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.

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l1b3rty's picture

Great excerpt! In the wake of QE Three Forever, nothing but bad news....This won't dig the boyz outta any hole for more than months. Then we get the "alien invasion" Krugman desires. This invasion is sure to be between terrestrials...

DeadFred's picture

And in the face of a retreating economy, the possibility of conflict, and potential collapse of the EU will the banks who take the QE free money buy stocks at the top or might they wait for the better prices they know are around the corner. If Ben didn't get their pledges in writing he'd better watch out.

Thomas's picture

I agree with the whole essay but there was nothing new in it.

sunaJ's picture

Yes, straight and to the point.  Fundamentals are more important than technicals and the music will soon stop.  Since we are at it, let's also state that unchecked fraud only gives birth to more of the same.  There, two fundamentals of economics that alone will doom this sorry system. 

knukles's picture


With this, don't mean shit.
No Illuminati, eh?

BlackholeDivestment's picture

...when re-runs of Seinfeld ''Serenity Now!'' are on , after the single mother (call her Alice, cuz she works at the resturant at the truck stop) comes home from her first job at 5:30 PM, do you really think she's going to get Democracy Now? Blaa haa haa. Like she's gonna send in some cash to PBS too or something. Yeah. Those boys do not ''care'' about the tiny portion of people that know all about their works, and at this point it does not matter if the general public had a clue. The slaughter is not 2 years away now.

Return on the wages of sin is death, and it don't mean shit to ...Bitchez.

Short Memories's picture

Not sure about this bit:

"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"

This phenomanon can be found in physics just like most of the non BS parts of economics and so it's not tied to "real wealth" at all.




q99x2's picture

Thanks for the link. I'll never get my homework done now.

EscapingProgress's picture

Homework...hah! I learn more in a day on Zerohedge and other blogs than I learn in a month from doing homework and going to my classes.

Totentänzerlied's picture

Jesse's openly a socialist of the generic can't-be-bothered-to-identify-himself-with-any-specific-form-but-I-still-want-my-free-shit variety (Homo Sovieticus vulgaris).

Peter Pan's picture

The music has in fact stopped and it is only the echoes of yesterday's music that we mistaken as continuing. And then one note at a time we will realise that the whole fraud has come to an end with very real consequences.

And then at some point another Obama or Romney will stand before the people to tell them that if they follow him he will lead them out of the wilderness. And they will follow, only to find that, like the Israelites, they will be wandering for 40 years without ever reaching the Promised Land that Abraham was at least able to guide his people to.

The world as we know it is about to evaporate and the only question is whether the chaos that follows is a flurry of activity by the market trying to ressurect reality or whether it will be chaostan, as dog eats dog in the game for survival.

giddy's picture

It was Moses who led the Israelites around for 40 years.  They got there.  He didn't. 

Funny. You'd think after thousands of years of human history we'd either do something original or have learned by now.  Nope.  Rise and fall of civilizations is the same ole chit.  The actors haven't changed much either.  Still fighting for survival and using religion to rev-up the masses.  

It's coming faster than they think.       

CPL's picture


It's a question of defining paradise it turns out.

Overfed's picture

Great essay. Thanks.

ZeroAvatar's picture

WOW!  Awesome, CPL!  Thanks much.

Christoph830's picture

It's new material for everyone in the Eccles building

Antifaschistische's picture

The "law" of diminishing returns does NOT, has NOT, and never will apply to counterfeiting in this regard; no level of counterfeiting EVER produces any aggregate wealth...none!!! QE1 produced zero net return so the laws of diminishing return do not apply. Of course counterfeiting benefits some...manhattan, mega recipients of gov dollars etc.. However this is only a shift of wealth from the 90x% to the elites who have fooled us into believing THEIR scorecards (dow, etc) are the metrics that matter.

Good short article but the theory is misplaced when tied to QE counterfeiting.

Totentänzerlied's picture

It's a fair point (I think), but it is also rather obvious that by a lay definition of "diminishing returns" QE certainly fits the bill, as does counterfeiting, and fiat money the amount of which must expand to cover interest payments --- each of these are now in the obviously exponential phase of their exponential growth but also obviously are not working remotely as well as they had been up until 2007/8 as regards creating growth, real or illusionary.

One should expect diminishing returns from any system predicated on the exponential growth of anything and/or themselves (or a part thereof, including inputs) intended/required to grow in perpetuity.

