The law of returns does not answer the following questions: (1) Whether or not the optimum dose is the only one that is capable of producing the effect sought. (2) Whether or not there is a rigid limit above which any increase in the amount of the variable factor is quite useless. (3) Whether the decrease in output brought about by progressive deviation from the optimum and the increase in output brought about by progressive approach to the optimum result in proportional or nonproportional changes in output per unit of the variable factor. All this must be discerned by experience. But the law of returns itself, i.e., the fact that there must exist such an optimum combination, is valid a priori.
The Malthusian law of population and the concepts of absolute overpopulation and underpopulation and optimum population derived from it are the application of the law of returns to a special problem. They deal with changes in the supply of human labor, other factors being equal. Because people, for political considerations, wanted to reject the Malthusian law, they fought with passion but with faulty arguments against the law of returns—which, incidentally, they knew only as the law of diminishing returns of the use of capital and labor on land. Today we no longer need to pay any attention to these idle remonstrances. The law of returns is not limited to the use of complementary factors of production on land. The endeavors to refute or to demonstrate its validity by historical and experimental investigations of agricultural production are needless as they are vain. He who wants to reject the law would have to explain why people are ready to pay prices for land. If the law were not valid, a farmer would never consider expanding the size of his farm. He would be in a position to multiply indefinitely the return of any piece of soil by multiplying his input of capital and labor.
People have sometimes believed that, while the law of diminishing returns is valid in agricultural production, with regard to the processing industries a law of increasing returns prevails. It took a long time before they realized that the law of returns refers to all branches of production equally. It is faulty to contrast agriculture and the processing industries with regard to this law. What is called—in a very inexpedient, even misleading terminology—the law of increasing returns is nothing but a reversal of the law of diminishing returns, an unsatisfactory formulation of the law of returns. If one approaches the optimum combination by increasing the quantity of one factor only, the quantity of other factors remaining unchanged, then the returns per unit of the variable factor increase either in proportion to the increase or even to a greater extent. A machine may, when operated by 2 workers, produce p; when operated by 3 workers, 3 p; when operated by 4 workers, 6 p; when operated by 5 workers, 7 p; when operated by 6 workers, also not more than 7 p. Then the employment of 4 workers renders the optimum return per head of the worker, namely ?6/4 p, while under the other combinations the returns per head are respectively 1/2 p, p,7/5 p and 7/6 p. If, instead of 2 workers, 3 or 4 workers are employed, then the returns increase more than in relation to the increase in the number of workers; they do not increase in the proportion 2:3:4, but in the proportion 1:3:6. We are faced with increasing returns per head of the worker. But this is nothing else than the reverse of the law of diminishing returns.
If a plant or enterprise deviates from the optimum combination of the factors employed, it is less efficient than a plant or enterprise for which the deviation from the optimum is smaller. Both in agriculture and in the processing industries many factors of production are not perfectly divisible. It is, especially in the processing industries, for the most part easier to attain the optimum combination by expanding the size of the plant or enterprise than by restricting it. If the smallest unit of one or of several factors is too large to allow for its optimal exploitation in a small or medium-size plant or enterprise, the only way to attain the optimum is by increasing the outfit's size. It is these facts that bring about the superiority of big-scale production. The full importance of this problem will be shown later in discussing the issues of cost accounting.
3. Human Labor as a Means
The employment of the physiological functions and manifestations of human life as a means is called labor. The display of the potentialities of human energy and vital processes which the man whose life they manifest does not use for the attainment of external ends different from the mere running of these processes and from the physiological role they play in the biological consummation of his own vital economy, is not labor; it is simply life. Man works in using his forces and abilities as means for the removal of uneasiness and in substituting purposeful exploitation of his vital energy for the spontaneous and carefree discharge of his faculties and nerve tensions. Labor is a means, not an end in itself.
Every individual has only a limited quantity of energy to expend, and every unit of labor can only bring about a limited effect. Otherwise human labor would be available in abundance; it would not be scarce and it would not be considered as a means for the removal of uneasiness and economized as such.
In a world in which labor is economized only on account of its being available in a quantity insufficient to attain all ends for which it can be used as a means, the supply of labor available would be equal to the whole quantity of labor which all men together are able to expend. In such a world everybody would be eager to work until he had completely exhausted his momentary capacity to work. The time which is not required for recreation and restoration of the capacity to work, used up by previous working, would be entirely devoted to work. Every nonutilization of the full capacity to work would be deemed a loss. Through the performance of more work one would have increased one's well-being. That a part of the available potential remained unused would be appraised as a forfeiture of well-being not compensated by any corresponding increase in well-being. The very idea of laziness would be unknown. Nobody would think: I could possibly do this or that; but it is not worth while; it does not pay; I prefer my leisure. Everybody would consider his whole capacity to work as a supply of factors of production which he would be anxious to utilize completely. Even a chance of the smallest increase in wellbeing would be considered a sufficient incentive to work more if it happened that at the instant no more profitable use could be made of the quantity of labor concerned.
