The Myth of Efficiency
[Reprinted from Time, Uncertainty, and Disequilibrium, Mario Rizzo, ed. (Lexington, Mass: DC Heath, 1979), pp. 90-95; The Logic of Action One: Method, Money, and the Austrian School (Cheltenham, UK: Edward Elgar, 1997), pp. 266-273. The pagination of this edition corresponds to Logic.]
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Let us take a given individual. Since his own ends are clearly given and he acts to pursue them, surely at least his actions can be considered efficient. But no, they may not, for in order for him to act efficiently, he would have to possess perfect knowledge—perfect knowledge of the best technology, of future actions and reactions by other people, and of future natural events. But since no one can ever have perfect knowledge of the future, no one's action can be called "efficient." We live in a world of uncertainty. Efficiency is therefore a chimera.
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I just read this paper & was impressed. And thus wanted to share. Comments, thoughts?
ooo, I'll have to read that. Might help me out with one of my statist friends.
Say wa?
I disagree, there are actions more efficient than others, just as there are some people who are more knowledgeable than others, simply because they are not totally knowledgeable or efficient doesn't mean that knowledge and efficiency does not exist.
There is such a thing as efficiency, and efficiency is not a chimera.
Conza88:Let us take a given individual. Since his own ends are clearly given and he acts to pursue them, surely at least his actions can be considered efficient. But no, they may not, for in order for him to act efficiently, he would have to possess perfect knowledge—perfect knowledge of the best technology, of future actions and reactions by other people, and of future natural events. But since no one can ever have perfect knowledge of the future, no one's action can be called "efficient." We live in a world of uncertainty. Efficiency is therefore a chimera.
I think it is commonly understood that efficiency means "efficiency based on present knowledge". I don't need perfect knowledge to judge the superior efficiency of driving from NY to Boston when compared to walking.
Z.
The Late Andrew Ryan: Say wa? I disagree, there are actions more efficient than others, just as there are some people who are more knowledgeable than others, simply because they are not totally knowledgeable or efficient doesn't mean that knowledge and efficiency does not exist. There is such a thing as efficiency, and efficiency is not a chimera.
z1235: Conza88:Let us take a given individual. Since his own ends are clearly given and he acts to pursue them, surely at least his actions can be considered efficient. But no, they may not, for in order for him to act efficiently, he would have to possess perfect knowledge—perfect knowledge of the best technology, of future actions and reactions by other people, and of future natural events. But since no one can ever have perfect knowledge of the future, no one's action can be called "efficient." We live in a world of uncertainty. Efficiency is therefore a chimera. I think it is commonly understood that efficiency means "efficiency based on present knowledge". I don't need perfect knowledge to judge the superior efficiency of driving from NY to Boston when compared to walking. Z.
I think this also has something to do with subjective value and the ordinal value scale. Does one value time, money, distance, effort, steel, location, etc....
What definition of efficient is he using?
"This is another area where non-Austrians do not take time into account. Mises explained (in a whole chapter on “Time” in Human Action) how it is a praxeological category. He then highlights how the concepts of time and change are inseperably connected. Or we could substitute “change” for “uncertainty,” as Rothbard used it. Because action takes place in time, uncertainty exists and perfect knowledge is impossible. Efficiency necessarily cannot exist. Rothbard then explains how action relates to learning:
As the individual acts to achieve his ends, he learns and becomes more proficient about how to pursue them. But in that case, of course, his actions cannot have been efficient from the start—or even from the end—of his actions, since perfect knowledge is never achieved, and there is always more to learn.
In addition, individuals’ ends change all of the time, thus implying a different set of means required to achieve those ends. In this case, too, efficiency is not possible.
Moreover, the individual’s ends are not really given, for there is no reason to assume that they are set in concrete for all time. As the individual learns more about the world, about nature and about other people, his values and goals are bound to change. The individual’s ends will change as he learns from other people; they may also change out of sheer caprice. But if ends change in the course of an action, the concept of efficiency—which can only be defined as the best combination of means in pursuit of given ends—again becomes meaningless.
Also, even if we assume that an individual’s ends do not change, could we assume that all individuals’ ends are the same? Rothbard explains that efficiency
. . . only makes sense in regard to people’s ends, and individuals’ ends differ, clash, and conflict. The central question of politics then becomes: whose ends shall rule?
