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The only difference for an actual society would be that it would cross the demand curves always at the same level, but would extend a short distance beyond them to allow for firms producing at a loss, thus:
In the case of decreasing cost there would be a series of cost curves crossing the successive demand curves at progressively lower levels as the demand increased, thus:
In all the above diagrams, d, d', d" are demand curves; c, c', c" are cost curves. AA' shows the levels at which the cost curves meet or cross the demand curves as demand increases, in Figs. 1 and 2 under conditions of constant cost, in Fig. 3 under conditions of decreasing cost.
It was stated that when we so amend the marginal cost theory as to make the marginal cost no longer the highest cost but an intermediate cost, we seem to have rendered the whole theory valueless for practical purposes as a means of determing normal price. Now it is sometimes desirable to determine normal price independently of market price, especially when the latter differs widely from it, as it may in time of war or financial panic. It is also desirable to ascertain normal price when the problem of government regulation of prices calls for solution. In such cases the difficulty referred to may be met by applying the following method.
On the principle of statistical constancy it would seem to be a legitimate assumption, in the case of a large and well-established industry, that, in normal times, about the same percentage of the entire output will be produced at a loss. Having ascertained from cost and price data, collected preferably by a government agency through a series of years, what this percentage is, we can, for the year under study, subtract this percentage from the total output and note what is the highest cost among the costs at which the remaining portion of the output is produced. This cost we may call the marginal cost and consider the normal price as being equal to it.
For example, in a certain region where a considerable portion of the United States supply of sugar is produced, it would appear from pre-war statistics that in normal times about 3 per cent of the output is annually produced at a loss. In the year 1916-17 when an abnormal relation between supply and demand had been brought about by the war, but before government regulation of prices had been attempted, it was found that 97 per cent of the output was produced at a cost not greater than $92.00 per ton, which may accordingly be regarded as the marginal cost or normal price for that year.
The actual price was $124.56 or $32.56 above normal. In the following year, 1917-18, when the price had been regulated by voluntary agreement with the United States Food Administration, the normal price, computed by the same method, would have been $147.00. The actual price was $120.00, or $27.00 below normal.
In connection with the above analysis the writer wishes to emphasize the importance of statistical inquiry as a means of checking and extending economic theory. From the examination of a considerable number of cost curves similar to those shown in Dr. Taussig's article, he was struck with the remarkable family resemblance, whether they were derived from industries to which the law of diminishing returns would presumably apply or not. In all of them there was the same ascending ogee curve, sometimes steep, sometimes more nearly horizontal, but always a curve of the same family type, and in all cases, where the data were at all complete, crossed by the average-price line near its right hand extremity. This unexpected result led him to question whether competition, in the case of industries not subject to the law of diminishing returns, tended to result in a uniform cost for all producers to nearly so great an extent as had been generally supposed, and further led him to question whether there might not be more truth in Walker's theory of marginal and infra-marginal entrepreneurs than recent economists had been willing to admit. Further reflection made it clear that there was no real difference between Walker's theory of the marginal entrepreneur and Marshall's theory of the representative firm. Finally a promising method of handling statistics so as to determine marginal cost and normal price was developed as a result of such theorizing.
It is not the purpose of this article to assert that such cost lines as have been described will be found to exist for all industries. Some industries may be found for which the cost lines are horizontal or approximately horizontal, and in that case it would be interesting to investigate and compare with a view
to determining what are the factors which result in horizontal cost lines for some industries and ascending cost lines for others. Such an investigation would undoubtedly result in a further development and clarification of theory.
PHILIP G. WRIGHT.
AN EMINENT ECONOMIST CONFUSED
THE writer of this note has recently had called to his attention Professor Carver's new and interesting Principles of Political Economy. With much that is unusually clear and convincing, it is regrettable to find a vaguely stated and doubtfully valid argument that a protective tariff may add to a nation's wealth by drawing labor out of a line which its employers deem more profitable (under free trade) into one which yields its employers less. Professor Carver's argument, in its most concrete statement, is as follows: "Let us suppose that a certain tract of land had been devoted to cultivation of a fairly intensive kind, and had been producing enough to pay the wages of twenty laborers, with something left over for rent. Through some change of circumstance the price of wool rises, and it is found more profitable to use the land for wool-growing. By turning the land into a sheep run, nineteen of the laborers may be dispensed with, and the saving in wages would more than measure the difference between the value of the wool crop and that of the present crop, so that a larger surplus would be left over as rent. There is little doubt that the land would then be devoted to the growing of wool. That would be to the interest of the landlord and against the interests of the nineteen laborers, but the landlord is in a better position than they to determine the form of cultivation. There is also little doubt that this would be contrary to the interest of the community. Less would be pro
1 Principles of Political Economy, p. 360.
duced either for consumption or for international trade. Fewer people could be supported, or the same number would not be as well supported as formerly.
"If the nineteen men thrown out of employment cannot find places elsewhere, they will probably, since they want to live, offer their labor at lower wages - enough lower to enable the landlord to get as much rent from the more intensive form of cultivation as he might get by the less intensive form. Here we have the somewhat anomalous situation of an increase in price in one of the products of industry causing a fall in the price of labor. The key to this anomaly is found in the fact that what is cost to one man is frequently gain to another. Now in this supposed case (which is not altogether a supposed case) there is little doubt that some form of discrimination in favor of the present crop and against wool would increase not only the relative share of the produce going to labor, but the absolute amount of the produce of the land. . . . There lies the opportunity for the protectionist. By some discrimination which will tend to increase the profitableness of the intensive product, or decrease, relatively at least, the profitableness of the extensive product, an absolutely larger and more valuable product might be created.... Labor and capital would have been attracted from the less productive to the more productive industry."
The answer which first suggests itself and which the present writer ventured to make some years ago1 to Professor Carver's argument as it appeared in an article of 1902,2 is that there are, with reference to the nineteen men who, it is alleged, might be thrown out of work by free trade, two possibilities. Either these nineteen men have a preferable alternative, under the free trade régime, to wheat raising, or they have not. If they have not, they will accept low enough wages, rather than be unemployed and have nothing, so that
1 See Principles of Commerce, Pt. II, pp. 107-108, note, where Sedgwick and Edgeworth are also criticized for essentially the same error. The writer has since learned that his point was anticipated in a criticism of Sedgwick by Davenport, in the latter's Outlines of Economic Theory, New York (Macmillan), 1896, pp. 197–200.
• Publications of the American Economic Association, 3d series, vol. iii, pp. 176-182.