Buenos Aires, by Noelia Diaco. Photo is not visible, used only for sharing on social networks.

Thoughts on efficiency

November 4, 2011
I was talking with a local acquaintance who owns a tech business recently, and he was telling me about some of the challenges in running a business in Argentina. The laws here heavily favor the worker over the employer, and workers can claim verbal agreements to work longer-term than written contracts actually specify, so if a business hires someone, they're hired for the very long haul, or the employer risks costly lawsuits. That makes businesses hesitant to scale up to exploit new opportunities, because if they fail, they won't easily be able to scale down.

A few days ago after dinner, we went out to get ice cream, and noticed that in the several ice cream shops we passed, none of them busy, there were at least 3 employees when 1 or 2 would have sufficed.

Yesterday we spent an entire afternoon picking up a package at the post office.

So all this has gotten me thinking about efficiency. The American economic model and free-market economic theory treat efficiency as a holy grail. But clearly there are tradeoffs involved. "Scaling down" a business in a free market means laying people off. In a significant downturn, that means sudden and massive unemployment. A social safety net can cushion some of the impact, but there's still a social cost to that flexibility. Wouldn't a lot of those businesses still survive, one could argue, if they kept those temporarily-less-productive workers on the payroll? And might that inefficiency on the micro scale yield better macro outcomes - everyone still has income, so demand doesn't drop and cause a negative feedback loop; and the public safety net doesn't get too strained, so it can be more strategic in stimulating the economy back to health?

Arguing for efficiency, on the other hand, is the fact that spending an entire afternoon at the post office (and all the other similar entities), multiplied by all the international mail a globally-connected economy requires, must be an economic deadweight loss of colossal scale. The front doors of the post office are open M-F, 9am-4pm, so if I had a "regular" job, I would have had to take off a whole day of work. Contrast that with the U.S., where the Postal Service (nearly bankrupt, but that problem is solvable at the margins) has a decentralized network of thousands of stations, with mail trucks delivering and picking up packages door to door. I'm sure people get frustrated with the USPS all the time, but in my experience system failures were the exception rather than the norm; here spending an entire afternoon to get your foreign mail is the expected mode of behavior. And further, I would imagine as mail systems go, Argentina's - with internal barcode tracking and numbered queues - is still one of the more sophisticated ones in the world.

Everyone loves to rail at the DMV/RMV in the states. "It's like the DMV" is a way of saying "it's slow and surrounded by red tape." But the truth is, at least in Boston, the RMV was a pretty well-oiled, "necessary-evil" kind of machine. Any large and complex public-facing system is going to have annoying rules, waiting periods, and oft-frustrated customers, but efficiency is still important, and red tape varies by degrees.

There are at least a dozen ice cream shops within a few minutes of our apartment, all probably overstaffed for much of any given day. Yet their existence implies that they're profitable enough for their owners to make a living. There are economic policies here - protectionism, currency control, the aforementioned labor laws, etc - that would be called "socialist" or worst if proposed in the U.S. - yet the market here is still basically "free". The government does not dictate how many ice cream shops should be on a given block, or what flavors they should serve; the "invisible hand" of supply and demand rules like anywhere else. Maybe the deadweight loss is passed to the consumer through higher prices; but that, too, has to obey the laws of supply and demand. Inefficiency might slow people down and waste people's time, but it's not clear, walking down the street, that the overall socioeconomic structure is entirely worse off for it.

- Ben

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