Modern Economic Theory

We have seen that the law of diminishing returns has a wide application. But it specially applies to agriculture and other extractive industries. One thing that is common to all these industries is the supremacy of nature. It is, therefore, often remarked that the part that nature plays ill production corresponds to diminishing returns and the part which man plays conforms to the law of increasing returns. The inference is that agriculture, where nature is supreme, is subject to diminishing returns, while industry, where man is supreme, is subject to increasing return .  There arc several reasons why agriculture is subjectto the law of diminishing returns:  (i) TIle agricultural operations are spread out over wide area, and consequently supervision cannot be  very effective.(ii) Scope for the use of specialised n chinery is also very limited. Therefore, economic of large-scale  production cannot be reaped.(iii, T ere arc further lim ratio ariing fr rn the seasonal nature of the indu If). Agricultural perations arc  likely to be interrupted by r in and other climatic  changes. Man is not a complete maer of ‘ature. and110 wonder that the law of diminig cturn opcratcs in agriculture.

can realise all the possible economies, internal we!  external.But it is wrong to say that agriculture is always  subject to diminishing returns and manufacturingalways to increasing returns. The law of diminishing returns applies everywhere. To borrow Wicksteed’s  words, ‘This law is as universal as the law of life itself.”Its application is not confined to agriculture only; it applies to manufacturing industries too. If the industry  is expanded too much and becomes unwieldy,supervision will become lax and the costs will go up. The law of diminishing returns will, therefore, set in.  TIle only difference is that in agriculture it sets in earlier and in industry much later. A prudent indu trialist may not allow that stage to come at all. Agriculture, too, in the begining has increasing return .  Thus, both laws apply in all types of industries.extractive as well as manufacturing. As a matter of fact, they a c two aspects of the same law, which is also known as the Law of Variable Proportions.