Efficiency and Economics

Are there any economic systems that don’t try to achieve efficiency? Are there any economic systems in which efficient deals between parties are seen as bad?

Or does every economic system try to achieve economically efficient results?

Last Question first: Economic theory of efficiency is 50% a class room concept. Humans and corporations (which are run by humans) are just plain perverse and do Stupid Stuff all the time. When the top officials of most companies get together the #1 issue is always “how to make the next quarterly report look better.” No major decision is based on long term economics. (It wasn’t always this way. Carnegie and such were notorious for looking for long term ways to save money.)

One current infamous example of such weird corporate behavior is the “moving the company headquarters to the new CEO’s hometown.” Completely unjustified, hugely expensive, and ensured to be repeated by the CEO. I.e., inefficient in the extreme.

But, I said only 50%, the other half is just the Marketplace being the ecosystem these people live in and it will tear apart inefficiency and support efficiency all on its own.

So the Market completely believes in efficiency. People don’t. The Market doesn’t know and doesn’t care about politics, social policies, etc. It does what it does.

Now to address the first two points.

“Are there any economic systems that don’t try to achieve efficiency?” Yes, all of them. Some are worse than others. The system used widely in Europe 400-1500AD was horrible. Almost no concept of efficiency whatsoever. The actual implementations of Communism in the former Soviet Bloc was awful. (Whether the idealized form would be is a GD subject.) Just about any system where there is a small group of wealthy/powerful elite trying to preserve their status is doomed.

“Are there any economic systems in which efficient deals between parties are seen as bad?” Systems vs. Examples? A good econ textbook on the subject should give theoretical examples of such. It’s hard to come up with real life examples because nearly all deals aren’t efficient for both sides and there’s a lot of judgement issues about such matters. As for Systems, you can find sub-systems where such things are seen as bad. Many British elite found being “efficient” in business 2nd class behavior during the glory days of the Empire. That’s what “those” Dutch and Germans did. It just wasn’t considered gentlemanly to fret over mundane business details. (Fortunate, the British had enough free-thinkers from time to time who would actually behave intelligently and save the country’s butt.)

Well, yes. Look at the recent outcry over “outsourcing”.

The reason that markets are not 100% efficient is partially because people are irrational but also party because people do not care how efficient the system is if they are the ones who are negatively effected.

It certainly helps if we first understand what economists mean by efficient, which generally is that the benefits of any transaction outweigh the costs. Almost any non-coerced transaction is efficient, two people enter into a trade since they both deem themselves to be better off.

But there are exceptions, the most notable is the problem of externalities, wher there is a “social” cost to a transaction, i.e. a cost not borne by the parties firectly involved in the transaction. Well known examples are pollution, smoking, etc. It is also inefficent, by the way, when a transaction that should take place does not (should in the efficency sense). Agains this can happen if their are “social” benefits that are not borne by the potential transactors. Wel known examples of this are innoculations and education (By the way I give these examples inthe broadest sense, I am not claiming that they are or aren’t clearly what I claim, but they are common introductory textbook examples).

The other thing to remember is that we are talking about ex ante inofrmation, meaning that the transaction is deemed beneficial by both sides given the information they have,but may ex post information not be efficient. One would presume that the highest level of efficeincey would come from the most trnasparent amount of information, which is true, as long as there are not significant costs to obtaining that information.

There are arguments that as long as property rights are clearly defined and enforced, then all transactions are efficient. The progenitor, if you will, of this theory is Richard Coase. But then there is the issue of transaction costs, which are like friction in the marketplace, reducing efficiency )the same way friction in an engine reduces it’s efficient conversion of fuel to motion).

Of course, all this is very academic, which absolutely does not make it incorrect. Think of them as understaning gravity, but still not being able to describe the route a leaf takes when it falls off a tree.