I can't agree that counterfeiting never produces wealth, it may not create wealth per se, but it allows its recipients to increase their wealth when exchanged for assets of real value. As long as the counterfeit money is not revealed to be counterfeit, its exchange value is very real. Now, eventually, I suppose, some people will have exchanged a real asset for this counterfeit money and not be able to exchange it for real assets when the other party detects the fraud, but if the chain of exchanges is long then quite a bit more value was created than ultimately destroyed. It doesn't work this way for a pure fiat money system because in its case, everyone is the bagman as there is no alternative currency of value and the fake value of the fiat is ever-decreasing. Counterfeiting works rather well so long as there is a real thing of which the counterfeit is an "illegitimate" reproduction of high enough quality to fool multiple sequential parties.

SeattleBruce's picture

"I can't agree that counterfeiting never produces wealth, it may not create wealth per se, but it allows its recipients to increase their wealth when exchanged for assets of real value."


It transfers wealth to the source of the counterfeit (the bankstas), but it doesn't create a net increase in the wealth of society.  It's wholly unlike any productive activity, that provides food, sustenance, shelter and clothing, et al, for people.  It's simply a parasitic activity - and all the moreso as you understand that the counterfeiting, far from stabalizing the economy and financial systems, is creating an unsustainable bubble that will eventually cause great pain and sorrow for most people.

Antifaschistische's picture

agreed...counterfeiting absolutely can produce wealth just as QE produces wealth for a minority.   It doesn't produce net wealth.  Yes, even undisclosed counterfeiters will gain as they consume goods away from productive's this consumption that is robbed from the productive that makes it a net zero game.  In the end, the moral hazard created by benefiting non-producers at the expense of producers makes counterfeiting a net loss.

You see this at every level of our economy.  Beneficiaries of cheap credit, let's say mega corporations, who pay mega bonuses to people who build mega houses that consume mega electricity and mega water bills....all this consumption comes at the expense of productive people.  It's not ironic that mega house sales coincide with rising homelessness.  To be clear, I'm a hardcore pure capitalist and all for building whatever home you can afford, but the misallocation of capital to the mega corporations is not "capitalism" but a byproduct of the Fed's policies and our debt induced money creation machine.  This would not happen if capital were allocated in a competitive manner and if interest rates were set as they should be, through mutual consent of all savers and borrowers.

So, yes, even if counterfeiting forever remained undisclosed, it would still drive up prices or redirect goods and services from the productive, to the parasitical element.

MrPoopypants's picture

Even so, QE is losing its effectiveness in deceiving.

The law of diminishing returns doesn't only apply to "real aggregate wealth" - it also applies to the satisfaction I get from eating burritos, shooting heroin, or wanking off. The fourth time is never as good as the first.

CPL's picture



A lie is not productive.  Now, how is Europe going to get out of the Iranian Oil embargo coming?


It's going to be a very cold winter.

Winston Churchill's picture

Ben got them in writing,problem is they were all signed;

Linda Green.

Landrew's picture

What % here remember Linda Green ha! You do have to marvel at several million signatures ha!

km4's picture

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.

Bingo !

kaiserhoff's picture

Some of us still track the last vestiges for clues, don't we.  Sad, but better than nothing.


Thanks Tylers.  First principles are always welcome, as is the occasional introduction to a focused mind.

Squid Vicious's picture

The Shalom missed class that day... i guess? 

otto skorzeny's picture

he and his Harvard U./Winthrop House-mate Blankfein were up late the previous talking about how they would someday be doing "God's Work"

kaiserhoff's picture

I suspect Ben knows by now.  This is micro-econ 201.  Like any addict, he is in too deeply to care.

Jack Burton's picture

This will not stop Bernanke. He is all about "The Wealth Effect". He does not care how much money he must print, he wants to juice equity share prices, he thus rewards the stock owners. He feels that if stock owners feel rich because of markets rising, they will thus spend more and stimulate the economy. He also wants to get house price inflation going again as this produces "Wealth Effect" across a greater cross section of Americans.

Feeling rich the home owners and stock owners will spend that wealth they are under the illusion they now have. QE is all about juicing assets.

I think he will carry on with this until, as Marc Faber says, he destroys the world economy. In this he has help from the BoE, the ECB, the BoJ and other money printers.

otto skorzeny's picture

this is all being done to keep the few last rotten timber pilings of pensions and insurance companies together until we get into the next "growth spurt" (bubble). kind of like shooting an AK-spray and pray.

Prometheus418's picture


How about Fuck Bernanke and his attempt to create a "wealth effect."

