Balancing Productive Efficiency and Other Social Goals

Allowing larger firms to crush small ones might be good from one measure, but not from another. A socio-economic theory needs to determine what measures to endorse and which to relegate to second-order choices.

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Typically a larger organization can be more efficient than a smaller organization with the same outputs. They might have larger factories, larger shipping quantities, larger supplier discounts, more political pull to obtain tax breaks, better and wider distribution networks, and more besides. In general, there can be a positive correlation between size and efficiency, meaning that their costs can be lower for the same goods. This typically implies that unless there are some compensating advantages, such as individual location, the larger organization can drive the smaller one out of business.

In the larger socio-economic picture, is this always desirable? Is production efficiency the single goal that needs to be always sought? The question harks back to the question about what should or could be the goals of any new socio-economic system. This has the same two answers: one is that the status quo is best because those who benefit from it have the power to change it, and the power to approve it, and since they are benefiting the most, they find innumerable reasons to preserve it. Perhaps the most powerful one is that no changes are necessary and no uncertainty arises. The other is that there are various normative goals that could be set, but they are somewhat arbitrary, and depend on the individual who is determining what is ‘best’. Each individual was raised with some implicit preferences, and these suborn their thinking so that some particular, but arbitrary, arrangement is the one they recommend. Neither of these has much to offer.

Perhaps one way to start considering alternatives to the ‘Wild West’ system in which the bigger company usually kills the smaller one is to make a list of possible goals. The Wild West system of the maximization of production efficiency ignores the other two components of a socio-economic system, as described previously. These are distribution and consumption. The same Wild West system can be applied to distribution, with the largest distributor crushing all smaller ones, or absorbing them. Consumption is different, although it could be slanted to use much of the same words. Via the many social mechanisms where disparity is promoted, especially the positive feedback ones, consumption could be restricted more and more to those on the top of the disparity pyramid, which could be called, almost as a joke, maximizing efficiency of consumption.

A basic idea of the Just Deserts socio-economic theory is that rewards from effort should be related to the quality and time of the effort, rather than from other effects, such as a lottery of results, corruption being involved, various feedback loops, and so on. If the reward-effort correlation is too little, motivation is damaged and one of the drivers of social improvement is lost. If the reward-effort correlation is too great, motivation is again damaged and replaced with different motivations, such as might involve some moral crimes or other distortion of agreed-upon social arrangements.

This goal involves rewards allocations, and does not talk about the milieu in which these rewards and the associated effort are embedded. It talks about how to compute rewards based on both instantaneous effort and past effort, such as was involved with training or otherwise preparing for the current bout of effort. But in some socio-economic arrangements, because of the presence of more productive capital or because of special social arrangements such as hierarchies of control, there would be more production on the average from the expense of some individual effort. That efficiency would relate to the individual, not to the aggregate of individuals. Let’s use a simplified example to illustrate and explore this feature.

Suppose there is a nation completely isolated from all others, having 100 citizens, all capable of work, and it lives on only one product. The product is made in a large factory or alternatively in a set of smaller ones. The large factory employs ten workers in production, and uses ten more workers to build and maintain it. It makes 100 units of product in one unit of time, which is just what the nation needs. The smaller factories employ fifty workers, and use fifty more to build and maintain them. Together they also make 100 units of product in one unit of time. Clearly the efficiency of the large factory, or more specifically, the average production efficiency of the individual workers in that factory, is five times that of the smaller ones. If production efficiency per individual was the goal chosen by this nation as the basis for its choices, the large factory would be preferred, and there would be twenty workers employed, and eighty without anything to do. On the other hand, if production efficiency on the average was the goal chosen by this nation, the smaller ones would be equivalent in this measure, as both produce one hundred units per unit of time, and the nation has one hundred workers.

This example is easy to interpret, as it discards all the details that obscure the problem, which is the usual distribution of talent among workers, the distribution of ability to work among citizens, and a multitude of other real complications. The example does show, however, that a seemingly small change in the measure of the goal makes a tremendous difference in what alternatives can be considered. Production efficiency in a plant versus production efficiency in a nation sound similar, but are actually quite different in effect.

One aspect of this situation is that there was also a hidden assumption that the desired consumption level was one unit of production per citizen per unit of time. For some production items that might be the case, and for others, not. If all one hundred workers worked at one of five large factories, then the nation would produce five hundred units of production per unit of time, and this surplus might be distributed one way or another. Perhaps the surplus would be beneficial and perhaps it would be harmful. There are also ways to implement a type of full employment, where workers rotated in and out of the large factories employ, having to do only 20% as much work but each one resulting in the same amount of production as if they worked 100% of their time in the smaller factories. Another aspect might be that two or more large factories produce surpluses which can be stored for use in bad times, and then shut down temporarily when inventory becomes saturated.

Even an example simplified in the extreme has complexities that need more details to be added in order to be able to develop any insights. If the national goals included maximizing production efficiency of the nation as a whole, with no surpluses needed or desired, there are two ways to do it and also combinations of them, where there could be one larger factory able to produce 50% of national production and several smaller ones together making the other 50%. What kind of criteria might be used to be able to judge which of these is desirable? If we are bent on developing a system based on the just deserts concept, then the case which employed all of the workers would have all of them receiving the same rewards, and the case which employed only part of them would have more rewards going to those who were employed and less to those who were not. We have in this example created a situation where all workers are equally capable and equally interested in working, but by some lottery, only a part of them have employment and the associated larger rewards. That might not seem to be in keeping with the just deserts socio-economic theory, but the theory does allow for lotteries to determine rewards, but only to some extent.

If the rule is to correlate effort and reward to a certain degree, then the theory must take into account the situation where there is no opportunity for effort. Perhaps other theories assume there is always opportunity for effort, and this may be their downfall. One insight might be that situations with lotteries being a large factor in determining effort or rather opportunity for effort to be expended, just as situations where lotteries are a large factor in determining productive efficiency per individual, some sort of rectification is needed. Lotteries are not necessarily efficient, nor do they have any other moral benefits.

One tentative concept for the socio-economic theory of just deserts is that opportunity lotteries should be restricted to some small change in reward, perhaps something in the ten to fifty percent level. This implies that there would be some way of measuring what effort might be applied if an individual won an opportunity lottery, but that is a discussion which needs much more time and thought. The question of how regulating or rectifying an opportunity lottery might affect motivation needs to be addressed, as well as how the rectification process worked and how it could be structured to avoid gaming. How could it be possible to tell who would work if they had opportunity, and who is simply hoping to avoid work by playing the opportunity lottery.

 

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