Front Page Titles (by Subject) CHAPTER 34: DECREASING AND INCREASING RETURNS - Economics, vol. 1: Economic Principles
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CHAPTER 34: DECREASING AND INCREASING RETURNS - Frank A. Fetter, Economics, vol. 1: Economic Principles 
Economics, vol. 1: Economic Principles, (New York: The Century Co., 1915).
Part of: Economics, 2 vols.
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DECREASING AND INCREASING RETURNS
§ 1. Estimates of the world’s population. § 2. Population growth in Europe since 1800. § 3. Increase since 1790 in America. § 4. Relation of population to resources. § 5. Birth rates. § 6. Death rates. § 7. Population growth and intensive cultivation. § 8. Law of increasing and decreasing returns. § 9. Increasing returns in the nineteenth century. § 10. Rhythmic changes of population. § 11. Cumulative dynamic economy. § 12. Individual and general adjustment to static conditions. § 13. Adjustment to dynamic forces. Note on Various meanings of diminishing returns.
§ 1. Estimates of the world’s population. The movement of population can be known with approximate accuracy only where a census of the population is regularly taken. This was done nowhere until the end of the eighteenth century, and even now is done for only a small part of the world. In all other places and times, movements of population can only be estimated, usually from very insufficient data. It is certain, however, that in ancient times a considerable density of population was attained only in a few centers of empire (Egypt, Babylon, Persia, Greece, Rome, etc.), where peace, trade, fertile soil, comparatively advanced methods of agriculture, accumulated wealth, and extended political power with tributes from subject people were combined in an exceptional degree. Nearly the whole of the habitable globe was possessed by hunting tribes or by pastoral nations very sparsely peopling the lands. It has been estimated that the population of the earth at the death of Augustus (19 ad) was about 50 million.1 Since 1800 there is more of knowledge and less of guess work in the figures, which have been estimated as follows:2
Repeating the warning that these figures are mere estimates, it may yet be believed that a great increase had taken place between the first century and the year 1800, of which a large part, about half, had been in the Chinese Empire, numbering then about 300,000,000 people. But the most enormous increase occurred between 1800 and 1910, about one billion people being added to the world’s population, the total in 1910 being nearly three times as great as it was in 1800.
The population of Europe is said hardly to have exceeded 50,000,000 before the fifteenth century3 at which time England had about 2,500,000 people.4 Population grew rapidly from the end of the fifteenth century with the increase of centralized government, better agricultural methods, foreign trade, inventions, etc. An enormous loss of life took place on the Continent during the Thirty Years’ War (1618-1648), still a term of dread in Germany which, during that time, lost through violence, pestilence, and famine about two thirds of its former population. Despite numerous wars the population of Europe, according to a widely quoted estimate, was 130,000,000 in 1761,5 and was about 175,000,000 in 1800.6
§ 2. Population growth in Europe since 1800. Population increased in Europe at an unprecedented rate in the nineteenth century. It numbered about 175,000,000 in 1800, over 250,000,000 in 1850, about 390,000,000 in 1900, and 400,000,000 in 1910. Many things helped to increase the food-supplies available for Europe. The resources of the American continent were hardly touched until the great western movement of population began and new agencies of transportation brought American fields thousands of miles nearer to European markets. The improvement of machinery and of other economic equipment in Europe, and better methods of cultivation aided to increase production rapidly. Population followed, tho not with equal step. The increase has gone on at undiminished pace in eastern and southeastern countries but recently there has been a notable decline in the rate of increase in several of the countries of western Europe. France has been nearly at the stationary stage since the beginning of the twentieth century, and England probably will have reached it by the middle of the century. The great war begun in 1914 must, in the warring nations, greatly reduce the marriage rate, increase the death rate, and reduce the birth rate, until the end of hostilities. The men killed in battle are fewer than the children never to be born, who but for the war would have come into the world.
