Efficiency and its Implications

            We can all agree that efficiency is generally a good thing, right? Efficiency is a lack of waste, a best use of the resources available (i.e. doing the best you can with what you have). Thinking about all of the resources in a given country (including human labor), how can these resources be used most efficiently, and consequently, what economic organization system best promotes this efficiency?

Throughout history, we have basically seen two general philosophies arise in the large scale management of resources. One system entrusts the responsibility of efficiently allocating resources to a small group of powerful, “educated” people. The other approach is the polar opposite where the responsibility for allocation of resources is pushed down to and spread out among individual citizens, with little or no input from oligarchical figures. The question at the very core of the issue is can a small group of smart, even benevolent humans make better micro/macro resource allocation decisions than the overall body of citizens pursuing their own interests?

I believe this video (based on a famous essay by Leonard E. Read) answers the philosophical question far more eloquently than I ever could: http://www.youtube.com/watch?v=IYO3tOqDISE 

Does history provide us with empirical evidence of a superior system for efficiently allocating scarce resources? I think the best way to understand the effect of real world variables on a theory is to simply look at examples of where the theory was applied in the real world. We are fortunate to have substantial historical data showcasing the legitimacy of these theories in real world application. Some prime examples of the differing ideologies in application might be the Soviet Union and the United States, or South Korea and North Korea. A bit of reading and research will reveal that the oligarchical economic systems tend to be plagued by shortages and surpluses (yes, surpluses are bad too – they imply that resources were over-allocated to that area, and as a result, were not used efficiently to produce something else that may have been needed more). While shortages and surpluses certainly exist in free market economies, history shows us that they are orders of magnitude less prevalent. I, Pencil explains the free market’s superiority over central planning by showing us that even the production of a pencil is far too complex to be efficiently organized by a central planner.

If we are looking to end hunger for example, and understand that agricultural resources are not unlimited, should we choose the system characterized by waste or that which promotes resource efficiency? And if we are convinced that many free individuals can better allocate resources than central planners, how far can we take that? Does this theory of free market resource allocation efficiency work in some sectors of an economy, and not in others? I intend to explore and evaluate some common beliefs about limitations of a free market in coming posts.