Overview: The Law of Diminishing Returns is an economic theory that describes how at a certain point, increasing labor does not yield an equally increasing amount of productivity. In other words, when the amount of input increases over time, at some point the rate of output decreases for each unit of input.
Originators: Anne Robert Jacques Turgot (1727-1781), Thomas Malthus (1766-1834), David Ricardo (1772-1823) [i]
Key words: production, economics, labor, agriculture, growth over time, rate of return, diminishing returns, law of diminishing marginal returns
The Law of Diminishing Returns was developed by a number of economists in the 19th century. Original thought on this economic theory was mostly discussed in terms of farming, fertilizer, and the production of crops.
An early research study on the impact of fertilizer provides a good example.[ii] Soil contains a limited number of nutrients that enable it to grow a maximum number of crops. Adding fertilizer to soil is one way to increase the amount of crop that can be produced on a plot of land. However, there is a limit to how much increasing fertilizer leads to an equal increase in the amount of plants.
This early study highlighted research on the impact of monobasic phosphate of lime – a type of fertilizer – on potted plants. Units of fertilizer were added to potted plants, after which the rate of growth of the plants was measured. When one unit of fertilizer was added, this led to a 44.3% increase in yield per unit of fertilizer. When 2.5 units of fertilizer were added, this led to a 10.8% increase in yield of plants per unit. Finally, when 10.0 units of fertilizer were added, this led to a 2.0% increase in yield of plants per unit. The more units of fertilizer that were added, the less yield of return each unit of fertilizer produced.
The Law of Diminishing Return began as an economic theory, but over time, people have shown how it’s application covers a broad range of other areas.
Employee work hours: Increasing the number of hours that an employee works leads to greater productivity to an extent. However, after hours are increased to a certain point, the employee ends up being less productive due to burnout, illness, and absenteeism.[iii]
Healthcare: Research has shown that when doctors use medical interventions, more is not always better.[iv] Over time, an excessive number of medical interventions can actually harm a patient instead of lead to improvement. Doctors need to weight the costs and benefits of each intervention, considering at what point a patient will experience diminishing returns.
Education: One study found that student’s grades increase the more they study, but only up to an extent. [v] Students who studied between 60 and 120 minutes received better grades than those who studied under 60 minutes. However, as soon as students began studying more than 120 minutes, their grades began to fall lower than those who studied between 30 and 60 minutes.
Many areas of life are impacted by the Law of Diminishing Returns, which provides a good reminder that sometimes working smarter is better than working harder.
References
[i] Cannon, E. (1892). The origin of the law of diminishing returns, 1813-15. Economic Journal, 5(2).
[ii] McNall, P. E. (1933). The law of diminishing returns in agriculture. Journal of Agricultural Research, 47(3). 167-178.
[iii] Pencavel, J. (2014). The productivity of working hours. IZA Discussion Paper No. 8129.
[iv] Mold, J. W., Hamm, R. M., McCarthy, L. H. (2010). The law of diminishing returns in clinical medicine: How much risk reduction is enough? Journal of the American Board of Family Medicine, 23(3), 371-375.
[v] Fernandez-Alonso, R., Suarez-Alvarez, J. & Muniz, J. (2015). Adolescents’ homework performance in mathematics and science: Personal factors and teaching practices. Journal of Educational Psychology, 107(4), 1075-1085.
