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The sabotage of efficiency

from Peter Radford

Sabotage.

Not the sort of sabotage we associate with plucky heroes undertaking dramatic action like blowing up railway lines and so on.

No, the sort of sabotage that is a great deal more subtle.  The kind that is summed up by the metaphorical boiled frog.  The slow devious and underhanded chipping away at something termite-like until the edifice is more fiction than fact.

That sort of sabotage.

The sort of sabotage that Thorstein Veblen wrote about a hundred years ago in his curious collection of papers later accumulated into the volume entitled “The Engineers and The Price System”.  I must admit that every time I read those papers I come away with a furrowed brow.  What on earth was Veblen getting at?  The argument ends with a reference to a soviet of engineers rising up in defiance of the various vested interests whose dead hand weighs heavily open the supposed efficiency of something he calls the industrial system.  The notion of a soviet had a very different connotation back in the early 1920s than it does now, and the industrial system was a novelty subject to a great deal of intellectual scrutiny.

This system Veblen describes is the development of modern production from its primitive roots in the work-at-home artisanal version at the beginnings of industrialization to the 1920s version that seemed at the time to be the height of complex interconnection and intricate interdependencies.  He puts a heavy burden on his engineers.  They are the class who understand the system best and are able to squeeze its efficiency to the ultimate degree.  And he is adamant: this system is the provider of all that society has come to depend upon.  Ownership of the assets within the system is one thing, but the beneficiary of the output is society as whole.  We, he argues, are dependent on the system.  So we have, by extension, become dependent on the goodwill and honesty of the engineers who, alone, can make the system work most efficiently.

The problem, then, is sabotage.

In one of the middle chapters of the book, called “Finance and the Engineers” Veblen describes the relationship between the then developing class of business managers, the external financiers, and the poor engineers whose efforts at creating ever more efficiency are inevitably undermined by the desire of vested interests to extract rents for themselves.  Business managers, we are told, don’t really understand the technology, but they do understand the way in which to subordinate the technology to commerce.  In particular they understand that optimization of technical prowess and optimization of profit are not the same thing.  They might, for instance, decide to throttle back on production, thereby depriving society at large of that extra product, in order to maintain prices and profit margins.  The financiers, to whom the business managers report, also accept and encourage this slowdown of production.  Since the assets within the system are supposedly “owned” by external forces — the clientele of the financiers — it is inevitable that the assets are underused.  The system is, in Veblen’s usage of the world, sabotaged by vested interests.  And society suffers.

This has an enormously contemporary feel.

Setting aside the oddity of this argument within the overall corpus of Veblen’s work, and setting aside his somewhat naive view of the motivation of engineers, it seems he is onto something.

As an aside:  it is difficult to decide whose view is more naive.  The economists who have busily constructed theories based upon ridiculously exaggerated rigor on the part of both producers and consumers or Veblen who is encouraging his engineers to resist the sabotage and thus become benevolent providers for society.

But Veblen was no fool.  He obviously understood that any economic theory positing that efficiency was the goal of an economic system was an absurd reading of real-world human objectives.  He also understood, I am sure, that efficiency is an elastic and elusive concept.

His insistence of the enormous complexity of modern industrial activity with its multitude of connections and dependency on the smooth workings of each of its parts in order for the whole to edge towards efficient outcomes is an acute observation.  He would have chuckled, surely, at our contemporary obsession with supply chains.  His engineers might have been able to foretell the failure of modern supply chains, but their voices would have been swamped by the sabotage of the investors whose eye on profit drove production into ever more tenuous tentacles reaching around the globe.  The impulse to offshore, outsource, or otherwise “globalize” was not an effort to squeeze more efficiency from the industrial complex.  Its was an effort to squeeze more profit for shareholders.  That the impulse was sold to society as an efficiency creating exercise is no matter.

Or, rather, in this case the sabotage was the co-option of the very concept of efficiency by financiers.  Their self-interest became the definition of efficiency.  So, whereas an engineer in Veblen’s telling might view efficiency as maximizing the output from a given set of inputs, our latter day financiers define it in terms of profit.  The two can, and most often do, contradict.  So the dominant version of “efficient” has become that of the owners of the inputs.  The asset owners.  And chronic underproduction and overpricing, not to mention fragile supply chains, are the result.

