Full text: Introduction

8. 
be ascertained with confidence. It appears likely, however, that the economist’s 
conviction about the importance of diminishing returns rests on prejudice, and that 
we hardly ever enter the range of diminishing returns, or of increasing capital- 
output ratios. 
It is conceivable that the relation of profit margin and profit rate 
expounded in Chapter III at least partly explains why this should be so: If the 
capital-output ratio is increased, the profit margin must increase, also the 
method would be rejected because of the implied decline in profit rate. As the 
profit margin increases, a further increase in capital-output ratio is less likely 
to yield a constant profit rate. Thus the increase in capital-coefficient would 
tend to set limits for itself sooner or later. Whether this is in fact the explana 
tion of the apparent constancy of capital-output ratios in history, or their decline 
with size and advancedness of technique (in a cross section), and the limited range 
of capital-output ratios in manufacturing, cannot be decided with confidence. 
As a special case in which some of these complex relations might be 
studied the problem of servicing machines may be mentioned. When a number of 
automatic looms are tended in common by a number of workers, the management wants 
to know which combination of numbers of men and of machines is most advantageous. 
This problem is solved by the methods of stochastic processes ^; it appears 
that an increase in scale of operations up to a certain point yields better 
utilisation of both men and machines. This is a special example of the 
"principle of massed reserves" (Sargent Florence) which has very wide applications 
in the field of inventories, cash holding, etc. It is essentially a probabilistic 
problem and has to be dealt with by these methods. 
Evidence of the capital-coefficient is still much too imcomplete to 
clarify all the details. It is safe to state, however, that capital per man 
and scale of output increase jointly in the course of technical progress, and 
the inter-relation of the three elements is of great importance. 
^ Cf. C. Palm, The Distribution of Repairmen in Servicing Automatic Machines, 
(in Swedish) Industritidningen Norden, Vol. 75(1947). 
W. Feller, Probability Theory and its Application, Vol. 1, XVII.7 
D. R. Cos and W. L. Smith; Queues, London 1961, Chapter IV: Machine Inter 
ference.
	        

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