Rethinking Efficiency

Posted on July 1, 2010 by

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Our economy is driven by the goal of efficiency, yet at the same time we are becoming increasingly inefficient. This paradox can be explained by examining the way we measure both efficiency and the needs of our current economic model. It requires us to be inefficient to survive – and increasingly so. What it all comes down to is the seemingly simple question of whether GDP is a benefit or a cost. Unfortunately it is a bit of both, which is what makes it such a useless indicator; and this we must learn to understand. Until we have a better indicator to strive towards, we are likely to become increasingly inefficient, as the costs of GDP increase faster than the benefits – in what is termed uneconomic growth.

The paradox of efficiency comes down to the difference between the micro (industrial) and macro (societal) level. As Conrad Schmidt puts it, we are working efficiently at being inefficient. [1] This is because in industry, only micro efficiency is considered, i.e. how to make more of something, faster and cheaper. However, macro (or social) efficiency – the efficiency with which society uses the goods and services produced – is not considered (at least while there are un-priced externalities). Ironically, in order to keep our economy running and people employed, we have to use things increasingly inefficiently, since we need to consume ever more, and throw things away just as quickly. Planned obsolescence for example (where a product is designed to break or be useless within a short period of time), can ensure that GDP climbs, despite being a blatantly inefficient use of resources. Quality has become an enemy rather than a friend.

GDP is an index which measures the industrial competitive advantage nations have over one another, however this is aimed simply at gaining a short-term advantage at a long term cost to society and the environment. [1] Car use and the rise of suburbia is a good example of this. Sure, we are now making cars extremely efficiently, but because so many costs are not included (subsidised by government or society), the result is extremely inefficient. Air pollution and greenhouse gases are not priced; governments (especially large ones) spend a lot on military to secure oil supply; highways authorities spend huge amounts of taxes building and maintaining highways; thousands of people are killed in road accidents; and people end up spending hours every week sitting in a little steel box, all by themselves. The whole design of our cities is simply, hugely inefficient. We need a real vision of what efficiency is and what it means.

Herman Daly, in his early visions of a steady state economy, outlined a useful measure of real efficiency, which is expressed by the following equation (I will explain the terminology shortly): [2]

Total Efficiency = clip_image002 = clip_image004X clip_image006

The first part is easier to picture: services are those that are provided to us – it could be thought of as wellbeing. Throughput is more or less the GDP – the transfer of resources and waste between the environment and the economy. Using resources and creating waste (consumption) clearly fits better as a measure of cost rather than a benefit (a measure of wellbeing) – although our consumption also provides us a service (wellbeing). Daly cleverly divides this further into two separate components of efficiency ((1) and (2)). In a steady state economy, the amount of infrastructure (physical capital) is intended to be constant. This is the ‘stock’ component. By splitting it, we can see two ways in which we can become more efficient. On the left (equation (1)) we want to maximise the ‘services’ provided by the constant level of ‘stock’. In other words, we want to choose the infrastructure that provides us the most wellbeing – perhaps a sports stadium or theatre instead of a parking building (decided collectively of course). The right side of the equation (2) concerns our efficiency in maintaining the infrastructure. We want to maintain the fixed amount of stock with as little resources as possible – therefore building a phone that lasts 10 years is better than one that lasts 2 years; and making things that can be easily fixed is better than making things that need regular replacement. If throughput is our consumption, then it could be gradually reduced as we get better at designing things to last and easy to repair, without a cost to our wellbeing.

I hope the appearance of economics does not scare you off from considering what this equation really means. It puts meaning back into economics! Perhaps it can seem technical or hard to envision, and if so, then a recently developed indicator known as the Happy Planet Index (HPI) expresses the same simple principle of benefit versus cost, albeit in a far simpler way. [3] Instead of services and throughput, the HPI uses the better known measures of happiness and ecological footprint. More specifically, human benefits are measured in ‘happy life years’; a score that combines subjective wellbeing with life expectancy. The longer and happier life is – the better. On the cost side, ecological footprint – now fairly well known – is a measure of the resources needed to support our way of life, measured in ‘global hectares’. Clearly, we need to limit our footprint to below the capacity of the planet. True efficiency is about maximising happiness while staying within ecological limits. If you thought that the US or Japan may be the most efficient country in the world – then forget it. Costa Rica takes first place, with a life expectancy and life satisfaction above that of America, and a footprint only a fraction of the size (although still slightly above the global average capacity). As for the United States and even China, they have become progressively less efficient since 1990. [4] Western Europe is moving in the right direction, but has a long way to go.

In the end, we must always keep in mind what efficiency really means. It means more benefits and less costs. So while it is true that some companies have learnt to be efficient by increasing profit and lowering operating costs, this is a detail of efficiency within an inefficient system. We must change the system in order to realise real efficiency that will benefit not only us, but also our planet.

[1] Schmidt, Conrad 2006; Workers of the World Relax: The Simple Economics of Less Industrial Work, pgs. 68, 79-83, 114-124

[2] Daly, Herman E. 1974; Steady-State Economics versus Growthmania: A Critique of the Orthodox Conceptions of Growth, Wants, Scarcity, and Efficiency, in the Journal of Policy Sciences (5), p. 149-167.

[3] nef 2010; The Happy Planet Index 2.0; available for download at www.happyplanetindex.org – You can even calculate your own HPI score on this website!

[4] Ibid., p. 35

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