LinkedIn tracking pixel

The Challenge of Efficiency and the Potential Threat of Social Productive Efficiency

Efficiency is concerned with the optimal method of producing goods at the lowest possible cost.  In economic terms, Productive efficiency occurs on the production possibility frontier (PPF), where it is impossible to produce more of one good without producing less of another. Productive efficiency involves producing at the lowest point of the short run average cost curve. It can also refer to producing at the lowest point on the Long Run Average Cost curve, i.e. benefiting from what is called economies of scale.  Related to it is the concept of technical efficiency, which refers to the optimal combination of goods as, for example, the use of the minimum combination of labor and capital (cost) to produce a certain quantity of goods.

Logically, it would not be productively efficient for the nation as a whole if all resources were diverted to the output of boots for the army with a total or quasi total disregard for the cultivation of food or health care.  However, this does not mean that boots were still not being produced at the lowest point on the average cost curve. The production was productively efficient, but not allocatively efficient, and much less socially efficient.  Both are quite different from Productive Efficiency. They are more concerned with the distribution and allocation of resources in society, and less on the profit motive.  Monopolistic practices are frequently said to be allocatively inefficient because they are able to set the price higher than marginal cost and make more than normal profits as in the case of perfect competition.1 Nevertheless, following the thinking of the brilliant Harvard Professor Joseph Schumpeter, it must be accepted that profit motivation, together with the gale of continued innovations resulting from the impetus given by imperfect competition and the search for above normal profits, has come to be the most powerful engine of progress, , particularly in the long run expansion of total output: a process totally absent in the former Soviet Union and other socialist systems.2 Few people would deny that these firms operating in a free economic environment were not productively efficient. The allocation of goods was left primarily to the changing demands in the market.  The production of horse and buggies in the nineteenth century became superfluous with the invention of the motor car or any other new means of transportation that came into the market. This is what Schumpeter calls “the gale of continuous innovation.”

The concept of social efficiency is acquiring increasing attention not only among economists but also in the case of political and social scholars, as well as in those who specialize in the universe of ethics.  It attempts to take into account all externalities (including ethical behavior) in order to equate social marginal benefit with social marginal cost. But this raises serious questions about the inclusion of an externality as ethical behavior in the equation.  

The former Soviet Union and other totalitarian states are perfect examples of these travesties related to the meaning of social efficiency.3 Under the guise of “social efficiency” and “ethical behavior,” the government can decide what is good social behavior and what is beneficial for the wellbeing of the State.4 If production does meet this requirement, it is considered inefficient even though the items are technically produced at the lowest possible cost. This is a very dangerous approach not only to the economic concept of efficiency, but to the definition of efficiency itself.

If ethical behavior becomes the measure for efficiency, then how can we criticize totalitarian regimes for imposing, for example, bans on the construction of hospitals that do not provide abortion facilities for their patients?  For them, this is unethical behavior and, thus, socially inefficient. This would equally apply to the construction of roads, concert halls, cinemas, etc. If they do not conform to the ethical standards of those in authority, they would be classified as inefficient and rejected as anti-social.  

We are not living in a perfect world which accepts natural law as a generalized norm of conduct. At present, even though desirable, it would be utopian to accept natural law as a generalized, objective moral truth in our contemporary relativistic world. Ethical behavior means different things for different people. This is a reality that cannot be denied, a reality which can be traced back to the existence of original sin.  As the French philosopher Jacques Maritain reminds us in his excellent book Man and the State, the difficulty in reaching a unified world government is because of the lack of a unifying principle such as, for example, natural law.5 Even the European countries find it extremely problematic to create a European Union. Each country follows its own interests and moral standards. The same applies to the definition of efficiency and ethical behavior. In the case of defining social efficiency, they follow different interpretations of what are called externalities, particularly with respect to ethical behavior.

