Economics (Law of Diminishing Returns)


Law of diminishing returns - a law affirming that to continue after a certain level of performance has been reached will result in a decline in effectiveness


In 1798 the Reverend Thomas Malthus examined the impact of population growth and reached the somewhat gloomy conclusion that population growth would naturally check itself in the form of famine, wars and disease.


He based this view on the idea that populations tended to grew geometrically (assuming couples had two or more children)


2,4,8,16, 32, 64


while the capacity of land to produce food tended to increase arithmetically (the ability to cultivate more land was less rapid)


2,4,6,8,10,12


The inevitable conclusion for him was that the population growth rate outstripped the capacity of land to provide food for the people, ergo starvation and famine. The theory was based upon what has become known as the law of diminishing returns.


The laws states that as increasing amounts of a factor input such as labour or fertiliser are added to a fixed factor such as land then the marginal product of the input would eventually diminish i.e. the increase in the output of land, the crop yields, would progressively decrease.


All factors of production have a capacity determined by their physical and technological capability. Simply adding more inputs of labour to an area of land will not continually increase the output of land proportionately.


There comes a time when the capacity of the land is reached and diminishing returns sets in. No extra fertiliser or extra labourers can change the physical composition of the soil to increase its fertility. Indeed the diminishing returns suggest additional factor inputs would reduce productivity of the land.


As with all theories and models, their strength can be tested according to the extent to which they enable predictions to be made about the real world. Has the population of the world or regions shown signs of cataclysmic famine? On a global scale one has to conclude not. The weaknesses of Malthus\'s analysis were that he assumed a given state of technology. The technological changes that have enabled the development of improved fertiliser and pesticides and more sophisticated machinery and horticultural techniques generally have ensured that agricultural yields has increased dramatically.


The law of diminishing returns is a short run concept. It assumes that there is a fixed factor and that the state of technology is constant. In reality the productivity of the factor of production land and the state of technology has increased.


Nevertheless, perhaps, in the case of rural Zambia where the population is growing at a rate of between 2 and 3% per annum with a doubling rate of every 20-30 years and limited access to the technologies that enable the productivity of land to be expanded, the worsening levels of poverty are omens to some of Malthus\'s gloomy predictions being realised.


The \'law of diminishing returns\' plays so large a part both in the theory of rent and the theory of population as they are now taught, that we should naturally expect to find it promulgated both by James Anderson, the reputed anticipator of Ricardo, and by Malthus in his Essay on the Principle of Population.


In this expectation, however, we should be disappointed. Anderson, far from teaching the law of diminishing returns, was one of those enthusiastic agriculturists who have a hazy belief that an increase of the labour employed upon the soil will always bring in a proportionate, if not more than a proportionate, increase of returns. Malthus is often supposed by excessively careless readers to have put forward the law of diminishing returns when he said, \'The improvement of the barren parts would be a work of time and labour; and it must be evident to those who have the slightest acquaintance with agricultural subjects, that in proportion as cultivation extended, the additions that could yearly be made to the former average produce must be gradually and regularly diminishing,\' but between this and the law of diminishing returns there is nothing in common, except the use of the word diminishing.\' Nothing that has ever passed muster as the law of diminishing returns ever asserted, as Malthus did, that the increases of the whole produce of a country must necessarily diminish. All that the \'law\' asserts is that under certain circumstances the returns to a given