Chapter 16: Efficiency
Updated: 3/3/20
Now Abel became a shepherd, but Cain cultivated the soil (Genesis 4:2b).
The Bible says that domesticated animals and agriculture were basic to society from the beginning. Adam named the animals on day one (Genesis 2:19–20). This means that he classified them. He was also told to develop the garden (Genesis 2:15). [North, Genesis, ch. 8] This means he understood agriculture. God on day one gave him sufficient knowledge to begin to develop the earth: animal and agricultural. Adam would have to learn about details. General principles were insufficient.
God cursed the ground after the fall: “. . . cursed is the ground because of you; through painful work you will eat from it all the days of your life. It will produce thorns and thistles for you, and you will eat the plants of the field. By the sweat of your face you will eat bread, until you return to the ground, for out of it you were taken. For dust you are, and to dust you will return” (Genesis 3:17b–19). [North, Genesis, ch. 12] Adam had agricultural knowledge. He understood what God had done. When God ejected Adam and Eve from the garden, He dressed them in animal skins (v. 21). They probably watched Him do this. They learned.
Adam taught his sons about both lines of food production. They specialized early in their lives. Cain became a farmer. Why? Abel became a herdsman. Why? The answer is this: each had a brother to trade with who lived nearby. Each could specialize in his production. Why did they specialize? Because each of them had skills and interests that were different. Each recognized early that he would be more productive by specializing in what he knew best and then trading with each other. This is the division of labor at work. It is made possible economically because of trade. Economists have a word for the economic reason for specialization: efficiency. Each participant can gain greater net income by specializing and then trading a portion of his output. This means that each participant devotes fewer resources to production in order to gain the same subjective economic value from his production mix: information costs, time, raw materials, and capital.
This specialization was not based on geography. Each of them had the whole world to choose from, except for the sealed-off garden. Instead, they lived near enough to each other to trade easily. This means that the differentiation in production had to do with knowledge, not geography. This knowledge was technical and intellectual. It involved the knowledge of cause-and-effect. Part of this knowledge was theoretical. Part of it developed over years of hands-on practice. The longer that each man specialized, the less likely that he would switch careers. He would have to gain too much knowledge to compete with the other brother. He would be a low-output worker for several years.
One of the most widespread myths of social evolution is that all men were originally hunters. Agriculture became common about 12,500 years ago, we are told. It became common only in the Middle East. The agricultural revolution transformed the world. It made possible towns and then cities. Typical is Wikipedia’s entry for “Neolithic Revolution.”
The Neolithic Revolution, Neolithic Demographic Transition, Agricultural Revolution, or First Agricultural Revolution was the wide-scale transition of many human cultures during the Neolithic period from a lifestyle of hunting and gathering to one of agriculture and settlement, making an increasingly larger population possible. These settled communities permitted humans to observe and experiment with plants to learn how they grew and developed. This new knowledge led to the domestication of plants.Archaeological data indicates that the domestication of various types of plants and animals happened in separate locations worldwide, starting in the geological epoch of the Holocene around 12,500 years ago. It was the world's first historically verifiable revolution in agriculture. The Neolithic Revolution greatly narrowed the diversity of foods available, resulting in a downturn in the quality of human nutrition.
Consider what this implies. Homo sapiens supposedly evolved about 300,000 years ago. This was in Africa. For the next 287,250 years, human beings hunted animals to survive. In a long Wikipedia article on “Human evolution,” we read this: “Around 50,000 BP [before present], modern human culture started to evolve more rapidly. The transition to behavioral modernity has been characterized by most as a Eurasian ‘Great Leap Forward’, or as the ‘Upper Palaeolithic Revolution’, due to the sudden appearance of distinctive signs of modern behavior and big game hunting in the archaeological record. Some other scholars consider the transition to have been more gradual, noting that some features had already appeared among archaic African Homo sapiens since 200,000 years ago.” Even if this was as late as 50,000 B.C., these people were intellectually slow. It took 37,500 years to discover agriculture, move into towns and settle down. Knowledge then expanded rapidly, people spread across the face of the earth, and today they have smartphones. Tomorrow? Who knows?