Let me repeat that, in my opinion, production efficiency or productivity is an economic term which can be used for good or evil. The same can be said of efficiency. Scientists can produce and build the most sophisticated objects, but it is for man to make the right decision as to their use. God bless them for their technological efficiency.  They are not necessarily responsible for the final outcome of their scientific research.  An architect may use — and rightly so — the most advanced and efficient techniques in the construction of a building, but his responsibility is limited to his professional duties which exempt him from any responsibility as to the way and for what it is used. Let us not confuse apples with oranges.

In his defense of private property, Pope John Paul II states that private property “is a right, which is fundamental for the autonomy and development of the person and has always been defended by the Church up to our own day;” however, the Church also teaches that it is not an absolute right and that its limits are inscribed in its very nature as a human right. However, he affirmed with equal clarity that “the USE of gods, while marked by freedom, is subordinated to their original common destination as created by GOD.”6 The word USE is emphasized.  The terms efficiency, productivity and creativity, in general terms, are neutral values.

Blame can be placed for the deterioration in ethical values on the rapid development of scientific research and the unbelievable improvements in efficiency, but the reality is that the moral foundations of Western societies have declined to such a degree that even the concept of natural law is rejected or at least ignored, a fact that the great minds of Plato, Aristotle and Cicero would cringe at the idea. This being so, how can we claim that efficiency depends on such externalities as the application of ethical standards i.e., natural law, which, as Maritain tells us, are not even accepted by the so-called Christian nations of Europe? To make efficiency a contingent on ethical behavior as, for example, the application of a just or minimum wage is like entering into a quagmire of quicksand of contradicting ethical principles.7

Let us conclude this brief essay by reminding the reader that collectivist ideologies, with their paraphernalia of forms, fixed prices under the banner of justice, injunctions, permits, and checks can easily control the economy. To claim that any firm or industry that does not meet the ethical standards set by the government can be declared socially inefficient and, thus, prohibited, can only increase the totalitarian power of the State.8  What is really needed is a socially adjusted free enterprise system and less meddling with the traditional concept of a morally free value efficiency which, we all know, can be used for good or for evil.

1. Perfect competition is an ideal but nonexistent economic model based on the ideas of Classical Economics and the writings of Adam Smith, especially his groundbreaking book The Wealth of Nations.

2. See Joseph Schumpeter, Capitalism, Socialism and Democracy. London: George Allen & Unwin ltd, 1952. part II. Chapters Vii and VIII; pp.81-106.

3. Factories were given targets of production in accordance with what the authorities considered socially efficient outputs. In my honest opinion this decision constituted a dangerously potential threat to political and economic freedom. Who determines what is socially efficient and, in particular, what is ethically acceptable. 

4. The Chinese government, at a tremendous cost, has built the world’s largest water diversion project, channeling water from the  south to the north.  However, Jon Barnett of Melbourne University claimed, writing in the magazine Nature, that the project had not met government expectations and displaced thousand of famers whose homes were destroyed.  See the following article in the Economist from London: “China has built the largest water diversion project.   Channeling water from south to north does more harm than good”.  See: The Economist 4/24/18. https:/ China/21740011.

5. See: Jacques Maritain, Man and the State, Washington D.C. The Catholic University Press, 1998.  See also, Alberto M. Piedra, The European Union and Dechristianization The Wanderer, April, 2017. And Fredrich Hayek. The Road to Serfdom.  Chicago University Press, 1944.

6. John Paul II, Centesimus Annus, Chapter IV, #30, May 1, 1991.  I stress the word USE. p. 80.

7. Who determines what is a just wage when, as Maritain tells us, there is no unifying set of ethical principles which tells us what is right and what is wrong.  Is it the government’s job or Nietsche’s “ubermensh,” through subjective legislation, to impose their view of what they consider a just wage?  Have we forgotten that we live in an imperfect world?

8. For an excellent analysis of the Free Market system and the threat of collectivism see: Wilhelm Roepke. A Humane Economy, Henry Regnery, 1960.  See also Midhael Novak, The Spirit of Democratic Capitalism, Simon and Shuster, 1982 and Friedrich Hayek, The Road to Serfdom, Chicago University Press, 1944.