There’s more to efficiency than just cutting costs

⭐ Robert Jameson
Jan 25, 2019 · 3 min read

(Introduction to Economics, Lesson 15)

It is a common saying that ‘you can’t get something for nothing.’ In a sense, however, you sometimes can, because most processes — including the production processes used in making nearly every manufactured good we own — involve a considerable amount of waste. If we wasted fewer materials or made more effective use of people’s time, then we’d be producing things more ‘efficiently’ and we could, effectively, get something for nothing.

There are, of course, many different ways of improving the efficiency of a particular factory or a particular production process. Changing the layout of a factory, using improved technology and providing better training for workers are just a few possible examples.

The concept of efficiency is at the heart of a lot of Economics. Economists like to show how, by organising ourselves more effectively, we can reduce waste and get more out for less put in.

This type of efficiency — in simple terms; getting more out for less put in — is the sort most people will be familiar with and is known as ‘technical efficiency’ or ‘productive efficiency.’ This is the type of efficiency that is often referred to by employers, whether they are manufacturers, service providers or government departments. Again, when efficiency is mentioned in news reports, this is the sort of efficiency they are probably referring to. (Although, often, when firms talk about ‘improvements in efficiency,’ they’re not really talking about efficiency at all — they just want their workers to work harder for less money!)

There is, however, another type of efficiency which is often ignored, but which is incredibly important. This other type of efficiency is known as ‘allocative efficiency.’ Allocative efficiency is concerned with whether our scarce resources are being allocated to their best possible uses. Are resources being allocated to where they will do the most good? Whilst a lot of attention is paid to productive efficiency, it is allocative efficiency which is, in many ways, far more important.

A simple example will demonstrate the difference between productive efficiency and allocative efficiency. Productive efficiency is: How can we best set up factories to make smartphones? Allocative efficiency is: Should we be allocating our scarce and valuable resources to making smartphones in the first place? Is there actually a better use for our resources than making smartphones?

Our global economy expends vast resources on designing, manufacturing, distributing and using modern smartphones. It’s all very well asking whether these phones could be made slightly more efficiently, but this shouldn’t stop us seriously considering the question of whether we should be designing, manufacturing, distributing and using them at all. Are smartphones really being mainly used for productive purposes — or are they mainly just being used as a means of wasting time and distracting people from the things they know they really ought to be getting on with?

If productive efficiency is concerned with how we achieve certain things, allocative efficiency is concerned with the much bigger question of what we are achieving and what we ought to be trying to achieve — as individuals, as a society and as a species.

As a species, we have huge productive capabilities. We can produce huge quantities of goods and services. We are, however, using vast resources in order to make those products and wasting much of those resources along the way — that’s productive inefficiency. Even more worryingly, however, we are largely producing things which do us little or no good whatsoever or even harm us — that’s allocative inefficiency. We can be producing certain goods in huge numbers — but if those goods do us little or no good and provide few, if any, benefits, then perhaps we should be allocating our valuable resources to something else.

>>Lesson 16>>

<<Index>>

Bob's Economics

Plain English Economics from someone who actually…

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