The Law of Diminishing Returns and Real-World Application
February 8, 2022
"The law of diminishing marginal returns is a theory in economics that predicts that after some optimal level of capacity is reached, adding an additional factor of production will actually result in smaller increases in output."
Within the context of business supply and demand, profits gained from certain investments will occur in proportionally smaller increments as more money or labor is invested in it. In even simpler terms, the quality and value of essentially anything are bound to reduce if the frequency of this something reaches a certain level. Although this simple definition isn't fully representative of the law since it's vaguer than it is specific to the context of economics, the basis for this definition shares the same philosophical foundation that can make the law of diminishing returns applicable to the pragmatic context of rudimentary human life.
What's interesting about the world of economics and its composites is how fluidly applicable a lot of fundamental concepts can be applied to practical, real-world scenarios. The breakdown of money depends on very forthright, black and white systems of thought. Dealing with money at the highest level doesn't have a capacity for intuition, or anything less of concepts contingent upon practical, data-driven solutions. As the saying goes, "the numbers don't lie." This is why these concepts can be made pertinent to the honest individual.
The most primitive example of this concept is economic inflation. The more money the federal government prints, the value of the U.S dollar depreciates because it’s less scarce and more available in the United States. During an economic recession, the value of the dollar increases because there is less collective money in the United States. Arguably, scarcity breeds intrinsic value in our world on both practical and sentimental levels. This specific concept in economics is called scarcity value.
"Scarcity value is an economic factor describing the increase in an item's relative price by an artificially low supply."
The following is an excerpt from a Praxis Society Threshold Member I was speaking with about Adam Smith's "The Wealth of Nations."
"The two things that determine price are labor and scarcity (monopoly). The price for every product in every market is the result of these two factors. Each product will draw more heavily from one than the other due to similar market factors. If a single stone of infinite value dropped from the sky, a rock from another galaxy, it would require minuscule labor to pick it up. That would be valuable almost entirely because of scarcity. Where there is no scarcity, the price will be entirely labor-based."
Another general example is any form of work output. A worker produces 50 units in 95 hours but in the 96th hour, the output falls to 45 units. There's a fine breaking point in work output that leads to a diminishment of production and quality when this limit is pushed. The more hours we put into our own labor can only take us so far before the work we’re producing begins to rot. This is often referred to as burnout.
Although economic inflation is a fundamental example, the law of diminishing returns stems from the supply and demand aspect of business. For example, an entrepreneur starts a restaurant and hires three inceptive cooks. The first month of the restaurant's opening brings in $10,000. Seeing the financial potential of his restaurant, the entrepreneur hires two more cooks. Because of the new cooks' labor contributions, the restaurant brings in $14,500 for the second month. He repeats this process for the third month and although the increase was less than the first, he brings in $16,000. Seeing this trend of more cooks bringing in more revenue, the entrepreneur hires yet another two cooks for the fourth month. However, he sees that his monthly profit fell from $16,000 to $15,000.
Although more cooks equated to more revenue for the first three months, the fourth month exemplified the law of diminishing marginal returns. The optimal level of capacity for cooks in the restaurant was reached during the third month and since the entrepreneur pursued past this level, profits fell during the fourth month. With 11 total cooks, they began interfering with one another and the quality of their work diminished because with so many cooks working at once, they each were less proactive and not as independently occupied to maximize their labor output. Additionally, more cooks also means more checks for the owner to write every month to his employees which began to work against the hopeful increase in profit these same workers would be bringing in for the business.
Although the restaurant example doesn't apply to most of our lives, it's prominent in depicting how the law of diminishing returns works. When we take this concept and shift our context to think of our own lives, there's a window of perspective in which it applies. We can find it true in our own lives that a higher frequency of something will more likely than not equate to the diminishment of quality.
The more there is of something, the less we hold a desire to it. The less there is of something, given that it will breed rarity, the more we hold a desire to it. I consider this an intrinsic and almost primal pattern of human behavior. Although not the same concept, "FOMO" or "Fear of missing out" falls under this umbrella of human behavior.
How would our outlook on life change be if our lifespan lasted five times its average? The tendency to waste time and burn years overly invested in fulfilling the present's gratification rather than the future's joy. Why? Because we would have so many years to live that the grand scope of life would not be affected.
In polygamy, it's impossible for a man to fully devote all of himself to each partner because there are too many partners to disperse himself among. It would also be more difficult for the man to reach the pinnacle of love and appreciation for each woman given that his volume of devotion has to be distributed among the many. What does the beauty of your woman's face mean to you if she's merely one of many?
One's most treasured facets of life lose their spark if their presence becomes frequent enough to the point of a stale appreciation. Similar to how people will say you need to experience the bad in order to have an appreciation for the good. Without the bad, good would be a mere standard taken for granted.