Law of Diminishing Returns

QUOTE

Esther Dyson once said…

“With the catch phrase 'more is better,' we sometimes find out that more is just more, and better is something entirely different.”

(Swiss investor and journalist.)

CONCEPT

Law of Diminishing Returns

The Law of Diminishing Returns is an economic principle stating that there is a point at which the level of benefits gained from something becomes less than the amount of energy or resources invested.

It's most often discussed in the context of productivity and efficiency, highlighting that incremental investment in a particular area will yield proportionally smaller gains after a certain threshold.

STORY

The Loom … Boom?

During the British Industrial Revolution, the textile industry became a pioneer in mechanization, which dramatically increased productivity.

At the heart of this transformation were the looms, sophisticated machines that weaved yarn into fabric. As the demand for textiles grew, factory owners began to install more looms, rapidly expanding their production capabilities.

Initially, the introduction of additional looms led to a proportional increase in output. Factories boomed, and textiles became more affordable and abundant. However, as more looms were packed into the same factory space, the increase in productivity started to slow down.

Factory owners faced a conundrum. Despite the number of looms doubling, the output less than doubled.

They encountered issues of overcrowding in the factory floor space, which made it difficult for workers to operate efficiently. The noise and heat generated by the looms became excessive, leading to more frequent breakdowns and a less conducive working environment.

There was a limit to how much output could be increased by only adding more looms without considering the efficiency of the workers and machinery.

The factories had reached their saturation point; the cost of maintaining and operating additional looms began to outweigh the value of the fabric they produced.

The textile industry's experience with looms became a classic example of the Law of Diminishing Returns. It illustrated that while increasing production factors can lead to increased output, beyond a certain point, the benefit of adding more inputs diminishes.

Efficiency is not just about quantity but about the optimal use and balance of all resources involved in production.