A few weblog posts in the last few days have my formally-uneducated mind spinning. First, there was a point-counterpoint between Dan James of CEOBlues.com and Peter Rukavina of Reinvented.net on the nature of government spending and waste. Then, a post my Matt Linderman at Signal vs. Noise on the growth of the average work week in America.
These ideas helped to coalesce a question that has been bouncing around in my head, in one form or another, for years: Is efficiency a good thing?
Take the example of a small fictional nation-state that is run by a staff of 1,000. Maybe 100 of these staff are accountants who manage taxes and the financial affairs of the state. Then one day someone invents a computer that allows one accountant to do the work of 10. You cut your accounting department down from 100 to 10 and the work still gets done.
Is this a good thing? First, ninety people have lost their jobs. This is not good. Some may become successful entrepreneurs while others may go hungry.
However, you can now reduce taxes with the money saved on staffing costs. With their extra cash from the lower taxes, the happy people of our little nation-state will go to the movies and get those neon under-lights for their hot-rods. This means the movie house and neon hot-rod joint will hire more staff. Will they hire enough to counter the job cuts that started it all?
This starts to lean towards the question of which is better: big government or small government. However, I don’t want to become ensnared in politics, as my question (hopefully) goes beyond the public sector.
Take the accounting-software layoff example above and transpose it to a private corporation. Obviously, efficiency is a good for the closed system of one company. Fewer accountants means more money left over for shareholders. However, I want to know how a change like this affects the larger system, the economy and society as a whole.
What does it mean when we invent a robot that can mow our lawns for us? We all have a few extra minutes to spare each week (how does free time affect the economy?). Lawn care businesses go under. A robot-mower industry is born. What is the net outcome of all of these changes to the system? Is there a net gain to the economy?
What happens if you extrapolate this scenario even further? Assuming it is possible (a questionable assumption, admittedly), imagine a world in which all or most work is done by robots. What does this mean for the economy? Do we continue inventing new services and products to entertain ourselves and get rich? Cory Doctorow’s novel, Down and Out in the Magic Kingdom (free download) takes place in a future in which there is no scarcity, and access to inevitably scarce goods (art, landmarks, etc.) is managed by a reputation economy.
I’m sure this question has been asked (and answered) before. Perhaps anyone with Economics 101 could answer it. Can anyone shed any light on the subject?
>When we invent a robot to mow the lawn…
Actually John Deere has industrial farm equipment today that is steered by GPS to reduce overlap in seeding and chemical (feeding or insecticide) application. Therefore, farmers can plant and feed 24-hrs during beneficial weather, without a human to steer (are they pilotless? I don’t know, the story is in Wired, here’s a link to my weblog entry mentioning it). So if they can do that, robots that mow your lawn are do-able today…
I don’t have the answer to your main point, though. I’d say we need to work less, though. Work to live, don’t live to work (unless you honestly enjoy it, and get to see your family). Less hours makes people more efficient.
My response started to get quite long, so instead I posted it on my site. A couple of excerpts…
There have been numerous instances throughout history of new technology replacing industries. Ice delivery, carriage manufacturing, and typesetters were all common businesses, but they have been replaced by refrigerators, automobiles, and computers, respectively.
Progress is good for the economy. As the world moved from the agricultural age to the industrial age, the quality of life improved. In industrialized countries death from childbirth is a rare occurrence. We have the ability to travel great distances and make machines that do work for us. As we move from the industrial age to the information age, similar improvements in the quality of life will occur.
I think you have implicitly answered your own question. Technology, economics, and people form a complex and highly interdepenent system. A particular efficiency is “good” (or valuable) if its net gain to society and the economy is positive.
Of course this really just means the answer is “it depends”. But that in itself is a useful conclusion since it answers the question “Is efficiency always a good thing?”. No.
Is an efficient answer to this entry a good thing? Meaning, answering a 10-paragraph question with the hyper-efficient “No, not always”; is that a good thing?
“Progress is good for the economy” is a circular argument – it presupposes that the basis for the economy is economic growth. That being said, the historic levels of employment in light of technological change have been relatively stable. Whole communities may be dislocated through the irrelevance of the resource base – Londonderry north or Truro had thousands of inhabitants in the late 1800’s based on mining and milling. All are gone. Perhaps a net gain but a specific loss to those people dislocated.