Here is the social problem facing Darwinian social evolutionists. If the human brain has not changed much over the last 300,000 years, why did it take so long for mankind to figure out that planting seeds would provide a far more predictable and far lower-cost supply of food than hunting? Why were they so slow? Why were they so inefficient for so long? It was not biology—a lack of intelligence. Then what?
The Bible’s account makes far more sense. Mankind had knowledge of animal husbandry and agriculture from the beginning. This was a matter of specialized knowledge. This knowledge became even more specialized over time. Output per unit of input therefore increased. This means that producers became more efficient. This did not take millennia. It became commonplace with the sons of Adam.
Efficiency is a category that applies to mankind as producers and consumers. The idea of efficiency is an extension of the idea of cost, which is an extension of the idea of scarcity.
I argue that we are far more efficient as producers than consumers. There are reasons for this that are consistent with economic theory, both Christian and humanistic.
1. Efficient Production
What do economists mean by efficiency? This is not an easy question to answer in theory, as I shall explain in Section C. The most widely used definition of efficiency has to do with production: obtaining greater output per unit of resource input. This idea is the equivalent of reducing waste. The economists’ concept of efficiency was summarized memorably by a socialist, Upton Sinclair, in his popular 1904 novel, The Jungle, which was about the meat packing industry in Chicago. “‘They don't waste anything here,’ said the guide, and then he laughed and added a witticism, which he was pleased that his unsophisticated friends should take to be his own: ‘They use everything about the hog except the squeal.’” This phrase was incorporated into the American language: “everything but the squeal.”
Efficiency owes a great deal to double-entry bookkeeping, which was invented in Europe in the second half of the fifteenth century. This system enables businesses to track expenditures precisely. The slow but steady replacement of Roman numerals by Arabic numerals and the decimal system reinforced the adoption of double-entry bookkeeping. Gutenberg’s printing press allowed the inexpensive printing of books about these accounting techniques. These techniques spread into the Western business world. All of this accelerated in the second half of the fifteenth century. Innovations in business spread fast because of low-cost printing. Economic theory teaches this: “When the price falls, more is demanded.” This surely applied to printing. Metal type-based printing changed the world, beginning in the West. Beginning around 1500, the combined economies of Western Europe began to grow more rapidly than the economies of China, India, and the newly created Ottoman Empire.
Business budgeting has always been a driving force of literacy. Whenever there is a discovery of ancient tablets in the Middle East, the bulk of them are business accounting records and tax records. Businessmen are forced to pay close attention to numerical accounts. Why? Because they are in search of money: the most marketable commodity.
Consumers possess money. They have a wide range of choices. Businessmen must specialize production in order to persuade consumers to part with their money. They gain their competitive advantage by means of specialized information in narrow markets. They must pay close attention to costs. If they fail to do this, they will be replaced by more efficient, less wasteful competitors. They will go out of business. They have greater incentive to find ways to reduce waste than consumers do as per capita wealth increases. Consumers do not need to specialize; producers do. Producers must specialize in what future buyers of specific products will buy. Consumers mentally count on future sellers to be there to sell when they want to buy. They can therefore safely afford to be less focused on the specific components of their discretionary spending. The richer they become, the more discretionary spending they possess. The wider their range of choices becomes. This is the best definition of increasing wealth: more choices available from the same expenditure of resources, especially labor time.
2. Inefficient Consumption
I have commented on the anti-waste outlook of American businesses in 1900: “everything but the squeal.” This outlook was basic to mass production, which visibly began to replace small-business production in the 1870's: Carnegie (steel), Rockefeller (oil), and the railroads. Mass production was driven by cost-cutting and price reductions. Henry Ford adopted this strategy in 1908 with the Model T car.
