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cost can be explained entirely in terms of external economies ) nor, therefore, that if the rigid mathematical disharmony which Professor Pigou predicates (op. cit. p. 938) between competitive and socially desirable output really exists, it is to be explained on this ground of the certainty that the individual producer will not reap the reward of his own improvements. And in order to test this conclusion, I make my old supposition. Suppose an industry of this character to be administered in trust by a National Guild. Since the disharmony of interest due to the externalisation of economies is removed—since the Guild can be certain that the full advantages of any improvement which it makes in organisation will be enjoyed by itself alone—it would be natural to infer from Professor Pigou's analysis that such a Guild will produce what he holds to be the socially most desirable outputthat is, will push production to a point at which the product of the marginal unit of resources is sold for a price which just affords adequate remuneration to that marginal unit. But of course it
will do no such thing, for that would be to carry on production :- at a loss. It will regulate output in such a way that total receipts
cover total costs—that is, it will seek to establish deliberately the equilibrium which tends to be established automatically under conditions of competition.
§ 8. If, therefore, competition really offends in the rigid mathematical manner asserted, we must look for some other explanation. And I can find none. I am led on to question the relevance of Professor Pigou's whole apparatus to this group of “ decreasing cost” industries as well as to the other. Is not the body (whether private monopolist or State) which seeks to improve substantially 1 on competitive output in such cases seeking to voyage pennis non homini datis, and not merely to penetrate the secrets of Time, but to do that leisurely old gentleman's work for him ? I struggle out of the giant's embraces into the peaceful enclave of my hard-won prejudices about the nature of . decreasing cost of this type :—that it only means that, given time and the progress of organisation, a larger output can be produced at a lower cost per unit than a smaller output used to be. We used not to dare conceive of falling cost per unit as a determinant of increased output, but only as resulting from it, or at the rashest as “ being associated with it.” 2 Dare we, there
i For I have some qualifications to make, below, $ 9.
2 Cp. Marshall, Principles, p. 45, note. “But in real life the cost of production per unit is deduced from the amount expected to be produced, and not vice versa. Economists commonly follow this practice."
fore, conceive of falling “marginal supply price” as a potential determinant of increased output, as Professor Pigou seems to do when he comes to discuss the actions of a monopolist with powers of discrimination (op. cit. pp. 248, 950)? Let me make my full confession. I do not believe the “ curve of marginal supply prices " has any message for us at all in connection with my “ decreasing cost” industries of Group (II). I can attach a meaning to him in connection with my Group (I), and though I do not regard him as such a socially desirable character as Professor Pigou does, I can see his bearing on certain problems of price-discrimination. But in our present surroundings I do not want him at all. I am content with an old-fashioned supplycurve, the locus through time of the end-points of a number of “particular expenses curves,” each of them indicating the conditions of production in a given state of organisation. And I am content to suppose that at each point on the locus competition, by producing just so much that total receipts cover total costs, is on the whole securing the best results at that time and in that stage of organisation attainable.
§ 9. On the whole, for having cleared away the alleged rigidly mathematical sins of competition, we are now free to consider its not precisely measurable peccadilloes. For I have no wish to deny that the State, by well-devised intervention, can in certain cases accelerate the improvements in organisation from which decreasing cost arises. It can artificially raise the demand-curve by protective tariffs; it can artificially lower the particular expenses curve in force for the time being by the grant of welladministered subsidies; and in either way it may enable any given point on the original supply-curve to be reached earlier than it otherwise would have been. This would be true even if all economies were “internal”; but the admitted fact that some of them are “ external ” strengthens the point; for I have no wish to deny that the uncertainty of enjoying the full fruits of one's labours retards progress. I have no theoretical quarrel, therefore, with the old-fashioned “ infant industry” argument for protection or subsidisation, which it seems to me would remain intact even if Professor Pigou's constructions were to collapse, and which indeed is supported by him without the aid of their more intricate scaffolds (op. cit. p. 122). But the aim of such State intervention must be clearly conceived. It is not to maintain permanently a production which is “uneconomic ” in the old-fashioned sense that receipts do not cover costs, but, at the expense of temporary loss, to bring about more quickly a state of affairs where production is still “economic,” though larger than before. Such a policy of subsidy is, therefore, quite different in nature from the policy of permanent subsidy to “ decreasing cost " industries recommended, at least in theory, by Professor Pigou (op. cit. p. 193).
1 But it might, I think, be argued that under competition, since each supplier is chronically tempted to cater for a larger part of the market than is in fact likely to fall to his share, those experimental enlargements and improvements in which some of the roots of“ decreasing cost" are found are more likely to take place than under a regime of single supply, even if the latter does not seek monopoly profits.
§ 10. Has David grown bolder? Or is the giant really an easier mark when he stalks through the pastures of " increasing cost”? At any rate I take up my sling with alacrity.
