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In defence of inefficiency

Carrots and sticks must be employed to encourage businesses to create good jobs
Excessive pursuit of efficiency also leads to increased unemployment. For example, increased outsourcing and automation may increase the efficiency of an organization or a process. Image used for representational purpose.

Rakesh Kumar   |     |   Published 15.01.20, 09:54 PM

A common refrain is how prevalent inefficiency is in all aspects of life in India. A trip between two cities often takes two to three times longer than an equivalent journey in most Western countries. Forty per cent of the fruits rot before they reach the market. Getting a driver’s license takes weeks. Agriculture employs over 50 per cent of the workforce but produces less than 20 per cent of the economic output. Infrastructure projects are mired in delays. Planes and trains rarely run on time.

This chronic lack of efficiency has an adverse impact on the economy, heath, social harmony and national pride. Unsurprisingly, a huge amount of resources and effort are being utilized to improve efficiency of processes and institutions. Automation is being employed. Digitization is being promoted. Public sector units are being sold. Professions and industries — the information technology segment, for instance — are being incentivized.

It is good to remind ourselves of the perils of excessive efficiency. An efficient system is necessarily more fragile since it is optimized for a particular goal in a given environment. When the goal or the environment changes suddenly, as in the case of natural or man-made disruptions, the system can collapse. On the other hand, a relatively inefficient system is likely to be more resilient to disruptions. A good example is the economic crisis of 2008. Economies that were much more efficient, where the distribution of resources was optimized to maximize economic output and benefits to customers, bore the brunt of the crisis; inefficient economies, such as India, withstood the impact on account of such factors as the presence of an informal economy, which made these economies inefficient to begin with.

Excessive pursuit of efficiency also leads to increased unemployment. For example, increased outsourcing and automation may increase the efficiency of an organization or a process. But it may reduce the number of jobs as well as the incentives to support labour rights, skilling, and public well-being. Consider agriculture. A move to extensive farming may be more efficient for India, but it will worsen employment and social equilibrium. With the rise of robots and artificial intelligence, the trade-off between efficiency and employment is going to get stronger and labour rights weakened further.

A blind quest for efficiency also creates monopolies and increases inequality in the long term. Organizations that have higher efficiency accrue more resources that can otherwise be used to increase their efficiency. The snowball effect makes it difficult for anyone else to compete with them. This is evident from the near-wipeout of small, family-owned businesses in several sectors in efficient societies. Even in India, efficient organizations have started eliminating competition; Reliance is one example in the case of the telecom market. Once monopolies are created, efficiency optimization starts getting equated with profit maximization. This expands the divide between the efficient and others, allowing the former to manipulate the system to push for advantages.

As counter-intuitive as it may sound, a single-minded pursuit of efficiency may also discourage innovation. Efficient systems require a quick and coordinated communication of a solution across different components of the system. This encourages hasty convergence to a single solution. An inefficient system, on the other hand, can be thought of as a decentralized system where different components communicate poorly, if at all. Such a system has a higher likelihood of coming up with a set of very different solutions. We see this routinely in markets where inefficient and disorganized start-ups, as opposed to well-oiled corporations, bring disruptive innovations.

We also see this in other domains. For example, groundwater harvesting techniques are dramatically different in regions of India that are largely isolated from each other.

Inefficiency may also benefit democracy in many ways. There has been significant work showing that an inefficient media market, one where the number of entertainment options is limited, promotes greater political knowledge and participation. Similarly, an inefficient labour market ensures greater investment in skilling, education and healthcare.

Of course, the above is not an argument for preferring inefficiency over efficiency. Trips must take shorter time. Fewer fruits should rot. Drivers’ licenses shouldn’t take weeks to be delivered. Agriculture should be more productive. Punctuality must characterize projects, planes, trains and automobiles. However, there is indeed a case for systemic policy interventions to prevent possible collateral damage, even at the expense of efficiency. Productive friction — tariffs are an example — should be introduced selectively to build resilience and protect jobs. Anti-trust policies should be strengthened to ensure competition. Carrots and sticks should be employed to encourage businesses to create good jobs and better work environment. Long-term investments should be incentivized over short-term capital.

Inefficiency should not be considered to be a dirty word.

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