This same anti-waste outlook was basic to American consumer culture until after World War II (1941–45). Here are two representative phrases: “Waste not, want not.” “Use it up, wear it out, make it do, or do without.” This outlook goes back to Benjamin Franklin’s aphorism in the mid-eighteenth century: “A penny saved is a penny earned.” The Great Depression (1930–1939) reinforced this outlook. But, after 1945, this outlook began to fade. As per capita output increased and wages increased, most Americans no longer faced economic hardship. A new outlook and a new budgeting strategy replaced the old: consumerism funded by debt. This is the essence of Adam Smith’s vision of personal economic motivation: “Consumption is the sole end and purpose of all production.” It was at this time that Keynes’ theory of the consumption-driven economy gained control over academic economics. Demand-side economic theory displaced supply-side economic theory. Keynes replaced J. B. Say. This was marked by Paul Samuelson’s textbook, Economics, which appeared in 1948.
In the 1950s, America’s postwar economic production techniques began to spread across the Western world. Per capita output increased as per capita investment increased. So did per capita income. This enabled most people in the West to escape the psychological burden of the fear of deprivation. There was no return of either economic depression or world war. The West’s process of capital investment and technological innovation spread into the Third World. It began to be visible in Asia after 1950: Hong Kong, Japan, South Korea, Taiwan, and Singapore. This process of poverty elimination has continued to spread to mainland China (1979–), post-Communist Russia (1991–), and India (1995–). The subsistence income lifestyle is being eliminated rapidly. This is the result of about two centuries of compound economic growth, interrupted only by the Great Depression. This truly is a new economic world order. It is exclusively the product of industrial capitalism, which is in turn the product of the private property legal order.
Consider the smartphone. No consumer product has ever spread so rapidly around the world: less than a decade after 2007. When we think of the most pervasive home consumer products—the telephone (1900), electric lighting (1900), the automobile (1908), radio (1920), television (1947)—none attained worldwide dominance as fast. This testified to worldwide wealth. Billions of people could afford them. Widespread access to the World Wide Web (1990) was available because of the graphical browser (1995). This was the second-fastest consumer technology in worldwide adoption.
As per capita income increases, will people exercise better taste in using their smartphones than they have in the first decade? The answer depends on their worldview. If their worldview is that of economic theory ever since Adam Smith, they will spend a larger percentage of their household budgets of money and time on consumption. As the monetary cost of consumption falls because of the reduced price of digital communications, the most valuable resource that people will consume is time: a nonrenewable resource. If there is social continuity, they will waste lots of time with their smartphones, just as they do today. Middle-class people will buy more expensive smartphones than they can use efficiently for wasting their time. They will buy high-end smartphones for reasons other than efficiency in either personal productivity or their consumption of entertainment.
This raises the question of the subjective economic value scales that individual consumers adopt in assessing their personal criteria of efficiency. At the margin of their daily expenditures of time, they prefer to devote time to consumption rather than working longer hours. This preference is subsidized by the tax code. Leisure time is not taxed; wages are taxed. Next, there is the psychological factor of boredom. People hate boredom. They are inexperienced in dealing with it. Yet there are few studies of boredom. There is no academic treatise on the economics of boredom. Entertainment alleviates boredom for the masses: video games, movies, television, novels, and popular music. Add to this spending on vacations and travel. The expenditures of the masses points to leisure as their choice. But no academic entrepreneur has entered this field to secure his reputation. The field of leisure economics has not developed.
People in high-technology societies work fewer hours each year because capital-funded new technologies enable them to become more efficient producers. Their rising income is spent on consumer goods. These are goods that are far down on their prior scale of values. The doctrine of marginal utility teaches this. With new patterns of time-allocation devoted to entertainment, their tastes change. They become more dependent on entertainment. This borders on addiction. With respect to some video games, this can become addictive.
