Efficiency is Hilarious

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Dialogue Works, January 18, 2024.

First part: https://youtu.be/ifnCakYJNVM or https://www.youtube.com/watch?v=ifnCakYJNVM

Second part:


Dialogue works (Nima): when it comes to capitalism, they’re talking about that capitalism is by far the most effective and productive economic system. Ohio Senator, James Vance, just recently said that Russia produces as much ammunition in a day as the U.S. does in a month. what’s the problem with the U.S. economy that they’re not capable of producing enough ammunition to help Ukraine?

Richard D. Wolff: Well, let me begin with a comment. I do not believe it is an exaggeration to say that the spokespersons for every economic system in the history of the world have included people who say that whatever system they are, the spokesperson of is the best and the most efficient and the most equitable and the most and the most fill in the blank with positive adjective.

This is childish, and yet you would imagine that a reasonably mature people would get beyond this kind of cheerleading if they’re involved in a serious conversation. It is actually very easy to show whether you are looking at an ancient tribal economy or village economies or slave economies or feudal economies that they had their areas where they were remarkably efficient side by side with areas where they were remarkably inefficient.

Assuming that there is a standard that enables you to distinguish between them, which frankly, I don’t believe there ever was or is.

Let me explain briefly,

When you notice that there’s profitability in a particular industry and the CEO, all of the CEOs in that industry are asked, why are you profitable? And they give that wonderful answer that they should have outgrown in fourth grade.

We’re a very efficient company here. The only appropriate response is laughter. Why? Well, what does efficiency mean conventionally in economics? Efficiency purports to do the following thing. It looks at the consequences of some act. Let’s take a, for example. Is it sufficient to expand the hospital to add a new wing to that hospital or for a company?

Is it efficient to buy a fleet of trucks or to hire 50,000 more people or whatever, whatever the issue is? Here’s what you taught. You look at all the benefits that flow from this act and you look at all the costs of this act and you compare them. If the benefits are larger than the cost, why then it’s efficient and you go ahead and do it.

And if the costs are better than or larger than the the total of benefits, well then it’s inefficient and you don’t do it. Okay. All right. Now, here are two simple problems. And here I’m simply talking basic philosophy. Or if you like, basic mathematics. How do you know all of the costs or all of the benefits of anything that has ever happened or that could ever happen?

And the answer is, you cannot do that. And no one ever has. Part of the reason is that costs and benefits lie in the future, and it’s kind of hard to get a good number on what they will be. And if there is an economist who knows what the costs will be. Well, then that economist is going to become very rich because they have figured out how to tell the future, which of course is a scam.

They can’t do that. Number two, the costs and benefits are infinite in number and variety. To go back to my example. Suppose there’s a hospital considering building a new wing. Well, if they build that new wing, it will change traffic patterns in that area. Change traffic patterns will alter, real estate prices change, traffic patterns will change. The number of people that get injured or die in automobile accident.

How in the world can you know in advance what all the costs from doing this are? And the answer is you cannot. So here is what all cost benefit analysis has in common. They are frauds because they cannot do what they claim to do. What they actually do is look at a selection of the costs that you can do and a selection of the benefits that you can do.

But then the only interesting thing is the principle of selection, because it isn’t a comprehensive comparison. Long story short, if you do any serious investigation, then you cannot evaluate the efficiency of any economic system and the people who claim that it is the most efficient are giving you the use a technical term total bullshit. And they ought to be called on the carpet for doing that.

There is. It really is kind of childish. CBS did the report 60 Minutes back in May of last year, and in that report, they showed that the Defense Department of the United States is a place that doesn’t have enough ammunition because the company is producing defense equipment, you know, planes, ships, missiles, guns are engaged in. And you can see the statements there from all the relevant officials.

Price gouging and the price gouging is not modest, but price gouging is outrageous. And they give you the figures. They’re a price that’s 100 times what it ought to be or more. Here is the irony. It’s not that Russia can produce what we can produce. My guess is the United States cannot produce Russia. Let’s remember the GDP with all the problems which we have discussed about what the GDP means.

But the GDP of the United States is 21, $22 trillion, and the GDP of Russia is one and a half trillion dollars. We are talking about vastly different industrial systems. And the reason why the United States doesn’t have enough ammunition and by the way, that is part of the reality of why Russia is doing as well in the war in Ukraine as it is.

It’s not because they produce more or better, it’s because they don’t have and this has going to affect a lot of Americans if they take this seriously. They don’t have the level of corruption that we do. We have outdone them. And you know what this is like. This is the same story that has afflicted every empire in human history.

