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Efficiency is a good thing, right? Not necessarily…

An interesting article by Roger Martin in the Harvard Business Review entitled “The high price of efficiency”, challenges the intuitive idea that efficiency is the basis of innovation and disruption and argues that the quest for efficiency at all costs results in less innovation, greater concentration, higher levels of inequality and the greater structural fragility associated with monocultures.

It’s well known that the efficiency gain derived from an innovative process can lead to the disruption of an entire industry. Examples abound: the use of the internet, for example, generated several companies that initiated processes that are noticeably more efficient than those of their traditional competitors, bringing disruption to industries as varied as music, the media, retail, etc. However, the result of taking this search for efficiency to the limit has resulted in the dominance of an industry by very few competitors that soon become unassailable and that protect their privileged situation by acquiring any competitor that threatens further disruption.

Such a situation, not exclusive to the technology sector, presents society with an important problem: the hijacking of innovation capacity by a few increasingly larger and more efficient competitors, who are able to convert that efficiency into lower prices, but create problems for society because their efficiency requires low-cost labor working in poor conditions in countries that allow it or the use of subsidies in others to provide their workers with a decent standard of living, or that simply put their less efficient competitors out of business. In response, US Democrat Bernie Sanders recently launched the Stop BEZOS Act to make large corporations compensate the state for the fact that a large part of Amazon’s workforce has had to resort to charitable programs to survive, which is an unacceptable way to transfer resources from the state to companies, and that finally forced Amazon into raising the minimum wage of its grossly underpaid warehouse staff.

The search for efficiency at any cost invariably leads to such paradoxes: companies squeeze workers who have to turn to the state to make ends meet, while at the same time the company’s profits soar but without any corresponding increase in taxes. Meanwhile, competitors with these companies cannot do so under the same rules, because they are not able to acquire the same kinds of economies of scale; even they find a way, they will simply end up being bought.

Roger Martin says the answer lies in regulation and identifying the factors behind Amazon and others’ efficiency and eliminate any that suppose a financial burden on the state. In addition, a systematic break is required using powerful anti-monopoly laws designed to prevent giant corporations from exploiting their efficiencies to stifle competition.

The idea that efficiency is the enemy of innovation may be counterintuitive, but the evidence now clearly shows that we are moving toward an unsustainable imbalance with many historical parallels.

(En español, aquí)