Entertainment is immediate. The substitution of entertainment for production is the result of two major factors. First, there is increasing wealth. Second, there is a shortening of time perspective. This shortening substitutes a lower-class outlook regarding time for an upper-class outlook, to use the insights of political theorist Edwin Banfield in the late 1960's. There are four major factors behind this. First, people are becoming more present-oriented. Entertainment is habit-forming. It is enjoyed passively. It takes no intellectual skill to watch television. It takes self-discipline to resist the lure of free entertainment, which is not free. Free entertainment consumes time, a valuable resource according to God. Moses prayed: “Our life passes away under your wrath; our years quickly pass like a sigh. Our years are seventy, or even eighty if we are healthy; but even our best years are marked by trouble and sorrow. Yes, they pass quickly, and we fly away. Who knows the intensity of your anger, and your wrath that is equal to the fear of you? So teach us to consider our life so that we might live wisely” (Psalm 90:9–12). Second, most people have never been skilled at budgeting their time. The spread of city clock towers in the West after 1200 was a major factor in the history of Western urban productivity. The town clocks enabled employers to enforce time schedules on employees. As for individuals, this retrospective phrase is close to universal among old people: “Where did all the time go?” They seem surprised. They warn young people, who pay little attention. Third, when we are not consuming, we devote most of our waking hours to dealing with immediate problems. We defer planning for distant problems. This phenomenon has a phrase: “the tyranny of the present.” Fourth, the vast majority of people have always been present-oriented. Their increasing wealth is enabling them to purchase entertainment services that they could not previously have afforded.
As consumers, we are not efficient. When the pressure of competing producers is removed at the end of the working day, we revert to our default setting: leisure. I am not saying that men do not like to work. They do. This is built into us by the dominion covenant. This is why some people have hobbies. Hobbies are not passive entertainment. They require actively allocated time, plus money, plus skill. There is competition from other hobbyists. The Web lets people see what their best competitors have achieved. The pressure of competition calls forth efforts to achieve greater efficiency. Passive entertainment does not.
Prices are unbiased, objective, highly specific records of the money terms of past exchanges. They reveal highly specific information. A price is limited. It does not reveal the non-monetary terms of an exchange. The broader the market, the less detailed are the non-monetary terms of exchange.
Because prices are specific, participants know what they are committing to. Non-participants and would-be participants also know. Prices convey information. Decision-makers can assess the costs of their actions in buying or selling specific assets. They can impute subjective value to exchanges, and then they personally impute economic value to the wealth they will have to surrender, net, for making an exchange. The subjective estimations of economic value involve objective comparisons: the money price of an exchange. This money price can be compared with the money prices of other price-determined exchanges. Money prices enable the decision-maker to compare the cost of this decision with the objective boundaries of his wealth, including what he can borrow at a specific rate of interest. Prices reveal limits. This is a crucial factor in decision-making. Men are finite. They need reminders of their limits.
With respect to economic efficiency, the decision-maker’s goal is to keep his expenditures of money inside the boundaries of his objectively bounded range of possible decisions. He asks: “Can I afford this?” This has to do with the present. He also asks: “Will the subjective benefits that I receive as a result of this exchange offset the subjective benefits that I will not be able to enjoy?” This has to do with the future. It is an entrepreneurial estimate. There will be a two-fold accounting on the other side of the transaction. This accounting will be objective (monetary) and subjective (psychological).
Efficiency has an objective component: present financial boundaries. It also has a subjective component: post-exchange satisfaction. In business, the financial component is primary. Members of the board of directors do not care about the satisfaction of the senior managers except insofar as they will have to compensate them in the future. In the realm of consumers, the more present-oriented they are, the more they care about subjective satisfaction. The long-term objective budgetary limit of their spending is heavily discounted by lower-class decision-makers. In contrast, it is only minimally discounted by upper-class decision-makers.
