The Law Of Diminishing Returns

Tyler Durden's picture

From Bill Buckler, author of The Privateer

The Law Of Diminishing Returns

In the discipline of rational economics - and even in the “economics” which has sadly taken its place - the law of diminishing returns applies to productive processes. It states that with all other factors remaining the same, the addition of more units of one factor of production will at some  point result in a lower yield per unit. There is always an optimum combination of factors of production which yields the highest return per unit of production. Increase one of these units beyond that optimum and the yield provided starts to drop. This does not necessarily mean that the amount of output drops. It means that the output is now not being produced in the most efficient manner. Factors of production are being wasted.

Please note that ALL the “schools” of economics regard the law of diminishing returns as a foundation principle. Please note more carefully that they all regard it as applying to PRODUCTIVE processes - that is to processes which result in an increase in REAL wealth. The creation of “money” either via the printing press or the computer keyboard is not a productive process. Rational economics is fully aware of this fact and therefore does not advocate the production of ever greater quantities of “money” as a path towards economic “growth” or prosperity. Modern “economics” has blanked this inconvenient fact out of their calculations and clamours above all for the production of more an more “money”.

Those who watch the “markets” have ruefully noted that each new application of Quantitative Easing has had a lesser effect than the one that preceded it. In the US, they have noted that the “markets” got a huge bang for the buck out of QE 1, a much lesser boost from QE 2, and have thus reacted hardly at all to QE 3. The reaction that “more” needed to be done has come in lock step with this demonstration of diminishing returns from the central bank pumping of money into the “economy”. The market surge from QE 1 was met with celebrations on the Wall Streets of the world while the central bankers talked glibly about their “exit strategies” once their introduction of the financial “nuclear option” had swallowed the “recession” in a mushroom cloud of new “money”. By the time QE 2 was introduced, the “exit strategy” talk has died out. Today, in the early throes of QE 3, there is already talk of QE 3.5 - 4 - 5 - ...

Slowly but surely, a realisation of what the excess production of “money” DOES produce is dawning.