Expanding the Meaning of ‘Efficiency’

by Don Boudreaux on July 20, 2013

in Economics, Growth

Warning: wonkish

I agree with almost everything that David Henderson says in his recent EconLog blog-post on Noah Smith’s assessment of the relative magnitudes of the potential benefits in wealthy countries of gains in efficiency vs. greater redistribution of income.

My agreement, though, is qualified with “almost” because I sense that a strong case can be made that, from a Julian Simon perspective, economists’ use of the term “efficiency” is too narrow.  And because I’ve also long believed that semantics are never seldom “mere” (as in “mere semantics”), I fancy that it’s important and relevant – even for the sake of positive economics – to broaden the meaning and use of the term “efficiency.”

The question is ‘What factors that promote economic growth are most appropriately treated as fixed and which are most appropriately treated as variable?”  The standard neoclassical approach is to treat the available stock of raw materials, the stock of capital goods, available human labor, the existing state of technical know-how, and the size of markets – along with consumer demands – as fixed and then to find that arrangement of these inputs and opportunities that yields the greatest flow of output of consumer goods and services (perhaps measured, ultimately, in subjective-utility terms?) over some span of time deemed to be most appropriate.

It’s child’s play – and some economists at the University of Chicago have occasionally and cleverly enjoyed such play - to show that the greater the number of relevant factors that are treated as fixed, the closer the ‘system’ necessarily is to being ‘efficient.’  If enough factors are treated as fixed, then any particular arrangement of the ‘system’ is ‘efficient.’  Whatever is, is for a reason.  And if we treat as fixed all those forces and factors that cause what actually is to be what actually is, then – given the givens – what actually is can’t possibly have been anything other than what it is.

Is I clear? ;-)

My plea here is for economists to stop taking as fixed not only the existing state of technical know-how but also to stop taking as fixed the existing stock of resources.  Recognizing that human creativity creates resources – recognizing that human creativity transforms what would otherwise be worthless raw materials into economically useful and valuable resources – is to recognize that the existing stock of resources is not fixed; the size and contents of that stock will change over time and that change is not appropriately treated as exogenous.  The size and contents of the stock of resources are themselves, to a very significant degree, endogenous to the economic system and, therefore, so are changes in the size and contents of the stock of resources endogenous, to a very significant degree, to the economic system.

It follows that a failure of the economic system to achieve some achievable amount of resource creation is an inefficiency on par with the failure of an economic system to use the existing stock of resources in ways that yield maximum output value (as judged by consumers).

Therefore, it seems to me, Noah Smith is wrong – even beyond the reasons mentioned by David Henderson – to assert that in advanced economies “there are relatively few efficiency gains to be had.”  Or, at least, the ghost of Julian Simon gives reason to question this claim by Smith.

I don’t pretend to have the above worked out fully satisfactorily.  Perhaps the above is mistaken.  And I do understand and accept David’s response to commentor kebko that efficiency is not helpfully measured by how close an economy is at time t to where that economy can possibly be at, say, time t+100 years.  The Mayflower’s lack of steam engines did not make that ship an inefficient mode of ocean transportation in 1620.

Nevertheless, I sense more than a grain of useful insight in kebko’s comment (pasted below in full with original emphasis):

What a strange thing for him [Noah Smith] to say. You could have said that about some place in the world at any time over the past 200 years. If you had applied his logic to some country 50 years ago and redirected that country from seeking efficiency to redistribution, we would pity them today, and regard them as third world.

So many goods and services we consider to be part of basic social safety net are products of very recent efficiency gains.

This is an ironic reason why it is so hard to get public support for markets - the one thing that markets are uniquely able to provide us with is precisely that thing that we could not have imagined.

In 30 years, when he is penning essays about how every citizen deserves free access to nano-bots and anti-aging treatments, can someone please glove-slap him for me. ;-)

Being lazy this hot summer afternoon – and being co-proprietor of this blog! – give me both the excuse and the privilege of offering here little more than rather vague impressions.  (This post is hardly ready for submission to a scholarly economics journal!)  In my head swirl Julian Simon-esque lessons along with wisdom that my mind labels Schumpeterian-McCloskeyan-Hayekian-Kirznerian.  (And see here, too.)  Conventional givens should be questioned; they should not be fixed parts of our analyses.  To treat these conventional givens as given and fixed is, I suspect, analytically inefficient.

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