Knowledge And Decisions

Instead of looking at the efficiency of an economy in terms of how much input is required per unit of output — that is, the cost of production — we can look at how much output can be obtained from a given input. In both ways we can see that there is no fixed relationship between input and output but some general patterns that need to be kept in mind in discussions of economic systems — or even legal, political, and social systems. Generally, the pattern has been that increasing one input while other inputs remain constant, usually increases output — at first faster than the one input is increased, then in proportion, then slower, and finally there is an absolute reduction of output when the one input is added in unlimited quantities. The question is, why this pattern exists.

A lone man farming a vast expanse of land has a limited number of options as to how he will work this land. He may spread his labor thinly all over the whole land area, spending a substantial part of his workday walking over this area instead of actually tilling the soil, or he may decide that he will get more total output by cultivating only half of the land, putting more intensive labor there and cutting back on the amount of his walking from place to place, letting more of his energy go into the actual cultivation. Which of the two approaches he will use will depend on how the various considerations balance out in the individual case. The point here is merely to illustrate the kinds of options he has as a lone farmer (input), which can be compared to the options when there are two units of the same input — that is, two farmers on the same land.

While one farmer could either cultivate the whole land area as one unit or cultivate half the area and leave the other half uncultivated, two farmers have the option of cultivating all the area as a unit or cultivating both halves as separate units. That is, two farmers can either do what one farmer would have done or can, in addition, do things which one farmer could not have done. This is true also in the details of the work. For example, in transporting small objects into an area out in the field, two farmers may choose either to carry them or to throw them to one another. A single farmer has only the first option. In carrying heavy and/or awkward loads, one farmer is limited to getting grips in two places no further apart than the span of his arms; two farmers working together can get two sets of grips with each set being much further away than one person’s arm span. In short, within a range of work activities, two farmers have all the options available to one farmer, plus some other options as well. How often they will choose to work separately and how often as a team depends upon what the advantages are in practice. The crucial point however is that more options generally mean better results, where the larger number of options includes all the smaller number of options. This principle has wide applications within economics and beyond economics, as will be seen in later discussions.

In the case of two farmers on a large tract of land, they can each do whatever one farmer could do and together they can do things that neither could do alone. In the absence of offsetting problems, we would therefore expect two farmers to produce more than twice the output of one farmer on the same ample expanse of land. In short, we may expect a rising output per unit of the input. For similar reasons, we might expect three farmers to also increase output more than in proportion to the increased input, since more elaborate organization of the inputs is now possible. How long the output would increase more than in proportion to the input would depend upon many specific facts, but what is important here is why it could not continue increasing this way forever. Beyond some point, the land would become crowded with people, and their getting into each other’s way and distracting one another’s attention would begin to offset the organizational advantages.

If the two farmers had been sharing the output as partners, they would — automatically, and perhaps even without thinking about it — have been monitoring each other’s work, reducing the prospects of one’s taking it easy at the expense of the other. The ease of monitoring and the certainty of being monitored would guard against the level of effort falling below the two farmer’s own best judgments of the balance between ease and output. But when the number of farmers reached a hundred, no single farmer could equally easily watch the other ninety-nine, nor would each farmer be equally sure that his relaxations of effort would be detected by the others.