increase in the amount now transmitted per man in the mail service per week is represented by a geometrical progression with a tremendous ratio. From this same farm his father hauled his wheat thirty-five miles to Jackson, taking approximately fifteen hundred pounds to the load, and requiring three days for the round trip. The Michigan Central freight can now transport wheat at least sixty thousand times faster; so that even though the most liberal division be made as to the part contributed by an equivalent of a single man and team now, a man's productivity is multiplied several thousand times. This is what we add instead of an "equal dose." It may be claimed, however, that the introduction of the railroad brought a period of phenomenal increasing returns, but that they were not maintained. It is a fact that there has not been an increase in speed at all in proportion to the outlay devoted to increasing speed, and the law of diminishing returns seems herein to be finely illustrated. However, increase in transportation does not mean simply increase in speed, but much more, it means number and extent of persons and things that can be transported in a given time. The number of people who have been brought into participation in transportation through the extension of the railroads, the increase in the power of locomotives, and the organization of the systems, demonstrates that the rate of progress has been continuous and of the same radical character as the change from stage-coach to express train. The exhibition of increasing returns is multifarious. During the Boer War I received the evening paper in an interior city at five thirty p.m. and read of battles that occurred at six o'clock that same afternoon in South Africa. This was in Tennessee near the home of Andrew Jackson who fought the battle of New Orleans after the war was over, and he did not then hear of peace until several weeks after it had been declared.
Increase in units of production does not consist merely of adding similar units. The saving of time by rapid transportation and intercommunication, the organization of capital so that it may be turned over several times where formerly it could perform but one service, makes a multiplication almost inconceivable, and every one knows that in the region of invention and organization we are just beginning to open up discoveries for entry; while the division of labor and the application of the processes of efficiency-engineering give a potentiality to the present units of labor that is revolutionary. If we will project our imagination, keeping within the limits of reason, we can predict the rate of progress will be continuous. It is quite conceivable that before this generation is passed we shall plough with power generated by the tides and transmitted by wireless processes, and that radium will be harnessed so that its incalculable energy can be used. With the tremendous increase in power the surface of the earth can be enlarged indefinitely. Why should not the plains of Europe and America be set on edge, or why should not artificial heat and light make possible several layers of productive soil, and certainly it can be employed all the year round! Already sanitation and invention are making possible the exploitation of the tropics, the really productive regions of the earth which hitherto have been undeveloped. Men can soon work where they can not live continuously because they can commute in airships and change climatic conditions daily.
In the light of these facts and fancies let us consider the validity of Malthus'"s three principles:
1. "Population is necessarily limited by the means of subsistence." This is more imaginative than dangerous, for, since "means of subsistence" is psychological as well as physical, it can not become a mathematical term. Nowadays our magazines are telling us that consumption of one half or one third of the "means of subsistence" would add greatly to our efficiency. I myself have made a definite reduction in the amount of food consumed and thereby multiplied my efficiency. Furthermore, it is undoubted that the science of nutrition is going to add many units to the food supply by subtracting the injurious, the wasted, and the unnecessary. This is the prospect before us, but in the meantime, with all the natural forces for multiplication of population active, nevertheless the means of subsistence has increased far beyond any proportions that have before prevailed. There is not the slightest evidence to-day that means of subsistence is directly effecting the increase in population.
2. "Population invariably increases where the means of subsistence increases, unless prevented by very powerful and obvious checks." This is so untrue to-day that it is not open to argument. In fact, the portion of population having the greatest means of subsistence is standing still while the poorest furnishes the greatest increase. To be sure, the standard of life may be the line at which the force of the means of subsistence is defined, but this is an artificial line. The rate of increase is not lessened by any powerful and obvious check, and it is not beginning to keep up with the rate of increase of the means of subsistence. There never was a time when the world was as well fed as at the present.
3. "These checks and the checks which repress the superior power of population and keep its effects on a level with the means of subsistence are all resolvable into moral restraint, vice and misery." Professor Patten in his last book, "The Social Basis of Religion," says, "Sin is misery; misery is poverty; the antidote of poverty is income." If the signs of the times meant anything, there is an increase in the world's income and a potential decrease in the world's misery through better distribution. Misery, then, with its accompanying vice can not be the result of the law of diminishing returns, for returns are increasing.
Since the means of production are land, labor and capital, and the methods of capitalistic-mechanical production increase the possibilities of the last two indefinitely, the resources of production show no more signs of being exhausted than the heat of the sun. Our census returns show that the population of the United States has increased 21 per cent, in the last decade, that urban population has increased even more, and that many of the best rural districts have lost population; and still there has been a disproportionate increase in the amount and variety of food. These facts make it absurd to argue that, as applied to production in the large, the law of diminishing returns is a factor to be considered. Why then in the teaching of economics, and in business is not the emphasis changed so that such a point of view as that of Mr. Rockefeller may not be attained? For obviously, as Patten says, our modern progressive civilization has passed the line of deficit and is capturing broader and broader fields of surplus. If we are going to retain a full treatment of this law and Malthusianism in our text-books, could it not be labeled as a historical condition of which occasional relics may still be found? In answer to the argument that it is essential that we take the law as a starting point for the explanation of economic phenomena, I would reply that the explanation is good only for a condition that is stationary and looks to the past. May we not demand that in some way economists should frame a law, in which, as in the law of the moving point by which the hyperbola is traced, the prophecy of the future should be as perfectly expressed as the history of the past, and thus looking ahead, give us a true description of modern conditions of production?