Chapter 37 The eighth chapter is the relationship between marginal cost and value.general principles

Section I This chapter and the following three chapters further study the relationship between direct and supplementary costs and the value of products, especially with regard to the influence of the time factor, and the influence of the derived demand of products on the value of the factors used in their production. This and the next three chapters deal with the relationship between the marginal cost of products and their value on the one hand, and the relationship between marginal cost and the value of the land, machinery, and other means of production employed in their production.Such studies relate to normal conditions and long-term outcomes.This fact must always be kept in mind.The market value of anything can be substantially higher or lower than its normal cost of production: the marginal cost of a particular producer can at any time have nothing to do with the marginal cost under normal conditions.

It was pointed out at the end of Chapter VI that one part of the problem cannot be separated from the rest.Relatively speaking, there is no such thing, and its needs are not hugely affected by the needs of other things that make it useful.We might even say that the demand for most commodities is not immediate, but derived from that of those commodities of which they contribute (as raw materials or means) to the production of finished goods.As this demand is thus derived, it in turn depends to a large extent on the supply of other commodities with which they co-produce those commodities.Moreover, the supply of anything that can be used to make any commodity is often greatly affected by the demand for that thing, which in turn is divided from the use in the production of other commodities, etc.These interrelationships can and must be ignored in quick and informal discussions of world commerce.But a careful examination of these relationships cannot be avoided in any study worthy of the name.This requires us to keep many things in mind at the same time, and because of this, economics can never be a simple science.

The scope of the contribution these chapters are to make is small, but that scope is difficult.We need to be careful and not just look at it from one side.Because it is full of pitfalls and stumbling blocks.It deals primarily with the payment of land, machinery, and other material means of production.Its basic arguments apply also to human rewards; but these rewards are affected by factors that do not affect the rewards of the material means of production; It's hard enough. Another example of the substitution principle in the second section. Let us first recall the role of the substitution principle.In the modern world nearly all the means of production pass through the hands of employers and other entrepreneurs who specialize in organizing the economic forces of the population.Each of them chooses at all times and places those factors of production which seem best suited to his use.The total price which he pays for those factors of production which he employs is as a rule less than the total price which he must pay for those other groups of factors which may be used in their place.For whenever this is not the case, he will proceed to replace it with a less expensive measure or process.

The above arguments are consistent with common sayings in daily life, such as "everything has a tendency to find its own destination", "most people's income is almost equal to what they are worth", or "if someone earns more than another person times, which means that his work is also worth twice as much", or "machines will replace manual labor, as long as it can provide cheap labor."It is true that this principle does not work without obstacles.It may be limited by custom or by law, by sectarian opinion or by the charter of a trade union.It may be weakened by the lack of enterprise, or it may be tempered by the unwillingness to break up the partnership.

But it always works, and it permeates all economic measures of the modern world. For example, there are several kinds of field work in which the horse power is clearly more expedient than the steam power, or the steam power is clearly more expedient than the horse power.If we may now assume that no new great advances have been made in horse-drawn implements or power machinery; and, therefore, that past experience has taught the farmer gradually to apply the law of substitution; then, on this assumption, the use of steam power must be extended to such to such an extent that no net advantage can come from any more use of steam-power in place of horse-power.There would, however, remain a margin where they could all be used indiscriminately (as Jevons might say); the cost of.

Likewise, if there are two means of obtaining the same result, the one by skilled and the other by unskilled labour, that which is more efficient than cost will be employed.There will be a margin at which each method will be used indiscriminately.On that line, the efficiency of each method is proportional to the price paid for it, taking into account of course the special circumstances of various factories in different regions and in the same region.In other words, the ratio of wages of skilled labor to unskilled labor is equal to their ratio of efficiencies at the margin of indifference. Moreover, the competition between manual and machine labor is analogous to the competition between different kinds of manual labor or different kinds of machine labor.Hand labor has an advantage in some operations, such as weeding irregularly growing weeds of those valuable crops, and horse power has a distinct advantage in weeding a common turnip field; Applications in will be extended to such an extent that no net benefit comes from further use.On the margin of indifference between manual labor and horsepower, their prices must be proportional to their efficiency; the effect of substitution thus tends to establish a direct relation between the wages of labor and the price which must be paid for horsepower. .

The third section defines the pure product. All kinds of labour, raw materials, machinery and other equipment, and internal and external organization of business are routinely employed in the production of commodities.The superiority of economic liberty is especially evident in this respect: a gifted entrepreneur runs his own risk to experiment to see whether a new method or a combination of old methods is more efficient than the old ones.Indeed, every entrepreneur is constantly trying, according to his energies and talents, to understand the relative efficiency of each factor of production which he employs, and of other factors which may be substituted for some of them.He tries to estimate the net product (i.e., the net increase in the value of his total output) that will result from the additional use of any factor; by net is meant less any additional cost that may be indirectly incurred by the change, plus the consequent any savings that come from it.He seeks to use the elements up to that margin at which their pure product no longer exceeds the price he has to pay for it.His estimates are generally based on trained instincts rather than formal calculations; but his methods are much the same as those indicated in our study of derived requirements; from another point of view they may be described as using A method that a complex and sophisticated system of double-entry bookkeeping can do.We have done some simple calculations of this kind.We have seen, for example, how the proportions of hops and malt in ale can be varied, and how the extra price ale can fetch by increasing the amount of hops is a typical factor in determining the demanded price of hops.Assuming that the increased use of hops entails no extra labor or expense of any kind, and that the advantages and disadvantages of using this extra quantity are worth considering, then the added value of ale is the marginal pure product of the hops we seek.In this case, as in most others, the pure product is an improvement in the quality of the product, or a general increase in the value of the product.It is not a definite part that can be separated from the rest of the product, but it can be separated in exceptional cases.