Truth be told, I don't know anyone who has assets affected by the Federal Reserve anymore.  I work for a company that builds tens of millions of dollars worth of ordinance for the US government every year, and the conversations we have during the work week involve nickels, copper pennies and chickens.  Yes, before any of you can ask, I made the case for silver, and it went over well- but now even silver is getting to be too precious for day-to-day transactions.  It *was* fun for a while when I was eating Pad Thai and Thai Coffee for lunch for $.70 (in Mercury Dimes.)  But sadly, reality has interposed itself, and most of us are eating PB&J now.  At least I can say that my "weak hands" were strong enough to ensure that the silver I sold remained in my home town.

Earlier today, I helped my quartermaster fix his truck because he can find supplies cheap and bring them here.  We don't talk job titles and gadets anymore- just tactics and rank.  Didn't involve a damn cent, just mutual respect and the willingness to do a job that needed doing.  My payment for the mechanic work, if I get it, is for him to talk to the boys with the heavy military vechicles just outside of town and get them to throw in with us.

Storm's coming- make sure your shelter is stocked.

andrewp111's picture

What is Bernanke going to do when QEternity stops working? Cry in his beer?

smithcreek's picture

It's fascinating to me that so many in the media, politics or economics can talk about, discuss and defend the concept of the "Wealth Effect" out of one side of their mouth yet deride what they term "trickle down" economics out of the other.  I'm trying to imagine all the poor people getting excited about the S&P's latest rally and how wealthy they feel.  So I guess it's ok for Bernanke just to use his printing press to magically, out of thin air make already well to do stock owning people more wealthy?

At least with "trickle down" you were talking about tax breaks for real companies producing/manufacturing real products employing real workers.  So at least in theory there was a direct link from lower costs to higher profits to company growth.  Now, the hope is that printing money magically makes well to do people feel even more well to do, so they order a double mocha frappachino instead of a single?  Having a major part of your economic theory based on some "magical" feeling is pretty scary.

SeattleBruce's picture

"He (Bernanke) also wants to get house price inflation going again as this produces "Wealth Effect" across a greater cross section of Americans."

Hey Ben, how's that strategem working out for ya?

Abrick's picture

My wife always gets upset when I let her know that her output is now not being produced in the most efficient manner. WTF?

Cabreado's picture

Modern “economics” has blanked this inconvenient fact out of their calculations and clamours above all for the production of more an more “money”.

Yes, Mr. Buckler, but let's be fair -- your article neglects the fallacy of infinite growth.

It means that the output is now not being produced in the most efficient manner. Factors of production are being wasted.

Factors of production have nowhere to go...

SeattleBruce's picture

Even if we understood how to perfectly unleash our best and brightest minds on creating a completely sustainable economy, the FED/banksta agenda would misallocate capital away from that pursuit.

vote_libertarian_party's picture

Apparently Europe is starting to report higher inflation.  


Bond vigilantes...line 1.

otto skorzeny's picture

the fact that "economic growth" can continue at some massive rate is highly improbable. a return to the mean on planet earth is returning if you look at a chart of human population as you would a stock chart(e.g. NFLX) then we are in for a rude awakening

ISEEIT's picture

God is an Austrian.

Guaranfucking teed.

otto skorzeny's picture

You're more of an Old Testament kind of guy?

akak's picture


God is an Austrian.

Is that why strudel is so heavenly?

infinity8's picture

so let it be written. . .

Atomizer's picture

When a monetary system is maximized to full efficiency and draws little return. The elites decide to piss in your cereal bowl by using religion chaos to generate new highly profitable returns.


It’s been a while.. but here I go again. Do you understand the message now?

Ministry Messiah

RiverRoad's picture

Having done ourselves in re the over-production of debt;  we are now hell-bent re the over- production of money.  This is "beautiful deleveraging"????

apberusdisvet's picture

This will not end well, and the psychos in charge know it.  Why else the ramping up of the police state and the new obedience testing of the TSA in their "freeze!" program.  Not to mention the 25,000 military vehicles headed to DC, not in desert  camouflage but in standard military green.

Mike in GA's picture

what's your source for 25K mil vehicles "headed to DC"?

otto skorzeny's picture

I think he means all the excess Volt capacity that Uncle Sam is buying up for govt car pools to pad the sales #s.

James's picture

Mike, I googled 25K mil vehicles "headed to DC" and got a site named beforeitsnews that apparently some guys friends sisters boyfriends brothers wifes aunt heard it on "The View".

It looks like it's computer nite @ the pysch ward.

Also, I saw a cartoon where two Mayan guys were carving stone slab calenders and ran out of slabs @ 12/21/12.

The other Mayan said "That otta freak them out"!