Similarly, the well-equipped department of political economy in the American university may be expected in the future to command such material resources as will relieve the properly qualified student, teacher or affiliated investigator from the present necessity of devoting himself in the main to historical, institutional or local studies. The immediate environment will be utilized as an economic laboratory for the development of scientific spirit in economic study and sound method in economic research, and as the field from which the bases of working hypotheses may be derived. Thereafter the investigator will be encouraged to extend the range of his inquiry by visits to, and even residence in, representative localities with a view to collecting wider and more varied data and to testing tentative conclusions, and he will be supplied with the means actually necessary for the purpose. To some extent such funds can be made available by a modification of the fellowship system-the original purpose of which, the attraction of students to post-graduate study, has ceased to be necessary, and the further extension of which along existing lines threatens serious evils. University authorities will recognize that economic "investigation funds" are as essential to scientific activity as physical apparatus and medical clinics. Beyond this, and doubtless to a far greater degree, aid may be anticipated from coöperation with governmental agencies and with endowed institutions of research. Less and less will lack of material resources operate as a handicap. As long as the method be sound and truth light the way, economic investigation will probably receive as generous an equipment as the economic investigator deserves. JACOB H. HOLLANDER.

Johns Hopkins University.

INCREASING AND DIMINISHING COSTS IN INTER

NATIONAL TRADE.

INTERNATIONAL trade presents problems of great inter

est in both practical and theoretical economics, but it is a familiar fact that the solutions of the practical statesmen have not shown any general agreement with the conclusions of the theoretical economists. In recent years some progress has been made in the scientific discussion of the question, and the latest results have not always supported the conclusions drawn by the original exponents of the theory. Important modifications of these conclusions have followed from a more extensive analysis of the subject and a more exact or "quantitative" treatment of values. It is proposed here to examine and illustrate certain particular problems, namely, some of those affected by increasing and diminishing costs.

Almost from the beginning the facts of increasing and diminishing costs were recognized as of some importance in determining the advantage of international trade,1 but only recently have they received something like a general appreciation. Economists are agreed that, roughly speaking, increasing amounts of manufactures are produced at diminishing costs per unit, in labor and capital, while on the other hand agricultural commodities are produced at increasing costs. This, at least, is likely to be the case where manufactures involve a large use of machinery, kept "up-to-date," and where agriculture has passed the first stages of development, i. e. extensive cultivation. If a country, therefore, engaged chiefly in agriculture, exchanges its products for those of a manufacturing country, as their trade increases in extent, the former will find itself in a relatively unfavorable condition, and the latter in a relatively favorable condition. significance of this fact in practical economics has been strongly

2

The

1 Cournot, Recherches sur les Principes Mathématiques de la theorie des richesses, 1838.

I have been told that John Rae laid great emphasis on these facts, but I have not seen his work. Rae, Political Economy, Boston, 1834.

'Cf. Marshall, Principles, 1st ed., pp. 374-380.

It

insisted on by Professor Patten in his well-known treatise.1 is perhaps unnecessary to state that the case is of some real significance in the commerce of the world, and not a mere curiosity of economic theory. It is a situation which frequently confronts new countries in their dealings with those of long established industries. What is proposed here is to determine, in a particular case, the gains and losses of two countries under conditions of non-intercourse, free-trade, or certain impediments and encouragements thereto.

In theory, according to the familiar principle of comparative cost, it might happen that the agricultural country could produce both sorts of commodities more cheaply than the manufacturing country, and yet the trade, if left to private interest, would lead to the production of only one of them, and the importation of the other. The question would still remain whether this was a desirable result for the country under consideration. It is freely admitted nowadays that it is not a very exceptional thing to find that the gain of individuals in trade is inconsistent with the advantage of society as a whole, and the question here is whether such a trade is always beneficial, whether we consider one country by itself, or jointly with the community with which it is trading. In the particular example selected the calculation will show that the country possessing superiority in both agriculture and manufactures, under the initiative of private traders seeking for individual profit,3 will tend to produce and export agricultural products, and to diminish its production of manufactures, not only to the prejudice of the whole country as respects the utility of its total consumption, etc., but also to the prejudice of both countries taken together; i. e., although the second country will gain by the trade, its gain will not equal the first country's loss.

The possibility of such a result in international trade is discussed by some writers, notably by Professor Edgeworth in his

1 Patten, Economic Bases of Protection, Philadelphia, 1890.

..་

Comparative cost means the cost under conditions of isolation."-Bastable, Economic Journal, June, 1901, p. 228.