A stationary or declining population throughout Europe sometime after the return of peace is a possibility. But this does not destroy the significance of the fact that there is inherent in humanity a great potential power of increase, the realization of which would be disastrous, the limiting of which either by crude objective means (famine, war, illicit measures) or by violitional means is inevitable. It does not disprove the great biologic proposition in the Malthusian doctrine.
§ 3. Increase since 1790 in America. The growth of the population of the United States since 1790 (the date of our first census) has been proportionally much greater than that of the European countries. But it has been in two respects different from theirs, and abnormal: in being so greatly aided by immigration (while many of them lost greatly by emigration); and in spreading over wide new areas of land, almost uninhabited before, instead of merely increasing the density of population on the same area of land.7
The population the first three decades increased almost entirely extensively, moving toward an ever-widening frontier, spreading itself over a great territory. Twice did great additions of territory cause the average density to decrease (1800-1810 and 1840-1850). Cities, meantime, were growing, and decade by decade from 1850 on the growth of population was in nature more intensive. The increase in the number of persons per square mile in the first thirty years was almost nil, .7 of a person; in the second (1820-1850) was 2.4 persons; in the third (1850-1880) was 9 persons; and in the last (1880-1910) was 14 persons per square mile. The increase in density was 20 times as fast in the last thirty as in the first thirty years, having almost doubled between 1880 and 1910. A large part of our area is desert, greatly inferior to the sandy northern plains of Europe, and a large part is barren mountain (the Rockies), greatly inferior to the well-watered Alps, as a place for human habitation. Still the population of the United States is sparse compared with the countries of Europe.
§ 4. Relation of population to resources. We can account for this wonderful growth of population throughout the world only in the light of the increased power of production of wealth. The population of different countries, and of different sections of a country, is seen to bear a general relation to their resources. A community with a poor soil, little wealth, and no machinery is doomed to remain few in numbers. Mountains, districts poorly watered, the frozen regions of the North, are sparsely populated because natural resources are lacking. If food production alone is thought of there are apparent exceptions to this statement, but there are no absolute contradictions of it. A favored harbor may make possible a flourishing commerce on a rocky coast; an infertile soil may support a large population when great deposits of coal or iron insure, by exchange, great food-supplies. Productivity must be measured under modern conditions by the purchasing power that is possible in the environment.
The whole world has been coming more into the condition of political security, settled industry, and improved methods of production. The result has been a great reduction in the extent and severity of famines, an increase of the real incomes of the masses, and the survival of large numbers of people, young and old, who formerly would have been cut off. The increase of wealth, made possible by the new conditions, has gone largely to increase the number of people. The biologic factor in population is great and ever present.
§ 5. Birth rates. The increasing population has not been due to any general increase in the birth rate. In most countries where there are any records it has been decreasing, and in some cases more rapidly than has the death rate. The world’s birth rate in 1911 is estimated to be 36.5 per thousand of population; that of the more advanced industrial countries is much less. In the quarter century between 1886 and 1912 the birth rate decreased in certain countries as follows:
§ 6. Death rates. A general decrease of the death rate makes possible a growth of population even with a decreasing birth rate. The food production has been increasing and famines have been decreasing, while great improvements in medical and in sanitary science have at the same time been made. The death rate in a community is a rough index of its general welfare: the death of a large proportion of the children before they arrive at maturity indicates poverty or ignorance. The urban death rate in Europe in the Middle Ages was tremendously high, but during the nineteenth century, as a result of engineering and sanitary progress, it sank nearly to that of the country districts. The race of man, ever since the beginnings of volitional control, has had a smaller death rate relative to the total number of individuals coming into existence than has any other species of living creatures. Even in the most miserable industrial population where one half the children die before they are five years old, the death rate is much less than among the young of the lion or the eagle. The average human death rate became much less in the nineteenth century than it had ever been before. The death rate in the world as a whole in 1911 is estimated to be 28.9 per thousand, which is far greater than that of the more advanced countries. The decrease in a quarter of a century in certain countries is as follows (for comparison with preceding table):
The estimates of world population indicate that the increase of numbers was at the greatest rate in the half century from 1830 to 1880 and that it is now much less. Population increased so rapidly that the limit of resources began to be felt. The pressure of population makes itself felt in various ways, and on various levels of national culture in Japan, India, Germany, the United States, and in almost all other lands.