In our actual world things are different. The expenditure of labor is deemed painful. Not to work is considered a state of affairs more satisfactory than working. Leisure is, other things being equal, preferred to travail. People work only when they value the return of labor higher than the decrease in satisfaction brought about by the curtailment of leisure. To work involves disutility.
Psychology and physiology may try to explain this fact. There is no need for praxeology to investigate whether or not they can succeed in such endeavors. For praxeology it is a datum that men are eager to enjoy leisure and therefore look upon their own capacity to bring about effects with feelings different from those with which they look upon the capacity of material factors of production. Man in considering an expenditure of his own labor investigates not only whether there is no more desirable end for the employment of the quantity of labor in question, but no less whether it would not be more desirable to abstain from any further expenditure of labor. We can express this fact also in calling the attainment of leisure an end of purposeful activity, or an economic good of the first order. In employing this somewhat sophisticated terminology, we must view leisure as any other economic good from the aspect of marginal utility. We must conclude that the first unit of leisure satisfies a desire more urgently felt than the second one, the second one a more urgent desire than the third one, and so on. Reversing this proposition, we get the statement that the disutility of labor felt by the worker increases in a greater proportion than the amount of labor expended.
However, it is needless for praxeology to study the question of whether or not the disutility of labor increases in proportion to the increase in the quantity of labor performed or to a greater extent. (Whether this problem is of any importance for physiology and psychology, and whet
her or not these sciences can elucidate it, can be left undecided.) At any rate the worker knocks off work at the point at which he no longer considers the utility of continuing work as a sufficient compensation for the disutility of the additional expenditure of labor. In forming this judgment he contrasts, if we disregard the decrease in yield brought about by increasing fatigue, each portion of working time with the same quantity of product as the preceding portions. But the utility of the units of yield decreases with the progress of the labor performed and the increase in the total amount of yield produced. The products of the prior units of working time have provided for the satisfaction of more important needs than the products of the work performed later. The satisfaction of these less important needs may not be considered as a sufficient reward for the further continuation of work, although they are compared with the same quantities of physical output.
It is therefore irrelevant for the praxeological treatment of the matter whether the disutility of labor is proportional to the total expenditure of labor or whether it increases to a greater extent than the time spent in working. At any rate, the propensity to expend the still unused portions of the total potential for work decreases, other things being equal, with the increase in the portions already expended. Whether this decrease in the readiness to work more proceeds with a more rapid or a less rapid acceleration, is always a question of economic data, not a question of categorial principles.
The disutility attached to labor explains why in the course of human history, concomitantly with the progressive increase in the physical productivity of labor brought about by technological improvement and a more abundant supply of capital, by and large a tendency toward shortening the hours of work developed. Among the amenities which civilized man can enjoy in a more abundant way than his less civilized ancestors there is also the enjoyment of more leisure time. In this sense one can answer the question, often raised by philosophers and philanthropists, whether or not economic progress has made men happier. If the productivity of labor were lower than it is in the present capitalist world, man would be forced either to toil more or to forsake many amenities. In establishing this fact the economists do not assert that the only means to attain happiness is to enjoy more material comfort, to live in luxury, or to have more leisure. They simply acknowledge the truth that men are in a position to provide themselves better with what they consider they need.
The fundamental praxeological insight that men prefer what satisfies them more to what satisfies them less and that they value things on the basis of their utility does not need to be corrected or complemented by an additional statement concerning the disutility of labor. These propositions already imply the statement that labor is preferred to leisure only in so far as the yield of labor is more urgently desired than the enjoyment of leisure.
The unique position which the factor labor occupies in our world is due to its nonspecific character. All nature-given primary factors of production—i.e., all those natural things and forces that man can use for improving his state of well-being—have specific powers and virtues. There are ends for whose attainment they are more suitable, ends for which they are less suitable, and ends for which they are altogether unsuitable. But human labor is both suitable and indispensable for the performance of all thinkable processes and modes of production.
