Opportunity Cost:
Marshall's Criticism of Jevons
Harry Gunnison Brown
[Reprinted from the American Economic Review,
Vol. 21, No. 3 (September, 1931), pp. 498-500]
The theory of "opportunity" cost has come into such general
acceptance that it receives a degree of lip service even from
economists who do not clearly understand it. But there are still a
good many who argue that the rent of land does not form part of the
cost of production in a sense analogous to that in which wages and
interest do.
A few stress the fact that much land is so unequally adapted to
different uses as to make any alternative to its best use of little or
no significance. And it never seems to occur to them that some labor,
also (as well as some capital), is so unequally adapted to different
lines as to make any alternative occupation of little or no
significance. When a piece of land has alternative uses, the choice
among them is just as significant, so far as supply is concerned, as
is the choice among different occupations of a worker who has
alternative lines of work among which he may choose.
Another difficulty -- and this seems to have confused Marshall --
arises from the notion of a no-rent margin of land use, extensive or
intensive. The whole price of goods produced on this margin is said to
resolve itself into wages and interest. The price of any specific kind
of goods competitively produced is said to be fixed at this margin,
and rent is said to be a result of the price so fixed.
But those who so formulate the relationship appear to be innocent of
any suspicion that their formulation can as justifiably be turned
completely around. For it is equally possible to picture to ourselves
a no-wages margin where the entire price is resolvable into interest
on capital and rent of land. If this fact is made clear, surely the
reader will be able to see that we can picture, also, a no-interest
margin where the entire price is resolvable into wages and rent.
Perhaps someone will demur at this point, contending that while there
may be marginal land which yields no rent, there is no marginal labor
which yields no wages. Let such a person remember, however, that for
over a hundred years economists have laid stress on the intensive
margin of land utilization. The "final" unit or "dose"
of labor and of capital to an intensively used, rent-yielding piece of
land adds nothing to the rent but merely produces wages and interest.
And the same principle can be applied to labor. To be sure, there may
not be any laborers who will work for nothing. But there are intensive
uses of labor which yield no wages. To use a given piece of land more
intensively without adding to rent is merely to apply more labor and
capital to this piece of land when the added product so resulting is
all absorbed in wages and interest. Likewise, to use a given amount of
labor more intensively without adding to wages is merely to apply more
land and capital to this amount of labor when the added product so
resulting is all absorbed in rent and interest. The labor is paid no
more. It is better provided with land and capital and so its product
is larger. But the increase of the product all goes to pay rent and
interest. The labor is used more intensively in a sense analogous to
that in which land is said to be used more intensively when more land
and capital are applied to it. The laborers do not work any harder. In
regard, therefore, to intensive use as here defined, there is a part
of the product of industry that includes no wages (and similarly, of
course, a part that includes no interest), just as truly as there is a
part that includes no rent.
All this may be said to be commonplace. Yet apparently some
economists who can see the basic principle involved, when they are
explaining interest, wages and rent by the marginal productivity
analysis, can be entirely oblivious of it when they are explaining
commodity price. That is why they assume that price always includes
wages and interest although admittedly the price of a part of the
product contains no rent!
It is this error -- for surely no economist who really sees the
entire picture will deny that it is an error-which invalidates
Marshall's criticism of Jevons on rent and the expenses of production.
Marshall, in an extended footnote on rent and price, concludes as
follows:[1]
Jevons asks (Preface to Theory of Political Economy, p. liv):
"If land which has been yielding 2 pounds per acre
rent, as pasture, be ploughed up and used for raising wheat, must
not the 2 pounds per acre be debited against the expenses of
production of wheat?"
The answer is in the negative. For there is no connection between
this particular sum of 2 pounds and the expenses of production of that
wheat which only just pays its way. What should be said is:
"When land capable of being used for producing one
commodity is used for producing another, the price of the first is
raised by the consequent limitation of its field of production. The
price of the second will be the expenses of production (wages and
profits) of that part of it which only just pays its way, that which
is produced on the margin of cultivation. And if for the purposes of
any particular argument we take together the whole expenses of the
production on that land, and divide these among the whole of the
commodity produced, then the rent which we ought to count in is not
that which the land would pay if used for producing the first
commodity, but that which it does pay when used for producing the
second."
In the light of the analysis presented at the beginning of our
discussion, Marshall could with equal cogency -- no more and no less
-- have criticized some one who argued that wages receivable in an
alternative line should be debited against any product, and in the
same words, thus:
"The answer is in the negative. For there is no
connection between this particular sum of 2 pounds (wages) and the
expenses of production of that wheat which only just pays its way
(contributing nothing to wages)."
Similarly with the next sentence. Why might not Marshall as well have
said:
"What should be said is: 'When labor (or capital)
capable of being used for producing one commodity is used for
producing another, the price of the first is raised by the
consequent limitation of its field of production"?
And as to the next sentence after this one, might not Marshall as
well have said:
"The price of the second will be the expenses of
production (rent and 'profits') of that part of it which only, just
pays its way, that which is produced on the no-w ages margin of
labor production"?
And so we might go on to the end.
There is no intention here to go into an analysis of opportunity cost
or a defense of it. Competent economists have analyzed and expounded
it and, properly interpreted, it needs no defense. The present purpose
is merely to show that such an attack as Marshall levels against the
opportunity-cost theory as applied to rent has neither less nor more
validity against the opportunity-cost theory as applied to wages or
interest. The opportunity-cost theory either is not or it is a
formulation which helps us better to understand the operation of the
market and the forces lying back of it. In either case it has the same
significance for land rent as for the interest ("profits")
of capital and the wages of labor.
FOOTNOTES AND REFERENCES
- Principles of Economics,
8th ed., London (Macmillan), 1920, p. 437.
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