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The End of Efficiency

Economists have been strangely blind to the need to trade off efficiency for longer-term sustainability, largely because their equilibrium models regard the future as simply an extension of the present. But there is no reason to believe that what is efficient today will be efficient tomorrow and always.

LONDON – Economics is the study of economizing, or using the least amount of time and effort to produce the greatest amount of satisfaction. The more we can economize on the use of scarce resources, the more “efficient” we are said to be in getting what we want. Efficiency is a prized goal because it literally cheapens the cost of living. Cheapness in obtaining the goods and services we want is thus the key to a better life.

Efficiency lies at the heart of trade theory. In the early nineteenth century, the economist David Ricardo argued that each country should concentrate on making what it could produce at the lowest relative cost. The late Nobel laureate economist Paul Samuelson described Ricardo’s theory of “comparative advantage” as the most beautiful in economics, equally applicable to the division of labor between people, businesses, and countries. It remains the underlying theoretical rationale for globalization.

Efficiency is also why economists have been fretting over labor productivity in advanced economies. In the United Kingdom, for example, workers produce, on average, no more output per hour today than they did in 2007, so there has been no gain in efficiency. This means that UK living standards have remained flat for 13 years – the longest period of stagnation since well into the Industrial Revolution. Economists have published hundreds of articles in learned journals trying to explain this “productivity puzzle.”

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