What meaning are we to attach to the curves which exhibit the disharmony between competitive output and socially desirable output under conditions of increasing cost? We must return to the already-quoted prelude (op. cit. pp. 190–191) for Professor Pigou's answer. (We find there that the employment of an additional unit of resources in an industry may modify unfavourably the general organisation of the industry, so as to make each unit of resources there employed yield a smaller net product than it would otherwise have done. And since, as we have seen, Professor Pigou conceives of each supplier as producing an indefinitely small proportion of the total output, these unfavourable results are felt almost entirely by other suppliers. In other words, we are asked to recognise the existence of “external diseconomies ” 1 arising from the increase in output, and sufficient to produce the rigid mathematical defect of competitive output from the output socially desirable.
Now external economies we know, even if we refuse to yield them exclusive homage : transport developments, the telephone and the trade journal, the shop of the club and the market-price, subsidiary industries, a skilled labour supply,—we have all at some time tried to memorise and to reproduce the formidable list. But these external diseconomies, mathematically no less powerful, who in the world are they? Can we not be told at least one of their names? We are told in an appendix that “ the reason why diminishing returns in terms of money appear where they do appear is, in general . . . that that proportionate combination of factors which it is most economical to employ when (x + Ax) units of commodities are being produced is in general a less efficient proportionate combination than that which it is most economical to employ when x units are being produced ” (op. cit. p. 936); but we seek in vain for a further word of explanation, or for any word at all of illustration. Out with your pebble, David, and get it over! You do not believe that there are "no sich persons."
1 I am not attempting to father the actual phrase on Professor Pigou, but must ask him to admit parentage of the conception.
It is natural that we should fall back on what we learnt long ago about the phenomenon of increasing cost. We know that additional applications of capital and labour to a given piece of land yield after a point a diminishing return of product; we know that the supply of land, and still more the supply of land of any particular quality, is limited; and we know that in industries making, directly or indirectly, a large use of land, the influence of these facts may overbear the influence of improvements in technique and organisation, and bring it about that, even if we allow for the progress of time, a larger volume of output is produced at a greater cost per unit than that at which a smaller volume of output used to be produced. Herein I am content to find the sole and sufficient explanation of the phenomenon of increasing cost. But I see no reason at all to inferv from this state of affairs that production in such industries is being carried further than the social interest dictates. The land itself, and the other factors employed with it, are presumably each being employed up to, but not beyond, the point at which any further application would be less advantageous to the individuals concerned than application in some other field; and I see no cause for suspecting in this matter any but special and incidental disharmonies, of varying and indefinite magnitudes, between the interests of the individual and of society.
§ 11. But this, the giant may say, is to evade his fortifications, not to overthrow them by frontal attack. I must reply that that task, in my judgment, has been performed. Professor Allyn Young, accepting the twin curves but not the inferences drawn from them, argues that the reason for the excess of the " marginal supply price ” of any given volume of output over its average cost per unit, lies in the necessity which increased output entails of paying higher prices for the land employed in yielding every unit of output, and not in any attraction of real resources to the industry beyond those specifically employed in producing the additional units of output. I am convinced by this, and unshaken by the Professor's reply (op. cit. pp. 934–6), which
1 Review of Wealth and Welfare in Quarterly Journal of Economics, August 1913, p. 683.
turns once more on the negligibility of the relatively small. Any given industry, he states (a generous exception is made for “dominant crops” such as wheat), uses so small a proportion of the community's whole supply of land that it can obtain additional supplies of land without driving up against itself the price of land per unit. Yet I cannot unlearn all at once that the rent of land in any use depends on its productivity in that use, and not in some other use; I recall that farmer who has no doubt at all that it is best to grow hops on his land, and therefore presumably under competition has to pay a rent appropriate to hop-growing; and I feel convinced that if there is a large expansion in the scale of production, say, of the cinema industry in any town, its effect will be felt on the rental value of the sites which that industry occupies.
And if Professor Pigou is right, how does it come about that when output is expanded a “ less efficient proportionate combination of factors ” has to be employed than was previously the case? I can see no reason for such a drop in efficiency, except that the margin of application of capital and labour has had to be pushed further, owing to the impossibility of obtaining indefinitely increased supplies of land at the old rent. Will Professor Pigou tell us clearly whether he conceives this drop in efficiency to be due to the operation of the law of diminishing return from land, or to some other “external diseconomy"? If the former, why should this law be brought into play if the industry can obtain the use of increased quantities of land at the old rent? And if the latter, what, once more, are these “external diseconomies "?
Meanwhile I conclude provisionally that, under increasing as under decreasing cost, competitive output, whilst doubtless not impeccable, commits no such rigid mathematical sin as that which has been laid to its charge.
$ 12. There remains a word to be said about“ short periods," with reference to my Group (I) of “ decreasing cost " industries. Such industries are, as has long been recognised, liable to terrible disorganisation in times of temporary depression of demand, since any hope of covering standing charges is apt to be temporarily abandoned, and slaughter prices accepted. If sellers
1 Marshall, Principles, p. 436. Cf. the note on the following page : “And is for the purposes of any particular argument we take together the whole expenses of the production on that land, and divide these among the whole of the commodity produced, then the rent which we ought to count in is not that which the land would pay if used for producing the first commodity, but that which it does pay when used for producing the second."