Tuesday, October 31, 2006

Ah, inefficiency - I miss you

I remember reading a story about Henry Ford some years ago. He got some of his employees to go through old Model Ts in junkyards and find the parts that had never worn out. If there was some component that was still intact in all those old cars, there was a problem with it. It was too perfect. There’s no point having an axel that’s still perfect after the rest of the car has worn out – that’s just wasteful. So he’d then set them to work to make a cheaper and less perfect axel.

The competitive market is a rather ruthless and cut-throat thing. It doesn’t tolerate waste. If you’re a supermarket and you have really short queues, that means you’re employing too many staff. Your competitor, with slightly longer queues, can undercut your prices and steal your customers. If you’re an airline and you offer seats with lots of legroom, you can’t fit as many passengers in and you can’t compete with the prices offered by other airlines.

In a competitive market, companies are always looking for ways to make products better and cheaper. When they do, they capture a momentary advantage. Then their competitors copy what they do or work a bit harder to capture the advantage back. That must be tiring. I’d like to take long lunches at work. I’d like to leave a bit earlier. I think we all would. But we’re in a competitive jobs market that won’t tolerate that wastefulness.

Unfortunately, we tend to like things that are wasteful, they’re the things that are really good. Short queues, lots of legroom, long lunches.

What made me think about this was reading this document (pdf) about the successes of salinity emissions trading in the Hunter River, north of Sydney. It proudly proclaimed "The scheme has resulted in a significant improvement in water quality in the Hunter river – it’s now fresher than most bottled mineral waters!" My first thought was "That’s not an indicator of success, it just means that they’ve set the allowed emissions at an inefficiently low level: you don’t need river water that’s fresher than bottled water and what’s the cost to industry of complying with standards that stringent?" Oh dear, I’m thinking like an economist.

I’m overstating this a bit. After all, markets have niches and these include niches for higher-priced, higher- quality products and services – and maybe lower-paid, longer-lunch jobs.
Nevertheless, I’d say this. I think that most industrial countries have done a very good job over the past few decades of promoting market reforms and removing inefficiencies, getting rid of monopolies, fostering competition. Ultimately, it’s made most of us materially better off. It’s a good thing.

But I understand people who get nostalgic for a world of, well, unjustifiable inefficiencies: short queues; legroom on flights; long lunches; cars made to be great, not made to be just good enough at the lowest price. It does sound pretty nice, doesn't it?

1 comment:

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