Efficient Allocations?

Willford King has written:

“It is easy to find a man in almost any line of employment who is twice as efficient as another employee, but it is very rare to find one who is ten times as efficient. It is common, however, to see one man possessing not ten times but a thousand times the wealth of his neighbor … Is the middle class doomed to extinction and shall we soon find the handful of plutocrats, the modern barons of wealth, lined up squarely in opposition to the propertyless masses with no buffer between to lessen the chances of open battle? With the middle class gone and the laborer condemned to remain a lifelong wage-earner with no hope of attaining wealth of even a competence in his old age, all the conditions are ripe for a crowning class-conflict equaling in intensity and bitterness anything pictured by the most radical follower of Karl Marx. Is this condition soon coming to pass?” [Emphasis in original]

That was in 1915. My how times change.

Well maybe not. That comment about the middle class has a very contemporary ring to it.

A couple of things pop out at me when I read that quote – no doubt you will find your own emphasis.

First is that question of ‘efficiency’. I have often argued that the concept of efficiency has little of no value in any aggregated sense because we have such incomplete information we can never do a calculation of efficiency. The economy is open ended and subject to such uncertainty that it renders the notion of efficiency – in this context – null. It is a non-concept and ought to be expunged from our thoughts.

But, at a lower level and within a more constrained context, efficiency creeps back in. This would be at the level of a single business firm where the calculation of efficiency, whilst being still subject to uncertainty, is more tractable. This is especially true in the context of the kind of planning and allocation of resources that typical firms indulge in. I don’t for a moment imagine that it is possible to arrive at an ‘optimum’ in any true sense, but it is possible to make ‘efficient’ allocative decisions within a planning process whilst acknowledging their likely error when compared against unfolding events. Plans never, as the saying goes, hold up well in the face to subsequent reality, but they act a credible guide and as a framework for resource allocation.

Second, and following on from the first, is the undercurrent in King’s comment that the world is divided in two: there are those making allocation decisions and there are those who are subject to those decisions. Perhaps this dichotomy is between capitalists and workers. Perhaps it is between management and workers. Either way the implication is that one side decides the other’s future and fortune. One is active the other is not. This opens up the space for concepts such as class to enter our economic theorizing. That dichotomy seems both very real and agnostic with respect to the political order of society: there will always be those who decide and those who don’t. Whether the planning is centralized or decentralized decisions are made and resources allocated. There is no systems to avoid the issue. Which means, in turn, that those low level efficiency decisions will occur whether we like the outcomes or not.

So, if for a moment, we look at an economy as a method of getting work done, where work is the force that translates resources into consumable material, the question of the efficiency of that work stays at the center of the economic problem. The more efficient we are the more consumable material we extract from the same work. This seems non-controversial to me. To complain about efficiency is not to argue that efficiency is somehow an erroneous idea, it is to complain about the results.

And this gets me to the third point I read into King’s quote above.

Let me phrase it as a question:

If the amount of work in an economy is fairly evenly distributed, how come wealth is not similarly fairly evenly distributed?

Orthodox economics elides having to deal with this question by introducing notions like marginal productivity. This is nothing but another of those made up tricks economics uses to avoid confronting the reality of an economy. In particular it elides the consequence that political power has in shaping economic outcomes. If you want to deny power, and to pretend that economic outcomes depend on ‘natural forces’ , then you need to invent a mechanism to accomplish that trick. Marginal productivity is, in this case, the trick to be deployed.

Like a lot of economics marginal productivity has an air of high theory to it, but in truth it is not an easily identified artifact of an actual economy. It fits neatly in the airtight confines of the models economists so love to rely upon. It fits a lot less easily in the observable world. Indeed I doubt it really exists at all.

Which leaves the discrepancy between work and reward open to further study. It is one question economics may think it has answered, but that answer was won only by denying the question existed to begin with.

So let’s ask it again: why are work and reward differently distributed in the observable economy?

In the quote above I think King is asking that question.

Isn’t he?