The question then may be asked why neoclassical thought is so unrealistic:
The blindness of economic thought to the realities of the world is systematic and is a product of the utilitarian philosophy that has dominated economics for a century and a half. For utilitarianism holds that everyone’s ends are really the same, and that therefore all social conflict is merely technical and pragmatic, and can be resolved once the appropriate means for the common ends are discovered and adopted. It is the myth of the common universal end that allows economists to believe that they can “scientifically” and in a supposedly value-free manner prescribe what political policies should be adopted. By taking this alleged common universal end as an unquestioned given, the economist allows himself the delusion that he is not at all a moralist but only a strictly value-free and professional technician.
In these cases of conflicting ends, furthermore, one group’s “efficiency” becomes another group’s detriment. The advocates of a program—whether of compulsory uniformity or of slaughtering a defined social group—would want their proposals carried out as efficiently as possible; whereas, on the other hand, the oppressed group would hope for as inefficient a pursuit of the hated goal as possible. Efficiency . . . can only be meaningful relative to a given goal. But if ends clash, the opposing group will favor maximum inefficiency in pursuit of the disliked goal. Efficiency, therefore, can never serve as a utilitarian touchstone for law or for public policy." - Chris Brown
z1235: I don't need perfect knowledge to judge the superior efficiency of driving from NY to Boston when compared to walking. Z.
I don't need perfect knowledge to judge the superior efficiency of driving from NY to Boston when compared to walking.
So you would say, someone who chose to walk from NY to Boston instead of driving would be acting irrationally?
Conza88: z1235: I don't need perfect knowledge to judge the superior efficiency of driving from NY to Boston when compared to walking. Z. So you would say, someone who chose to walk from NY to Boston instead of driving would be acting irrationally?
If you want to go in a day.
Conza88:So you would say, someone who chose to walk from NY to Boston instead of driving would be acting irrationally?
scineram:If you want to go in a day.
"The assertion that there is irrational action is always rooted in an evaluation of a scale of values different from our own. Whoever says that irrationality plays a role in human action is merely saying, that his fellow men behave in a way that he does not consider correct. If we do not wish to pass judgment on the ends and the scales of value of other people and to claim omniscience for ourselves, the statement, "He acts irrationally," is meaningless, because it is not compatible with the concept of action. The "seeking to attain an end" and the "striving after a goal" cannot be eliminated from the concept of action. Whatever does not strive after goals or seek the attainment of ends reacts with absolute passivity to an external stimulus and is without a will of its own, like an automaton or a stone." - Mises
z1235:I think it is commonly understood that efficiency means "efficiency based on present knowledge". I don't need perfect knowledge to judge the superior efficiency of driving from NY to Boston when compared to walking.
And since you don't have perfect knowledge, and the future is uncertain: your car breaks down, their is a traffic jam, accident on the highway, your breaks fail, engine explodes..
Maybe someone wishes to take a detour...
"In the course of attaining the primary end, secondary ends are attained. A man walks from A to B. He would choose the shortest route if other, secondary ends did not demand satisfaction. He makes a detour if he can walk in the shade a little longer; if he can include in his walk another place, C, which he wants to look for; if, by doing so, he can avoid dangers that may be lying in wait for him on the shortest route; or if he just happens to like the longer route. If he decides on a detour, we must infer that at the moment of decision the attainment of such secondary ends was of greater importance in his judgment than the saving of distance. Consequently, for him the "detour" was no detour at all, since his walk brought him greater satisfaction or?at least from the point of view that he took of his situation at the moment of decision?was expected to bring greater satisfaction than the attainment of his destination by the shorter route. Only one who does not have these secondary ends in mind can call the longer way a detour. As far as our stroller was concerned, it was the correct route, that is, the route that promised the greatest satisfactions.[7]
Since satisfaction and dissatisfaction depend only on the subjective view of the individual, there is no room for argument on this question in a science that does not presume to establish a scale of values or to make judgments of value. Its conception of an end, in the strict sense, is more deductive than empirical: ends are determined by the wishes and the desires of the individual. Whenever reference is made to the greater or lesser appropriateness of means, this can only be from the point of view of the acting individual." - Mises
Rothbard is not referring to relative efficiency, but absolute efficiency.
