Saturday, April 25, 2009

Free Markets (17) - Efficiency

Efficiency is Human
This following statement frequently heard.

The market is efficient.
This statement is not true. Markets cannot think, assess, decide or act, so they cannot decide what is efficient. Markets cannot be wise.

Efficiency is a human concept. Only people can be efficient. Some are clever, others are highly skilled, but everyone is better off, if producers want makes wise decisions. An economy becomes more productive as wise producers find more efficient ways to do complex tasks.

Japanese auto makers found ways to make their production processes more efficient, which enabled them to offers better cars at lower prices. This wisdom and efficiency resides in the Japanese managers and engineers, not in the market. Free markets provided a way for consumers to access their efficiency and buy high-quality cars a low price.

Specialisation and Efficiency
Specialisation generally increases efficiency. When a person can concentrate on one set of tasks, they the can learn to do them more effectively. Specialisation benefits everyone, but people can only specialise, if there is a way for other others to obtain what they have produced (without using force or theft, and not relying on compassion). Markets where goods and services can be offered for sale allow people to specialise in the activities which they do best.

The people who designed my computer produced an efficient product. If there were no markets and no specialisation, they would spend their days cultivating crops and hunting game. They would be worse off and I would be worse off too, because I could not make a computer in a thousand years.

Freedom to offer goods for sale on a market allows people to specialise, but the person who chooses to specialise immediately comes under pressure to operate efficiently. A person or business that decides to produce goods to offer in any market immediately faces a compelling dilemma. They must offer the goods for sale at price sufficient to cover their production costs, but pushing their offer price to high will dramatically reduce their sales.

The market producer must choose between higher prices and more sales. This dilemma forces an ambitious business to reduce the costs of production by finding ways to be more efficient. This allows them to increase their income, without increasing prices and losing sales. Markets facilitate efficiency.

This full series is at Markets and Efficiency.

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