Friday, October 01, 2010

What 'efficiency' means?

In bookstores, I can always see some books on 'an efficient resource management' or 'efficient corporate governance' or 'efficient blah blah blah'.

By the way, what do you mean by 'efficient blah blah blah'? I don't understand it at all! What is efficient? Are you efficient? Hmm...I have no idea.

My English dictionary tells me that it means 'working well'. It's a good answer and most people who say 'efficient blah blah blah' probably may mean so by it.

However, economics tells me somewhat different definition of it: efficient means 'happier'. It's a little ambiguous and it sounds subjective although economics deals with objective social problems, but for me it is rather a correct way of using this word.

When I think of what to change in my life, say, what to cut down on in my spending, what to throw away in my bookshelf and how much to drink in this bar and so on, I usually think of 'the Pareto-efficient' and it means 'happier', say, "if I drink a little more, to what extent will I be happier?".

Usually this word is used on the public policy conducted by policymakers and the effects on the economy and the people's lives: Assume there are two people, A and B and they try to trade each other. If A can't be better off/happier than ever unless A tries to make B worse off/less happier, A is in the 'Pareto-optimal/efficient' condition and vice versa.

Pareto is an Italian sociologist in the 19th century and the Pareto efficiency is used when economists think about the deals between some people, that is, an 'inter-personal' trades, but it's not the wrong usage when I talk of an 'intra-personal' trades between today's Taro and tomorrow's Taro on what or how much to choose to eat/drink*.

Anyway in terms of economic thinking, an 'efficient resource management' should be the one that makes the people related to it happier/more satisfied, rather than that reduces the cost and raises the profit.

*Some alert readers may say, "if you want to talk about Pareto-optimum/efficiency, you should touch on the Edgeworth box, contract curves, core and the first/second theorem of welfare economics". I know I should use these ideas if I talk about it formally.

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