The Meaning of Efficiency

I’ve been thinking around the relationships between free markets, efficiency, and sustainability lately. I hope to come back to discussions of food production and sustainability soon, but for now here are some of my thoughts about efficiency:

First, I started to tease apart what is really involved with the term ‘efficiency’ apart from our common usage of it. Princeton’s online ‘wordnet’ has a nice, succinct definition of “the ratio of the output to the input of any system.” Another, less scientific way to state it seems to be ‘the best means to attain the desired ends.’ This iteration highlights the normative judgments implicit in our everyday use of the term. Efficiency in its technical sense defines the inputs to maximize outputs, whether that be production or destruction. The atomic bomb is the most efficient means to kill large numbers of people, but our goal should not be to destroy life. When we use efficiency in the economic sense, we generally refer to utilizing resources such that no more output can be got from them without additional input. Though the language is slightly different for each of these definitions, ‘outputs’ has the same meaning as ‘desired ends,’ just with different connotations(outputs=value neutral, desired ends=normative).

Complications arise because in reality, ‘outputs’ of a system are complex and value-laden, and ‘inputs’ are limited by our institutions like laws and social norms. For example, in industrial production, it is efficient from the perspective of a business to pollute the environment, because it reduces the resources necessary to produce a given product. This highlights the fact that one person’s efficiency is another’s inefficiency. If the desired goal is environmental preservation rather than material accumulation and production, the industrial approach is perversely flawed. Different end goals drastically change the means used to achieve it. We don’t want pollution, so we ban it. This is a way to preserve the freedom to clean air and water. In the face of subjective goals and complex means, we have developed the institution of free markets to guide us. So what do free markets mean for the desired ends and appropriate means of production?

Free markets ideally determine production and consumption decisions based on supply and demand. This means that the aggregate demand will set the desired ends of production, and aggregate supply will use the fewest means to produce and deliver them. In Adam Smith’s conception, the ‘invisible hand’ will guide individuals acting in their own self-interest to create a socially optimal outcome. However, problems arise from individual interest conflicting with social goods like environmental quality and equality. Self-interested individuals don’t value future generations’ well being appropriately because their ‘self’ will not exist. They also don’t value common goods correctly because the benefits accrue to the individual while costs are spread across many people. Individuals have additional nasty tendencies to discriminate, hoard, and cheat in their attempt to satisfy their wants. People often want to increase their own freedom and resources at the expense of others’. Allowing aggregate demand to determine the ends upon which we define the efficient means thus presents significant problems.

The other important component of free markets is the supply side. If we allowed producers to use whatever means are most efficient to produce what is demanded, we would have collusion, monopoly, and pollution whenever the companies could get away with it. We try to regulate the production methods of companies to stop them from reducing the freedom of others to produce or consume. The problem with regulation of free markets is that there are nearly infinite possible ways of producing goods, so to attempt to ban certain kinds or categories of production always leaves other options to circumvent the bans. Regulations are necessary to protect freedom, but will always be one step behind companies looking out for number one.

Thus, efficiency as determined by free markets is not always desireable! Aggregate demand has inherent mistaken tendencies, and aggregate supply has an inherent bias toward circumventing regulations intended to protect the freedom of individuals and society. Yet, free markets are held aloft as the most efficient pattern of organization as if efficienty were an end in and of itself. Efficiency is just a MEANS to and end. We as a society and individuals need to define the ends that we want, and then structure markets to respect those goals. Innovation is best achieved through self-interested incentives, but hopefully we also want equality and freedom for ourselves and future generations. If this is the case, we have some serious re-thinking to do about the efficient means to achieving these ends are, and they most certainly aren’t pure free markets.


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