Economic Efficiency Is Not Engineering Efficiency

In many discussions on economics and engineering, the concept of efficiency is often raised, in one form or another. Many engineers and scientists, familiar with the engineering concept of efficient design and operation, try to apply these ideas to economics. This invariably fails, because efficiency in economics marked different from operational and design efficiency. Furthermore, the efficiency of the market as a whole is at odds with the efficiency of a given business.

In Engineering, a design or process is efficient if it maximizes the amount of work done, while minimizing the resources used (raw materials, time, labor, fuel, etc). An efficient design should do everything it is designed for, and if possible eliminate the need for other devices or processes, while avoiding any unnecessary steps or equipment. Cost is only an issue to the extent that money is itself a resource, and often a limiting one. An important engineering goal is to produce a solution that is lasting; if a product can be maintained indefinitely, and need not be replaced, it is especially esteemed.

In Microeconomics, a company is efficient if it returns the greatest profit in the shortest amount of time, and continues to do so indefinitely. All other considerations are irrelevant; maximizing the bottom line is the only yardstick. This contradicts the Engineering definition in that a sensible manager can and should be ready to throw vast amounts of cheap resources into a project, if it means that greater revenue is made as a result.

One implication of this is that a product or service need only be complete enough to satisfy the customer, especially if it makes it possible to sell the same product repeatedly, or sell a newer, more complete version of the product later. A business that sells a product which completely satisfies its customers indefinitely will put itself out of business; eventually, every user who wants and can afford the product will have it, and new sales will come solely from replacement of damaged products. Thus, a business has a strong disincentive to produce design which are efficient in the engineering sense.

It should be noted that it is only necessary to create a perception of value; value itself is not required, and in fact a business can thrive quite readily by providing goods or services of negative real value, provided that the consumer perceives a positive value.

This definition applies equally to both free economies and planned economies: in the latter case, the perception of value shifts from the consumer to political patrons supporting the operations, and the maximized 'profit' may be political rather than monetary, but otherwise the equation remains unchanged.

In Macroeconomics, efficiency of an economy is threefold: that the maximum number of workers be employed; that the maximum number of products and services are created; and that the flow of currency is maximized. If employment rates drop, it results in a recession; if the availability of products drops, it can result in excessive inflation; and if the flow or currency decreases, it can cause a drop in interest rates, and even lead to deflation. These requirements contradict those of engineering efficiency, and can contradict those of microeconomic efficiency under certain circumstances as well. - JayOsako

It would be interesting to see a "metrics stack" for MacroEconomics?, to see where the metrics for a compartmentalized activity conflict with those of the "economy" as a whole. -- GarryHamilton

They exist. One of them's the GenuineProgressIndicator. Other measurements have beem made that show, for example, that the coal industry in the USA is a negative real value producer since the health and environmental consequences outweigh any value extracted from the coal.

While I more or less agree with the central conclusion of this page, I'm afraid I must take issue with several of the supporting arguments.

1) Despite the fact that engineers deal with efficiency a great deal, efficiency isn't a technical term in engineering in the sense that engineers more or less use it in its everyday sense: a given process is efficient if there is no way to produce the same outputs with fewer inputs. "Minimizing the resources used" is the essence of efficiency while "maximizing the amount of work done" is irrelevant.

2) It is implied that long lasting products are somehow connected to engineering efficiency, but really there is no connection between long lasting and efficient other than the fact that engineers tend to like both. Engineers also tend to like ice cream, so what?

3) In contrast, efficiency does have a technical meaning in economics. Luckily, it's the same technical meaning in micro, macro, and every other form of mainstream economics: value maximization. That's all it is: X is efficient if and only if it maximizes value. There are lots and lots of places on the web where you can find this definition: http://ingrimayne.saintjoe.edu/econ/Efficiency/WhatIsEff.html is an elementary exposition, http://www.fee.org/vnews.php?nid=112 is particularly appropriate here for its discussion of technical versus economic efficiency, and chapter 15 of David Friedman's Price Theory text (http://www.daviddfriedman.com/Academic/Price_Theory/PThy_Chapter_15/PThy_Chap_15.html) is a great place to dig deeper (and also contains a justification for my not using the term "Pareto optimal" in this paragraph).

4) Economists usually talk about the actions of a company, rather than the company itself, being efficient or not, but no matter: in neither case is it the same as returning "the greatest profit in the shortest amount of time". Rather, a company is being run efficiently if it is chosing the actions that maximize the value of the company. Often, these actions will not be the ones that maximize short term profit -- such actions are typically called investments, and companies make quite a lot of them.

5) The careful reader will notice a small subtlety in the definition of efficiency as "value maximizing": it doesn't specify what thing we are maximizing the value of. Typically, context makes this clear, so when we talk about the efficiency of a hot dog stand we assume we are trying to maximize the value of said stand. Often, though, we will wish to examine the results of an action on the value of an economy as a whole, in which case we merely need say so. Thus you will often find economists speaking of something like coal burning as efficient to the particular company but not efficient for society as a whole. Indeed, this sort of situation is the exact definition of market failure, a subject on which economists have devoted a fair amount of ink.

6) As should be clear by now, the proposed definition of macroeconomic efficiency is also rubbish. Maximizing the value of an economy as a whole is not the same as employing everybody and maximizing the number of products and services created, and has absolutely nothing to do with currency flows. To give but one counterexample, leisure time has value to all but the most workaholic, so economists are duty bound to include it in their efficiency calculus.

7) "If employment rates drop, it results in a recession; if the availability of products drops, it can result in excessive inflation; and if the flow or currency decreases, it can cause a drop in interest rates, and even lead to deflation." Only a generous definition of the word "can" prevents this statement from being completely false. For example, a recession is usually defined as a contraction in GDP, but GDP can easily expand even while employment rates drop if productivity is increasing. (This isn't just theory, either: it happened last year!) But all of this is immaterial as none of these things have anything to do with economic efficiency.

8) Finally, there is the implication that engineering efficiency is somehow morally superior to economic efficiency.

Actually, my intended conclusion was just the opposite - that it is foolish to try and apply the engineering concept of efficiency to markets and businesses. I intended no 'moral' point, as I reject the concept of morality in toto. I apparently was not clear in this, and I apologize for this error. I will gladly grant the rest of the critique, however, as I am not actually an economist (obviously). - JayOsako

Of course, nearly the exact opposite is true: engineering efficiency is an inherently amoral concept -- it makes perfect sense to say that one design for a planet destroying death ray is more engineering efficient than another, but that doesn't make it better morally. On the other hand, to say that something is value maximizing for society as a whole is an argument for it being good (though admittedly not a conclusive one for any but the strictest of utilitarians).

-- ThomasColthurst