The law of diminishing returns is known – if only
instinctively – to most people; and there is no need for me to go into an
elaborate mathematical demonstration of it here. What it says basically is that
a good thing is good till you realize that too much of it is beginning to work
against you – turning increasingly into a bad thing the more that you use it.
In other words, you can exploit something up to an optimum point after which
the exploitation of the thing becomes an abuse that diminishes the benefit you
seek to derive rather than increase it.
This law comes to mind when you follow the American debate
with regard to the employment situation in that country. The point hotly
debated these days concerns the participation of the working age group in the
workforce. Yet, the questions that nobody seems eager to ask are these: Is
there an ideal level of participation? If so, how do you define working age
group? If a family has several small children, and one of the parents stays
home to raise them, is that parent counted as participant in the workforce?
To give the matter a context that illustrates it better, it
is useful to mention that a few days ago; the American Labor Department issued
a report indicating that of the 245 million Americans in the working age group,
155 million were working. This comes to about 63 percent participation rate in
the labor force. In other parts of the world, they call participation rate the
ratio of those who work to the entire population. Applying this to the
American scene, it would mean that the participation rate is 155/310 which
comes to exactly 50 percent. This means one American works to support two
people.
To get a sense of what all this means, we need to look back
at history. For thousands of years, the human race has lived by hunting,
fishing and farming; all of which were family exercises in which children that
were barely able to walk, participated in the effort under the watchful eyes of
their elders. As to the children themselves, they considered the exercise to be
a game they enjoyed playing because it allowed them to explore nature and
discover its mysteries. They learned new things and acquired useful skills
which they honed in anticipation of a future when they will be on their own.
They knew that to survive, they will have to rely on their own wits, and
perhaps supervise and coach a younger group of children at the same time.
If this situation can be called a near 100 percent
participation in the workforce, we ask: what happened after that? What happened
when knowledge progressed, and highly developed skills were now required to
make the new weapons that would be needed to hunt a different sort of animals?
When new fishing gear was called for to go farther into the sea and catch a
different sort of fish? When new farm implements were necessary to engage in
farming techniques that would increase the yield of a plot of land?
All those requirements demanded that some people free
themselves from the daily chores of having to gather food, and spend time
learning new trades. These people spent a portion of their childhood absorbing
the knowledge and developing the manual dexterity that were required to make
the products upon which they and the others will rely to gather the food and
take it home safely. And so, the question we must now ask is this: In view of
those developments, what happened to the 100 percent participation in the
workforce?
There is no doubt that the participation rate was reduced.
In return, however, new products were created, and they helped to increase the
food supply. And this was the start of a trend that has continued to this day.
The more that the trend took hold, the more positive the return to society, a
reality that became stark at the start of the Industrial Revolution. Indeed,
this was the time when the energy that was used to make new products was no
longer restricted to human or animal muscles. It was gradually replaced with
the use of the wind and the water falls, themselves augmented at a later date
by energy derived from coal and petroleum products; and later still with energy
derived from nuclear material and other inventions.
The effect of all that was to usher the heyday of family
life. This was a time when the common sight was a family containing half a
dozen children or more. In general, the wife stayed home to raise the children,
and the father went to work, able alone to provide a decent life for the whole
family. So we ask: What was the participation in the workforce at the time? And
the answer is probably no more than 20 percent. But this would be true if we
ignored the work done at home by the wife and the older siblings who looked
after the younger ones.
But then things began to change, and they paved the way for
the returns to become negative. That is, the phenomenon of diminishing returns
began to show itself. The starkest manifestation of this being that today – a
middle class family in which both parents work – they cannot afford to have
more than two or three children. Anything beyond that would strain the family
budget. In terms of participation in the workforce this translates, as we saw,
into a 50 percent rate. And this is more than double what it was in the heyday
of family life.
And so, the question to ask is this: What caused the returns
to go from positive to diminishing? To answer the question simply: There comes
a point (call it optimum) when it takes more time and more resources to make a
labor saving device than the device will save when finished and put to use.
Can the phenomenon of negative return be reversed? Possibly.
In fact, the Japanese car manufacturers tried something in the 1970s when they
put teams to work assembling cars rather than leave individuals to the monotony
and drudgery of the assembly line.
The experiment seemed to work well, and the whole world
tried to emulate it. But then, the Japanese went crazy and started thinking in
terms of “just in time” manufacturing. This blew away the experiment, and my
hope is that they will return to it, and see if they can make it yield a
tangible result this time.