This is the story of why the Romans could not defeat the barbarians in the fifth century. It’s why medieval kingdoms fell apart. It’s not because they couldn’t produce enough knives and guns and spears and all the rest of it, but that the internal mechanisms of the system made it no longer functional and bullshit like efficiency calculus is part of the mental corruption, if you like, these make-believe categories.

We look back on the Middle Ages and we smiled to one another when decisions were made by kings and queens who consulted their advisers, who read the appropriate passage in the Bible to find the answer. We think we’re better than that. The Bible, we say, was a book. There were lots of books. I picked that one. Yeah, well, the notion that you can do the right thing by following Jesus is exactly on a par with the notion that you can do the right thing by choosing the official alternative, as if you were in a position to do that.

I used to tell my students all the training in the world will not enable you to leap over the Empire State Building. You just can’t jump over it. So you don’t bother training to do what you know you can do. Why do we train people in cost benefit analysis? It is a mirage. It is an ideological exercise in order to sanction whatever decisions are made for altogether different reasons by pretending they have been authorized by an objective outside absolute, totally true arbitrator.

Well, in medieval times that was called God. Today we call it efficiency analysis. It is the same fantasy.

Michael Hudson: Well, I think that you don’t have to look at the future in order to make projections. I think efficiency is in the eye of the beholder. Boeing, for instance, is much in the news. And Boeing found it very efficient.

Instead of making airplanes that were adjusted to new fuel-efficient engines, it found it more efficient to the executives to make airplanes that crashed. That was efficient because they could use their money instead of changing the engineering around, instead of building a new airplane. They could use the revenue that they were getting simply for stock buybacks and to pay out of dividends.

So that was very efficient, you know. And in terms of prices, of course, you can forecast prices if you’re in a monopoly position and you can charge whatever you want. You decide what price you’re going to charge. It’s at your will. And you can have control over costs, especially if it’s the government. That’s what the Pentagon capital system is.

That I think was really what the interview was talking about under Pentagon capitalism. I think a decade ago it was making a toilet seat for $20 and charging $500 for it. But now they’re even more egregious overruns. It’s very efficient if you’re a Boeing or another military contractor. It’s not efficient for the whole economy. So, I think  the real question, since our talk is about capitalism versus socialism, is what’s efficiency under capitalism and what’s productive and productivity?

Well, the textbook presentation of industrial capitalism says it’s very efficient and it was efficient in the 19th century. It was more efficient than feudalism. And that was really what industrial capitalism set out to be. To cut it, not to raise the costs of Pentagon capitalism and what you’re talking about, but to cut costs in it and cut the economy’s overall costs by getting rid of the landlord class.

So instead of paying land rent to a hereditary aristocracy, you would use that as the tax base. You would essentially get rid of monopoly rent and you’d get rid of financial rent. In other words, what made capitalism efficient was that it was moving toward socialism and it was moving toward socialism by having the government take the lead in providing basic needs. ….For the cost of living and for the cost of doing business so that the employers didn’t have to pay them. These costs were to be paid essentially by progressive taxation of the wealthiest property owners and the wealthiest finance shell operators. And I think as we discussed the last time, the income tax in America in 1913 fell only on the wealthiest 1%.

So, in the 19th century, industrial capitalism certainly looked productive to the extent that it was supporting a mixed economy, a private public economy that was moving towards the government, producing all of the communications, education, health services, transportation that could otherwise be monopolized or that labor would have to pay for and hence the employers would have to pay for.

So, the question is, you know, what went wrong was that the the rent recipient class fought back and they fought back for the last century, ever since World War Two and especially since the 1980s. We don’t have industrial capitalism anymore. Sometimes it’s called monopoly capitalism, but I prefer to call it finance capitalism because banks are the mother of monopolies and it’s the financial sector that has promoted monopolies because they can efficiently make money much, much easier simply by charging whatever they want and not having to take the customers into account, not by producing good materials.

Efficiency today is a race to the bottom. If the race to the bottom is in employment, it’s a race to the bottom for inequality. It’s a race to the bottom for Boeing making airplanes that suddenly don’t really have much oversight and regulatory control and their doors blow open and they crash. So, again, we’re living in a world where the whole concept of efficiency changes and productivity is no longer simply the physical productivity of output per man hour.

It’s how do you create wealth – do you create wealth and be productive in the way that Goldman Sachs said they are the most productive workers in the United States because they make the most money financially, they make the most money by taking over companies, breaking them up, smashing them down, and then slowly de-industrializing them.

