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Why is efficiency still king in business?

August 9, 2011

I’ve only taken a couple of basic economics classes in my time, so I certainly wouldn’t dare call myself an expert on the subject. That said, I have a sinking suspicion that no one else is either – including the people who portray themselves as such. Which is a problem, if you think about it, because we’ve got this enormous group of people running around making claims that they can’t possibly reasonably make.

To me, it often appears that economics is to politics as religion is to philosophy. Economics and religion both require a lot of guesswork that rarely holds up to scrutiny, but people who believe in each still cling to them because the alternative – admitting that they don’t really know – appears far worse. I’m sure there will be those that disagree with me, but I find it hard to dispute that in both fields evidence based answers are not always held with the highest regard

For instance, I rarely hear anyone in the media ask this question: why should we assume that efficiency is better for businesses? Since the Industrial Revolution began it seems that the pinnacle of a successful business is to produce the best product at the cheapest cost. On its face this is a hard goal to dismiss. It’s common sense, right? Well, not really.

In a closed system like a town, city, or any other relatively small region the standard of the best product at the cheapest cost can take a small business to great heights, employ many people, and make life better for everyone involved. But on a much larger scale I don’t think the same holds true, because as a business grows it will employ fewer and fewer people relative to what it produces.

A company of a 100 might be able to make 100,000 widgets – or 1,000 widgets per person. But a company of 1,000 might be able to make perhaps 2,000,000 widgets – or 2,000 widgets per person. If demand across the board is for, say, 10,000,000 widgets, then while it’s true that 5 large companies are more productive than 100 small companies, those 5 companies actually employ 5,000 fewer people. What are those people to do?

This is a very simple example, but I hope you understand my point. As long as new business are being created to re-employ the people that more productive companies don’t need anymore things can stay relatively balanced. But when technology begins to move so fast that the unemployed people can’t find jobs because no companies need them anymore we have a problem. So I ask, wouldn’t slightly less efficiency be better sometimes?

Seriously, we all want cheap stuff; but when that comes at the cost of millions of people out of work, wouldn’t it be better to buy a little bit less stuff that’s slightly more expensive and higher quality because it takes a few more people to make it? I guess in the end, I don’t really know – which is perhaps the difference between me and all those economists after all.

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4 Comments leave one →
  1. August 9, 2011 4:22 pm

    Whoa, dude. Are you serious? “Better to remain silent, and let people think you the fool, than open your mouth and remove all doubt.” Not that I’m saying you are a fool, it’s evident you ought to mix in some Adam Smith, John Maynard Keynes, Milton Friedman, or Bryan Caplan in with your GRRM.

    Economics is not to politics what philosophy is to religion. Rather, ideology is to politics what philosophy is to religion.

    That said, here’s the short answer to your dilemma. Those people who lose employment due to increased efficiencies are able to then go elsewhere in the economy where the market says their skills (or new skills the market wants) are needed. For example, in 1800, 95 in 100 Americans worked on a farm. Today, the percentage is less than 1 in 100 (or so says the EPA http://www.epa.gov/agriculture/ag101/demographics.html). Advances in technology have allowed us to So should we mourn the loss of all those agriculture jobs?

    No. Those individuals have moved on to other jobs. Jobs that the market–i.e. consumers–actually want. And what we wanted was those people in agriculture to do other things, like manufacturing, in service industries like medicine and law, and, of course, to sell and stock books.

    Keeping people in jobs that are not warranted by profit actually hinders economic growth, stagnates an economy, and ends up hurting those people in the long term.

    For a great couple chapters on it, check out the first couple chapters of “The Myth of Rational Voters” by Bryan Caplan. He succintly summarizes some of these type of misconceptions about economics. I think you’d find it interesting and enlightening.

    Back to the original point–why do people care so much about economics, the reason is very simple: it has extraordinary explanatory ability about the world, and more often than other social sciences is correct.

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    • August 9, 2011 4:29 pm

      By the way, rereading that first paragraph sounds a little more harsh than I intended. I apologize. Didn’t mean to call you a fool–I just think you ought to look a little close at the reasons for efficiencies and how they increase wealth. I.e.: at economics.

      Like

    • August 9, 2011 5:48 pm

      First, I fully understand that jobs will disappear and new ones will reappear to replace them. Upon a rereading of my post I can see why you would think that I don’t. That’s a failure of my own writing, and not your reading. My bad.

      However, those kinds of market trade offs are simply never 1:1 swaps. If we lost 95 out of every 100 agricultural jobs due to technological advances (and lets not forget, that’s not the only reason those jobs disappeared) not all 95 of those unemployed farmers ever found other work, even if 9,500 jobs were created somewhere else. When you dig down into it, some of those farmers took them, and some of them found their way into everlasting poverty, and some of them killed themselves.

      I’ve found myself becoming far more concerned with local and personal motivations as I’ve gotten older than I am about theoretical (and imaginary) popular motivations. If you’re a 57 year old farmer and you lose your farm, what do you do? How do you start over again? The deck would be severely stacked against you, even if it were slightly better for your children – or more likely the children of the stockholders of the agribusiness that pushed you off your land in the first place.

      Real life isn’t statistics, as so much of economics seems to want it to be. Nor is the same economic theory equally applicable in every place at every time. In that way it’s actually much closer to political theory than I probably let on. I will read the book you suggested, as I think it sounds quite interesting. However, a book that may help you understand my point of view better is Philosophy and Real Politics by Raymond Guess. There he suggests that much political theory (and by default a great deal of the other “social sciences”) is far more limited in its explanatory power than most people give it credit for.

      While economics as many economists like to present it is nearly as universal as the math it uses to determine its results, the reality is that most such theory is entirely localized in its explanatory power to a particular space and time with particular specific societal conditions in place. Would the economics of ancient Rome be the same as modern China? Not at all, even if at a cursory glance you have similar features in place – people, money, trade, goods, services, etc. The motivations and totality of experiences of the actors involved are so far apart, that it would be difficult to even include them in a meaningful conversation.

      Anyway, back to my original question in the first place: why should we assume that efficiency is better for businesses? A better expression of this question should probably read like this: why should we assume that efficiency is always better for the totality of businesses and workers in a given society? The two questions really are very different once I look at them again.

      The first seems simple. Businesses need to make profits to sustain themselves, thus keeping many more people employed than unemployed, and benefiting society. I totally get that. But is that all there is? I guess I’m also asking what happens when the conditions of society change so that this way doesn’t work anymore – ie, when technology moves so fast that once you lose a job you can’t get another because it will take you too long to learn the new skill required to do it; and besides other countries can do it far cheaper anyway.

      I don’t pretend to have an answer, I just hope to point out that right now no one else seems to either.

      PS – thanks for making me write a response that was longer than the post in the first place 🙂

      Like

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