This section is from the "Economics In Two Volumes: Volume I. Economic Principles" book, by Frank A. Fetter. Also available from Amazon: Economic
Intensiveness and exten-siveness of utilization are relative terms. The utilization of one machine or of one piece of land is more or less intensive as compared with another when more of other agents (e.g., labor) is used with or upon it; or the utilization of an agent becomes more or less intensive than it was before if more or less complementary agents are used than before. One might say that the use of an agent is intensive in one place as compared with another (e.g., land in New Jersey compared with that in Kansas), yet extensive as compared with still another place (with that in western Europe). In the same way extensive utilization is relative.
*The rectangles, M, N, O, P, Q, represent agents of various grades, each consisting of strata of uses. The best uses are a, b, and c, in M; but after M has been utilized intensively down to d, N will begin to be utilized at its highest point. When utilization goes down to f, O comes into use, and so on. Therefore it will be seen that until the intensive margin takes in d, M is on the extreme margin of utilization, and N is just outside it; when the intensive margin falls to g and h, P is inside the extensive margin, and Q is just outside.
§ 9. Application of complementary agents at the two margins. It is not our purpose at this point1 to emphasize the fact (important as it is) that changes of demand occur, and that these changes cause the best economic proportion to change. Rather we use illustrations of change to make clear that in any given set of conditions there is a best proportion in which to combine agents. There is a right degree of economic utilization in that particular situation. Where this best proportion is attained, is a point of economic equilibrium, in the sense that there is in the situation itself (and until some other conditions change, as invention, increased demand, etc.) no motive to change the proportion. In such a case the effort is made to repeat the process, to maintain just that proportion which has been found to be on the whole best. If either of two complementary agents is used in greater or less amount than this best proportion, a loss results, something less than the possible maximum of value is obtained.
Now the case of the two margins always occurs when one of the complementary agents is present in more than one quality or grade, as respects stuff, form, or place. Then the supply of the complementary agent is distributed over the different grades of uses, now to the lower uses in the better agent, now to the upper uses of the poorer grades. In this way the effectiveness of each unit of the complementary agent is kept equal on the intensive and on the extensive margins of utilization of goods. As the value of the added product in the more intensive use of a particular agent decreases, a point finally is reached where it is better to transfer the outlay to another agent, to shift from the intensive to the extensive margin, by going over to the use of another field or of another machine not so good. As the effectiveness of the labor, of the machinery, of the lands, of complementary agents of every kind, that men have to apply to two grades of another agent is being compared constantly, the uses of the complementary agents are distributed along the two margins. The margin of utilization is marked by a line of uses valued at zero. When used to that point the total value obtainable from the agent is at its maximum. If utilization is less intensive the value of the last possible use is lost, and if it is more intensive there is a net loss on the outlay.
1We are studying here the static problem. In Part VI, chs. 32-39 the dynamic problem is much more fully treated.
§ 10. The principle of proportionality in agriculture. The principle of proportionality applies to the use of agents in all kinds of business and determines the degree of their economic utilization. This general principle was first formulated in reference to land in agriculture, and for a long time was supposed to be peculiar to the use of that class of agents.2
The use of land in agriculture is conditioned on the presence of a top-soil of suitable mineral elements and texture, and on a proper surface, exposed to light, air, and sun, with the necessary climatic influences of temperature, moisture, etc. It was long ago seen that on such a piece of land a crop larger than usual could be obtained only with greater effort or expenditure.3
It is obvious to every farmer and gardener that he cannot indefinitely increase his crop, that two men cannot always produce twice as much as one man on a fixed area of land, and that in general the product does not vary either up or down in proportion to the labor and materials applied. Instead of 20 bushels to the acre, 25 or 30 bushels might be raised, but it would require more plowing, labor, seed, fertilizer, and other expenses, in value greater than the addition to the value of the crop. On the other hand a moderate degree of thoroness of cultivation is necessary to get any results worth while; and, besides, if a small crop is raised, the value of most of the uses of the land for that season would be entirely thrown away. Only 5 or 10 bushels per acre might be raised with less expense per bushel merely for labor and material, but there would be left no remainder to apply to the value of the land-uses. Between the wastefully small crop of 1 bushel and the wastefully large crop of 100 bushels an acre, there lies a point, more or less correctly ascertained by experience, where the largest net result is obtained, a point where by aiming to raise either less or more the man in charge gets a smaller net return (surplus of total price over expenses) .
