Economic Rehab – Lesson 2: Efficiency

Karl FitzgeraldCommentary, True Cost EconomicsLeave a Comment

Tohm Curtis continues his slightly sarcastic journey into the underpinnings of economics

Okay in Lesson 1, I concluded with the not so startling revelation that the economy was ultimately limited by the external environment or reality. Economics is a science because it’s constrained by reality, and hence people use observations to make predictions on how the natural environment will behave.

But so too is physics, mathematics etc. Lets go further now and look at economics as the study of decisions and what makes a good or bad decision. What is the result of a good decision?

Profits – Doing More with Less:

I’m from a business school and thus naturally in my mind, the result of a good decision is profit. Don’t let that turn you off as an activist though. Hopefully you would agree that profit occurs as a result of a decision where our return exceeds the cost of making that decision. The cost – benefit analysis.

So the recipe for profit is efficiency, in every manifestation in the corporate world, the business world, in trade, in economics, profit is derived from doing more with less. Sometimes it is getting more of the customers’ money, for the same product, then you are using your customers efficiently. Or it is from selling the same product to new customers, instead of developing new products which are expensive. Or it is from reducing your product and selling it at the same price.

Staff cutbacks intend to deliver the same product using less staff. They are trying to gain a greater return from their investment in wages.

Wanting Less Now, and More Later:

Imagine some cave person. Their aim in life is simple; eat enough to live long enough to reproduce. Maybe they are trying to choreograph a dance masterpiece in their lifetime, but let’s keep it simple.

This cave person has access to a stream with a bunch of fish in it, and they also have access to a sharp stick. The cave-person can skewer a fish out of the stream and eat it.

Simply put, the cave-person made a good decision to skewer the fish, because they profited in terms of energy, the fish they caught provided more energy than was expended catching the fish.

What if they caught 7 fish? At some point presumably they would have a surplus. They couldn’t eat all the fish they caught. So not only is the energy expended catching that surplus fish wasted, imagine if the dead fish spoiled overnight. If left in the stream it would stay fresh and be eaten tomorrow when it was useful/profitable to do so.

Cave-person in the Corporate World:

So in the above example the cave-person attempted to consume what it wanted, which unfortunately was not only more than it needed, but more than it could consume. Bad, inefficient decision.

Imagine though that that cave-person is now head of a big company listed on the share market. It makes $1 million dollars of profits, and the cave-person or CEO has to decide whether to pay out all these profits and make the shareholders happy now, or reinvest these profits to make shareholders happier in the future. Does it want more today or more tomorrow?

Same for any wage earner, do you save your money to consume another day, letting it accumulate into a big pile you can roll around in naked, or do you go out today and drink it all? Do you want your money more today or more tomorrow?

Under-consumption for Activists:

Thus we establish the basic criteria for good vs bad economic decisions, and by extension good vs bad policy. Paying attention to the fact that policy is a piece of paper that dictates what decisions are to be made in what circumstances.

For example, I, a rebellious youth, often jaywalk. But I have a policy when very drunk to ALWAYS wait for the green man before crossing the street, often mumbling ‘green-man, green-man, green-man’ to myself. …back to the mythical criteria. Since we live forwards and not backwards, we generally should take good economic decisions to be those that will make our lives easier in the future or long term and bad decisions to be those that make life harder, period. There’s a quasi middle ground that muddies up the issues and allows defenders of lies, injustice and stupidity to get away with sounding like they know stuff about economics. This grey area is called the short term. A decision can look good in the short term, but be bad in the long term.

To avoid confusion, let me be clear, a decision fitting the above criteria is a bad decision. It is inefficient.

Homework exercise 2: Short Essay Competition

Why in Australian society do people need to pay for gym, in order to lose weight gained from eating food they also paid for? Are they efficient consumers? Think about it.

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