Marginal Thinking — A Mental Superpower To Help You Overthrow the Bourgeoisie
As a former management consultant and recent MBA grad, I’ll be the first to admit that most business frameworks are useless. They may sound smart, but they’re often just mental shortcuts that abstract away the real world and alienate people who haven’t learned corporate-ese.
“The dumbest way to simplify a tough problem is to throw out all the hard parts.” — Larry Keeley
After six years in the maw of modern business, however, I found a few frameworks that are actually helpful. I shared one a while back — Quantum Thinking — and even two years later, about ten people read about it every day.
This piece is Quantum’s long-needed sequel. It regrettably has fewer Bitcoin references, but if you want to witness the ascension of another mental superpower, finally understand how taxes work, or overthrow the bourgeoisie, keep reading.
This time, we’ll focus on Marginal Thinking, or why a single tree can sometimes teach us more than the entire forest.
This superpower is best understood by watching it in action. So… action!
In my extremely humble opinion, Christian’s Confections is clearly the best candy store in the tri-county area. Sure, it’s recently run into a spit of trouble… but it’s all because of those meddling kids and their hacking skills!
When I opened last year, folks loved that I charged only $1 per piece of candy and bought a few pieces whenever they came in. Not too shabby, but nothing to write home about. And then, out of the blue, I had a game-changing idea: I should offer a volume discount. Buy six or more candies, get 50% off. Brilliant!
The day the sale hit, I was ecstatic. Kids ran into the store and bought as many candies as their little arms could hold. Most left with exactly six candies, strangely, but what did I care — I was out of stock by lunch!
But when I dug into the numbers that afternoon, something was wrong. Somehow, I had made less money than the day before. After another week of bleeding money six candies at a time, I still had no idea how to fix my store — so I did what any responsible confectioner would: I called Boston Confectioners Group (BCG) and asked for help.
The next Monday, a consultant flew out; by Thursday, I had a $100,000 invoice and three slides to show for it.
This is what BCG gave me:
The first slide put it perfectly: I was stuck in the Pit of Despair. Even though I sold more candies, I made less money. What a bummer!
My consultant’s second slide blew my mind. By offering marginal-rate discounts, I could have outsmarted those wily kids.
Honestly, this one was a little rude. But, I suppose, true. I needed the bitter truth to sell my sweets. Thanks, BCG!
The core lesson of Christian’s Confections will be the focus of this piece:
A powerful way to simplify big, complex systems is to look at marginal contributions.
It sounds simple, and it is. But you’ll be surprised to learn how far Marginal Thinking can take you. Let’s turn now to a true story and see our new principle at work in the real world.
In the hours after the 2016 Presidential election, my friends and I decided to save the American Republic by helping political campaigns better organize their volunteers. Within days, we had named ourselves The Tuesday Company; within weeks, we had our first squabble about pricing.
No single price made sense. A local campaign might pay $1 per month for each of their fifteen volunteers, but national campaigns didn’t have million-dollar tech budgets. Perhaps they would pay us one cent per volunteer — but could we really charge a local candidate 15 cents a month while keeping a straight face?
The obvious solution was a volume discount; I proposed one where the first ten volunteers cost $1.00, eleven-plus cost $0.50, and so on. I thought it was elegant; my co-founders disagreed. “That makes no sense,” one argued. “Why would we charge $10.00 for ten volunteers and $5.50 for eleven?”
“No, no, no,” I replied. “That’s not what I meant. This would work like taxes.”
… 🦗 …
“You know,” I stammered. “Marginal rates?”
In the weeks that followed, Tuesday adopted a pricing policy without marginal rate increases and I was left to brood on my failure to persuade. After some time, it became clear that most people don’t have an intuitive sense of how tax brackets work — including, it seems, senior Republican congressmen:
Most folks know that earning a higher income equates to a higher tax “bracket,” but many think that people end up tax brackets, meaning if you earn enough all of your income will be taxed at a higher rate. If true, the U.S. Tax Code would have a Pit of Despair: earn $84,199 and pay 22% tax (~$18,500), but earn two dollars more for a total of $85,001 and pay 24% tax (~$20,400).
U.S. Single Filer Tax Brackets, 2019
$0 to $9,700: 10%
$9,701 to $39,475: 12%
$39,476 to $84,200: 22%
$84,201 to $160,725: 24%
Luckily, that’s false. Uncle Sam will never punish you for earning more money because tax brackets are applied to marginal, not total, income above a certain threshold. In other words:
People don’t belong to tax brackets — individual (marginal) dollars do.
Say you make $50,000 a year. Your 39,473rd dollar is taxed at a rate of 12%. So is #39,474 and #39,475. The next dollar you earn, however, falls into a higher tax bracket and is taxed at 22%. Note that earning #39,476 doesn’t change the tax rate of your previous dollars. They’re independent of each other. There are never retroactive changes.
In total, Uncle Sam will charge you a confusingly specific 13.72% tax rate on your $50,000 for a total of $6,859. That number makes little intuitive sense when viewed at the level of total income and total taxes. But viewed marginally, it is far more comprehensible:
Your first 9,700 dollars are taxed at 10%; the next 29,775 are taxed at 12%; and the remaining 10,525 are taxed at 22%. How can you understand a number like 13.72%? Imagine a stew filled mostly with “12%,” with a pinch of “10%” and “22%” added for flavor.