Jonathan M. F. Catalán: Rothbard is not referring to relative efficiency, but absolute efficiency.
Ah? How did you come to that conclusion?
scineram: What definition of efficient is he using?
"the concept of efficiency—which can only be defined as the best combination of means in pursuit of given ends"
I think that sentence should be "If his own ends are clearly given..." but no matter. There are several glaring assumptions the writer makes. First, that actions are efficient based on the pursuit of one's ends. The very fact that I can drive my car five blocks out of the way to get home defies this. The fact of my acting towards an end does not make the action I take efficient. It can, however, be assumed that I am taking what I perceive to be the most efficient course of action, though I may just be a dum-dum who believes driving five blocks out of the way will magically keep my engine intact.
The other glaring assumption is in the sentence stating that in order to act efficiently, an individual needs "perfect knowledge". Does it really need to be pointed out that there is no reason to be efficient if one has omniscience? One would already know the best action to take, and therefore have no need to be efficient. The very fact that socialism has never panned out well defies this. At face value, no less.
We do live in a world of uncertainty. However, it does not follow that one cannot be efficient, because the uncertainty is not absolute, nor does uncertainty create an absolute unpredictability. We have something called math, as well as another something called science, which can and do demonstrate every day that there are things we can control in a world of uncertainty. We don't even have to be right. The original model of the atom is not the same model we use today, but the principles behind it did explain the atom in ways that were scientifically more useful to those who...and you're not going to believe this...went on to find more efficient models that offered better explanations. Efficiency is more like a domesticated chimera, if anything.
Conza88: Ah? How did you come to that conclusion?
The original quote was:
Rothbard can only be talking about perfect efficiency; that is, without error. I don't think it takes reading Rothbard to realize that people make mistakes, nevertheless some actions are relatively more efficient than others. Human action takes any given amount of information and knowledge available and hope to makes the most efficiency decision; sometimes it comes out as intended and other times it doesn't.
To illustrate my point, in a free-market an entrepreneur knows it is more efficient to borrow capital when it's cheaper, or to allot capital to a certain investment knowing that one investment will reap higher rewards than another. And so, humans strive for efficiency, and strive to gain relatively higher efficiency, but can never attain perfect efficiency because:
So, I think it's evidence that when Rothbard uses the word "efficiency" it is in the strictest of definitions, to do away with the idea that through central planning one can make human action more efficient. But, I think Rothbard would agree with the idea that free human action is relatively more efficient than human action as engineered by centralized markets.
Jonathan M. F. Catalán:Rothbard can only be talking about perfect efficiency; that is, without error.
I believe the better way to phrase / interpret it - would be - static efficiency, no? As opposed to dynamic efficiency?
400 years of Dynamic Efficiency - Jesus De Huerta De Soto (You may like this one, it pimps Spain
Furthermore, in the 1920s and 1930s, the static concept of economic efficiency became the focal point for a whole new discipline, which came to be known as "welfare economics," and which grew from alternative approaches, of which the Pareto approach is the most well known.
From a Paretian perspective, an economic system is in a state of efficiency if no one can be made better off without making someone else worse off.
Our main criticism of welfare economics is that it reduces the problem of economic efficiency to a simple mathematical problem of maximization, in which all the economic data are assumed to be given and constant. However, both assumptions are entirely wrong: the data are continually changing as a result of entrepreneurial creativity.
And that is essentially what Rothbard was attacking in the OP linked article?
And precisely for that reason, we need to introduce a new concept, that of dynamic efficiency, understood as the capacity to foster entrepreneurial creativity as well as coordination. In other words, dynamic efficiency consists of the entrepreneurial capacity to discover profit opportunities as well as the capacity to coordinate and overcome any social maladjustments or discoordinations.
Now, from a dynamic standpoint, an individual, a company, an institution, or even an entire economic system will be more efficient the more it promotes entrepreneurial creativity and coordination.
And from this dynamic perspective, the truly important goal is not so much to prevent the waste of certain means considered known and "given" as it is to continually discover and create new ends and means.
