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Goodwin – Is efficiency always the goal?

A commentary on Economics and society

[From: Chapter 1 Section 2.3 of Goodwin, N. R., M., H. J., Nelson, J. A., Roach, B., & Torras, M. (2014) Principles of Economics in Context. Armonk, New York: M.E. Sharpe]

DEFINITION: economic efficiency: the use of resources, or inputs, such that they yield the highest possible value of output or the production of a given output using the lowest possible value of inputs

Most economists have focused on economic efficiency as a key goal in economic policymaking. An efficient process is one that uses the minimum value of resources to achieve a desired result. Or to put it another way, efficiency is achieved when the maximum value of output is produced from a given set of inputs. Given this focus, many economists have seen their role as advising policymakers on how to make the economy as efficient as possible.

One appealing aspect of the goal of efficiency is that apparently everyone can agree on it. Who in his right mind would argue for using more resources than necessary or having less of something good when more is possible at the same cost? Because it seems so obvious that efficiency is a good thing, aiming for it is often thought of as a purely technical and scientific exercise, one based on positive analysis. This is not actually the case, however, because regarding efficiency as a goal involves a very important normative judgment: A standard of value must be adopted before the definition of efficiency can be applied.

Money is the standard of value that has traditionally been used in economics. Specifically, the commonest economic definition of value has been that of market value—that is, price. Using this standard, an economist would say that resources are being used most efficiently when the market value of the resulting outputs is maximized. “More is always better,” it is assumed, where the “more” is composed of things that people are willing to pay for.

This definition of efficiency is not a simple matter of positive fact; when examined, it clearly includes some normative assumptions. First, it is based on an implicit acceptance of the current distribution of wealth and income. Because a person’s willingness to pay for something is obviously influenced by his or her ability to pay, in general those with the most money will disproportionately determine what is an economically “efficient” allocation of resources. For example, if the aggregate willingness to pay of high-wealth households for luxury cars exceeds the willingness to pay of lower-income households for basic health care, then the efficient allocation would tilt toward production of luxury cars over provision of basic health care.

Second, this definition of efficiency assumes that nothing has value unless humans are willing to pay for it. In other words, nothing has intrinsic value and should exist for its own sake regardless of whether people place monetary value on it. But perhaps certain things should have intrinsic value, such as the right of nonhuman species to exist or goals like freedom or fairness.

Other standards could be used instead to measure value. Many things that we value are not bought and sold in markets: Health, fairness, and ecological sustainability are examples. Policies directed toward producing the highest value of these outputs from given inputs may be quite different from policies designed simply to maximize the market value of production. Likewise, focusing only on minimizing the monetary costs of inputs may lead to actions with high social and environmental costs. Thinking of efficiency only in terms of market value can lead to neglect of other, perhaps more urgent considerations.

Example: Goals Beyond Efficiency

The point that efficiency defined in terms of market value is rarely the only important goal is vividly illustrated in a story that a now-eminent economist always tells at the first session of a new class.

After he finished graduate school, this young man’s first job was to advise the government of a rice-growing country where it should put its research efforts. He was told that two modern techniques for rice milling had been developed elsewhere and was asked to calculate which of these two technologies should be selected for development. The young economist analyzed the requirements for producing a ton of rice under each of the two competing technologies. Each of them used a mixture of labor, machinery, fuel, and raw materials. He calculated the monetary costs for these inputs, and, finding that Technology A could produce a ton of rice at slightly less cost than Technology B, he recommended that the government invest in the more “efficient” Technology A.

Returning a few years later, the economist was horrified to discover what had happened when the country implemented his suggestion. It turned out that the traditions of that country included strict norms for the division of labor: specifically, what work women were allowed to do and what was defined as men’s work. Technology B would have been neutral in this regard, maintaining the same ratio of “male jobs” to “female jobs” as had existed before. Technology A, however, eliminated most of the women’s work opportunities. In a society where women’s earnings were a major contributor to food and education for children, the result was a perceptible decline in children’s nutrition levels and school attendance.

Charged with determining which technology was best, the young economist had not asked, “Best for what?” Instead, he made an implicit assumption that the only final goal was maximizing output and that the only intermediate goal he had to worry about was efficiency in resource use. He has subsequently told several generations of economics students, “Nobody told me to look beyond efficiency, defined in terms of market costs—but I’ll never neglect the family and employment effects again, even when my employer doesn’t ask about them.”

Commentary added, 1 December 2015

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