Why is efficiency so dangerous in today’s world? We value efficiency. Use as little as you can: Same-day delivery, multitasking, texting on one device while sending email on another, maybe talking on a third. Efficiency is seen as a good thing, while inefficiency is seen as a waste of resources.
Why is efficiency so dangerous in today’s world?
- There is good reasoning behind thinking this way. Economists assert that increasing efficiency is the main way to improve our standard of living. If your company is going to give you a salary increase without changing your efficiency, it will also have to raise its prices to make up for the decrease. If all companies do the same, they will end up stagnating: you’ll need higher wages to get to the higher prices of the things you buy. So, if we want to make material progress, we must become more efficient.
- Streamlined supply chains, just-in-time deliveries, and no slack in the workforce increase efficiency. If we achieve that then all aspects of our lives will improve or that’s what we promised.
- For automakers who want to achieve the highest mileage per gallon possible through their vehicle designs, air resistance and asphalt friction are the enemies of efficiency.
- In the financial world, most disputes arise at the point of exchange (at the point of exchange both the buyer and seller are contractually obligated to complete, so withdrawing is a breach of contract and imposes fines).
- Before money was invented, the potato farmer had to use potato sacks to trade eggs and milk. British historian Niall Ferguson states in his book The Ascent of Money that the invention of money has gone a long way toward reducing inefficiency, and much of what has happened in the financial world over the past 200 years can be seen as a continuation of that revolution.
Loans, for example, mean that you can shop for eggs and milk even without money at the moment. Since then, financial markets have taken this efficiency to another level. The creation of Options Markets means that you don’t have to go through the trouble of buying a stock that you will soon sell anyway. You can only promise to buy it and then sell it at the price and date specified in the option contract. Then you can trade the option instead of the underlying stock.
Each of these and many other developments have made it easier to do business without wasting time and effort. Thus, economic transactions became faster and more efficient. This is clearly good in some ways. But the 2008 financial crisis indicated that there may be a lot of good things going on. If mortgages and other loans were not converted into tradable assets (“securities”), bankers may have taken the time to assess the creditworthiness of each applicant. If people had to visit a bank to withdraw cash, they might spend less and save more, this is not just speculation.
For example, Research reviewed by Nobel Prize-winning economist Richard Thaler shows that people will pay more for (something) with a credit card than with cash.
It could be said: A few obstacles to slow our work will enable organizations and individuals to make better financial decisions.
A decade ago, I argued with American psychologist Adam Grant in a paper that the phenomenon of “too much good” might be a general rule: some incentives produce excellent performance; Too much of it leads to suffocation. Little group cooperation leads to cohesion and boosts productivity; While imposing too much of it leads to estrangement. Some empathy enables you to understand what another person is going through; Too much can stop you from saying and doing difficult things.
Similarly, in my book, The Paradox of Choice, I argue that while a life without freedom of choice is not worth living, a life with many choices leads to paralysis, bad decisions, and resentment. Finding the right amount—what Aristotle called “the middle”—of motivation, cooperation, empathy, choice, and many other aspects of life—including competence—is the main challenge we face, as individuals and as a society.
Getting to the middle isn’t easy!
- That is what the English poet William Blake noted in his book The Marriage of Heaven and Hell: “You will never know what is enough unless you know what is more than enough.” If the financial crisis has taught us that we are becoming more efficient in our dealings, what about the COVID-19 pandemic? Why not stockpile major supplies and machinery, expand hospitals, or ensure the durability of our supply chains?
- The reason, of course, is that these practices would have been seen as ineffective (and even eating up profits). The money spent on dusty masks and gowns in the warehouse can always be used for more “productive” market use.
- Likewise, hiring more people than would be required under “normal” conditions, or making products yourself rather than relying on international supply chains, would have been deemed ineffective. One lesson, then, is that in order to be better prepared next time, we must learn to live less “efficiently” in the present.
