The Rule of Diminishing Marginal Return

There is a well-known law in economics called the ‘Law of Diminishing Marginal Utility’, which states that as consumption of a good or service increases per unit, the satisfaction derived from consuming an additional unit or more will lead to a subsequent decline in its overall utility. In other words, the more you consume, the less satisfied you will be with each additional product or service you purchase. The first thing you buy, use, or consume will be the most satisfying but the 2nd, 3rd, or 4th unit of the same item you utilize will not be as useful and could even not satisfy you at all.

This fundamental law in basic economics is one that is worth memorizing because it makes total sense. The first chocolate bar you consume will be delicious and fulfilling. You may not be satisfied with just one chocolate bar so you may end up eating another one since the first one was so tasty. However, anyone will tell you that the 2nd chocolate bar will not be as tasty or satisfying as the 1st one and you may even end up with a stomachache from eating too much chocolate if you are not careful.

The ‘Law of Diminishing Marginal Utility’ does not just apply to economic principles but goes far beyond that in terms of being applied to human psychology. The act of consumption, I would argue, is not just an economic one but also applies to the psychology of choice and how we live our lives. Everybody is a consumer in one way or another whether it’s the air we breathe, the water we drink, or the food we eat each day. Without any consumption, we would not survive but it is our choices that define our consumption habits and how we behave not just as economic actors but as human beings.

In a psychological context, instead of calling it the ‘Law of Diminishing Marginal Utility’, I would refer to it as the ‘Rule of Diminishing Marginal Return’, which is similar but discussing more how it’s a rule of life that the more we buy of something, the less return on that investment we will get out of it. The first of something whether that’s the purchase of a new car, a first trip to a new country, or the first time you try a new cuisine. These experiences will captivate you and do its job of putting your happiness level to a 9 or 10, but it’s a rule of life that it won’t stay there. While the memory of that experience will provide you with satisfaction and joy in its remembrance, your psychological state will revert to the norm of being level in terms of happiness or satisfaction with life. You may try to buy or consume more of something to recapture that feeling of happiness but that would actually be counterproductive in the long run and actually create false expectations compared to the first time you purchased or consumed that activity, experience, food, or drink.

How do you avoid the marginal returns of consuming, buying, or eating too much? Well, that is not easy to do but that is part of being a mature and responsible adult. You must have enough willpower and be able to reason with yourself that one more plate of food, one more drink, or one more car will not do the trick in giving you happiness. You must realize that your base level of happiness as a person won’t change as a result of consuming more and it may end up backfiring by causing your satisfaction to be lower because you consumed too much in the first place.
Being able to limit your consumption and controlling your vices will make you better off. If you can master your desires or your urges, then you can focus on bettering yourself or making you happier through more sustainable means. If you are working on personal projects, devoting yourself to a volunteer cause, or working on improving yourself mentally and/or physically, that kind of satisfaction will have a higher return on investment than just mindless consumption.

Consumption of goods and services may spike your happiness and satisfaction levels in the short run, but that kind of joy is short-lived and can often feel isolating if you are not sharing in that joy with others. That is why a meal with friends or family is often much better than eating by yourself. It’s why travelling with a close friend will generate more memories than a trip by yourself. It is not wrong to sometimes treat yourself to a nice meal, a nice trip, or a new gadget but shared experiences will make you happier and create more memories than those times that you were on your own in consuming.

One should carefully watch what they consume and monitor how much per day, per week, per month, and even per month they are consuming whether that’s food, drink, goods, etc. Everything in moderation is a good way to be as an adult and if you want to abstain entirely from consuming something, then that is an admirable thing to do as well. The worst thing you would want to do is to become overindulgent or overly reliant on a consumable good to make you happy or give you long-term satisfaction in life. You know better than anyone else the limits of your consumption and that true happiness is derived through shared experiences in life and of challenging yourself to be a better and more developed person.

In the long-term, I believe you get increased rather than diminished return through producing instead of consuming, by challenging yourself mentally and physically, and sharing yourself with others whether that’s through a good meal, a volunteer experience, or a worthwhile group project. All the chocolate and ice cream in the world won’t add to your happiness but would rather detract from it. A bowl of ice cream or a chocolate bar will satisfy you for a few hours, but you eventually will be back to that same level of happiness homeostasis that you had previously.

Instead of looking to keep yourself content or happy all of the time, know that happiness is not everything in life and that you benefit more from the hard work and the struggle that you put yourself on a daily basis than of just sitting on the couch and eating ice cream until the end of time.

When you get to that 2nd or 3rd bowl of ice cream, you should realize that you’re starting to get a stomachache and that you should stop yourself before you get sick. The diminishing marginal return of trying to seek out happiness through ice cream should be counteracted by getting off the couch and into the gym to start working out those extra calories you just gained.

