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necessary to secure an additional $100 worth of product may be assumed as follows:

I. To secure first $100 increase requires $60 increased expenditure
II. To secure next $100 increase requires $50 increased expenditure
III. To secure next $100 increase requires $50 increased expenditure
IV. To secure next $100 increase requires $70 increased expenditure
V. To secure next $100 increase requires $100 increased expenditure
VI. To secure next $100 increase requires $125 increased expenditure

Five different stages appear in this illustration. The separate stages may be stated as follows, corresponding with the like numbered stages in the above illustration:

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According as different degrees of labor and capital are applied the returns increase (1) faster than labor or capital, (2) just as fast, (3) slower, (4) not at all, (5) or with cost exceeding income and consequent actual loss.

In this analysis, the law of diminishing returns is expressed in the form of a law of increasing costs per unit of output. In the shifting, new implications are involved, and the new law is not identical in detail with the old. Nevertheless, the new law embodies the essence of the traditional law of diminishing returns. And it does this in a form which squares with modern accounting and which is a more practicable and workable instrument of calculation in the hands of the user of land. The practical question in the mind of the user of land is: If I increase my expense for labor or capital, will my unit costs of production increase or decrease? The unit cost concept is the indispensable thinking tool for the solution of this practical problem.

Increasing Costs and the Principle of Proportionality.-Increasing costs and decreasing returns introduce the most important problems in the use of land. These problems center around the best proportioning of the factors of production. The farmer is anxious to realize the largest possible net returns on his land. Shall he buy more machinery, more fertilizer, more capital of any other kind? Shall he hire more labor ? What shall his answers be to these vital questions? In general, he will tend to add more capital until increasing costs approach the point of marginal costs and returns approach zero. He will tend to increase labor until increasing costs approach the point of marginal costs and returns approach zero. And the combination of factors will be in such proportion as will be expected to yield the largest net returns from a given total expenditure.

Assume the size of a piece of land to be constant. Then, without any change in land, we may multiply the use of both labor and capital. Or, without any change in land, we may let the use of capital remain the same, but multiply the use of labor. Or without any change in land, we may let the use of labor remain the same, but multiply the use of capital. When we get the most advantageous combination of these factors, we have the right proportional use of land, labor, and capital.

During the last few decades in the United States, there has been a development in the direction of more use of capital and less use of labor. Machinery has displaced labor. A new proportioning of the factors of production has taken place. Capital has been given more importance and labor has been given less importance. This reproportioning of factors has gone on in obedience to the laws of increasing and decreasing costs. It was found that additional use of capital meant decreasing unit costs whereas additional use of labor meant increasing costs. It was necessary to check the use of the factor which meant increasing costs and to augment the use of the factor which meant decreasing costs. The new combination of labor and capital is aimed to secure a larger net return in proportion to expenditure. Unit costs are kept down by the reproportioning of the factors of production.

The strategy of successful use of the land centers around the wise proportioning of the factors of production. The proportioning actually found is a result of many factors. The proportioning varies greatly from country to country. It varies greatly in the same country from one period to another. It varies with the density of population. It varies with the technology of production, the invention of new machinery, the discovery of new processes. But whatever the variation, one of the most crucial factors in profitable use of the land is the best combination of factors to secure low unit costs of production on the maximum amount of product.

The same principles apply to forms of land production other than agriculture. For instance, urban building sites present a basic problem of diminishing returns, or increasing unit costs. Capital may be added to a given piece of building land by building higher above ground and lower below ground. Skyscrapers and basements are the typical forms of intensive use of building sites. Whether to build a ten-story or a forty-story building is a problem requiring fine calculations. In general the determining factor is the tendency for unit costs per square foot of floor space to reach the point of increasing expenditure, which indicates the point of diminishing returns. Beyond this point, the higher the building the higher the unit costs, and the higher the unit costs, the less the rate of additional returns on the land in proportion to the additional costs of capital and labor. Similar applications of the principle of diminishing returns may be made to mining, water-power development, and other forms of utilization of the land.5

Diminishing Returns and Size of Management. The foregoing analysis of diminishing returns applies to changes in the proportions between the several factors in production. But there is another important application of the general principle of diminishing returns, namely, an application to the size of management. Assuming land, labor, and capital to hold a constant proportion to each other, the total size of the farm, or mine, or realty company is subject to a law of diminishing returns. Additions to total size may yield increasing returns at first due to the advantages of large scale production. But when carried to further extremes, such additions tend to reach the point where diminishing returns set in. When unit costs of production begin to increase, it is an index of overgrown size of management. In agriculture, the most advantageous size of farm varies from product to product. If the farm is devoted to truck products, the point of diminishing returns sets in quickly, and the size of truck farm is therefore limited to a few acres. If the farm is devoted to livestock raising, the point of diminishing returns sets in slowly, and farms may under corporation management be thousands of acres in size. There is an erroneous notion in the popular mind that the small farm is ideal for all purposes. From a poetic standpoint this may be true, but from an economic standpoint it is a useless notion. The proper economic size depends upon where the point of diminishing returns appears.

Diminishing Returns and Growth of Population. In addition to applying diminishing returns to proportionality and to size, we may also apply it to the general ratio between a country's total land supply and its total population. As the population increases, the need for food and clothing increases, and every acre of land supply is cultivated up to the point of diminishing returns. Poorer and poorer grades of land are brought into use, and more and more labor and capital per acre are employed. The unit cost of crop production mounts higher and higher, until diminishing returns put a limit upon the capacity of the soil to support the growing population. This tendency is subject to various exceptions and counter-influences which are discussed separately in the treatment of problems of population.

