1.10.08

Diminishing returns

Those days two happenings have gave me back to a forgotten law in economics.

I'm talking about the Law of Diminishing returns.


Before continue reading I suppose that you would know what happenings am I talking about? Well, it's about the last google toolbar pagerank update and the crisis

What Diminishing returns is?
In a production system with fixed and variable inputs, beyond some point, each additional unit of variable input yields less and less output. Conversely, producing one more unit of output costs more and more in variable inputs. ***

The key in that trouble is that a system lives from several inputs to produce its output. If one of its inputs increases and this increase does not go with a proportional increase of the other imputs the system is in the edge of a problem in terms of performance.


That is exactly (under my opinion) what is happening with google toolbar pagerank updates. Month after month there are some extra millions of websites. According to the mentioned law, to maintain a level of pagerank, the website's ranking must grow proportionally to the number of new websites. That's why important websites which had achieved levels up to 6 and 7 are decreasing to 4 and 5. It's a really challenge.


In terms of economics and (the crisis) I think that we are suffering the same law.
Those years some inputs have been increased, multiplied, magnified and it has become a proportional effect in outputs. It was risk, it was subprime, it was credits, it was inversion ... It was everything to make money.
But the rest of inputs of the system did not increase at the same proportion (working like a economies of scale).

Now, The law of diminishing returns could be adjusting the system.









*** Extract from Wikipedia
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