From Cambridge to Eternity: “The Law of Diminishing Returns”

 

Once upon a time in the West, there was a certain “creative destroyer,” as it were. For the sake of convenience we copy the rest of story from Wikipedia. 

Richard Arkwright, who patented the technology in 1769, designed a model for the production of cotton thread, which was first used in 1765. The Arkwright water frame was able to spin 96 threads at a time, which was an easier and faster method than ever before.

For yet additional convenience, we assume the “thread” is a final good traded in the market.

Law of Diminishing Returns. Now suppose a firm registered as Threads Maker & Sons Co. The firm owns 100 Arkwright and hires about 300 laborers in the factory. The firm keeps the number of machines constant over the three fiscal years as “capital budgeting” cycle. The firm experiences the law of diminishing returns as “labor-hours on the job” increase in the given cycle of capital.

             Apparently, the law does not hold true over cycles due to inevitable changes in the capital stock. So, we are supposed to discuss the invincible law of diminishing limitedly to the defined cycle, that is, the particular three years.

A Second Factory of the Firm. As the business unexpectedly booms, the firm outside-shockingly opens a second factory in Birmingham or somewhere else.

             We have yet to prove whether the golden-rule law of diminishing is applicable consistently across factories. In the first place, the labor productivity in "real quantities" is subject to variation across factories. In the second place, efficiency in terms of nominal revenue per labor-hour must be different across, as well. Then, “Where is the beef of diminishing returns?”

New Entrants. In a certain cycle of capital budgeting, Threads Maker experiences too high marginal cost of production thanks to an extraordinary boom of business. As everywhere else, on the other hand, there are speedy emulators.

             We have yet to prove that the iron law holds true across firms.

A Creative Destruction. In a dozen years or so, Threads Maker replaces the existing capital stock with Arkwright 2.0. We have yet to prove the steely law of diminishing has to do with such destruction of progress.

             The baseline at any rate: We may legitimately speculate that the Arkwright machine of the firm will seldom stay still like a stock. Put it differently, few “rational” firms would keep investing in Arkwright 1.0, the obsolete.

Fallacy of Composition. As of now, we do not know whether the law of diminishing returns will apply to the economy as opposed to the market. As far as we learn in the introductory economics class, the market is envisioned for trade per individual period of an individual product. Such a period is in turn far shorter than the accounting year of GDP (Y). Needless to say, the economy is indecipherable collection of all different product markets.

             Oh no, we have not yet to prove that the market is subject to the ultra-binding law of diminishing returns.

In Fine. As long as fallacy of composition is alive and well, we’d never know whether the machine is the factory is the firm is the market is the economy. ???

ONCE UPON A TIME IN THE WEST - Ennio Morricone ...