Efficient Allocations?

from Peter Radford

Willford King has written:

“It is easy to find a man in almost any line of employment who is twice as efficient as another employee, but it is very rare to find one who is ten times as efficient. It is common, however, to see one man possessing not ten times but a thousand times the wealth of his neighbor … Is the middle class doomed to extinction and shall we soon find the handful of plutocrats, the modern barons of wealth, lined up squarely in opposition to the propertyless masses with no buffer between to lessen the chances of open battle? With the middle class gone and the laborer condemned to remain a lifelong wage-earner with no hope of attaining wealth of even a competence in his old age, all the conditions are ripe for a crowning class-conflict equaling in intensity and bitterness anything pictured by the most radical follower of Karl Marx. Is this condition soon coming to pass?” [Emphasis in original]

That was in 1915. My how times change.

Well maybe not. That comment about the middle class has a very contemporary ring to it.

A couple of things pop out at me when I read that quote – no doubt you will find your own emphasis. 

First is that question of ‘efficiency’. I have often argued that the concept of efficiency has little of no value in any aggregated sense because we have such incomplete information we can never do a calculation of efficiency. The economy is open ended and subject to such uncertainty that it renders the notion of efficiency – in this context – null. It is a non-concept and ought to be expunged from our thoughts.

But, at a lower level and within a more constrained context, efficiency creeps back in. This would be at the level of a single business firm where the calculation of efficiency, whilst being still subject to uncertainty, is more tractable. This is especially true in the context of the kind of planning and allocation of resources that typical firms indulge in. I don’t for a moment imagine that it is possible to arrive at an ‘optimum’ in any true sense, but it is possible to make ‘efficient’ allocative decisions within a planning process whilst acknowledging their likely error when compared against unfolding events. Plans never, as the saying goes, hold up well in the face to subsequent reality, but they act a credible guide and as a framework for resource allocation.

Second, and following on from the first, is the undercurrent in King’s comment that the world is divided in two: there are those making allocation decisions and there are those who are subject to those decisions. Perhaps this dichotomy is between capitalists and workers. Perhaps it is between management and workers. Either way the implication is that one side decides the other’s future and fortune. One is active the other is not. This opens up the space for concepts such as class to enter our economic theorizing. That dichotomy seems both very real and agnostic with respect to the political order of society: there will always be those who decide and those who don’t. Whether the planning is centralized or decentralized decisions are made and resources allocated. There is no systems to avoid the issue. Which means, in turn, that those low level efficiency decisions will occur whether we like the outcomes or not.

So, if for a moment, we look at an economy as a method of getting work done, where work is the force that translates resources into consumable material, the question of the efficiency of that work stays at the center of the economic problem. The more efficient we are the more consumable material we extract from the same work. This seems non-controversial to me. To complain about efficiency is not to argue that efficiency is somehow an erroneous idea, it is to complain about the results.

And this gets me to the third point I read into King’s quote above.

Let me phrase it as a question:

If the amount of work in an economy is fairly evenly distributed, how come wealth is not similarly fairly evenly distributed?

Orthodox economics elides having to deal with this question by introducing notions like marginal productivity. This is nothing but another of those made up tricks economics uses to avoid confronting the reality of an economy. In particular it elides the consequence that political power has in shaping economic outcomes. If you want to deny power, and to pretend that economic outcomes depend on ‘natural forces’ , then you need to invent a mechanism to accomplish that trick. Marginal productivity is, in this case, the trick to be deployed.

Like a lot of economics marginal productivity has an air of high theory to it, but in truth it is not an easily identified artifact of an actual economy. It fits neatly in the airtight confines of the models economists so love to rely upon. It fits a lot less easily in the observable world. Indeed I doubt it really exists at all.

Which leaves the discrepancy between work and reward open to further study. It is one question economics may think it has answered, but that answer was won only by denying the question existed to begin with.

So let’s ask it again: why are work and reward differently distributed in the observable economy?

In the quote above I think King is asking that question.

Isn’t he?

  1. March 25, 2015 at 9:13 pm

    We have not escaped Alfred Marshall’s choice of “Principles of Economics” over the classical “Political Economy”. Nor have we escaped out of his division of economic agents into ‘consumers’ and ‘producers’ when, in fact, “consumption is use for a measurable benefit” and “production is use for a measurable benefit.” (Of course, Utility was envisaged by him as a Cardinal, measurable thing, like profit or loss; But he certainly confused decisions to purchase with decisions to use for a measurable benefit of some kind.) Until economists reconstruct the meaning of consumption as use for a benefit, they have no hope of developing economics as a body of verifable knowledge about Politcal Economy.

