Though it seems quaint and perhaps irrelevant in an economy dominated by content creation, disruptive technology, and influencers, a review of the principles underlying production processes can still be quite insightful. Anytime we work under a deadline or otherwise have to perform meaningful work within in some time constraint, we’re subject to the same basic principles as the assembly line worker a century ago. Economists describe any constrained process as exhibiting two or three stages.
The first is referred to as Increasing Marginal Productivity. While one person may be able to build a bicycle in a week, two people might be able to build three in that amount of time. Whereas one person is relegated to shaping the frame, painting, assembly, etc. Two people can divide the tasks allowing each to specialize and therefore be more efficient. Such gains from specialization and exchange are largely responsible for the rapid increases in standard of living post industrial revolution.
But even the popular concept of “Flow” is an application of Increasing Marginal Productivity. Setting aside enough time to become completely immersed in a task allows you to complete a more than proportional amount of work. When I sit down to write, the first fifteen to twenty minutes aren’t particularly useful. But as my mind settles into the task and I’m able to filter out other distractions, my productivity improves. And so, I can complete four times as much in an hour as I can in the first 20 minutes.
Therefore, in four hours I could do sixteen times more? And in eight hours, thirty-two times? Nope. Definitely not. The invariable second stage of production is subject to Diminishing Marginal Productivity. Like everyone, I have a limited amount of mental energy at any given time. I believe Elon Musk refers to these as brain cycles. He seems to have more than I do, but we both (as well as you) still have a limited amount. So, while I’m able to enjoy increasing productivity for a while, at some point the additional work I can complete in some fixed amount of time (say an hour) begins to diminish. I simply become tired.
But this applies to any constraint. Say I run a call center with twenty stations. What happens when I try to add a twenty-first operator? Perhaps he can give other operators a break and so have some benefit. But he won’t add as much as the 20th operator did. Or think about what happens when you add fertilizer to a garden. Your garden produces more vegetables. But what happens if you keep adding fertilizer, will your garden continue to increase yield seemingly forever? No, at some point the gains diminish because you’re not adding more water, soil, etc. Any constraint inevitably produces Diminishing Marginal Productivity.
| Law of Diminishing Marginal Productivity – Given some constraint on production, increasing the amount of a variable input will eventually reach a point of diminishing gains. |
Diminishing Marginal Productivity applies to any constrained process. But you should be careful to not confuse it with the next stage, Negative Marginal Productivity. You may find that adding one more salesperson to your team increases your revenue by only $50,000 per year, whereas the one prior added $70,000. But does that mean you should not hire that additional salesperson? What if you only have to pay them $40,000? Then while their marginal contribution is less, it is still positive and desirable.
The final of the three stages of production is Negative Marginal Productivity. If we keep adding a variable input to a process where at least one other input is fixed, we may actually see negative gains. Back to our garden, if continue to add fertilizer to the same garden at some point we will damage the soil and the yields will decrease. Likewise, if you decide to study for sixteen hours straight just prior to an exam, your score will likely be adversely impacted.
While we refer to the three stages of production, and certainly we should be familiar with all three, it isn’t necessarily true that every process will be subject to all three. There really are no gains from specialization in the use of fertilizer. Nor did my third call center operator add more additional capacity than the second added. But many processes do seem to exhibit Increasing Marginal Productivity and so it’s worth retaining.
We also don’t generally see many examples of Negative Marginal Productivity. Mostly though this is due to the rationality of decision markers. Few coffee shops, for example, will put so many baristas behind the counter that they get in one another’s way. Why pay someone to decrease your revenue? But again, it’s an important concept to retain because it does at times impact our personal and professional lives. I can become so busy that I find it difficult to accomplish any tasks. Likewise, an organization can grow so large it’s difficult for decision makers to effectively respond to changing market conditions.