§ 7. Population growth and intensive cultivation. Let us analyze the process of change when population is a dynamic factor. A growth of numbers disturbs an established equilibrium of cultivation on the extensive and intensive margins (see Chapter 12), changes the relation of the value of labor-services to land uses (and to all instrumental uses), and leads to new levels of adjustment. Real changes are, of course, always complex, and along with population-changes go changes in machinery, area, methods, use of fertilizers, etc. Our question is as to the effect of population-change in itself considered, other things being equal, and for simplicity is limited here to the case of staple food crops.
A population on an area varying in fertility would apply its labor to the best tract. This, in an earlier example (Chapter 15) would be A, where, by hypothesis, 10 days’ labor produces 24 units. Wages would stand at the level of 2.4 bushels and rents would be nil. When the pressure of population requires that B should be cultivated, the wages on A would be 22 bushels and rent about 2 bushels. When cultivation moves to tracts C and D, rent arises successively on B and C. If each tract continued to be cultivated with the same amount of labor as before, the rent on A would be first 2, then 4, then 6 bushels when tract D first came under cultivation; the rent on B would then be 4 bushels, and the rent on C, 2 bushels. (See Figure 59.)
But with each extension of the margin of cultivation there should occur increasing intensity of cultivation on the older tracts, so that the return to a unit of labor should be equal in the two uses. When labor will yield but 2.2 bushels on B, it will be applied on A as long as it yields as much as 2.2 bushels (not 2.4 as before). Then this would work out as to rents and wages (in bushels) as shown in the table. (The amount of increase of labor for intenser cultivation is arbitrarily assumed. It would vary in practice but always be more intense as cultivation extended.)
So far as the rent results from differences in fertility, it depends on the maintenance of the fertility. If the fertile qualities of the better fields are not restored and maintained, the yield on the once better land would fall at the same time that cultivation extended to the poorer land. Rent may, however, in some cases result from mere advantage of location as population extends.
When a change in the relative quantity of land (or other agents) occurs that imputes to labor less bountiful results, it is a case of decreasing returns; a change in the opposite direction (through discovery, opening of new lands, increase of agents, etc.) is a case of increasing returns.
§ 8. Law of increasing and decreasing returns. The law of increasing and decreasing (or diminished) returns may be thus stated. The amount attributable to the labor element of a whole population varies with the amount and efficiency of the material agents at the disposal of labor, increasing if they increase more rapidly than population, and decreasing if the population increases more rapidly than they do. It is one aspect of the law of proportionality as applied, not to a private enterprise, but to the relation of the whole population to its resources. The law of decreasing returns received a name first, and the term has been loosely applied to many very difficult problems.8 It was first used in England about 1815 with reference to land in agriculture under steadily increasing intensity of cultivation of the soil year by year in order to get more food per acre. It was called the law of “the decreasing returns of capital and labor as applied to land.” The course of events in England called attention to the subject. Population was growing rapidly, and there was need for more food. During much of the time from 1793 to 1815 England was at war, and it was hard to obtain food from abroad. The English farmers, tempted by the higher prices, took poorer lands (marshy, cold clay, infertile) into cultivation and sought to get larger crops from the older fields. This took more labor per acre, and yielded a larger total product, but less per day’s labor. Grain and other produce rose in price, land rents and land values increased, wages fell, and therefore the peasant’s day of labor bought less food than before. The worst period of all for high wheat prices was from 1800 to 1813; the year of highest recorded annual average price was 1812, $3.80 a bushel. It was a lesson in dynamic economics on a large scale.