For a more extensive treatment of this entire matter, I recommend to you the principal works of Mises, Hayek, Kirzner, and Rothbard on the idea of the market as a dynamic process driven by entrepreneurship and on the notion of competition as a process of discovery and creativity.
In my opinion, these "Austrian" authors provide us with the most exact concept of dynamic efficiency, which contrasts with the more imperfect concept of dynamic efficiency developed by both Joseph A. Schumpeter and Douglas North.
Jonathan M. F. Catalán:So, I think it's evidence that when Rothbard uses the word "efficiency" it is in the strictest of definitions, to do away with the idea that through central planning one can make human action more efficient. But, I think Rothbard would agree with the idea that free human action is relatively more efficient than human action as engineered by centralized markets.
Good point. I agree. Your comment promoted me to digg further and I found in MES, he uses the term slightly differently it seems. And more so in the "dynamic" meaning manner.
This article (How is Efficiency Obtained? - Fernando Herrera-Gonzalez) also touches upon the above, but builds into it.
"Economic policy is nowadays always measured against the standard of economic efficiency, that is, static efficiency. A concrete economic policy is deemed to be good if it improves the static efficiency of the market. The ideal economic policy should be the one able to drive the market to the nirvana of perfect competition, in which static efficiency is maximized, as is social welfare.
The concept of the state of perfect competition has been widely criticized by the main exponents of the Austrian School, including Mises, Hayek, and Rothbard. However, government officials and mainstream economists seem impervious to their reasoning. So, they keep analyzing and studying the alternatives of economic policy according to this absurd standard.
What I propose to do in the following lines, it is to draw on the classic example of Robinson Crusoe, as used by Murray N. Rothbard in Man, Economy, and State,[1] to try to follow what would have been the life of our hero had he attempted to maximize static efficiency."
Would the above conclusions be right, or am I way off base?
Conza88:From a Paretian perspective, an economic system is in a state of efficiency if no one can be made better off without making someone else worse off.
Well, Pareto criterion has been dropped in favor of Kaldor-Hicks, because it can almost never improve.
scineram: Conza88:From a Paretian perspective, an economic system is in a state of efficiency if no one can be made better off without making someone else worse off. Well, Pareto criterion has been dropped in favor of Kaldor-Hicks, because it can almost never improve.
No, the Pareto efficiency hasn't been dropped. And I'll make the effort to explain more.
The Pareto efficiency hasn't been dropped and the Kaldor-Hicks is an ad hoc hypothesis. The Kaldor-Hicks pertains to what happens when an individual(s) is worse off. Kaldor pertains to the people making those worse off being able to compensate the 'worse-off'. Hicks pertains to those 'worse-off' willing to be compensated. It is ad hoc as it is an effort to not only fix a problem, but as an hypothesis, it assumes that those worse off will be satisfied by the compensation and those making those 'worse-off' will be able to agree to compensations. Neither of these are certain and Kaldor-Hicks is completely about there is a 'worse-off'. It's an effort to explain welfare, property rights violations, etc....
Individuals by the billions are exchanging with each other valuing what they receive more than what they give in the exchange so nobody was made worse off, ie. Parento Efficiency, and thus better off in the free market, ie. Unanimity-Rule.
Just because those exchanging are better of does not mean others are not worse off.
scineram:Just because those exchanging are better of does not mean others are not worse off.
those others are not involved in the exchange.
I'm not going to explain your own theoretical attempts in this thread anymore, let alone for it to be considered a philosophical attack would probably mean to manage to explain your own theoreticals without me having to explain not only my conceptions but yours as well. Doing the work for two people isn't high on my priority list in this forum at all times.
good day.
wilderness:those others are not involved in the exchange.
And? They are still worse off.
Efficiency is a mechanical/physical concept - something can be more efficient with given inputs compared to given outputs. But it is up to us to determine the relevancy of input and outputs - their relative values. Especially as there are trade-offs between various inputs and various outputs, it simply makes no sense to talk about 'efficiency' outside of a tautological context of X per Y; a context which has no implications for decision making unless one already accepts that X is the desired good and Y is the only relevant cost - a situation which rarely faces real people, if ever.
“Laws: We know what they are, and what they are worth! They are spider webs for the rich and mighty, steel chains for the poor and weak, fishing nets in the hands of the government.” - Proudhon