The Law of Diminishing Returns

When we put more effort or resources into something, we usually expect to get more out of it. Work more hours, be more productive. Exercise more, become fitter. Assign more people to a project, complete it sooner. Using the law of diminishing returns as a model shows us that the relationship between inputs and outputs in systems is not always linear. Past a certain point, diminishing returns almost always set in.

The law of diminishing returns posits that inputs to a system lead to more output, up until a point where each further unit of input will lead to a decreasing amount of output. In other words, at that point more effort leads to less return. Progress even further despite diminishing returns, and more inputs may reduce the amount of total output.

Consider adding sugar to your lemonade; the first scoop sweetens it a lot, but each extra scoop makes it only a bit sweeter than before. If you keep going, more sugar doesn’t make it sweeter, it just starts piling up at the bottom, unused.

The concept of diminishing returns applies in almost any system. In production economics, it describes declining additions to output as one input increases while other inputs remain fixed. Past a certain level, more inputs will lead to lower increases in outputs, until the inputs start to become a hindrance. A classic example is the number of workers in a factory. Hire more people and production goes up. Hire too many people and the factory gets crowded, people get in one another’s way, and there isn’t enough equipment to go around. Each additional worker then contributes less to the factory’s output.

One early application of the law of diminishing returns was in farming, with the advent of artificial fertilizers in the nineteenth and twentieth centuries. [1] Farmers found that adding more nutrients to their soil increased crop yields at first, making plants grow bigger in less time. But past a particular ratio of fertilizer to soil, adding more meant less corresponding increase in yield. Adding even more meant less yield in total, as the soil became overloaded. [2]

Diminishing returns are everywhere. Working an extra hour might make you more productive; working an extra three might mean more mistakes, so less work gets done per hour. [3] Tweaking the little details of a project might improve it, but doing so for too long might mean the improvements aren’t worth the time invested. Receiving enough funding to get off the ground might be a godsend for a new company, but receiving too much might mean decreasing benefits, as proving profitable for investors takes precedence over serving customers. When you’re learning a new skill, early practice sessions have a huge impact on your abilities, then subsequent hours of practice lead to diminishing improvements in performance.

The law of diminishing returns teaches us that outcomes are not linear and not all inputs to a system are equal. Often we focus on the trivial at the expense of the meaningful. An extra worker in a factory with ten employees is not equivalent to an extra worker in the same factory with one hundred. An extra hour of work at nine p.m. is not the same as an hour of work at nine a.m. To use the model, track what each additional hour, worker or other input contributes. Compare that gain with its cost before adding more.