Efficiency: Too Much of a Good Thing?

One of my firm beliefs is that the truth or the optimal level of something lies somewhere in the middle of a continuum. It’s amusing but also incredibly frustrating when people take hardline stances — this is especially true for politics and economics, and we see the worst of this in the United States, a country that seems to be on the extreme side of everything. “Government is the problem” (translation: government is always bad). “We must never ever raise taxes” (taxes are bad). In the New York Times there is a terrific article about efficiency, how it has been elevated to an intrinsic good. But is it?

The author makes some great observations. It is good that money was invented to replace the inefficient bartering system. It is good that people can access credit so that they can start a business or buy a house. However, the relentless pursuit of efficiency has consequences. For example, in financial markets leading up to 2008, it was more efficient to package junk mortgages and sell them off rather than to conduct due diligence and assess their creditworthiness. Oops.

In our capitalist society, of course companies are competing with each other and they need to improve their efficiency to remain competitive. Efficiency improves the companies’ (and their stockholders’) bottom line. Sometimes this means job cutting, and the consequences when this happens (workers lose their jobs, families fall behind, the wider community is adversely affected, etc) are an externality — a cost borne by the society, not by the company who can merrily declare the wonderful profits it’s making.

So here’s the problem. For people fixated on the financial bottom line, efficiency is not just a good thing but it is a good in and of itself. It is good just like how free markets are good. However, for us realists (idealists?) who believe there is more to life than the financial bottom line, we recognise that there can come a point when too much efficiency is not a good thing, in the same way that unfettered free markets with no regulatory oversight is definitely not a good thing.

Of course if any politician said such a thing in the US they’d be demonised and branded a socialist/communist/fascist/freedom hater by a sizable proportion of the population. Le sigh.

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