Another Group of Useful Maxims
This is my sixth group of the many short principles that help clarify reasoning, decision-making, or analysis. I am featuring some of them in a series of posts, expositing a few of them each time.
16. The Law of diminishing returns tells that more effort brings fewer gains.
It says that at a certain point, employing an additional factor of production causes a relatively smaller increase in output. We might add more chefs in a kitchen to increase output, but there will come a point where there are too many, and they get in each other’s way. A farmer might add more fertilizer to gain more produce from his or her land, but there will come a point when enough fertilizer has been added to extract everything the soil can produce. At this point, the addition of more fertilizer will not increase production.
Someone who is hungry can derive huge satisfaction by eating a slice of pizza. Since some of their hunger has been abated, they will gain less satisfaction from subsequent slices until their hunger has gone, and there is no further satisfaction to be gained by eating more because they are now full.
People talk of the ‘low hanging fruit,’ referring to easily achievable goals that require little effort to gain significant and immediate results. But, like the fruit on a tree, the subsequent ones will take more effort to reach, and the ratio of effort to achievement will be higher. In business, the later sales will take more effort to achieve than the earlier ones.
17. Opportunity Cost means that you can’t have everything at once.
It tells us that everything is a trade-off. Money spent on one thing cannot also be spent on another. Time spent on one activity uses up the time you might have spent on another. Technically, it represents the value of what you had to give up in order to take the option you take.
When Bjorn Lomborg presented a UN panel with a range of objectives and asked them to put them in order, they said, “But these are all worthwhile.” Lomborg was making the point that we can’t spend infinite money on everything; we have to prioritize. The less important things are the opportunity cost of committing resources to the more important things. We cannot spend the same money on providing clean water everywhere and eliminating malaria as we spend on combatting global warming.
Everything we do supplants what we could have done instead. Do we take the pleasant evening dining out, or the evening at the races? The one excludes the other. The increase in welfare spending uses up money that could have gone to increase defence spending. Everything is a trade-off and has its opportunity cost.
18. The Tragedy of the Commons is that people overuse free resources.
It occurs were people are motivated to overuse and deplete a finite shared resource. If there is common land, it is in each herdsman’s interest to graze his livestock there, even though each of them is overusing and depleting the value of that common land. Because the resource is ‘common,’ is has no individual owner, and no-one is incentivized to maintain it.
Modern examples include over-fishing and causing fish stocks to decline. Iceland and New Zealand have countered this by assigning ownership of fish stock to their vessels. This gives skippers property rights that they have an interest in protecting, and both countries have seen a rise in their fishing stocks as a result. Botswana gave villagers ownership of wild elephants in their area, and saw a rise in elephant numbers as the villagers began protecting their precious asset.
We can avoid the tragedy of the commons by assigning ownership to what was previously common, thereby motivating someone to protect it. Communism’s collective farms were a disaster that was only resolved by assigning the land to individual families. Private property will be protected; common property will not.
Madsen Pirie