Society pays a high price for subordinating the determination of output to the pursuit of profit.

This is particularly true in an economy dominated by oligopoly.  The efficiency of textbooks relies on competition.  Our modern economy is very far from competitive.  It is, in truth, more rigid and thus inefficient than we are often told.  We underproduce as a result.  Our resources are poorly invested because they are diverted towards profit and not efficiency.  The textbook tells us that these are the same and that, ultimately, the pursuit of profit will ensure efficient allocation of resources.  But the textbook fails to understand Veblen’s saboteurs.  His explanation was that the sabotage was too insignificant, in his day, to be too damaging for society.  He did, however, warn that the steady increase in rent-seeking would ultimately undermine the workings of the textbook economy.  We would end up with a crisis of underproduction and overpricing.  The saboteurs would end up running the system for their own ends.

Which is what has happened.

We could argue, with a few of our own extended examples, that the current economic landscape is a consequence of the pursuit of profit-as-efficiency instead of maximum output-as-efficiency.  This is the gist of Jan Eeckhout’s excellent “The Profit Paradox” published earlier this year.  Eeckhout’s subtitle tells the whole story: “How Thriving Firms Threaten the Future of Work”.  The pursuit of profit does not fulfill the objectives assigned to it in the textbook. Not unless, that is, society maintains its vigilance in enforcing the rules that textbook accepts as axiomatic.  Most notably ferocious competition sufficient to drive down profit and eliminate the space for the creation of rents.

Another failure we can attribute to the profit-as-efficiency maxim is the steady rise of finance in our modern economies.  Instead of being a medium for the efficient allocation of resources towards output, finance has taken on a life of its own.  Assets, instead of being circulated back into the real economy to support output get stuck inside the financial system itself.  They accrue profit for profit’s sake.  They produce nothing.

This accumulation has been abetted by extraordinarily lax monetary policy.  The saboteurs have become so embedded in our system that they have to be protected.  Their survival has become the dominant policy objective.  So we create money to inflate their asset prices and enhance their holdings.  But very little of that money we create is channeled into production.  It gets sucked up by the banks, hedge funds, and sundry other intermediaries.  Because the long term sabotage of the vested interests has so perverted the economy that the rate of return available on investment in creating productive output is less than that available in non-production.  It is something a Keynesian could have foretold:  if we starve demand we starve the entire system.  If we suppress wages we suppress demand.  The suppression accumulates steadily to produce a system in which underinvestment in output becomes ever more profitable.  The incentive for asset owners is to hoard rather than take risks.  Underinvestment becomes underproduction.  It becomes the realization of Robert Gordon’s vision of stagnation.  It produces an addiction by asset holders to ever more doses of money creation to preserve asset values.

And it produces the absurdity of our current policy debates.  How do we withdraw the money that we created to bail out our asset holders without damaging them?  How do we extricate ourselves from an economy dependent on excessive flows of money without plunging it into depression?

Maybe we should stop paying attention to the saboteurs.  That, surely, was Veblen’s message and his warning.  He was correct: those financiers are just fancy saboteurs.  And sabotage is a very real thing.

____________________

One more thing:  it occurs to me that all this talk about efficiency is something we need to take a good look at.  How can we even define an efficient outcome in a world of endemic uncertainty?  The economy is an open, not a closed, system.  It relies on inputs of energy and information, neither of which behave in the manner described in textbooks.  Efficiency is a chimera.  It is never achievable.  Which is why the concept is easily co-opted or perverted into whatever various vested interests decide it to be.  So maybe the source of the sabotage Veblen was talking about was economic theory, based as it was, on nineteenth century concepts that need to be updated if not thrown away.

But that’s for another discussion.

  1. November 24, 2021 at 1:12 pm

    Bank equity minimizing financial engineers managed, to sell the regulators risk weighted capital requirements that distort the allocation of credit, sabotaging by slowly building up too large exposures to what’s safe and to small exposures to what’s risky.
    https://subprimeregulations.blogspot.com/2019/07/risk-weights-are-to-access-to-credit.html

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