Law Of Increasing Returns In Economics: Increasing Returns and decreasing returns are two important stages in Law of Variable Proportions. Production can be increased either by changing all factors of production or by keeping one factor fixed while changing the proportion of the remaining factors. The classical economists and Marshall (a neoclassical economist) viewed that Law of Diminishing Returns is applicable to agriculture.
On the other hand, the modern economists described that the Law of Variable Proportions is applicable in every field of production. They viewed the Law of Diminishing Returns as a part of the Law of Variable Proportions (Law Of Increasing Returns).
Marshall’s Definition of Law Of Increasing Returns:
Marshall stated that Law Of Increasing Returns as follows: “An increase of labour and capital leads generally to improved organization, which increases the efficiency of the work of labour and capital. Therefore, in those industries which are not engaged in raising produce, an increase of labour and capital generally gives a more than proportionate increase in the return”.
He also stated that improved organization tends to override any increased resistance that Nature may offer. Marshall statement reveals the following points:
1) Increasing returns arise due to improved methods of production and increased efficiency of factors of production.
2) Increasing return tend to diminish or counteract any resistance offered by Nature in the form of returns.
3) The law of increasing returns is applicable to manufacturing industries.
4) Nature plays a significant role in agriculture. So, agriculture is subject to diminishing returns.
Mrs. Joan Robinson’s statement on Law Of Increasing Returns :
Mrs. Joan Robinson stated this law as follows: “When an increase in the amount of any factor is devoted to a certain use, it is often the case that improvement in organization can be introduced which make the units of the factor more efficient, so that an increase in output does not require a proportionate increase in the physical amount of the factor“.
This law may be applicable to all factors of production. But this law, like diminishing returns, may not be applicable to all cases. Because productive efficiency may increase in some cases due to improved methods. It may not increase in other cases.
Comparison between Marshall’s and Mrs. Robinson’s views:
Both Marshall and Mrs. Join Robinson considered that improvement in the efficiency of factors of production is an essential condition for increasing returns. Marshall viewed increasing returns as a law applicable to manufacturing industries. But Mrs. Joan Robinson viewed increasing returns as a law, applicable to every field of production. Besides, Mrs. Robinson stated that increasing returns is not applicable to every case. Improvement in the organization may increase efficiency sometimes and it may not increase efficiency at other times.
Applicability of Law Of Increasing Returns :
The classical economists and Marshall thought that while the Law of Diminishing returns operates in agriculture, the Law of Increasing returns operates in manufacturing. The following are the reasons for their view:
1) There is a greater scope for using machinery in industry than in agriculture.
2) Production is continuous and round about in Industry. But production in agriculture is influenced by Nature. It is carried according to the changes in seasons.
3) Specialization and division of labour can be introduced to a great extent in industry. But it is not possible to introduce specialization and machinery in agriculture due to the wider field of activity.
4) Supervision and management of production is easy in industry as the area is limited. But it is some what difficult to supervise and manage agricultural operations as they are spread over a wide area.
5) In agriculture the gap between input and output is long. But it is short in industry.
6) Nature plays a significant and dominant role in agriculture. Fertility of land deteriorates in course of time. Cultivation of crops is at affected by natural calamities like cyclones, Famines, floods etc. But the part played by Nature in industry is not significant and dominating one.
7) There is a real scope for the economies of large scale production in industry. But these economies can’t be secured as the output obtained from cultivation is not considerably large. Due to the above causes, Marshall observed that while the part that Nature plays in production conforms to diminishing returns. While that part which man plays conform to increasing returns. Hence agriculture is subject to diminishing returns and industry is subject to increasing returns. To say in other words Nature plays a dominant role in agriculture and man plays a primary role in industry.
Modern view of Law Of Increasing Returns:
Modern economists like Benham and Stigler expressed the view that it is wrong to assume diminishing returns in agriculture and increasing returns in industry. On the other hand they strongly contended that diminishing and increasing returns are applicable to both agriculture and industrial sectors. Diminishing returns arise due to several reasons like scarcity of factors, imperfect substitutability, heterogeneity of factors, wrong combination of factors etc.
When one factor is kept fixed and other factors are increased, after a point the fixed factors becomes less when compared to the variable factor. Such a combination of one fixes factor and the remaining variable factors lead to the operation of diminishing returns either in industry or in agriculture. We observe scarcity of factors of production in almost all fields of production including agriculture and industry. But diminishing returns can be checked through technological and intellectual capacities of individuals.
Causes for increasing return:
Increasing returns arise due to the following causes
l) Proper combination of the factors of production in right proportions
2) Full utilization of the productive capacities of indivisible factors.
3) Efficient introduction of specialization.
4) Availability of external economies of scale due to the expansion of the industry.
5) Achievement of economies due to the increase in dimensions of the factors.
6) Abundant availability of the essential factors.
Production costs will decrease when increasing returns arise. That is why the law of increasing returns is also described as the law of diminishing costs. Increasing returns arise due to the economies of large scale production.