2 Of this supposed peculiarity various explanations were given, such as the chemical qualities of the soil, and as the assumed durativeness of agricultural land, etc.
3 Note the significance of the phrase "larger than usual." Surely the crops may be larger some years than others, and especially large in those years when there is remarkably favorable union of rainfall, temperature, freedom from pests, etc. "Larger than usual" means larger than on the same, or on like, land under circumstances alike except in respect to intensiveness of cultivation.
§ 11. Intensive use of ground space. The principle of proportionality applies to ground-space in all industries. Some space is needed for any activity, even for mere existence, and a limited area cannot afford an unlimited number of uses. If a large library is accumulated in one small room, a point is reached where there is scarcely room to stand, and much energy is wasted in trying to find the books. In a university the psychical product, education, may be limited by the need of space. School-rooms, laboratories, and college class-rooms, if used all day and all night, would accommodate several times as many students as they do; but the "wee sma' hours" would not be popular; and, therefore, as students increase, buildings must be added. One cannot conveniently increase the business of a lumber-yard without a larger yard-space, or of a factory without a larger floor-space. But the added space may be gotten by spreading horizontally or piling up vertically. Even in agriculture vertical addition is possible by the use of greenhouses in which mushrooms are grown below the tables and tomatoes above, and where artificial heat gives a more intensive utilization throughout the winter. Therefore, with more space and also more time a single foot of ground can be made to yield half a dozen crops in the year. In the production of food, however, on account of the need of sun, light, and air, the limits of space are more quickly felt, and are less elastic than in most other industries; the difference, however, is one of degree, and not of kind. In mercantile, commercial, and manufacturing businesses 10 acres or 60 acres of usable floor-space may be had by putting a building of that number of stories upon an acre of land, and installing elevators and moving stairways, parcel carriers, and telephones. Not only is the initial cost high, but the cost of maintenance likewise, and it is economically warranted only when land-space is very high priced. Business adapts itself to this law, but does not escape its operation. Neither the law of gravitation nor the principle (or law) of proportionality is violated or broken when materials are lifted to build the upper stories. Both "laws" are at work, even when the building is rising from the ground.
§ 12. Intensive use of tools and implements. All the implements used in agriculture are subject to the limitation of the principle of proportionality. Why will not one hoe, one rake, one plow, one scythe, one horse, one wagon, do for all the farmers of a neighborhood? It might, in many cases, but it would be with much labor and time in carrying the things back and forth and in waiting for others to get through using them; it would require work to be continued all night, on Sundays and on holidays, and even then the plowing, hoeing, harvesting, and other farm operations could not be performed when most needed. Even now there is much loss in just these ways because, tho every farmer has at least one, and some have many, of these tools, there are brief periods when there are not tools enough. "Why, then, not have more tools? Because they cost. Between the extremes of no tools and a multitude a balance is struck at a point where the last additional tool adds to the price of the crop at least as much as the tool costs. The mode of estimating these costs we have later to study more closely.
In manufacture, whether by hand tools in small shops or by machinery, in transportation, whether by boat or railroad, there is, in the mind of the manager, the same ideal point of equilibrium between the price of the uses to be added and the price of the other agents (labor, tools, materials) that must be expended to secure the additional product. To do nothing with a tool, implement, machine, for the purpose of saving the things that would have to be used with it, is to lose the use of it.
§ 13. Intensive development of water-power. In the development of water-power it is possible to combine the original source of water-supply with various kinds of other agents to generate more or less power. A waterfall may be made to yield, perhaps, 25 horse-power daily with a crude undershot wheel, 75 more horse-power if a dam is constructed and an overshot wheel is used, 150 more horse-power if an iron turbine replaces the wooden wheel, and 500 more horse-power if a large reservoir is built a half mile distant and the water conducted under pressure to a reaction wheel at the foot of the fall. The last is technically the most efficient, but economically its large cost will not be warranted until there is a large demand for power at that place.
§ 14. Bearings of the principle. It is plain that this principle of proportionality must be taken account of in all practical affairs by those who are directing the processes of productive industry, whether on a large or on a small scale. Their problem is both technical and economic. They must make effective technical use of goods, and they must combine things in ways that will pay. To the student of economics a clear understanding of this most fundamental principle of proportionality is essential to the solution of the complex problems of valuation. Things are not valued in isolation from each other. The great mass of complementary agents act and react upon each other. The valuation put upon one agent is due in part to the presence in certain proportions of other agents. Many evidences of this truth will appear to us as our study proceeds.