- In this light, at least some inefficiency resembles an insurance policy. Think of your own situation, for every year you don’t get into a car accident and your house doesn’t burn down and you stay healthy, you can think to yourself that you’ve “wasted” your money on tons of useless insurance products and that you’d also be financially better off without paying those premiums.
- Most of us don’t like the feeling that we’re wasting money on insurance. We prefer to ‘wear’ this money, ‘eat’ it, or ‘money it’. Several years ago, after a long struggle and arguments, I convinced my elderly mother to replace her basic health insurance policy with a more comprehensive insurance product. Its resources were modest and the product policy was not cheap. The year went by, and fortunately, she did not have any serious medical conditions that required the use of the additional insurance cover. When it came time to renew, my mother resisted, because the money she had spent the previous year had already been “lost.” My response, perhaps unduly sarcastic, was that maybe next year she’ll be lucky, she’ll be really seriously ill, and she’ll get the insurance money.
- Fortunately, in many areas government regulations protect us from our desire to increase personal financial efficiency by forcing us to take out insurance. Laws require that we insure our cars, and mortgages require our homes. In the United States, Obamacare (the Affordable Care Act (2010), designed to increase the number of American citizens covered by health insurance) essentially forced people to get health insurance, until tax laws were passed in 2017 that made this Unenforceable by canceling penalties for lack of cover. I suspect that many of us are underinsured in general, but the problem would be much worse without the various insurance requirements imposed by the state.
- One way to think about insurance, however ineffective it may feel, is that it enables us to be resilient to the shocks that might strike us from a radically uncertain world. This is how our world is today. As British economists John Kay and Mervyn King note in their book – published this year – Radical Uncertainty, efforts to quantify risks by associating probabilities with many potential future nations of the world are mostly science fiction. The world is much more chaotic than a pair of dice.
What should we do in the face of this radical doubt?
- When making decisions, instead of asking ourselves which option will give us the best results, we should ask which option will give us good enough results in the widest range of future situations in the world. Instead of trying to maximize the return on investment in our retirement account, we should set a financial goal and then choose the investments that will allow us to achieve that goal under the widest range of future financial conditions. Also, instead of looking for the best job, we should be looking for a job that is good enough — satisfying enough — coworkers and managers come and go, and the future economy is fickle. Instead of choosing the best college to go to, we should choose a college that is good enough.
- The term used to describe this approach to decision-making: satisfaction. Satisfaction by focusing on a radically uncertain future might be called the pinnacle of satisfaction. Satisfaction is a form of insurance, insurance against financial meltdowns, global pandemics, bad bosses, boring teachers, and bad roommates. Insurance can seem heavy like a man wearing a belt and suspenders. Maybe we don’t need both but what happens if we don’t have either?
- The real flaw in capitalism
I believe that the real flaw in capitalism revealed by the financial crisis of (2008 AD) was its only unbridled pursuit of profit and efficiency. Perhaps the real flaw in our unpreparedness for a pandemic is a manifestation of the same. Capitalism does not have to be either wild or lonely. It is not in other societies with high standards of living, and it has not been present throughout history in the United States. - So maybe it’s time to revive some of the social norms that are slowing us down. For example: if people think of their homes as more and more financial investments as places to live, full of handicaps for children, dogs, friends, neighbors, and community, there may be less real estate speculation focusing on buying and selling homes just for profit. If companies feel the problems of being a caretaker of their communities, they may look different in simplifying their operations by eliminating jobs.
- We all love a car that goes 100 kilometers with one gallon of fuel. The forces of friction that slow us down are a costly nuisance, when we’re driving we know where we’re going and we’re in control, so we feel a good speed, although a little bit of friction can prevent disaster when you’re on an icy road.
- Driving is risky enough, and life is as unpredictable as driving. We don’t always know where we’re going, we’re not always in control. Black/clear ice layers everywhere. A little something slowing us down in the uncertain world we live in could be a lifesaver. Building friction in our lives as individuals and as a community is an addition to resilience in the system and can be our insurance policy against disaster.