It is, of course, impermissible to deal with human labor as such in general. It is a fundamental mistake not to see that men and their abilities to work are different. The work a certain individual can perform is more suitable for some ends, less suitable for other ends, and altogether unsuitable for still other ends. It was one of the deficiencies of classical economics that it did not pay enough attention to this fact and did not take it into account in the construction of its theory of value, prices, and wage rates. Men do not economize labor in general, but the particular kinds of labor available. Wages are not paid for labor expended, but for the achievements of labor, which differ widely in quality and quantity. The production of each particular product requires the employment of workers able to perform the particular kind of labor concerned. It is absurd to justify the failure to consider this point by reference to the alleged fact that the main demand for and supply of labor concerns unskilled common labor which every healthy man is able to perform, and that skilled labor, the labor of people with particular inborn faculties and special training, is by and large an exception. There is no need to investigate whether conditions were such in a remote past or whether even for primitive tribesmen the inequality of inborn and acquired capacities for work was the main factor in economizing labor. In dealing with conditions of civilized peoples it is impermissible to disregard the differences in the quality of labor performed. Work which various people are able to perform is different because men are born unequal and because the skill and experience they acquire in the course of their lives differentiate their capacities still more.
In speaking of the nonspecific character of human labor we certainly do not assert that all human labor is of the same quality. What we want to establish is rather that the differences in the kind of labor required for the production of various commodities are greater than the differences in the inborn capacities of men. (In emphasizing this point we are not dealing with the creative performances of the genius; the work of the genius is outside the orbit of ordinary human action and is like a free gift of destiny which comes to mankind overnight.6 We furthermore disregard the institutional barriers denying some groups of people access to certain occupations and the training they require.) The innate inequality of various individuals does not break up the zoological uniformity and homogeneity of the species man to such an extent as to divide the supply of labor into disconnected sections. Thus the potential supply of labor available for the performance of each particular kind of work exceeds the actual demand for such labor. The supply of every kind of specialized labor could be increased by the withdrawal of workers from other branches and their training. The quantity of need satisfaction is in none of the branches of production permanently limited by a scarcity of people capable of performing special tasks. Only in the short run can there emerge a dearth of specialists. In the long run it can be removed by training people who display the innate abilities required.
Labor is the most scarce of all primary means of production because it is in this restricted sense nonspecific and because every variety of production requires the expenditure of labor. Thus the scarcity of the other primary means' of production—i.e., the nonhuman means of production supplied by nature—becomes for acting man a scarcity of those primary material means of production whose utilization requires the smallest expenditure of labor.7 It is the supply of labor available that determines to what an extent the factor nature in each of its varieties can be exploited for the satisfaction of needs.
If the supply of labor which men are able and ready to perform increases, production increases too. Labor cannot remain unemployed on account of its being useless for the further improvement of need satisfaction. Isolated self-sufficient man always has the opportunity of improving his condition by expending more labor. On the labor market of a market society there are buyers for every supply of labor offered. There can be abundance and superfluity only in segments of the labor market; it results in pushing labor to other segments and in an expansion of production in some other provinces of the economic system. On the other hand, an increase in the quantity of land available—other things being equal—could result in an increase in production only if the additional land is more fertile than the marginal land tilled before.8 The same is valid with regard to accumulated material equipment for future production. The serviceableness of capital goods also depends on the supply of labor available. It would be wasteful to use the capacity of existing facilities if the labor required could be employed for the satisfaction of more urgent needs.
Complementary factors of production can only be used to the extent allowed by the availability of the most scarce among them. Let us assume that the pro
duction of 1 unit of p requires the expenditure of 7 units of a and of 3 units of b and that neither a nor b can be used for any production other than that of p. If 49 a and 2,000 b are available, no more than 7 p can be produced. The available supply of a determines the extent of the use of b. Only a is considered an economic good; only for a are people ready to pay prices; the full price of p is allowed for 7 units of a. On the other hand b is not an economic good and no prices are allowed for it. There are quantities of b which remain unused.
We may try to imagine the conditions within a world in which all material factors of production are so fully employed that there is no opportunity to employ all men or to employ all men to the extent that they are ready to work. In such a world labor is abundant; an increase in the supply of labor cannot add any increment whatever to the total amount of production. If we assume that all men have the same capacity and application for work and if we disregard the disutility of labor, labor in such a world would not be an economic good. If this world were a socialist commonwealth, an increase in population figures would be deemed an increase in the number of idle consumers. If it were a market society, wage rates paid would not be enough to prevent starvation. Those seeking employment would be ready to go to work for any wages, however low, even if insufficient for the preservation of their lives. They would be happy to delay for a while death by starvation.
There is no need to dwell upon the paradoxes of this hypothesis and to discuss the problems of such a world. Our world is different. Labor is more scarce than material factors of production. We are not dealing at this point with the problem of optimum population. We are dealing only with the fact that there are material factors of production which remain unused because the labor required is needed for the satisfaction of more urgent needs. In our world there is no abundance, but a shortage of manpower, and there are unused material factors of production, i.e., land, mineral deposits, and even plants and equipment.