Tuesday, January 7, 2014

Diminishing returns

Here's a short little article that appeared in the New York Times just before the new year:
The first piece of pumpkin pie is a real treat. The second piece might be good. But we may almost have to force ourselves to eat the third. Instead of enjoying it, we’re miserable. Why doesn’t the last piece taste as good as the first?

We’ve all experienced that moment when our enjoyment of something declines as we have more and more of it. With each additional unit, be it pie or something else, less and less value gets added to our lives. Why doesn’t adding more of something continue to add up to something better?

This concept of declining marginal returns, or utility, is something we often experience; but we rarely recognize when it happens in our lives. In fact, one of my college economic professors felt so strongly about making sure we understood it that she spent almost the entire semester on that single concept.

Whether it’s leasing a car or buying a new pair of shoes, at some point they’ll no longer be new, and the marginal utility of the car or shoes will probably fall to zero — or even go negative. By recognizing the role of marginal utility, we can avoid the costly mistake of expecting the new shoes we buy today to make us happier than the pair we bought last week.

Drinking too much water: We’re encouraged to drink more water to help us stay healthy. The amount that makes sense will vary by person and activity, but at a certain point, it stops being a benefit. In fact, drinking way too much water can hurt you. Taking too many vitamins: Your body can absorb only so much of certain vitamins, like vitamin C. After that, it just gets flushed out of your body. In the process, however, megadoses of vitamin C can cause things like headaches, insomnia and kidney stones. Buying too much plastic: Remember how excited you were the first time you gave a set of Legos to your children? That first time was magical. How many sets did it take before the Legos stopped being exciting and you had to come up with something else to impress your children?

Marginal utility can become incredibly expensive, both financially and emotionally. It can lead us to think that if we spend or do a little more that we can get back to the pleasure we experienced the first or second time. As a result, we keep chasing after a moment that may be all but impossible to find.

It may sound odd, but the key to dealing with marginal utility may very well be that we’ll enjoy more if we spend or do less...
How to React to Diminishing Returns (NYT)

We need more economics professors like the one mentioned in the third paragraph. What's amazing to me is that the concepts of diminishing marginal returns and diminishing marginal utility are well known in economics. Any economist can tell you what they are and even document them mathematically. Yet they absolutely refuse to see that there are diminishing returns to growth. That there are diminishing returns to productivity. That there are diminishing returns to population growth. That there are diminishing returns to technological innovation. That there are diminishing returns to complexity (as Joseph Tainter reminds us). And, yes, there are diminishing returns to happiness.

So you would think that economists would understand this concept. Too bad they don't seem to get it.

8 comments:

  1. Oh, they get it. They just know they'd pay a steep price if they admitted it in public. In fact, most economists, in my estimation, are propagandists for the system. It's part of their job description ever since Henry George. And people who can't stomach it, move into other work...

    So they create a lot of BS so they can live with their inner cognitive dissonance. Including keeping everyone else in line, all pretending. The interesting thing is... some day, the lie will out. What then? What comes after the kleptocrats and their apologists? I wish I knew. But nothing lasts forever, not even they.

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    1. True, but when you debate them, it's important to debate them using their own language and concepts. Remember the old rules of debate - you need to know your opponent's side as well if not better than your own.

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  2. "We know that at a certain point, more money doesn’t equate to more happiness and may have the opposite result. For instance, how many happy stories have you heard about lottery winners five, 10, even 20 years after they win?"

    Ah. Finally, an explanation for the insistence on shitty lottery odds, so that one person's life gets ruined with 400 million when 800 people could be ecstatically happy with half a million. Duh!

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  3. You know, Escape, your blog is like a fantastic university where the students are all silent (except a couple of us). Shame on you, lurkers. You know who you are. ;-)

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    1. So you want Escape's other readers to chime in? Fine. I'll share that I used his list of successful predictions in "Kunstler Victory Lap?" over at The Archdruid Report last week and got a favorable response from Greer himself. Of course, I gave full credit to Escape. I then put it into a post and linked to it from Kunstler's blog. So far, I have 300 page views.

      A conversation with The Archdruid about predictions

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    2. Wow, thanks guys! I hope people learn something from all this; I know I do. That tag line isn't just for show. Really, I've realized that this is all a big research project.

      I don't really make predictions (except for the odd one here and there), but I think it's important to test against reality. The danger is making predictions that are just things you want to come true. Unfortunately, things in the real world don't work out that way, otherwise we'd never be here - I don't think anyone actually wanted society to turn out the way it did. I like this paragraph:

      As for the demon-haunted world, that's the inevitable result of the failure of the cult of progress; as more and more people realize that techno-utopia isn't going to happen, they're not just rejecting technological triumphalism, they're rejecting science and the whole heritage of the Enlightenment -- which, in turn, were hijacked by the cult of progress and used as its stalking horses. Share his feast and share his fall...

      I agree. It's the misuse of science and the corruption of democratic governments by corporate greed that's made people turn against both. There's even a lot of talk about monarchy afoot! Well, maybe I'll get to engage more with other writers more directly. I'd like that - the year is young after all.

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  4. "In fact, one of my college economic professors felt so strongly about making sure we understood it that she spent almost the entire semester on that single concept."

    I wonder if Mr. Richards went to school at Rutgers, where Economics Professor Rosanne Altshuler has her students demonstrate diminishing marginal returns with tennis balls. I have a video of the demonstration at the link.

    Educational fun with balls

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  5. I think it's not so much the economists, really more the "man on the street" who needs to understand this - otherwise he wouldn't be doing nutty things like going into debt to buy a new car that depreciates 30% right off the lot.

    To a large degree I think it's a generational-attitude thing. Up until the 1960s or so there was still a lot of work to be done in terms of bringing everybody in the country up to a modern standard of living, and getting to the point where the full range of modern conveniences (things like electricity, TV/radio, hot showers, interstate highways and modern medicine) was accessible to the masses - returns to growth and technology then began to level off. In the 1980s and 1990s you had a sort of 'echo boom' in that the tech revolution focused minds on the prospect of rapid, massive bubble-wealth accumulation (at least, in the upper class) and a vaguely-defined techno-utopian future. But now this too has pretty much run its course and the it seems to me that "live with less" will be the big meme of the next few decades. Partly it'll be due to the immediate short-term requirements of debt-service, joblessness, and low income growth (though IMO these problems will abate over the next ~10 years); partly it'll be a matter of sharply reduced opportunities for massive windfall wealth or speculative financial gains; and partly it'll be a matter of changing social fashion (upper-class wealthy folks and celebrity thought leaders will cut back working hours, downsize their houses, and take up gardening because it's the cool thing to do, and they may even find they enjoy it).

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