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Reply to Robert Henderson on Efficiency

EconomicsPosted by Lee Waaks Sun, February 26, 2017 18:23:00

This post is a response by David McDonagh to Robert Henderson's blog post on efficiency. It was edited by Lee Waaks

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Robert Henderson asks "what do we mean by efficiency?" We need to note that there are at least two vitally different but germane meanings that we need to consider here: economic and technological efficiency. These two distinct meanings produce the interesting fact that they often clash. If we have to produce what might be technically efficient, but what we cannot really afford, then that is to be saddled with what is called a white elephant. A good example of a white elephant is Concorde, the supersonic jet aircraft. It was only viable with support from tax payers and even even then most could not afford to use it.

Society is organised by firms needing to make a profit. Profits are earned by gaining the patronage of customers by competition for their customers as against all other firms. The entrepreneur attempts to guess what the customers will buy. His costs will include wages, rent, interest on any loans and other costs relating to supplying the good or ware. Anything earned by the project over and above all the costs will then be the earnings of the entrepreneur as profit, but he also risks making a loss in this competitive quest. This is the small competitive section of the market economy where entrepreneurs rival each other and it is zero sum, insofar as the total amount of customers out there only have so much at any one time to spend. The rest of the market economy is co-operative and, like all trade, it is positive sum.

The state depends on successful economic activity on the market for taxation. No state can earn its own way for politics is negative sum, and thus wasteful, from an economic point of view. But nationalists ususally look at the state as a grand collective end or consumer good. Robert Henderson is clearly a nationalist rather than a liberal.

Profit shows that what the customers want has been successfully produced by the firms that make a profit. This is a way of rejecting most of what we technically might have done but is actually very uneconomic. The range of what is rejected as uneconomic is very wide and to go down any one of those wasteful uneconomic paths would be to enter a metaphorical crushing stampede of wasteful white elephants. Profit mainly allows us to dodge that stampede but the state is always there to tax the public in order to rescue some unprofitable projects, thereby saving the odd white elephant from the metaphorical stampeding herd. Profit is a good sign of successful economy in the mass urban society.

Henderson imagines the state gives public service but the reality is that it sets out to govern the public. Profit is feedback that the customers have been served but the state never truly serves. We are told that firms merely get lucky when they make a profit, but that such luck runs out. This account is very unrealistic. It is more likely that firms ebb not owing to bad luck, but due to all who wanted the good having already purchased it, with the result that not enough new customers prevent the firm from making a loss. The firm then either produces something else that some customers will patronise, or it ebbs away to go eventually defunct. By contrast, state projects like NATO rarely go defunct, but continue to draw taxpayers money and to look around for new ways to continue their wasteful spending.

There is no general boon that allows all firms to make a profit, but Henderson tends to imagine otherwise, and he believes there are periods when profits are easy to make. The reality is that at all times firms have to provide wares or services that customers will value more than the price the firm puts on the wares. They may always prefer to spend their money on other goods.

Henderson thinks some goods are so vital that it is hard not to make large profits regularly. He gives the banks as an example. But if things were left to the market in 2008, then a lot of banks would have been replaced by new banks. He pushes the dogma that monopoly is emerging, once again, but there has been no percentage increase in monopoly since about 1800. Growing monopoly is a mere myth rather than a growing problem. For example, we are told that the march of Tesco supermarket is relentless but then we might have said the same of Mac Fisheries
supermarket in the 1960s. Only Sainsbury's amongst the 1960s rivals among the then big supermarkets has made it into the 2010s. This will most likely be the case by the 2060s, too, but which one it will be is far from clear. Tesco has certainly had a lot of trouble in the last three years, so it may not survive far into the future.

What metaphorically "destroys" firms is not their rivals but the their lack of customers. Stores that do serve the customers well can continue indefinitely. The customers always have a superabundance of other things that they can buy with their money. They never lack lots of choice in the big city but they might in a small village because it might be more costly to drive beyond other than local stores. But the Internet cuts that cost somewhat even in a village in the last decade or so.

Firms pretending to be more successful than they are does not affect the public very much. Their ebbing is largely their own private affair.

Henderson thinks it is debatable whether profit is a good yardstick of efficiency in any case, but even if it true in some cases, he still believes it is not true in all cases. He believes universal public services need a lot of unprofitable work to be done. But in what sense are such things efficient in any sense whatsoever? He says the Post Office makes a loss on delivering posts to rural areas because it charges the same price as those posted within the city. But this means rural service is aided by taxation. However, universal prices can be achieved by the market (e.g. Mars bars) without state aid from taxation. In such cases, city buyers pay the costs of transportation to rural areas in order for firms to maintain a cheap universal price. We are told the state aids private firms by its Post Office prices because, they too, pay the universal price. But this is hyperbole, as firms can charge customers for delivery.

Henderson thinks that two criteria can replace profit as a sign of efficiency: "(1) is the service being delivered to all who need it? and (2) is the cost reasonable in comparison with equivalent operations in other countries?" But neither criteria indicate any economic efficiency whatsoever, as (1) allows no economy at all because it cuts out germane input from the needy; and (2) other nations are not likely to be efficient in state projects because they are bound to be wasteful, as all the state does is negative sum. Judging by his criteria, Henderson thinks the National Health Service (NHS) looks efficient. However, since 1970 the NHS has been a hospital closing programme and it is no more clear that the 1940s fad of nationalisation has done better there than elsewhere, such as the railways or in coal mining. People love the NHS only as they fear free trade in health care. But that is public fear and corruption rather than a sign of any actual economic efficiency. The NHS exists only owing to general taxation.







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