Talk:Law of diminishing returns

Comments?

Hi there! I had started the article as a raw draft on my user page. After I received feedback on my draft article I decided to put it up for discussion. --Paul Schächterle 14:45, 15 May 2008 (CDT)

I have advised Paul that this article is generally inaccurate, and I have suggested making a fresh start. Nick Gardner 11:30, 16 May 2008 (CDT)

I suggest that this article should now be deleted Nick Gardner 16:00, 6 June 2008 (CDT)

Frankly, I find the argument the article was generally inaccurate very vague. So just deleting the article does not seem right to me. I currently do not have the time to recheck everything. So I would be interested in a third opinion. Or Nick, you could make an alternative draft for the article. Of course I see and appreciate that you already have put a lot of work in a lot of other articles. --Paul Schächterle 11:12, 12 June 2008 (CDT)

In the approved article on microeconomics, to which I referred you previously, the law of diminishing returns is stated as:-

diminishing returns refers to the observation that if one only of the factors is progressively increased, leaving the others unchanged, output rises, at first in proportion, but subsequently less than proportionately to the rising input. For example, although doubling the number of workers on a building site might get the job done twice as fast, it does not follow that trebling that number would get it done three times as fast.

You will note that the question of the optimal combinations of factors does not arise, nor does it state that there are circumstances in which an increase of the variable factor will result in a decrease of the overall product. Those are two respects in which this article is wrong. I suggest that you withdraw it. Nick Gardner 01:04, 13 June 2008 (CDT)

I.m.h.o. the increase of one factor of production while another factor is fixed indeed is a question of an optimal combination (or proportion) of factors. The first author to formulate the law (Turgot) described it using as an example labour and soil. But we can apply the concept also to your example of a construction site.

Suppose we have one construction site (fixed) and a variable number of workers. To understand the (classical) law of diminishing returns (LDR), we have to consider the construction site to be a means of production, like a set of tools and machines. The product is then a building. Of course a building is not a continuous product but one with a fixed end size. Still we can measure input and output for a given period of time as long as the construction is not completed. Output can be measured in percentage of the construction completed.

• If we let only one worker do the work, we will see a very low percentage completed.

• If we increase the number of workers, the percentage completed will rise. According to the LDR adding the second worker will increase the percentage more than twice, because two workers can make better use of the construction site. Thus marginal productivity rises: The second worker adds more output than the first.

• If we have reached a certain number of workers, an additional worker will add just as much as or less output than the previous worker added. From that point on marginal productivity declines. The point with the highest marginal average productivity is the optimal proportion between fixed and variable resource, in our example between workers and construction site.

• If we continue to add more workers to the site from a certain point on an additional worker will not add more output because her/his work force cannot be utilized on the site. If we still add more workers the additional workers start to get counterproductive and will reduce the amount of output instead of raising it.

If you visit the german or spanish Wikipedia site, you will find similar expressions and a graph like the one used in this article. –-Paul Schächterle 08:32, 13 June 2008 (CDT)

OK! I am not sure of the detailed validity of your example, but I have to accept that the article may not be actually inaccurate (as I had at first thought). Nevertheless it seems to me that it is an unnecessarily elaboration of an essentially simple concept that serves no purpose but makes the concept more difficult to understand. As far as I can recollect, the basic concept is all that is ever used in economic analysis. Can you think of any use for the rest? Nick Gardner 11:04, 13 June 2008 (CDT)

Perhaps I should explain further why I think that unnecessary elaboration of this sort should be excluded from Citizendium. While the creation of patterns of words and numbers often arouses a degree of academic interest, it is unreasonable to burden the non-academic community with theorems which may seem to be important, but are really trivial and of no scientific value. For example, while it may not be entirely illogical to term all combinations of the factors of production that do not reach the condition of diminishing returns as "optimal", it amounts to a trivially circular use of words that does not throw light upon reality, but tends to obscure it. And while the proposition that there can be circumstances under which an additional input causes a reduction in output, is not actually wrong, it is trivial because it is entirely untypical of real economic activity. Let's leave this sort of thing to Wikipedia. Nick Gardner 04:18, 6 July 2008 (CDT)

In my opinion the article on the law of diminishing returns is a background article. It should therefore cover the concept as precisely as possible. This is not obscuring but should on the contrary allow for a more comprehensive view on the topic.

The assumption of diminishing returns can be based on two different concepts. This is a very important fact because each concept has different consequences. For example from the classical concept does not follow that there are generally diminishing returns because every rational economic actor who would like to increase output would chose a balanced rise of all input factors, if possible. Therefore diminishing returns will only occur where one factor is limited or fixed. Thus some economists who assume diminishing returns limit their assumption on the "short run".

Also, following the classical concept, diminishing returns can still lead to rising average returns (which is why my explanation above was wrong in one point, now corrected).

The distinction between the classical and the neoclassical concept is also very important to understand certain critical discussions about the assumption of diminishing returns (e.g. Piero Sraffa’s "The Law of Diminishing Returns under Competitive Conditions" which actually refers to the classical concept not the neoclassical).

Maybe we can find a textual formulation that is easier to read? --Paul Schächterle 07:20, 15 August 2008 (CDT)

On reflection, I am now inclined to believe that there should be an article that deals with the question of diminishing returns, but that the existing article should be replaced with one that treats the topic from a broader perspective. I suggest the following:

• the title should be “ The economics of supply” to enable the inclusion of increasing returns;
• it should draw a clear distinction between short-term and long-term relationships;
• it should refer to empirical evidence concerning short-term relationships, acknowledging the absence of diminishing returns in many cases and the existence of increasing returns in others;
• it should be explicit about Viner’s explanation of long-term diminishing returns in terms of external cost increases, which should be presented as the consensus view;
• there should be a brief acknowledgement of subsequent dissenting views.

And, as compared with the existing article:

• it should describe the scale effect in terms of output rather than productivity;
• it should not refer to the initial constant-returns phase in the short-run case as “optimum”;
• it should omit the trivial case of falling output due to overcrowding;
• graphs should be on the tutorials page and their axes should be properly labelled.

I shall await comments on this proposal before attempting any drafting.Nick Gardner 09:36, 21 August 2008 (CDT)