Efficency, however, is a little different – it is an outcome of technologies or systems aimed at creating efficiency. If we wanted inefficiency or it was an irrelevant factor we would create that – the creation of Snood was certainly not focused on efficncy.
All change is not efficient. McLuhan indicates that most technologies actually contain inefficiencies or unexpected products that were not intended. These are often more important. For example, he pointed out that typewriters broke the bar to women in the workplace. Prior to them we had male clerks. After female sectretaries. The exmpansion of industry through efficiency of administration was the goal of the typewriter and, later, the business computer. But is it really efficient when it removes focus from the workplace, allows all manner of email and web use?
One of the systems most prone to inefficiency is management. It is based on the principle that management is always positive and requires submission of the actual actors in an economy to it. Changes to management can be very dislocating and inefficient…but don’t tell a manager that.
I think “productivity” is the term normally used, rather than “efficiency”. One of the key reasons for the downturn in the IT sector is that companies spent billions on IT in pursuit of increased productivity, yet most have been unable to quantify the benefits (if any) that they have achieved. Along the way, many firms gutted middle management, alienated themselves from customers with user-hostile systems…etc: we all know the litany of what happens when accountancy-based IT consltants get turned loose.
The public sector is inherently inefficient as is any supply-side organisation. Their imperatives are not market-driven (another way of saying Darwinian).
On top of everything else, the Peter Principle rules, as does Parkinson’s Law. There is no hope. We just reshuffle the deckchairs on the Titanic and read good blogs.
The question of efficiency has been a hobby horse of environmental and ecological studies for at least the last 25 years. When big mega-projects such as dams on the Amazon River are undertaken, cost-benefit analyses were performed to answer the question does it make economic sense to build the dam? The problem was that these earlier forms of cost-benefit analyses were performed, they did not factor everything in to the equation, they only looked at the financial elements of the deal. consequently, some projects that had good looking numbers ($$$) turned out to be ecological and/or human disasters. Efficiency is good when the system you are looking at is purely financial or economic, but if there are other aspects of the system that are difficult to quantify, then chasing efficiency becomes an exercise in chasing ones tail.
How about political automation?
Increased efficiency is always a good thing overall, but as you say, it may harm a particular group. But the benefit to all of society is always greater than the harm to the group from the type of type of efficiency improvements you mentioned.
Also, efficiency does not neccessarily mean “make the most money.” It means “do most of what you want to do”, so as you can decide to forgo a high paying job with long hours to spend more time with your family.
Productivity improvements help society as a whole because they put limited resources to better use. We are not constrained so much by what we (physically) have, we are more constrained by our ability to come up with new ideas. So long as we keep coming up with new ideas, and keep wanting things (including things like clean air, clean water, safe neighbourhoods, all of which cost money) productivity gains will continue to improve our efficiency, although these transitions will harm specific groups along the way.
I suppose it matters to determine what is a benefit within the equation. The Nazis considered that the use of concentration camps and extermination camps was an efficincy which benefitted society more than it harmed particular groups. To Nazi logic, these camps were commercial operations, part of a horrible economic plan as well as mechanism for racist extermination. Human rights, the environment and other aspects of society are factors which must be included in the calculation of efficiencies if the outcome of the calcuation is not to be tyrranical.
So-called efficiency has added to the miseration of so many [Oh! Unfortunately I used to be an economist]
Alan: “I suppose it matters to determine what is a benefit within the equation.”
I’ll say. The whole idea of efficiency is subjective, which is why its citation provides excellent cover for political acts. Organized religion works similarly. This or that is defended/denigrated because it’s efficient/inefficient (pious/impious, etc.), glossing-over our lack of consensus on what’s valuable, in what measure, and to whom.
Where there is consensus about goals, efficiency improvements, good ideas and improved methods are instituted with little discussion: their benefits are evident to everyone. The only time you really need a word like “efficiency” is when you’ve got something to hide.
Hi, 1st time post here. I’m a 3rd year Commerce/Science student, and from what economics subjects I have studied, the mantra in all those is that “EFFICIENCY” is good. By “efficiency” we are referring to “Pareto Efficiency”. This state is achieved when one party or group can not gain without harming another group or party. So basically efficiency doesn’t just refer to maximising output per unit of cost. That’s all well and good, but even if the firm or the economy as whole produces at such a point, it may not be Pareto Efficient, or the best it could be. Efficiency is only good when the marginal benefit is equal to marginal cost (whether that be an opportunity cost or cost in terms of dollars), and hence noone can gain something extra without another losing out.
