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Risk, Uncertainty, and Profit; Knight, Frank H.
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Against the productivity theory itself an old and common criticism is that well stated by Wieser, *54 who attempts to refute Menger's presentation of it, and substantially the same line of attack has been followed more recently by Hobson, *55 who refers especially to Wicksteed. The contention is that specific or marginal productivity cannot afford a theoretically adequate method of distribution, for the reason that the sum of the products of the separate agencies, as defined by the theory, will be not equal to the total joint product, but considerably larger. The amount subtracted from the total product when "one unit" is withdrawn will, it is argued, be much greater than can be imputed to that agent alone, since the loss of any agent will more or less dislocate the organization. It, therefore, becomes impossible by this method to divide the total accurately into parts ascribable to the separate "factors" individually as the specific contribution of each. Wieser proposes an alternative method, which is identical with Professor F. M. Taylor's exposition of the productivity theory itself. *56 Hobson dogmatically declares the problem impossible.


The variation in interchangeability in different uses introduces a special complication which has caused confusion. The consideration which finally determines is not interchangeability in creating any particular physical product, but a certain amount of value. The former variety of interchangeability is not in fact a necessary condition for the operation of competitive distribution. If agencies are combined in different uses, effective substitution is secured through relative growth or decay of the different industries. We have previously remarked that Wieser, who repudiates the productivity theory of distribution as based on variation in proportions, puts forth the really equivalent theory, based on different proportions in different combinations. Taylor, however, takes the latter method for his explanation of the productivity theory, but points out that the two are equivalent. Both sorts of variations in proportion are, of course, concerned in the actual working of the market for productive services, and systematically occur together, as explained in our exposition of distribution theory just given. *70

This terminology is more or less arbitrary, but is one way of straightening out the current confusion and giving different names to different things. Taylor (loc. cit.) uses both expressions "diminishing returns" and "diminishing productivity," in connection with the instrumental law; in fact in virtually the same sense, and does not bring out the contrast between the variation of physical product and that of value product. Strange to say, he does not use the principle of diminishing returns which he so well formulates in his discussion of distribution, but adopts a different line of reasoning through different proportions of factors in different industries without variability of proportions in single industries. That this same principle is involved is recognized by Taylor, who thus shows a considerable advance over Wieser. This author, it will be recalled, uses the same theory of imputation which Taylor uses, but advances it in place of the specific productivity theory, applied to industries independently, which he repudiates. (See below, p. 110 [ II.IV.23—Ed.].)

As a consequence of the appreciable dimensions of the natural agent, the flexibility of the economic organization as a whole is restricted, and the criticism made by Mr. J. A. Hobson and Professor Wieser against the productivity theory is true to a considerable extent in many individual cases. There are many productive organizations consisting of small numbers of rather unique agents which very effectively supplement each other and are not so effectively demanded elsewhere. In such a case competition does not afford means of distributing the entire yield of the group among its members; an appreciable part of it resists automatic division and remains a joint product, dependent on the peculiar effectiveness of the particular organization. Many partnerships illustrate this point. Imputation goes as far as the group, giving that its proper income, but fails to distribute accurately within it. In case of a partnership this division between the members is usually made on ethical grounds or on the basis of "bargaining power," sheer personal force. In industry at large the special product of the organization above that competitively assigned to its components is likely to go, largely at least, to the entrepreneur, though bargaining power or the strategic situation always plays a large part in the proceedings.