|One mathematical consequence of the law of returns is that when the allocation of a factor exceeds the point of optimum return, its marginal product is always less than its average return. For example, Crusoe's marginal product when he allots more than three hours is represented by the figures in the shaded boxes of the diagram. Each of these figures lies significantly below the corresponding figure in the "Average Return" column.
The law of returns is popularly known as the law of diminishing returns, and the latter phrase has become associated with the supposedly pessimistic outlook of economics. Contrary to a common impression, however, average return typically rises in the earlier stages (as in the diagram), until the optimum point is reached. The law's real lesson is optimistic: human beings can improve efficiency and productivity through intelligent allocation of resources.
| Average |
Returning to our study of ethics, we now explore the practical implications of egoism.