But I could be wrong, economics is no longer my strong point.
Achieving and discussing efficiency is as old as the science of economics itself. It is Adam Smith who in 1776 first introduced such notions in “The Wealth of Nations”. Since the publication of that influential book it has been a topic mostly discussed in economics of the public sector. Most wellknown are the terms “Welfare Econimics” and “Pareto Efficiency” (as Rui Yi correctly reffered too). The main problem is that the matter is to complicated to discuss in a few lines in this post. In order to provide some usefull information I’ll include some points of interest:
1. | Resource allocations that have the property that no one can be made better off without someone else being made worse off are called Pareto efficient allocations.
2. | The Pareto principle is based on individualistic values. Whenever a change can make some individuals better off without making others worse off, it should be adopted. Most public policy choices, however, involve trade-offs, where some individuals are better off and others are worse off.
3. | The principle of consumer sovereignty holds that individuals are the best judges of their own needs and pleasures.
4. | Pareto effeciency requires exchange efficiency, production efficiency, and product mix efficiency.
5. | The fundamental theorems of welfare economics provide conditions under which a competitive economy is Pareto efficient, and under whichevery Pareto efficient allocation can be obtained through markets, provided that there is the appropriate redistribution of initial endowments (incomes).
6. | Exchange effieciency means that, given the set of goods available in the economy, no one can be made better off without someone else being made off worse; it requires that all individuals have the same marginal rate of substitution between any pair of commoditie. Competitive markets in which individuals face the same prices always have exchange efficiency.
7. | Production efficiency requires that, given the set of resources, the economy not be able to produce more of one commodity without reducing the ouput of some other commodity; the economy must be operating along its production possibilities curve. Production efficiency requires that all firms have the same marginal rate of technical substitution between any pair of inputs; competitive markets in which firms face the same prices always have production efficiency.
8. | Product mix efficiency requires that the marginal rate of transformation —the slope of the production possibilities curve—equal individuals’ marginal rate of substitution: Competetive markets have product mix efficiency.
As you can read the term efficiency is a complicated matter within the public sector. A lot of assumptions need to be made to come to a usable theorem. As is in most cases the problem, economic models are merely abstractions of reality and therefor stripped from any noisances that might interfer with it. The conclusion is (in part) that there’s never a state of absolute efficiency in our economy.
As for the effect of technology on efficiency; not all agree. There are different views on the matter. Some argue that technology has made us (i.e. the whole economy) more efficient. But there’s also an adverse effect of technology on efficiency. Take for example the use of internet and e-mail during working hours, that certainly doesn’t add to the efficiency of a company. Alas this topic is also to vast to discuss here. Instead i’ll link to interesting writings of the NSF (National Science Foundation): Significance of Information Technology: Societal Implications. Hope it’s of interest.
If you wish more information or have other questions you can always contact me via e-mail at the provided address. It might take a little while before I reply but I always do. I hold a MSc degree in Informatics and Economics, I currently do research in that area.
Keywords
Invisible hand, Pareto efficiency, Pareto principle, consumer sovereignty, fundamental theorems, centralized allocation mechanism, marginal benefit, marginal cost, exchange efficiency, production efficiency, product mix efficiency, utility possibilities curve, marginal rate of subtitution, marginal rate of technical substitution, marginal rate of transformation, technology efficiency, adverse effect of technology, societal implications.
Recommended reading
Didier Hilhorst has provided us with an impressive indication of the depth to which your question could be plumbed, Steve. Unfortunately, a phrase like “The principle of consumer sovereignty holds that individuals are the best judges of their own needs and pleasures.” expose itselves as being just opinion – not of the author of the email personally but of the field, as it were. In many instances it is clear that consumers are not the best judges of needs – poverty, ignorance and opression intercede eagerly to affect that judgment. Hence the socializaiton of capitalism since Bizmark. Libertarianism’s bent to pose thoery as principle is always both a danger and source of confusion.
If we avoid the seduction that others know areas of public policy on far more levels and therefore more correctly than we plebs cold possibly appreciate, the question remains valid as placed before the layity.
As Alan has remarked justly I did not give my personal opinion on the matter. By posting the above message I wanted to contribute to the discussion by adding some of the thoughts that have been expressed within the field of economics in general and economics of the public sector specifically. But qualifying the phrase “The principle of consumer sovereignty holds that individuals are the best judges of their own needs and pleasures.” as an opinion is not correct. As I noted later in my post these are qualified as assumptions. Of course an assumption can be an opinion or vice versa, but scientifically speaking mixing an assumption with an opinion is counterfactual.
