biomatrix systems theory blog

reflection on law of diminishing returns and opportunity costs

The law of diminishing returns states that adding more of one factor of production (while keeping others constant) will at some point yield lower per unit returns. While this seems to hold true in the context of material production processes, it begs the question if this is true in the context of information resources added to the production process in general and to that of information products or services specifically. Could in this context the law of diminishing returns become one of increasing returns?

And what about the concept of opportunity cost (i.e. the cost of an activity measured in terms of an alternative not chosen)?  It relates scarcity to choice and apparently ensures the efficient use of scarce resources. Yet information is rarely scarce. Also, the same units of information can be used at the same time in different production processes. We do not need to choose between them.

Are these concepts still universally relevant in the context of the economy relating to information, or are they only relevant to material production as a special case within a wider economic paradigm (e.g. physical production which dominated the agrarian and industrial ages)?  Do we need to extend our economic theory to make it relevant for the information age? Has the bursting of the dot com bubble been an example of applying the wrong paradigm?

The question Does investing systemically create more value for the dollar than a linear system? could be related to the above, since the essence of systems thinking relates to emergence (i.e. the arising of new properties from interacting parts at the level of the whole). The interaction of production factors co-produces the emergence of the value of the product (e.g. as measured quantitatively or qualitatively). This is also true in the production of material goods. If we operate profitably, this value is of course greater than that of the sum of the values of the parts (if we use the current economic growth related measures). This value may, however, increase multi-fold in the context of information, due to its abundant, win / win and synergistic nature.


Comments are closed.