F.— ECONOMIC SCIENCE AND STATISTICS. 127 



changes in productive technique. For example, it permits of a higher 

 degree of specialisation in management, and the advantages of such 

 specialisation are doubtless often real, though they may easily be given 

 too much weight. Again, it lends itself to a better geographical distribu- 

 tion of indixstrial operations, and this advantage is unquestionably both 

 real and important. Nearness to the source of supply of a particular raw 

 material or to cheap power counts for most in one part of a series of 

 industrial processes, nearness to other industries or to cheap transport 

 in another part, and nearness to a larger centre of population in yet another. 

 A better combination of advantages of location, with a smaller element 

 of compromise, can be had by the more specialised industries. But the 

 largest advantage secured by the division of labour among industries is 

 the fuller realising of the economies of capitalistic or roundabout methods 

 of production. This should be sufficiently obvious if we assume, as we 

 must, that in most industries there are effective, though elastic, limits to 

 the economical size of the individual firm. The output of the individual 

 firm is generally a relatively small proportion of the aggregate output of 

 an industry. The degree in which it can secure economies by making its 

 own operations more roundabout is limited. But certain roundabout 

 methods are fairly sure to become feasible and economical when their 

 advantages can be spread over the output of the whole industry. These 

 potential economies, then, are segregated and achieved by the operations 

 of specialised undertakings which, taken together, constitute a new 

 industry. It might conceivably be maintained that the scale upon which 

 the firms in the new industry are able to operate is the secret of their 

 ability to realise economics for industry as a whole, while presumably making 

 profits for themselves. This is true in a way, but misleading. The scale 

 of their operations (which is only incidentally or under special conditions 

 a matter of the size of the individual firm) merely reflects the size of the 

 market for the final products of the industry or industries to whose opera- 

 tions their own are ancillary. And the principal advantage of large-scale 

 operation at this stage is that it again makes methods economical which 

 would be uneconomical if their benefits could not be dift'used over a large 

 final product. 



In recapitulation of these variations on a theme from Adam Smith 

 there are three points to be stressed. First, the mechanism of increasing 

 returns is not to be discerned adequately by observing the effects of 

 variations in the size of an individual firm or of a particular industry, for 

 the progressive division and specialisation of industries is an essential part 

 of the process by which increasing returns are realised. What is required 

 is that industrial operations be seen as an interrelated whole. Second, 

 the securing of increasing returns depends upon the progressive division 

 of labour, and the principal economies of the division of labour, in its 

 modern forms, are the economies which are to be had by using labour in 

 roundabout or indirect ways. Third, the division of labour depends 

 upon the extent of the market, but the extent of the market also depends 

 upon the division of labour. In this circumstance lies the possibility of 

 economic progress, apart from the progress which comes as a result of 

 the new knowledge which men are able to gain, whether in the pursuit 

 of their economic or of their non-economic interests. 



