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The Inefficiency In The Economy – Why We Need Waste


13-Feb-12 15:26

Some think that the economy is about efficiency – maximising productivity from minimised capital – but I would argue that it is the reverse. It is inefficiency that is at the heart of the economy.

 

The birth of Britain’s nascent industrial revolution in the early 19th century imperilled by the Luddite Movement. This group of mill workers attacked the newly developed weaving machines in waves of violence across the north of England.

 

The source of their complaint arose over the redundancy and unemployment that the machines generated. Make a machine to do the work of ten men, the ten men fall idle.

 

The oversight of this reactionary movement is that these men’s labour can be reallocated to another area of production which increases overall output. It is through these cycles of innovation and redundancy that productivity has steadily improved over the past 200 years.

 

Most of the time, we focus upon innovation and improvements in economy to drive progress. However, without the inefficiency in the system, we cannot generate the needed capital to fuel that change.

 

Almost every aspect of the value chain is beset with some form of inefficiency. Value is only derived through inefficiency.

 

Firstly, in a way, the demand for the product itself is a form of inefficiency. Especially in the consumer retail space, the demand goods is drawn from tastes and desires, the satisfaction of which only partially adds to individual utility and rarely adds to the general good.

 

To build a car, wheels are required which in turn requires rubber. Each of these steps is necessary to achieve the final goal. By reducing the capital and labour required to achieve this and to shorten the time it takes, efficiency is achieved. However, if the final demand for the good is driven by poor decision-making (e.g. a car can be easily replaced through cheaper public transport) then ultimately the entire process is wasteful.

 

Secondly, each of the component steps in the value chain could be improved by more radical changes. Employees are only employed because no alternative has been developed to replace them. Once a technological substitute is invented, then the workforce is replaced.

 

Yet, if this occurred, then no one would have the money to buy the cars at all. Here we have the delicate balance between inefficiencies that prop up our economy.

 

Logically speaking, where we have a complex supply chain consisting of many stages, efficiency is improved where one of those are removed. However, apply this logic to all the stages and there is nothing produced. Even more destrutively, if we look at the margin cost of removing a single worker from the supply chain, it will always be close to zero. Yet the logical conclusion of this analysis, also, is the collapse of production.

 

Similarly, within the supply chain, which is essentially the totality of economies, excessive ‘efficiency-drives’ might have broader consequences on the general economy. It removes that bedrock by which individuals draw their salaries, through the temporary gap between unneeded want and superior alternative.

 

Sadly, we may need the Luddites to maintain our economic balance in the future.


Jonathan Webb Jonathan Webb is Research Manager at Procurement Leaders. Jon specialises in third-party risk, category management and strategy research and draws on experience working for, among others, PwC and international think-tank Transparency International. Follow Jon on Twitter: @j_p_webb

Tags: Economy
 
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