The moral of the story? Sometimes, systems are just too complex to be understood in toto, and Marginal Thinking can help us make sense of them.
Ralph Lauren is an American fashion designer and multi-national business owner. He’s the 215th richest person in the world, the 71st richest person in America, and as of August 2019 was worth $5.9 billion.
Mr. Lauren is an adherent of the “have money; spend it” intellectual tradition and his pecuniary release valve of choice is luxury automobiles. He has one of the most expensive car collections in the world, with over 70 cars valued at more than $300 million collectively — including one, the world’s only 1938 Bugatti 57SC Atlantic, which is worth over $40 million.
Why mention Mr. Lauren? It is challenging to judge the (in)justice of extreme wealth as an abstract concept, but Marginal Thinking can break down huge, philosophical questions into bite-size chunks.
Rather than idly wondering if we should overthrow the bourgeoisie, we can ask:
What’s a better use of $40 million: buying Ralph Lauren another car, or feeding 4,500 low-income families for a year?
The question answers itself — and understanding why will allow us to unlock one of the most powerful corollaries of Marginal Thinking: the Law of Diminishing Marginal Returns.
The basic idea is that as you gain additional units of something, each marginal unit is worth less than the one that came before it. Take water, for instance. The difference between zero and one liter(s) of water per day is the difference between life and death; the difference between one and two liters per day is smaller but still positive; the difference between two and three is smaller still; and so on. You’ll quickly realize that pretty much everything in life has diminishing marginal returns — particularly wealth. (An extra $10,000 a year means a lot more to me than it does to Ralph Lauren.)
If we analyze social distribution problems like taxes or government spending using Marginal Thinking, then, we have a framework for weighing claims against each other: which final marginal unit provides more value to its owner? To reframe the Ralph Lauren question above, what we’re really asking is this: which is more important, giving Ralph Lauren one more car or giving 4,500 families an additional $9,000 to spend on food? Certainly, the happiness derived from the food is greater than from the car; no matter how much Mr. Lauren loves looking at his Bugatti, the Law implies that low-income families love feeding their children more.
We can use these same principles — breaking down problems into their parts, analyzing the final marginal units of distribution, and remembering the Law of Diminishing Marginal Returns — to analyze nearly any complex system.
For instance, it’s hard to know if America investing too much or too little in defense spending. You may know that America spent more on defense than China, Saudi Arabia, India, France, Russia, the United Kingdom, and Germany combined last year — but our annual budget of $650 billion is too big a number to grasp intuitively, and it’s hard to say whether a $651 billion or $649 billion budget would be better.
We can, however, make sense of whether America should procure one more weapon, one more bomb, or one more fighter jet. The marginal cost of one F-35A jet is around $80 million and the U.S. recently committed to buy 478 of the newest F-35As. What if we bought only 477, and instead gave out 14,000 more Pell Grants to help low-income Americans afford a college education?
What if we bought 472, and kept the National Park Service fully funded?
Or, to water down what turned into a divisive list, what if we bought a mere 378 jets and funded some of the U.S.-Mexico border wall?
These Marginal Thinking tactics can also help you understand the collective impact of small, repeated actions.
I am a crazy person when it comes to tracking my progress towards achieving my personal goals, and I’ve found that what works for me is to think on the time scale of a single day. I’m far too good at procrastinating to think on a longer time horizon: give me a year to complete a goal and I’ll start in August; give me a week and I’ll start on Thursday. But give me a single day and ask me to make some small, marginal improvement towards my end goal, and I will get it done.
The potential impact of this mental superpower is seemingly limitless. Marginal Thinking can help us solve collective action problems (what is the marginal impact of one person reducing their red-meat intake?), achieve extremely long-term goals (what can we do today to help humanity survive longer than our solar system?), and quantify hard-to-grok risks and opportunities (what can I do tomorrow to prepare for good luck?). These types of questions are notoriously difficult to wrap our minds around — but the problem may be that we’re straining to see the entire forest when carefully observing a single tree might tell us all we need to know.
Marginal Thinking is powerful. Through the Law of Diminishing Marginal Returns, it’s the foundation of much of modern economics; through marginal rates it’s the basis of the modern tax system; through marginal actions it’s the secret to achieving big goals; and through the Boston Confectioner’s Group it has helped an ambitious confectioner create a pricing scheme that’s smarter than a fifth-grader.
In the end, Marginal Thinking helps you find compelling narratives by transforming the questions you ask of the world. It reminds us that it’s far better to concentrate our efforts where they can make a difference than to spread ourselves thin by taking on tasks our mortal brains were never meant to solve. Perhaps if we had infinite processing power between our ears, we wouldn’t have to use Marginal Thinking. But we don’t, so we do.
Marginal Thinking helps us stay rational even in the face of incredible complexity — and for that, it shall ascend from the dregs of normal business frameworks into the Pantheon of Mental Superpowers.
It shall ascend. One step at a time.
Find more of Christian’s writing by following him on Twitter (@cdkeil) or Medium (Christian Keil).