§ 9. Increasing returns in the nineteenth century. Other forces were at work to create better dynamic conditions in western Europe. The great war ended in 1815 and wheat prices in England fell to a much lower level by 1822. This level was nearly maintained in English markets until 1877. Then again was a great fall to the lowest point in 1894. Returns in agriculture after 1815 were on the whole increasing
until 1894. Accordingly, a day’s common labor exchanged for more food than before. Population grew, but still improved methods of agriculture produced more with less labor. Methods of transportation improved and the additional food was imported instead of being produced by very intensive cultivation of the limited area of England. After the forties a great Irish emigration actually reduced year by year the total population of Ireland. Methods of production outside of agriculture were at the same time improving, and real wages almost steadily rose in western Europe throughout the nineteenth century. The great fall in wheat prices as measured in the markets of Liverpool from 1878 to 1894 which bankrupted many farmers and reduced agricultural land values in the eastern United States and in western Europe, brought cheap food to the people. It was a period of increasing returns in agriculture, as an actual historical fact. It is a question whether that period did not come to an end about 1895, the growth of population in the international food markets of Europe and America having overtaken the increase of command over agricultural lands and brought us again into a period of decreasing returns.
§ 10. Rhythmic changes of population. Changes in population are constant. Until recently these changes have generally been of a rhythmic nature. Again and again, in the history of savage races, the failure of a single crop, war, or a plague would reduce a population in a few years much below a former level. This loss usually would be recovered within the next one or two generations. An enormous loss of population, however, such as that from the Black Plague in England in the fourteenth century, might rarely cause returns to the laborer to increase so greatly that the effects were not lost for a century. War, invasion, immigration, would reduce or add to the population of each country, yet on the whole the density of population would continue on about the same level from century to century. Good rulers and bad came and went and the education varied above and below a certain average. The amount of rainfall in some localities or in whole countries rises and falls in a pretty regular cycle of eight to ten years, more or less, causing food supplies to vary, as in the seven fat years and the seven lean years of biblical Egypt. The conditions for special crops, such as frost, snow, sun, cloudiness, hail, vary from year to year; and many insect pests run in cycles alternating with the insects’ food supply and parasitic enemies. In a larger view the rise of labor-incomes that resulted from the opening of America and with the agricultural improvement of the last century may prove to be only rhythmic, not cumulative. In so far as a rapid increase of population results, incomes are again lowered toward the former level.
§ 11. Cumulative dynamic economy. The growth of population in European and American countries in the past hundred years has gone steadily onward, not canceled by losses. The addition made to numbers (tho not necessarily a further continuation of the growth) is at least for a long period to come, a permanent fact. The movement is doubtless partly, but not wholly, rhythmic, and if a future decrease comes it is likely to result from different causes. This growth of population has gone along with other changes of an equally enduring character. Of this kind is the great increase of area open to settlement by the advanced industrial peoples, the permanent displacement on a whole continent of the savage, hunting economy and its inefficient methods of food production—the improvement of transportation opening up new sources of materials and foods to the older countries, and the rapid consumption of our supplies of timber, coal, and other mineral resources for which substitutes are difficult if not impossible to find.
§ 12. Individual and general adjustment to static conditions. In every economic situation there is involved an equilibrium of values and prices. It is the theoretically correct set of prices and incomes—not what we might wish to see but what logically results from the presence of men, desires, and goods as they are. In this equilibrium and in the movements bringing it about, there are two kinds or aspects of adjustment to be observed, the individual adjustment and the general adjustment. Each individual, it may be assumed, moves toward the occupation that (as conditions are, which he can not alter) offers him the best return (theory of wages), and uses his agents (theory of usance) so that they give the best return he knows how to obtain. If no new force is introduced and existing forces are permitted to work themselves out, a static equilibrium will result and will continue unchanged. The principle of proportionality would apply to all the combinations of factors in this equilibrium. At the prevailing prices and with the prevailing methods, so much labor of a certain kind should be used with so many agents of various kinds. If either more or less of any factor is used, the result is a product of less value for the costs and hence yielding a smaller profit (theory of profits). If a new method or a new proportion is found to be better, this is a new dynamic element. But if the theoretic, static equilibrium has been attained, there is no chance to increase the yield except when correcting a previous error by which the ideal adjustment was missed. The individual having found what seems the best adjustment has only to hold steadily to it.