* For a good statement of this motive see Mangoldt, Grundriss der Volkswirthschaftlehre, Stuttgart, n. d.

very learned articles on international trade, and by Messrs. Auspitz and Lieben in their splendid treatise on prices, to which more particular references will be made later. On the other hand, some of the most recent and authoritative writers on this subject have almost, if not altogether, ignored the important question of a diminution in total utility and consumer's rent.2

Since the problem is a quantitative one, some mathematical method must be employed. The geometrical method is capable of being applied to certain simple cases, and is employed here in the manner made familiar by Jevons. To the ordinary geometrical demonstration is added the device, familiar in certain engineering calculations, of constructing the diagrams according to an accurate scale, which makes it possible to measure the size of different areas representing value, cost and utility with a considerable, and, for the present purpose sufficient, degree of precision. In the accompanying diagrams the facts assumed about the cost of production and the utility of each article (i. e., supply and demand) in each country are indicated by appropriate curves (chosen arbitrarily) observing a definite law. These curves show the simultaneous variations of cost and utility without regard to the "efflux of time." Evidently there are some objections to this method of representation, but not, it is believed, of a character sufficiently important to vitiate the results.1

In order to reduce the problem to such a form that any deductions or computations may be made, it is necessary to make the conditions quite abstract, conditions which are, nevertheless, substantially similar to those usually premised in the theory of the subject. It would be impossible to represent the actual complexities of international trade, and scientific analysis requires that

1 Edgeworth, "Theory of International Trade," Economic Journal, iv, 35, 424, 606; Auspitz u. Lieben, Theorie des Preises, Leipzig, 1889.

2 Cf. Bastable, Theory of International Trade, 3d ed., London, 1900; Nicholson, Political Economy, New York and London, 1897.

3 Cunynghame, Economic Journal, ii, p. 39.

4 The most serious objection is that cost curves at a given time under given conditions of production ought not, it is said, to be descending (i. e., to the right), but that cost, under a condition of increasing returns, is properly represented by a series of shelves slanting upward (to the right), and in an échelon formation, having a general downward course.

Cf. Edgeworth, Economic Journal, vii, p. 69.

causes should be separated and their effects determined separately.1

We may make our hypothesis, in part, as follows:

Let two countries A and B possess such an equality of natural endowment, capital and labor that a dollar in one country corresponds to a dollar in the other in the purchase of all commodities. Let all goods be non-exportable, except money (gold). Now let each country undertake the production of two new exportable articles, viz., corn and steel, and let A possess a superiority in cheapness of production in both articles. Let the cost of transportation be zero.2 Let there be no change in other lines of business.3 Under conditions of non-intercourse, let the two commodities be produced and demanded as shown in the diagrams and in the following table:

1 Mill, Political Economy, ii, 143, ed. Appleton, New York, 1864; Lieben, Economic Journal, iv, p. 718.

Cf. Mill, ii, 143; Mangoldt, 203.

3 Cf. Auspitz u. Lieben, pp. 4, 426.

The

In further explanation of the diagrams the following may be noted. original corn diagram (No. 1) and the original steel diagram (No. 2) are drawn according to arbitrary formula which are supposed to represent the changing conditions of demand and supply (cost) at different prices. In order to get more exact measurements the same curves have been drawn in part on a larger scale for both corn (No. 3) and steel (No. 4) and these are the curves actually used in measuring. Since the numerical values correspond in the original and enlarged diagrams, "readings" can be made from either but more exactly from the enlarged ones. The letters on the X axis in the original diagrams do not appear in the enlarged diagrams, but the areas referred to can be controlled by means of the corresponding primed letters and the values read directly from the enlarged diagrams. The latter should be compared for numerical references in the text. The comparatively smooth curve of the original diagrams appears quite broken in the enlarged diagrams, but a practical test would show that this irregularity has no significant effect on the determinations (i. e., if the curves were "smoothed out" the results would not be appreciably changed). It should be said also that the original drawings are believed to be accurate to within the limits of the figures used but lose much both in accuracy and clearness when reproduced for printing. The curves can be easily reproduced for verification on square ruled paper, the key being as follows:

Diagram 1.

A Demand begins at y = 40, x = 8 and proceeds downward 8 squares at each step and across 4, 6, 9, 171⁄2, etc. for the first, second, third, fourth, etc. steps. A Supply begins at y = 30, x = 1 and proceeds down 4, across 2, 4, 8, 16, etc. B Demand begins at y = 40, x = 5, and proceeds down 5, across 2, 4, 6, 8, etc. B Supply begins at y = 25, x = 1, and proceeds down 2, across I, 2, 4, 8, etc.