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(ReadWith) EfficientMarkets, EconomicCalculationProblem

Quora Answer : If the left bases its policies on facts, why don't they acknowledge the inefficiency and inflexibility of government programs and its interference in the free market?

Aug 9, 2018

"Efficiency" itself is a very vague word.

What does it actually mean to you?

How do you measure it? And how do you measure whether governments are doing things less efficiently than the private sector when they are almost never doing exactly the same thing?

And what counts as "inefficient" is very much in the eye of the beholder.

Let me give you my favourite example.

Suppose I were to say to you

"In North Korea, the centralized distribution network is so inefficient that even after they make a pair of shoes in the factory, it costs them nine times as much again, simply to get those shoes onto the feet of the people who need them. What with all the bureaucracy and bribery and things sitting around in warehouses which sometimes end up getting forgotten about and thrown away."

Now, you might or might not believe me. But you'd probably be appalled at this example of the inefficiency of a centralized economy.

On the other hand if I say

"The cost of manufacturing a pair of Nike trainers is typically less than 10% of the final retail price. Retailers usually take around 50% of that price. And most of the rest of the money is spent on branding, marketing and a small amount on design. Particular editions quickly go out of fashion and if a range hasn't sold in three months it usually gets recalled and passed to discount outlets or junked"

then the situation I'm describing is basically the same.

The distribution network is still taking nine times as much as actually making the shoes in the first place.

It's just that we don't see "retail" as "inefficiency". But retail is often the biggest sector in Western economies. In the UK it accounts for £436 billion (2020) in sales. Tens of thousands of people employed. Huge constructions of supermarkets and shopping centres and out-of-town retail parks. Often requiring major transformations and upgrades to the transport system.

And yet, all that retail is, is the distribution system to get the stuff from the factory to the eventual consumer.

How has western capitalism built a system so inefficient that its distribution network consumes such a large proportion of its wealth?

Well, in a sense, the term "inefficient" is meaningless. Those are the values we express in our buying decisions. It turns out that, collectively, in aggregate, we prefer to spend up to 90% of our disposable resources on building shopping malls and redecorating shop windows each month, and making sophisticated short advertising films which are pumped to TV screens every hour, and sponsoring celebrities to wear fancy sneakers to parties, than we prefer to spend that 90% of our disposable resources on, say, having one working day a fortnight and thirteen days of free-time. Or leaving the environment untouched. Or ensuring that food goes to people suffering from malnutrition.

The concept of "efficient" or "inefficient" is neither here nor there. It's about the values that we "choose".

But that's always the case.

When people say "socialism is less efficient than capitalism" they are really just saying "I like the values that capitalism expresses more than I like the values that socialism" expresses.

They aren't using an objective measure of "efficiency" at all. If they were, it would have to be something like "hour of shoe use per hour of work needed to create and distribute that shoe". And if you used that measure, it's not at all clear that capitalism would come out looking particularly efficient either.


Does decentralized, free enterprise have to out-perform centralized planning?

The right think they've won the efficiency argument already : America, with it's minimal restrictions generates wealth for all.

The left can point to a multitude of caveats :

  • America's subsidy of people and talent immigrating from the rest of the world;
  • The hidden subsidy of 200+ years of slavery.
  • America's hidden government subsidy to industry via military spending
  • America's pool of dispossesed witnesses genuine inefficiency which is simply ignored.
  • The dollar was given the status of global reference currency by the Bretton-Woods agreements, on the understanding it would back that with gold. In the early 70's, America couldn't pay and Nixon took the US off the GoldStandard. Effectively the US was unable to pay it's debt and reneged. But due to the status of the dollar, it could escape any liability. No one else was rich enough to call it's bluff. But this extra power should be taken into account when considering US success.
  • America's ability to make unequal trade agreements with the rest of the world actually transfers wealth to it from poorer countries;

: Essentially, capitalism gave America the advantage over the majority of the feudalist world, and it's been ruthelessly exploiting that earlier success to maintain it's advantage through

** economic bullying (ability to make unfair trade deals : while espousing free market theory it imposes many trade restrictions and taxes on the third world),

** military bullying (war against Iraq),

** other exertions of power (for example, America promotes a general trade sanction against Cuba. Not only does it refuse to trade with Cuba which would be it's prerogative, but it also coerces others to not trade with Cuba. For example, by banning any ship which has docked in Cuba within the previous 6 months access to US ports. Most shipping companies in the region can't afford to take stuff to Cuba and then lose custom that involves the US

See also AmericanHypocrisy

Eventually I know we're gonna have to rely on AgentBasedModelling to answer the empirical question. Hence Optimaes

Interestingly, that seems to be what the AustrianEconomics-inspired AgoricSystems people are looking into.

See also LeftAndRightAndScale, NetworksAndMarketFailure, DecentralizedLeft, ProblematicAssumptionsUnderlyingEconomicLiberalism, WhatIsMoney, AntiAmericanism

CategoryPolitics, CategoryEconomics