  2. BRUCE E. WOYCH
    March 25, 2015 at 10:11 pm

    In a subsequent private discussion on this subject, a colleague pointed out to me that this is possibly represented in the last few decades as the Great convergence (Claudia Goldin and Robert Margo circa 1950 -60s) being overtaken by the Great Divergence (Krugman circa 1980s – 90s). On the one hand this represents baby boomer yuppies taking over from a more hands on industrious WWII generation; but it also parallels the changes from the gold standard to fiat dollar and the dismantling of the New Deal along with an aggressive push to deregulate anything that could be converted into an upstream paper economy.

    Of course economists must be on top of all this, right?

  3. Ack Nice
    March 26, 2015 at 12:54 am

    How very civilized of you, Mr. Radford – to make me and my life’s careful and diligent and exhausting work so perfectly invisible before you drove this dagger deep into my back! That way, people here won’t have to watch as I finish bleeding out in excruciating pain.

    Thanks for pretending I haven’t spent a whole year right here begging and pleading you economists to get real and focus like a laser on this most fundamental of all points in economics in the real world.

    I never even heard of Willford King – I’m a housewife and highschool grad who figured it out for herself – from scratch. If you’d care to look back at almost my every post here, you’d realize i’ve asked and brilliantly answered the question stumping you now – over and over.

    But I guess it’s the same old same old patriarchy: it aint a good idea until it comes from some man with a university degree…………………………………………..

    You won’t have to read any more words from unprofessional me. This was the mortal wound, Sir. Congratulations.

    • Tony
      March 26, 2015 at 10:23 am

      I hope that you aren’t really bleeding out in pain (metaphorically or otherwise) – and I hope you will continue to post responses to entries on RWER. Your plain speaking – on this and many other matters – is a great encouragement to all of us who pick up postings. If nothing else, we know we’re not alone. And maybe one day we’ll change something for the better.

  4. BRUCE E. WOYCH
    March 26, 2015 at 1:50 am

    In following up on some background for Willford King, it is interesting to discover that he opposed the New Deal, and his political economic stance comes extremely close to neo-conservative liberalization and the Chicago School monetary policy :

    “During the Great Depression, King opposed the New Deal. Instead, he advocated a sliding scale of wages based on production, no government intervention in business, currency expansion, the reduction of taxes in upper brackets, and the abolition of all levies on incomes of corporations and from invested capital.[1]

    In 1933, he founded the Committee on Economic Accord. In 1945, King retired from NYU to become chairman of the Committee for Constitutional Government, Inc., he later would serve as an advisor.”

    http://en.wikipedia.org/wiki/Willford_I._King

    http://en.wikipedia.org/wiki/A_Program_for_Monetary_Reform

    Willford King may have been concerned about inequality in that statement, but he was a true believer in pure capital establishment and appears closely aligned with the Chicago School and its developments.

    • BRUCE E. WOYCH
      March 26, 2015 at 2:02 am

      Sounds like the tea Party of their day…. Congressional investigations & indictments for Contempt of Congress included:

      The National Committee to Uphold Constitutional Government (NCUCG), also known as the Committee for Constitutional Government (CCG),[1] was founded in 1937 in opposition to Franklin D. Roosevelt’s Court Packing Bill. The Committee opposed most, if not all, of the New Deal legislation.”

      http://en.wikipedia.org/wiki/National_Committee_to_Uphold_Constitutional_Government

  5. BRUCE E. WOYCH
    March 26, 2015 at 3:09 am

    http://equitablegrowth.org/research/exploding-wealth-inequality-united-states/

    “Wealth inequality, it turns out, has followed a spectacular U-shape evolution over the past 100 years. From the Great Depression in the 1930s through the late 1970s there was a substantial democratization of wealth. The trend then inverted, with the share of total household wealth owned by the top 0.1 percent increasing to 22 percent in 2012 from 7 percent in the late 1970s.”
    …wealth inequality has exploded in the United States over the past four decades. The share of wealth held by the top 0.1 percent of families is now almost as high as in the late 1920s…”

    Exploding wealth inequality in the United States
    by Emmanuel Saez & Gabriel Zucman Posted on October 20, 2014

  6. March 26, 2015 at 11:38 am

    Wow what a great post.excellent

  7. March 29, 2015 at 7:05 pm

    Three things:

    1. A fair transaction fallacy. We assume that transactions are marginally neutral transfers of value, or paying exactly what something is worth, but they’re not. Even without coercion one side has market power and accumulates value in the micro. The whole concept of business is to maximise the aggregate of this imbalance.

    2. Scalability and ordinal outcomes. In David Ricardo’s times farmers faced non-scalable production and declining efficiency from additional land. In Google’s time providers of information goods are ordered by market reach and unbounded in scale, so that the top entertainer or brand may earn arbitrarily more than someone lower ranked who is nearly as good.

    3. The hidden currency of trust. A great CEO is probably not much more clever or intrinsically effective than a great engineer or any other competent operator. The CEO also doesn’t have overt capital. What they have is covert capital in the form of trust: they’re trusted to act as CEO, with certain morals and priorities that serve the role. Trust is earned opaquely and quickly, and in capitalism acts as the organized alternative to corruption.

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