April 28, 2013

The Efficient Fallacy

For far too long historians, politicians and mainstream media espouse the ideas of an “efficient” economy. Economists themselves continue to perform such a disservice by espousing such ideas as “market failure,” “misallocation of resources” and “the socially optimal outcome.” The concept of efficiency within economics remains one of neo-classical economics’ greatest lethargies to academic economic advancement.

Efficiency, according to the traditional economist, often times associates itself with an idea of failure of competition, human action and information asymmetries. A market failure results when markets do not produce the pareto optimal outcome that will ensue with requirements of perfect competition. In short, government action justifiably prevents externalities, recession, monopolies, subpar perfection and bests allocates productive outcomes

Given that value is subjective based upon individual wants, needs and desires, it remains very difficult to state there is an optimal outcome within a society. Societies are comprised of individuals, who are led to their own ends. The concept of Efficiency implies equilibrium and equilibrium implies an evenly rotating economy, which lacks dynamic and complex social interactions among individual actors. Instead, an efficient economy must take into account a static unchanging view of the world.

The problem of specifying ends also persists. Whose ends are we to justify as the “correct” end or the “efficient” end? The given individual decides his or her own ends, and certainly may pursue the ends for which he or she deems “the best.” Despite this notion, the individual actor may never reach an “efficient” position because one must posses perfect knowledge in order to do so. This knowledge must consist of future decisions, future outcomes, future reactions, future events and future actions—all of which are impossible to know.

Therefore, if one may not possess the knowledge needed to predict the future, how can one reach “efficiency?” The only way to reach “efficiency” is to know which actions, outcomes and decisions remain “optimal.” Since such given information is impossible for any human being acting within the realms of modern day physics, each and every individual’s actions cannot be assumed to be “efficient.”

Let one not forget that as persons are left to pursue their own ends, they will—over time—begin to perfect their knowledge towards reactions, decisions and outcomes. Even then, one will never achieve perfect knowledge. During this decision-making process, individual ideas clash, compete and differ. It is here than one must ask themselves, “which end is best and which will rule?” If one were to retain perfect knowledge and become and economic God, then why would any such decision ever require deliberation since one already knows what is best?

Given that individuals comprise a society, billions of decisions pass through the minds of persons in any given day. These decisions include utility analysis—costs and benefits—in addition to social costs, transaction costs, and many other internal dynamics. These factors, among many others, are subjective, noncomparable and nonadditive. No external individual can measure these costs nor can they observe them. For one to reach the conclusion, that “society” comprises specific decisions or that “society” favors a particular outcome leads one to suspicion. To suggest an aggregate set of ideas reflects an extremely abstract and meaningless view of an economic system.

There is one individual or a small group of individuals who are deciding what they deem is best for the economy—based upon their own preferences not mine or yours— and what they deem as evil. Ideas and decisions do not fall from the sky. Instead, they originate within the human mind—where we are unable to measure them, feel them, see them, touch them or any of the above. This, in contrast to modern economic teaching, proves a fallible way to apply economic forecasting, estimate future events or apply objective probability.

In conclusion, efficiency remains a purely subjective concept that cannot be determined nor measured; therefore, for an individual to conclude they reached “efficiency” remains fallacious. For a society, or a government for that matter, to determine what is efficient and what is not efficient exemplifies a central authority not a “collective consciousness.” Market failure and economic optimal solutions, therefore, are both ways to state individual preferences of outcomes. An “efficient outcome,” according to government, is simply one in which they favor and an “outcome failure” is one in which they do not favor. This simply cannot, under any circumstance, actually represent whether we reached efficiency or not. An undesired outcome upon the market does not come from a failure of the market . . . it comes from a failure of economists. There is simply no way to tell the future. . . unless we are God of course.

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