By embracing the struggle of a gym workout and burning off all that ice cream, you’ll be sacrificing that short-term happiness for that long-term struggle but eventual satisfaction of improving yourself physically as a person and making yourself happier and healthier in the long-run as a direct result of your choices and decision-making. You should not be afraid to indulge a little bit every now and then but remember that life is better experienced in moderation and you should always watch what choices you are making as you go through your life as both a consumer and a producer.

Book Recommendations – Volume VIII

As always, the summer season is an excellent time to be catching up on personal reading. One of my favorite activities during the summer is to lie out in the park or at the beach and dive into some books that have piqued my interest. Whether you are a fiction fan or a non-fiction fan, there are a lot of excellent books out there to keep you occupied. My three choices for reading this summer deal with non-fiction topics yet I hope they peak your interest as well even if you are a fiction fan.

1.) “Homo Deus: A Brief History of Tomorrow” by Yuval Noah Harari

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The follow-up to Harari’s first book, ‘Sapiens: A Brief History of Humankind’ dives into the promise, the challenges, and the problems facing humanity as we go through the 21st century and beyond. ‘Homo Deus: A Brief History of Tomorrow’ looks at how human beings got to this point in our collective history and how we will need to come up with new solutions whether political, economic, or social to adapt to this current age of rapid technological and climatic change. Clearly, this book deals with more speculation on the part of Harari as he lays out a number of possibilities that could come about in this century and beyond, rather than solely focusing on past human history as ‘Sapiens’ did.

Harari devotes a large part of the book to the fact at how much progress has been made across humankind in terms of eradicating disease, famine, and also how war has been limited in a time of relative peace and prosperity. The question that Harari poses is what will humanity focus its efforts on now that we have been able to get past in large part major sources of human suffering in the form of disease, famine, and war. Mr. Harari makes the argument that humanity will focus a lot of its collective effort on artificial intelligence, genetic engineering, machine learning, etc.

The goal particularly of the rich and wealthy will be to conquer death and achieve immortality through various means that the author goes more into detail about. However, how will social harmony be insured as artificial intelligence, robotics, and machine learning wipe out a large percentage of human jobs over the next few decades? Will the rights of the individual be maintained when a large part of the population no longer are able to find work or where they can receive adequate educational training for the jobs of tomorrow?

Harari is a sociologist so the details of the actual engineering and technology that would need to occur to make this shift happen is lacking in the book. However, he poses urgent questions for policymakers, economists, and other leaders as to what will happen when ‘big data’ algorithms know us and our desires better than they ever have. How will the meaning of ‘work, leisure, and relationships’ change as artificial intelligence continues to advance? Increasingly, Mr. Harari concludes that humans and machines will complement each other in various ways whether its in education, technology, the workplace, etc. and there can be nothing done to avoid this shift from happening in our lifetimes. What remains to be seen is how human societies react to a future where people must adapt to these technological changes to survive, prosper and how man and machine will act as they merge together beyond what was considered possible just a century ago.

2.) “Us v. Them: The Failure of Globalism” by Ian Bremmer

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Ian Bremmer, a notable political scientist has written a new book on the populist resurgence in the United States and around the world. He tackles the failure of ‘globalism’ as an ideology and how unfortunately it doesn’t look like we will all be able to live and thrive in a truly borderless world without political, economic, and social differences getting in the way. The fear of the ‘other’ and the tendency for human beings to organize themselves in separate tribes whether it’s the form of nations, races, and religions takes precedence even today as the reaction to globalism.

Mr. Bremmer makes the argument that ‘globalism’ and ‘globalization’ are separate in their meanings as ‘globalism’ as a term is primarily political in nature while ‘globalization’ is primarily economic. Globalization will continue to expand and thrive because its’ practical for nations to engage in trade and finance at the international level to boost and grow their national economies. As long as it is economically advantageous for nations to trade and do business with each other, globalization will continue to be a mainstay in economic relations.

‘Globalism’ however has received a backlash from the rise of political populism primarily in the Western world (the U.S., the U.K.) but also in Eastern Europe (Hungary, Poland), and also in developing nations like India, Mexico, Turkey, etc. Issues of mass migration, cultural shifts in nations, growing income inequality have led populations to look towards protectionism and ‘strongmen-lite’ politicians to address these systemic issues. In my opinion, Bremmer correctly argues that while the world is collectively doing well in terms of economic growth and the subsequent rise in living standards, there is still a serious political recession going on with far left and far right politicians gaining stream in terms of popularity.