The Intensive and Extensive Margins.—There are two opposite ways of increasing the product of the land, namely, intensive and extensive cultivation. In Australia a wheat farmer, with the aid of machinery, may cultivate more than five hundred acres of soil. In Japan, one man, by exhaustive labor, may extract a living from two

5 The Ricardian analysis stressed the doctrine that diminishing returns applied to the added costs of only the last portions, the added portions of product. Modern accounting rejects this notion of the last bushel of wheat costing more than the first, and deals with full average costs per unit, i.e., per bushel or per $100 of product.

acres of land. The former, or extensive, method involves the use of little labor on much land. The latter, or intensive, method, involves the use of much labor on little land. Either of these tendencies is limited by certain margins of returns. Extensive farming will approach the margin where the attempt to stretch the same labor over additional acres of land will not yield returns worth the effort. Intensive farming will approach the margin where the attempt to concentrate more labor and capital on the same land will not yield returns worth the outlay. The greatest output per laborer occurs where extensive farming is approaching the extensive margin. The greatest output per acre of land occurs where intensive farming is approaching the intensive margin.

A new country, blessed with rich and virgin soil, usually employs extensive farming. With land abundant, and labor scarce, each farmer will work a large area, and the effort will be to rely upon the natural fertility of the soil to yield the desired crops. European countries have for the most part developed intensive methods of farming. Japan, , China, and India have carried intensive application of labor on the soil to an extreme. The United States has in the past leaned toward extensive farming, but is now in the transition stage toward more intensive farming. Australia, Argentina, and other new countries represent the extreme of extensive farming. As population encroaches upon the supply of good land, poorer grades of land are brought into use and greater amounts of labor and capital are applied to all grades of land. This involves pushing farther and farther toward the intensive margin.

There is a general tendency for the extensive and intensive margins of returns to be equivalent. Each method tends to be pushed to the point where further additions of land, labor or capital would not yield returns worth the outlay. The point of marginal cost of production and of marginal returns will tend to be the same whichever method is used. The margin, in either case, is the no-rent margin, or the point where the cultivation of the land ceases to earn the net income necessary to induce continued production.

Intensive and extensive methods of land use apply to other uses of land besides farming. For instance, the urban realtor may make intensive use of a small plot of land by building twenty or forty stories high and digging far below ground, or he may acquire the same floor space by going to the outskirts of the city and sprawling a building two stories high over a large ground area. In either case, the margins of no returns will eventually appear and will check the intensive or extensive method of utilizing urban sites.

The Scarcity Aspect of Land Returns.—The fertility of the soil is not one bit more important to the farmer than the proper amount of sunshine and rainfall. Yet the farmer pays a price for the use of the soil whereas he receives free the use of sun and rain. This contrast leads the way to an explanation of the basic relation which supply of land bears to the price paid for the use of it. People pay for land, not because it is fertile, but because it is scarce relative to the demand.

Scarcity of the better grades of land accounts for the value placed upon them. People do not pay for the all important sun and rain because it is not scarce. If in a given region scanty rainfall has to be supplemented by irrigation, people then have to pay for water used on the land, because it is scarce. If a man wishes to grow plants in a greenhouse, and has to supplement the heat of the sun with artificial heat, he has to pay for heat because it is then scarce. In the case of land, if there were unlimited quantities of the better grades of land and of the superior locations, no price could be charged for the use of land.

To make clear the larger bearings of these principles, it is necessary to show the relation of this principle of scarcity to the principle of demand. Scarcity deals with the supply side of the laws of value and of price as applied to land. In the discussion of demand it was pointed out that users of land are willing to pay a price for the use of land because they expect by so doing to gain added income. Demand is governed by the prospect of income from the use of land. But demand alone does not explain land value, because the utility of air, sunshine, and rainfall is just as important in the prospect of income, yet no price is paid for the use of these. Supply enters into the value equation, and it is the fact of a limited quantity of the better kinds of land which enables people to own it and charge a price for the use of it. Not the fact merely that there is a supply, but the fact that there is a distinct scarcity of this supply relative to demand, causes a price and a value to be placed upon its use. The price of the use of land is, therefore, the point of balance between scarcity on the side of supply and of the prospect of income on the side of demand. Whatever affects either of these two factors sways the price of land use.

Since scarcity gives the key to value theory, on the side of supply, it is necessary to inquire what causes scarcity to be great or small.

Within certain limits, the scarcity of the land is, in Ricardo's phrase, "original and indestructible.” Some of the fertility of the soil may be exhausted by cultivation, but there still remains the fundamental chemical and physical composition of the soil. However much fertility may be wasted, certain qualities of the soil remain which are undiminished. Likewise, in the promotion of urban real estate, the best sites for heavy buildings are sharply limited, and can not be moved, expanded, or contracted. Their scarcity is, in this sense, original and indestructible. In mining, nature offers a fixed supply of mineral ores, so much and no more, and once the minerals are mined, that part of the supply is irreplaceable. Coal, iron, petroleum, for instance, exhibit a present scarcity so far as the better grades of mines and wells are concerned, and an ultimate absolute scarcity of the total geological supply.

In an effort to provide a means of measuring this "original and indestructible” part of scarcity, the Ricardian analysis assumes the case of two adjacent farms of equal acreage. Two farmers of equal ability give equal labor and employ equal capital in cultivating their

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