An a more personal note I agree that the assumption that Alan qualified as an opinion is not a representative one for the actual state of human behaviour towards consuming goods, alas. But assumptions need not to be an exact representation of reality (assumptions make it possible to reduce factors of uncertainty to achieve a model that is both fairly representative and makes it possible to view effects of unknown variables given a defined set of known factors), that’s why they’re called assumptions.
With Alan’s post we have rocketlaunched ourselves into the interesting area of methodology and philosophy. Although I find both these areas very interesting, I lack the knowledge to give indepth comments regarding the state of human behaviour, let alone consumerism.
Finally, a question always remains valid —certainly in the field of economics— wether it’ll be placed before the laity or a group of highly educated specialists. I certainly do not have the correct answer, nor does the rest of the world. That’s what makes it interesting.
Well said, I tried to make sure I was being generally grumpy but not personally so…and I think you appreciated that distinction.
I have experienced economic theory only where it meets social policy through the actions of my clients and I must admit have trouble with the difference between stated assumptions and received expertise. Maybe the trouble is theorists know they are being theorists but when application is being made by others of the given principles, too general an appreciation makes for too heavy a hand. As a result, through the abstraction internal to the assumption and then its misapplication, the output of the original idea put into place can be very wide from the mark. How does the application of the answer to a question such Steve’s hope to survive to any semblence of its validity or value?
I certainly appreciated your post. I felt your grumpy —as you qualified it— remark was more to evoke discussion rather than to make a blunt statement. Your post summarized most of the problems economic theories face: a lack of truly representative factors in a theorem or a model that includes all possible variables for that matter. We, unfortunatly, have to deal with this and therefor make assumptions. Basically to evade the complexity of real world behaviours and situations. Economics isn’t an exact science like mathematics, often 1 + 1 does not even equal 2 (metaphorically speaking). As I said in my previous post the above is more a matter studied in the field of methodology (of economic theories).
Aside from more academic related work I own a company that deals with more down to earth business related problems in the field of on-line branding, IT management and e-commerce. In this case I agree that the application of complex theories can lead to results that do not suffice or are (even worse) far from the desired output. But going from economics of the public sector to internet related business is a giant leap.
I might add that there’s a difference between developing abstract economic theories and developing —for example— effective business models, marketing strategies or customer interfaces. In this case assumptions play totally different roles. In business, making false assumptions or even slightly incorrect assumptions could be the start of failure. Interestingly this is exactly what dotcom companies did during the late nineties: luring venture capitalists with false (marketshare, consumer adoption, on-line buying, etc…) assumptions. It proved that these assumptions turned out to be too far from reality. Money was invested in hope of future revenue, which unfortunatly did not show (except for some succesfull companies, eBay being one of them).
It boils down to the difference between macro economics and business related economics (also reffered to as micro economics, but even that denomination is too broad). Some assumptions (even unrealistic ones) can lead to great macro economic models but on the other hand have a desastrous business model as a result.
Concering your last question: “How does the application of the answer to a question such Steve’s hope to survive to any semblance of its validity or value?”. I’ll try to anwer it in a next post. One of the reasons I do not post a lot of comments on weblogs that once you’ve posted you get sucked in. Although it’s certainly interesting, it also is a time consuming activity.
Thanks for the time taken. Steve and the guys just set me up with a blog of my own and all of a sudden I appreciate the need to set aside a good chunk of time to reasonably set out a statement of even three or four paragraphs if it is to be [or hope to be] at all entertaining or interesting. Still, input from another field of interest and work like yours certainly adds to a threads like these.
I found your blog with a search of the phrase “why is efficiency not good for the economy”. The reason I searched on that phrase is because of my Economics 101 teacher in 1968. Since I was a language major and I only took the course because I had to I don’t remember much about it. One of the few things I remember from that course is his statement that efficiency is not good for the economy. At the time Lockheed was building its huge C5 air plane just down the street. My teacher used it to illustrate his point about efficiency and the economic displacement of workers. Fewer planes to do the same work caused fewer workers needed to build them, fly them, maintain them, load them, etc.
I wish I could remember more. Right now I am trying to go back in time to find textbooks or writings from around that period to fill in the gaps on the subject.