The Law Of Diminishing Returns is not just some term economy professors use in boring classes. It actually affects everyone in their everyday life. If you learn to recognize where it applies in your life and how you can optimize it to work for you, you can maximize your freedom.
What is the Law Of Diminishing Returns?
It is the idea when you add more resources (workers, factories, money, time etc) to produce something, at some point you start getting less of the desired product for each addition of resource. I’m paraphrasing here so if you are a stuffy economist, there is no need to send me a five page description using big fancy words. I always like examples to understand and idea, so here are some:
Your goal is to produce as many cars as you can using the least amount of workers per car. Assume a car factory has 100 workers and produces 100 cars a day. That is one car produced for each worker. If you add 10 workers, you might get to produce 10 more cars per day, but at some point adding more workers doesn’t produce more cars. In fact it might produce far less. Imagine if you added 1000 workers to the same factory that was designed to accommodate 100 workers. Nothing would get done because everyone would be in each others way.
Here is what it might look like:
100 workers -> 100 cars produced per day
110 workers -> 110 cars produced per day
200 workers -> 140 cars produced per day
1000 workers -> 5 cars produced per day & 17 fistfights
Painting Your New House:
Your goal is to get your house painted in one day with decent quality while paying less in pizza and beer than you would have spent if you had to hire professional painters. Assume you need to paint the inside of your house and you want to have your friends come over to help you paint it quicker. Well, you are probably going to pick the most industrious friends first. But if three relatively motivated friends are good, then the more the merrier right? Well what happens when you try to get everyone you know and their friends to come over and paint? If you have thirty people show up you will not get 30 times the production of your first friend. You might just find the house worse off than before they came.
Here is what it might look like:
3 friends painting -> house painted in 8 hours
6 friends painting -> house painted in 6 hours
10 friends painting -> house painted in 5 hours
30 friends painting -> more paint on floors than on the walls, a fortune spent on pizza and beer, and your new neighbors call the police on your friends for making too much noise
Your goal is to pass the class and get as good a grade as you can get with the amount of time you are willing to spend learning the material. Assume the final is your whole grade in the class. If you study for 2 hours, you might squeek by with a 60. If you spent 4 hours, you might get a 75. Well no matter how many hours you spend studying, you can not get higher than 100, so what is the optimum amount of time to spend studying without getting diminishing returns for the hours you are investing in studying?
Here is what it might look like:
2 hours studying -> result 60
4 hours studying -> result 75
5 hours studying -> result 83
10 hours studying -> result 91
15 hours studying -> result between 97 and 100
20 hours studying -> result is that you have no life outside of studying
So how does this affect you every day and what can you do about it?
Most of the usual things you do in your life are like an engineering problem that has many solutions. What I’m talking about are things like food, housing, cars, clothes, and other things that you have to use everyday while you go on with the business of what you want to do with your time.
Usually the extreme solutions are the most costly as we will see. There is a sweet spot that gives you the most of what you need for the least amount. Money is not the only thing I’m talking about when I talk of a cost. People have varying amounts of money, but everyone only has the same 24 hours in a day. You can make more money, but you can’t make more time. Money and time are things you spend in your day to day life to get the things you need. Let’s see how going to extremes diminishes your returns.
Looking at the chart for food, we can see that you can spend a lot of time and little money on food or you can spend a lot of money and little time on getting the nutrition that everyone needs every day. The sweet spot of course, is somewhere in the middle. Now you may ask, isn’t it much better if you can get your food free by just hunting or growing a garden or picking wild berries?
To answer that I will tell you about one of those shows about people living in the wilderness off the land. In the episode I saw, they hunted, gathered berries, chopped firewood, and built some kind of wilderness shack. You know the type of show.
The crazy thing was that when they needed to get salt to salt their meat so it doesn’t spoil, they didn’t go down to the local supermarket and buy five pounds of salt for $2. Instead, they drove a pickup truck a number of miles to the beach, built a fire and boiled sea water for many hours to get their five pounds of salt. Now in their mind they are being true to “living off the land” and not paying for food. But, they did not build that Ford pick up truck and they did not push the truck to the beach. They used gas. That is not exactly living off the land so would it go against their principles to just buy the salt from the supermarket? I guarantee you they used way more in gas than the 5 pounds of salt would have cost at the supermarket. That is the small part of what they spent. The large part is that the two of them spent the better part of a day boiling water to get salt. They will never get that day back. Granted, they might have done that for the show, but they are really getting diminishing returns for their time. If the minimum wage is $8 where they live, one of them could have worked for 15 minutes to make the $2 to buy their salt.
Just because your food doesn’t cost you money, does not mean that you are optimizing your time and money for the best result. Those people that call themselves Freegans who dumpster dive to get food thrown away by stores are not optimizing their time and money. How many garbage cans do you have to go through before you find eatible food that you want to eat? They are definitely not in the sweet spot, unless you consider the sweet spot to be in the middle of a dumpster surrounded by rotting food.
To a lesser extent, even having a garden may not be the best use of your time. If you calculate how much time you spend on your garden and how much vegetables you get from it, I think you will find it is cheaper to buy it from the supermarket. If gardening is your hobby, that is a different story.
So, if spending my whole day finding and preparing enough food to survive the day is not optimal, then what about doing the opposite? So what is the opposite?
I would say that would be to hire a cook to shop for your food and cook it for you. Maybe even hire a butler to cut your steak and feed it to you so that you don’t have to suffer the indignity of lifting your own fork. In reality, I would say that this is better than spending your time hunting for food. Of course, this is only if you have so much money that hiring these people is not going to make a difference to you financially. Most people are not in that position. A little less, extravagant than that is to eat out every day. Although you are saving time by not having to shop and cook the food, you are still spending a good amount of time going there and you are paying about three times what the food would cost you if you cooked it yourself (not to mention tax, tip and drinks).
By now you see where I’m going with this. The sweet spot in getting the nutrition you require every day is using some time and some money to shop and cook for yourself.You also get to control the quality of what you eat as opposed to restaurants that might use worse quality food.
Finding the sweet spot works for a lot of things in your life. Here are some examples:
One extreme: Buying a $20 Walmart tent and living in the middle of the wilderness spending your day gathering firewood and berries and trying not to get mauled by bears while you sleep.
The other extreme: Building a custom 20 bedroom house in the middle of Manhattan with a staff of 10 people for just you and your cat.
The Sweet Spot: Buying an existing home in a low cost area that is not too big that will not make you have to work an extra 10 years just to pay for it. The time you don’t spend working to pay for or maintain it can be spent on what you really want to do with your time.
One extreme: Buying a old $500 car that you have to keep spending time and money repairing
The Other Extreme: Buying a new $500,000 car that you have to keep spending time (at the dealership) and money repairing
The Sweet Spot: Buy a mass produced used car with good reliability rating so you don’t have to worry every time you turn the key like you do on the cars in the two extremes.
One Extreme: Spending hours at the thrift store trying to find the shirt you want in your size without bedbugs on it.
The Other Extreme: Spending money getting custom tailored clothes that may or may not be in fashion next month
The Sweet Spot: Find a good quality clothing manufacturer you like (For men: Gap, Banana Republic, Brooks Brothers, Ralph Lauren etc) and just buy simple classic clothes when they have their yearly sale. Spend your time on things that matter to you instead of fashion.
The lesson here is that cheap or free isn’t always better. Spending obscene amounts of money isn’t the answer either because the bigger, or more expensive something is, the more time you need to maintain it or get someone to maintain it for you. The sweet spot is the thing that satisfies your need with the minimum amount of time,and to a lesser extent, money. Minimizing those things maximizes your freedom to do what you want with your time.