Underlying each individual’s adjustment is the general adjustment of prices and yields. Under these conditions not only this workman but all like workmen can get such an amount of real wages; not only this bushel of wheat and bale of cotton bring the price, but all other like units do the same; not only this acre of land, but all other like acres of land will have equal values and uses. The individual in making his adjustment is simply trying to get into line with the general situation, to find his true place on the various levels of prices made possible by the totality of conditions.
§ 13. Adjustment to dynamic forces. In a dynamic situation the adjustment still has the two aspects. The individual workman, the passive capitalist, and the enterpriser are all endeavoring to attain to an ideal adjustment inherent in the new situation. We have already seen in many connections and in many examples how profits and losses multiply in dynamic conditions.9 Every dynamic force in industry unsettles an equilibrium, makes some factor more or less plentiful, technically efficient, and valuable. The new ideal adjustment must be made quickly and correctly. Sometimes using more of a factor than before yields a larger profit, sometimes using less may do so. The general adjustment that goes on in dynamic conditions is most important because it involves not merely the change of this or that personal fortune, but the raising or lowering of the real incomes for whole sections and classes of the population, and therefore alters the general economic welfare.
Various meanings of diminishing returns. The chief other meanings given to the phrase law of diminishing returns, which must be deemed to be more or less confused and erroneous, will here be noted.
It is confused with the law of proportionality or with the law of enterpriser’s cost, especially as applied to the use of land in agriculture. The fact that a farmer can not profitably employ an unlimited amount of labor in any one year on a single acre is said to be due to the law of diminishing returns. A like application of the term is made in explaining the limitation in the use of land for other purposes, residence, etc. (see above, the principle of proportionality, ch. 12). This application is still further extended to the use of all other kinds of agents. Later and exacter criticism (notably Edwin Cannan, in “Production and Distribution,” 1894) has discerned that more than one problem is involved (which he called technical and historical diminishing returns). In our view there are at least three distinct problems: (1) technical proportion, the best mechanical or physical combination; (2) profitable proportion, the enterpriser’s best combination of factors at existing prices; (3) diminishing returns, the social-economic problem of the relation of population to resources.
The converse phrase, law of increasing returns, is applied to the economy of large production, especially in the common contrast between manufacturing, said to be subject to the law of increasing returns, and farming, said to be subject to decreasing returns. There is error here at every point. The manufacturing enterprise as it grows is assumed to enlarge the area of land, as it is needed (problem of investment in large production), whereas the farm is taken as a fixed area (problem of proportionality). This appears to have been first clearly pointed out by J. R. Commons in his “Distribution of Wealth,” 1895.
[1 ]The Italian economist Bodio’s estimate is 54 million.
[2 ]The first column was compiled from various authorities by Prof. W. F. Willcox, in his paper “The Expansion of Europe”; from which we have derived the yearly arithmetic increase and percentage of increase by decades.
[3 ]Mulhall’s “Dictionary of Statistics.”
[4 ]At accession of Henry VII, 1485 ad See Traill’s “Social England,” vol. III, p. 129.
[5 ]Estimate of Sussmilch, the famous statistician of the eighteenth century.
[6 ]Estimate of Levasseur, cited by Willcox.
[7 ]Population of the United States at each census 1790 to 1910.
[* ]The first rate shown is for the decade ending 1800, the last, 1910. The average rate for the whites until 1860 was around 35 per cent, but the trend since has been downward until in the last two decades it has been less than ⅔ as high as it was then; it would be much less but for the very large European immigration.
[8 ]See note at end of chapter on Various meanings of diminishing returns.
[9 ]See ch. 27, sec. 13, note.