Excessive use of any element in Section 4 will cause diminishing returns.This fact is similar, but not identical, to the fact that a corresponding increase in the capital employed in land, and in labor of all kinds, would give rise to diminishing returns. The notion of marginal use of any factor of production implies a possible tendency for diminishing returns as its use increases. In every branch of business, and indeed in all the affairs of daily life, the excessive use of any means to any end is bound to produce diminishing returns.We may give some more examples to illustrate the principle that has been demonstrated.In making a sewing machine, some parts will do just fine in cast iron, others in plain steel; still others require alloy steels which are very expensive, and all parts should fit smoothly so that the machine will run nimbly .

If any one expends undue care and expense in the selection of raw materials for secondary uses, it may indeed be asserted that this expenditure affords sharply diminishing returns; It may be more beneficial to him to build more machines.Things would be even worse if he spent too much on coating and varnishing only, and used inferior metals instead of necessary higher ones. This consideration seems at first sight to simplify the economic problem; on the contrary, it is a major source of difficulty and confusion.Because all these different tendencies of diminishing returns have some similarities, but they are different after all.Diminishing returns, for example, due to the disproportion of the various factors of production employed in a given job, have nothing in common with the apparent tendency to pressure on the means of subsistence due to increasing population.The principal application of the great law of diminishing returns of the classical school is not to any particular crop, but to all the major food crops.It holds that farmers must generally grow those crops which their land and resources are most suitable for growing, taking into account the relative needs of these crops; moreover, it holds that they must properly allocate their resources to the various uses.It does not assume that they were infinitely intelligent, but it assumes that they have shown considerable care and wisdom in allocating these resources.It refers to a country whose entire land is already in the hands of actual entrepreneurs who can replenish their capital with loans from banks, provided they justify the use of the loans. The law asserts that an increase in the total investment in agriculture in the country Will lead to diminishing returns to general agricultural products.This argument is similar to, but distinct from, that which, if any farmer allocates his resources unduly among various schemes of cultivation, he will receive from those excessive expenditures Some will get significant diminishing returns.

For example, in a given case there exists a definite proportion between the sums of expenditure which can most profitably be employed in plowing, harrowing, or fertilizing.There may be some disagreement on this question, but not much.An inexperienced man who has plowed many times a piece of land which has been reasonably well treated by machinery, and has given it little or no manure which it badly needs, will generally be reproached for plowing too often. , so that it induces sharply diminishing returns.But the consequences of this misuse of resources have nothing to do with the tendency towards diminishing returns to agriculture in an early-developed country due to a general increase in the employment of those resources properly employed in cultivation.Quite analogous cases can indeed be found, namely, that even in those industries where increased capital and labor, if properly distributed, produce increasing returns, particular resources, if employed in an undue proportion, produce diminishing returns.

Dry.Quite analogous cases can indeed be found, namely, that even in those industries where increased capital and labor, if properly distributed, produce increasing returns, particular resources, if employed in an undue proportion, produce diminishing returns. If there is more than enough in addition to the operating remuneration), then the steam door is open and new supply is coming in.If the reward is lower than this number, the steam valve is closed and does not move.In short, as the existing supply is gradually destroyed by use and the passing of time, the supply is always diminishing while the valve is closing.The valve is that part of the machine by which the general relation of supply and demand determines value.But marginal use does not determine value; for marginal use, together with value, is determined by the general relation of supply and demand. Section 6. The terms interest and profit apply directly to circulating capital, and, according to the assumption, only indirectly to productive capital.The central theory of these chapters. Thus, if the producer's individual resources take the form of general purchasing power, he will extend each investment to that margin at which he can expect no more net return from it than he can from some other material. The net remuneration that can be obtained from an investment in , machinery, advertising, or the employment of some additional labour.Every investment seems to be pushed through a valve which gives it resistance equal to its expansive power.If he invests in materials or labour, and this is quickly embodied in some salable product, the sale of the product replenishes his circulating capital, which in turn is invested on that margin, where Marginally, the rewards for any additional investment are too small to be profitable. But if he invests in land, or durable buildings or machinery, the return he receives from his investment may vary widely from what he expects, as will be determined by the market for his produce.During the age of machines, the nature of the market was mostly changed by new inventions or changes of seasons, to say nothing of the age of land.Thus his income from investments in land and machinery differs, from his personal point of view, chiefly in the longer life of the land.But the main difference between the two types of income, in terms of general production, is the fact that the supply of land is fixed (although in newly developed ); while the supply of machines can be increased infinitely.This distinction works for the individual producer.For unless some great new invention renders his machines obsolete, and there is a steady demand for what those machines produce, they will continually sell at a price approximately equal to their cost of production; Offer him the normal profit on the cost of that production (minus depreciation charges on the machinery). Thus the rate of interest is a ratio, and the two things it connects are two amounts of money.If the capital is "free" capital, and the amount of money, or the general purchasing power it commands, is known, its expected pure money income can be expressed immediately by a certain ratio (four, five, or one cent) to that money. ) expressed.But when free capital has been invested in something definite, its money value cannot as a rule be ascertained, except by reducing it to the net income capital it will furnish.The causes which govern it are, therefore, in varying degrees analogous to those which govern rent. We are already confronted with the central theory of this part of economics, namely: "What is rightly regarded as 'free' or 'fluid' capital or interest on new investment is regarded as a rent ( quasi-rent) would be more correct. However, there is no strict demarcation between circulating capital and capital 'sedimented' in a particular branch of production, between old and new investments. Each group of investments can gradually become Another group of investments. Even ground rent is not treated as a thing in itself, but as a principal species in a large class; It's extremely important from a standpoint."