‘Us v. Them’ reflect the growing unease and anxiety that a lot of people have regarding ‘globalism.’ Besides the cosmopolitan populations that live in the major cities of the world and who have benefited from the cross-cultural exchange of peoples, trade, finance, etc., there are many others who feel threatened by the ‘other’ and how their country and culture may be changing as a result. Mr. Bremmer sees the happening of Brexit, the election of Trump, and the rise of strongmen around the world as a reaction to ‘globalism’, and how there are drawbacks in that many people feel left behind by their political and economic elites who enacted these policies without their support. ‘Us v. Them’ is something that has occurred throughout human history and to myself, it goes back to our fundamental nature of our willingness to divide ourselves into separate tribes and to look upon the ‘other’ with suspicion and fear.

According to Mr. Bremmer, political populism is not likely to go away anytime soon and the rise of automation, an increase in artificial intelligence, the weakening of the middle class in both the developed and developing world are likely to put continued pressure on weakening political institutions who may or may not be agile and forward-thinking enough to come up with satisfactory solutions to these 21st century issues.

3.) “Notes on a Foreign Country: An American Abroad in a Post-American World” by Suzy Hansen

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‘Notes on a Foreign Country: An American Abroad in a Post-American World’ by Suzy Hansen is a refreshing take on the way American foreign policy decisions have affected the U.S.’s relationships with certain countries such as Iran, Greece, Afghanistan, Turkey, Egypt, and specifically the people who feel that they have been negatively affected by those decisions. The average American is likely to be unaware of how large of a role the country has played beyond its borders and how some of those decisions have left deep, festering wounds in the people of those countries who were directly affected and still haven’t forgotten.

Ms. Hansen who came from a personal background similar to mine has lived in Turkey for over ten years and has traveled to the Middle Eastern countries such as Iran and Egypt looking for the perspectives of those citizens in regards to how America changed their countries, mainly for the worse. Her personal background growing up was very insular and she went to travel and live overseas in order to see her country differently.

From reading this book, it was refreshing to see Ms. Hansen do her research about the countries she was living in and visiting as well as interviewing many people in those countries to hear their stories and their perspectives. I believe that her book does a great job of enlightening Americans about negative foreign policy decisions made in the past that our country may not like to remember but is still forefront in many other countries’ perspective of the United States.

As Hansen left home and lived overseas, her innocence and that of America is stripped away because it’s a harsh truth to face yet it is one that we must all face is that America has not always done good in the world and there have been negative effects of past U.S. foreign policy decisions that heavily resonate with those peoples to this day. The key aspect of this mix of journalism and personal memoir makes this book stand out as a referendum on America’s role in the world, and how its likely to decline in the future. While our impact may lessen on our nations in the future, Hansen sees that as a possible good occurrence do the damage that has already been done.

My main critiques of this book is that while Ms. Hansen diagnoses that issues with U.S. foreign policy, I do wish there was an addition to the book where the author discusses how America can better its foreign relations in the future and to move forward positively with the countries she has become familiar with. However, to be fair, that would take a whole another book to diagnose how U.S. foreign policy should move forward. Also, I believe that this book was a bit too negative in its perspective on America and it could have been more balanced in its overall viewpoint. Ms. Hansen’s book pulls no punches and is a clear-eyed look on the blindspots of American exceptionalism and how our values have not always been well received beyond our borders.

Made In America?

free-trade-cartoon

Have you ever noticed this small yet important detail when you’re out at the store buying a consumer good whether it’s a pair of pants, a carpet, or some brand new shoes? For those of you who are confused right now, there’s a tag attached to the item indicating that the final product was “Made in …..” which indicates the origin of the country the good has come from. I doubt that most people notice this small detail when they’re out shopping and it’s probably not their biggest concern.

However, I do believe it’s very important as consumers to know where our goods and services are coming from and to what sort of quality they are made. It’s also important to ask the question of these companies who make these consumer products, both foreign and domestic, how well are they treating their employees and what do they pay them for their hard work? Do they receive good health benefits and vacation time? Are the working conditions in their factories and shops safe and hospitable?

I have noticed that most of the clothing, household items, and electronic products that I have bought were not made in the United States. I am not against wearing or buying consumer goods that were created and manufactured in other countries. However, I do worry that we are relying too heavily on these foreign-made products in our daily lives instead of having some of these same goods made in the U.S.A., which could improve the lives of many people looking for decent-paying jobs. Many abandoned and dilapidated factories, plants, and mills could be re-opened again if we change the way we look at free trade.

According to the official and most recent numbers on United States International Trade Data, there was a sizable overall trade deficit in goods and services of $43.9 billion dollars in October of 2015. Since ‘The Great Recession of 2007-2008’, the trade balance has not changed greatly in terms of lowering the overall deficit. Over the past five years alone, the monthly trade deficit has ranged from $40 to $65 billion. There has been very little sign of this trade imbalance being decreasingly significantly or being entirely eliminated recently. This means that the U.S. is importing a much larger quantity of goods than we are exporting overseas. While some people would argue that this is not a big deal, I would say that in order to grow the economy at a higher output and decrease unemployment further, increasing our exports overseas with the stamp “Made in America” should be a higher priority especially with the upcoming presidential election.

