Knowledge And Decisions

Even if all one hundred farmers had identical notions of how much output was worth how much effort, each farmer individually would have an incentive to put forth less than this effort, since his own individual shortcomings would have very little relationship to his own individual share of the output. They might all “know” in an abstract sort of way that the total effort was related to the total output, and so all might desire to keep everyone’s performance up to par, but there is a great difference between this desire — even if universally shared — and an organizational way of achieving it. At the very least, devising and maintaining an organized system of monitoring cannot be free, and whether it would repay its cost is an empirical question. Monitoring costs (either the costs of monitoring or the loss of output if not monitored) are an additional factor offsetting the possibilities of rising output per unit of input.

The original assumption that larger numbers of people meant additional options without an offsetting loss of other options is only approximately true for small numbers of people. Crowding, distraction, and monitoring costs offset the gains made possible by cooperative organizational work. As more and more inputs are added, beyond some point, the negative factors outweigh the positive advantages, and there is a falling ratio of output to input. This is the law of diminishing returns — a basic economic principle, with implications that go far beyond economics.

The law of diminishing returns applies to inanimate inputs as well. Although some amount of fertilizer on the land may have a small incremental effect on the size of the crop, and twice as much may cause the increment to be more than twice as great, beyond some point more fertilizer no longer increases the crop in equal proportions, and it is even possible to reduce the crop with excess fertilizer.

Economic decision making within the constraints of a price system with profits and losses seldom leads to production in the region where more input leads to absolutely diminishing output. There is obviously no point spending hard cash for inputs whose incremental effect will be negative. However, this is not to say that such results do not happen, when the incentives in the particular decision-making process make it rational for the individual decision maker, however detrimental it may be to “society,” which is not a decision-making unit.

Internal communication systems in large organizations are often open to many individuals who may wish to send memoranda, announcements, official documents, paychecks, survey questions, or plain gossip. The number and frequency of such internal communications influences how much attention the average recipient pays to each item. Infrequent arrivals of internal mail are likely to receive more attention per unit than a flood of material arriving every few hours. In other words, the law of diminishing returns operates, so that beyond some point there are diminishing increments of attention as the quantity of mail increases. With a sufficient inundation, there will be less total attention paid — less information effectively received — than if fewer communications had been sent. The situation can reach this level of absolutely diminishing returns only because there are virtually no costs to the numerous individual decision makers who decide whether to add more material to the internal communications system. They may all know that the recipients’ attention and patience are already strained, but each individual sender also knows that his action alone will have very little effect on that. As long as it is worth the bother of typing or mimeographing, the sender has every incentive to send, because part of the costs created by his decision will be externalized to others, in the form of generally diminished attention. When they all do it, they all lose — but this happens only because “all” is not the decision-making unit.² A more serious social problem arises when whole institutions have incentives to push their activities well past the point of incrementally diminishing returns, into the region of absolutely diminished returns.

TIME