Efficiency in business is mostly objective: monetary. Money is the agreed-upon standard of performance by the investment community. In contrast, efficiency in consuming is mostly subjective. Some people ask this: “Will I get my money’s worth?” The economist asks: “money’s worth of what?” Answer: subjective satisfaction or enjoyment. Consumption expenditures are individual. They may be representative for the family. But the head of a household cannot be fired for his decisions. In contrast, business expenditures are representative. Managers make decisions to buy and sell legally in the name of owners and on their behalf economically. The owners may decide to reward them or replace them. They face objective sanctions. They have objective incentives to produce a profit. Business expenditures must be below business revenues. These are assessed by means of prices.
As producers, we face competition. If our competitors are successful, we will go out of business. We will lose our source of income. This is a strong motivation for producers to pay close attention to monetary costs of production. We must focus our attention on a narrow segment of the market, which is the major time allocation of our waking hours. We specialize. We gain expertise. We learn the highly specialized skill set related to selling. If we do not, then our employers do. Specialization in production in an exchange economy requires efficiency: keeping monetary costs below revenues.
This is in sharp contrast to our lives as consumers. Our area of potential responsibility is vast: anything that money can buy, plus whatever non-monetary assets can buy. Our competition is widely dispersed: shoppers with money. Our attention is therefore dispersed. This is another way of saying that we are not specialized. We therefore do not become experts in consumption in the way that we become experts in production. Why not? Because of money. Money is the most marketable commodity. As consumers, we possess money. A myriad of sellers wants to sell us things. We are bombarded with offers to sell in every area of our lives as consumers, including Web surfing and online viewing of advertising-supported entertainment. Most people do not learn the skills of money management, although free online budgeting programs do exist, and millions of people use them. These are not double-entry bookkeeping programs, but they are detailed. But, compared to the number of people who own smartphones, online budgeting is a niche consumer product. The richer that people become individually, the less efficient they become as consumers. It takes greater self-discipline to avoid wasting money and time.
This is why worldviews will become more important in separating efficient consumers from inefficient consumers. Covenant-keepers will accumulate savings. They will become better investors. They will not succumb to the satanic lie of free time. There is no free time. Time is short, both individually and collectively. Jesus said: “We must work the works of him who sent me while it is day. Night is coming when no one will be able to work” (John 9:4). Paul wrote: “Look carefully how you live—not as unwise but as wise. Redeem the time because the days are evil. Therefore, do not be foolish, but understand what the will of the Lord is” (Ephesians 5:16–16). Covenant-keepers will become more skilled at imputing economic value to time and money in the way that God imputes this on their behalf. They will participate in world redemption: buying it back. They will seek first the kingdom of God (Matthew 6:33). They will, in short, abandon this economic worldview: “Consumption is the sole end and purpose of all production.” This is the confession of faith of contemporary economic theory. Smith’s assertion is the antithesis of the dominion covenant. It is the worship of mammon: “more for me in history.”
Efficiency is tied in economic theory to the reality of objective costs. In business, these costs are displayed in numerical indicators: money prices. Double-entry bookkeeping is the tool by which businessmen assess the recent efficiency of their businesses. They use accounting standards of monetary profit and loss. Jesus used a similar view of accounting in His parables of the three stewards in Matthew (talents) and Luke (minas). He also used the concept of forecasting in His warning to count the cost (Luke 14:28–32). [North, Luke, ch. 35]
The epistemological problem for humanistic economic theory is this: methodological individualism’s affirmation of an exclusively subjective imputation of value. There is no conceptual connection between this affirmation and the objective measurement of economic value. This separation goes back to the dualism of medieval philosophy: realism vs. nominalism. More recently, this dualism is basic to Kant’s dualism of science vs. personality. A consistent methodological individualist must deny that efficiency is a valid economic concept. Murray Rothbard took this position. He understood that the concept of efficiency assumes the ability of decision-makers to make interpersonal comparisons of subjective utility, which the position denies is possible. But few free market economists have had the courage to follow the logic of their position.
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The complete manuscript is here: https://www.garynorth.com/public/department196.cfm