With the decline in American manufacturing, the U.S. has increasingly looked to its trading partners overseas to fill the void that has been created. Due to free-trade agreements such as NAFTA and the recent passing of the Trans-Pacific Partnership, many American companies and jobs have moved overseas causing the trade deficit to increase over the past generation. This has led to many good-paying middle class jobs with health and other benefits to disappear. There has also been a steady decline in the Unions and their total membership and influence within the U.S.

Examples of the shift towards the growing importation of manufactured goods and products that used to be made in here at home can be found in companies such as Wal-Mart and Apple. These iconic companies that were created by Americans such as Steve Jobs and Sam Walton have changed significantly like many others since their early days. They have become multi-national in nature and have expanded their facilities and operations to multiple countries around the world. Even though their company headquarters are in Silicon Valley and in the heartland of Arkansas, these companies are not taxed like other U.S. companies and carry out their manufacturing and production of goods from overseas suppliers.

American workers are known to be more expensive to train and hire than those workers found in countries such as China, Vietnam, and Cambodia. That’s an unfortunate truth that has led many companies to take the easy way out by calculating how much they would save due to the fact that foreign labor is cheaper. For these firms, there is little to no need to worry about strict labor laws that don’t exist outside the U.S. and other parts of the Western world. For example, huge multi-national companies such as Apple have used subsidiary companies like the ‘Foxconn Technology Group’ for years in order to manufacture their iPhones and other high-tech products. There have been many investigative reports done by The New York Times and other news outlets about the harsh working conditions, poor salary, long hours, and reported suicides and riots occurring at these plants in China.

In a lot of developing countries, the taxes associated with doing business are much cheaper which allows a lot of big manufacturing firms to operate there more freely. Even though multinational companies have to pay U.S. taxes on the profits that they earn from products that they make and sell in other countries, Apple and others can avoid paying these taxes by re-investing their profits made from outside the U.S. on overseas factories, stores, warehouses, etc. Because of that, they won’t have to pay the higher taxes. It’s a significant loophole that hasn’t been closed yet and allows U.S. companies to store billions in profits overseas. “Apple is not alone in this strategy. U.S. companies have $2.1 trillion in foreign profit stashed overseas, according to Capital Economics.”

Once the multi-national companies decide to move their manufacturing and production operations overseas, it’s very difficult to bring them back to the U.S. Competitors like China have the infrastructure and a vast amount of workers willing to work in the factors for these supplier companies. It is the responsibility of companies like Apple to break their agreements with manufacturing giants like Foxconn if they ever decided to move their production operations back to the U.S. However, Apple would have to invest in billions of dollars to build these new factories and pay these workers a fair wage with benefits. This proposition is entirely unlikely to occur in the near future for Apple, Wal-Mart, GE, and others to move their manufacturing back to the U.S. due to the higher taxes, the higher costs of the workers and their desire to make the most profits that they can secure.

Free trade is a complicated subject but I decided to write about this issue because I think as consumers, we should know where our money is going. I am guilty like many other Americans in supporting these popular multi-national companies who have gotten away with sketchy business practices and who have shied away from creating jobs here in the U.S. However, it’s never too late to be informed about where your clothes, your cars, and your electronics come from. Do your research and be informed about these issues.

Globalization and free trade have lifted millions of people out of poverty and allowed many countries to boost their economies but it’s also led to a higher amount of competition, the stagnation of wages, and many environmental concerns. I am not a protectionist and I believe that some free trade is good. However, it’s more important than ever that we support fair trade and business practices from these companies. Workers around the world should be treated fairly with good wages, good health and vacation benefits, and they shouldn’t be taken advantage of whether they are located in Saigon or Detroit.

We have free trade with other countries so that we can exchange goods and services with them to better our economies and our peoples. Lets’ not create a situation where we are importing more goods than we should be at the expense of the American worker and taxpayer. These companies need to be held accountable for what they do both here in the U.S. and overseas.

I would encourage everyone reading this entry to think about where your goods and products come from. If you have the chance and opportunity to do so, I would argue that you should try to buy from the U.S. companies making the goods and services right here in America. I am not against buying foreign goods either but we have to know whether these large companies out there are playing by the rules and are not being exploitative.

By ‘Buying American’, it’s good to show those small businesses and firms that we still support them and that we want them to succeed. If you would like to support buying American-made goods and products, check out this website: http://madeinusachallenge.com/ (Made In America – Master List)

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