Diminishing marginal producivity

The picture below is of a mountainous area in Spain. It used to be full of small-scale farmers and is now almost deserted. Over the many centuries that farmers have tried to eek something useful out of this area, they created terraces all the way to the top of the mountains. In order to reach the top terrace, a farmer would have to walk up each morning and down each evening, spending his day cleaning out stones from the terraces and tending to the crops. You can imagine how little marginal productivity the top terrace is hence worth.

By comparison, the bottom terraces are easier to reach, on less stony ground, and with more water on it. The marginal value of spending an hour on them is much higher.

You should hence not be surprised to hear that over the last century, nearly all the farmers in this region have left to work in the cities and do something more productive. Only at the bottom of the mountain are there farmers left and they only use the most fertile bit.

Where does the food come from to feed all the people who stopped farming, you might wonder? Well, some additional food comes from improved production methods on the bit that is still used, but the vast majority comes from other areas with land that is much easier to cultivate. Hence not only are you looking at a classic example of marginal productivity in action, but also at a classic example of how reduced costs of transport have lead to a whole region adjusting its production decisions.

Author: paulfrijters

Professor of Wellbeing and Economics at the London School of Economics, Centre for Economic Performance