Capital & Production by Richard von Strigl

Author:Richard von Strigl [Richard von Strigl]
Language: eng
Format: epub
ISBN: 978-0-94546-631-4
Publisher: The Ludwig von Mises Institute
Published: 2000-11-06T16:00:00+00:00

9. Marginal Productivity and the Formation of Costs. The Static System

Of all our explanations, nothing is as likely to appear as “foreign to reality” as the principle of marginal productivity. The theoretical derivation of the principle, as we have presented for the so-called law of diminishing agricultural returns, will appear reasonable as a purely “theoretical construction.” It is very plausible that the increase of one of several cooperating factors of production will not lead to a proportionate increase in the output; this can only be expected from a corresponding increase in all factors of production. If one regards experience, however, then in fact the opposite relationship seems to exist in many cases. Consequently, would this be a case in which a doctrine—the doctrine of marginal productivity—is “theoretically correct, but wrong in practice?” To us the situation appears to be the same here as always whenever one believes oneself able to point out a contradiction between theory and practice: A theory can only be applied to experience as a whole. It would be wrong to believe that one could break off part of the theoretical structure and triumphantly refute it in practice. The assumptions, too, from which the reasoning set out always belong to a theory. And we must certainly keep this in mind, particularly with respect to the theory of marginal productivity Perhaps we must even strive to formulate what we have already presented in this regard more precisely.

Let us first, however, present the various possibilities which can result and in fact have actually occurred. We will have to distinguish between three cases.

1. Diminishing return or rising (marginal) costs: With a given combination of factors of production the increase of one of the factors of production employed results in an increase in output which remains behind the increase in this factor of production. Accordingly, a progressive withdrawal of units of one factor of production will bring about increasing losses in output with each withdrawal of a unit. This case corresponds to the assumption on which the doctrine of marginal productivity was based.

2. Proportional output or proportional costs: With an increase of one factor of production employed in a productive combination, the output will grow in the same proportion, just as with a decrease in the number of cooperating factor units it will go down proportionally.

3. Increasing output or falling costs: The increase of one of the factors of production working in a productive combination leads to an overproportional increase in outputs, just as the decrease in one factor of production leads to a subproportional drop in output.

These pure types can be found in various combinations. Most important will be the combination of rising and falling costs. Here, with an expansion of production the transition from rising to falling costs, as well as the transition from falling to rising costs, is conceivable. The case of proportional costs will be considered essentially as a link between these combinations. Not the entire cost curve will be relevant for the isolation of the marginal

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