So today, the most efficient capitalism is post-industrial capitalism or finance capitalism. You say it’s corrupt and they say, no, we’ve just made politics a free market. And if Boeing and other military spending people have the ability to back the campaigns of the congressmen on the military committees and the monopoly committees and if they don’t back what we’re doing, if they criticize us, we’ll just use the free market to back their political opponents in the next primary election. So, again, what is efficiency? It’s no longer what it used to be.

Richard D. Wolff: There’s a point that Michael made that is recognized, at least in the textbooks in economics. It’s one of those topics that you blow through in 10 minutes of some lecture and never return to it, because it is embarrassing if you return to it, since it invalidates most of the rest of the semester’s work.

It’s a distinction between private profitability and social profitability or private costs and social costs. And the argument is really very simple. Let’s take a situation where a capitalist decides it is, quote unquote, more efficient. I am going to buy this new machine, and that will allow me to fire 50 workers because the new machine can do what those 50 workers used to do.

So, our capitalist compares the machine which only costs 100 and the money he saves by firing 50 workers is 200. So, he’s ahead if he buys the machine and fires the workers. So, he does. There’s a net gain to him of 100. The difference between the money he had to lay out for the machine and the money he saved from firing the work, though, is simple, very logical.

Now the question, are we done? Have we now seen an efficient act, as are capitalists pursuing the profitable outcome made the right decision? Well, to do that, we’d have to look at the costs and the benefits. And let me tell you about the costs. They are not just the buying of the machine by Mr. Capitalist. The costs are everything that happens to those 50 workers, their spouses, their children, the neighborhood they live in, the real estate values of the homes they occupy, the viability of the stores they used to patronize.

I could go on. We know from a thousand studies that those 50 unemployed people will have higher rates of alcoholism, spousal abuse, mental physical injury and illness. All that costs society is going to have to bear those costs. The doctors, the social workers, you know, the difficulties, the fired workers children are now going to have in school because there’s turmoil at home, because a mother or father are out of work, nobody can say it because capitalism refuses to take any responsibility for those 50 workers.

We in the world of analysis, thinkers, professors, whatever we are, we are supposed to somehow blindly go along with complete bullshit that we are finished when we compare the cost of the machine that automates with the loss of those jobs. And the minute you don’t do that, the minute you admit that their social costs are not exhausted by those private costs that are counted by the capitalist, remember, he only counts what he has to pay for.

The only thing he has to do is pay for the new machine. He doesn’t have to pay for the mental health counseling of the children, of the fired workers. Not his responsibility. So, for him, that cost does not exist. But for those of us that are interested in the community as a whole, the costs do exist, and a system that constantly pretends otherwise is going to mean making one decision after another.

That is the end of vision, because if you look at all the costs, they far exceed the benefits. And here’s what’s worse, the benefits flow to one part of the community and the costs are borne by another part of the community, making it a political explosion of what’s going on here. Automation is profitable to the employer class, and it is an enormous burden and cost to the employee class.

And because of that, it comes back and bites the employer in the rear end as well. It is a social economic disaster, and if you were honest in economics, you’d know that, and you wouldn’t teach the rest of the course on the premise that profit as an incentive is some successful mechanism. It isn’t. It’s idiotic.

Michael Hudson: Well, when you talk about social costs, you’re really talking about the long run costs in the sense of what are the results of this automation you’re talking about.

But finance lives in the short run, and if you have corporations controlled by the financial sector, they live in the short run and they don’t care about social costs. And even more they try to make the government pay the cleanup costs. You can take for instance, oil for fracking. It pays for the oil frackers to pump chemicals into the ground to force the gas or oil up to the surface.

And the result is to pollute the water supply so you can light a match to the water that comes out of your tap and it catches on fire. For the oil companies and for the banks and the financial investors, this is a very high productivity you can take. And if you have the financial sector writing the laws that shape the marketplace, you have something like the Trans-Pacific Partnership.

That said, suppose you have an oil company that pollutes the land. For instance, of Ecuador or in Kazakhstan. If a government passes a law saying now the oil company has to pay the cleanup costs of cleaning up the pollution that it’s caused in the waterways or in the land, they have to reimburse the company for the entire fund because that’s an external economy.

Well, what you’re talking about, Richard, is, though, the external economy is society, so that if a government imposes a cost that benefits society at the cost of the American foreign investor or any other foreign investor, that’s against the law legally and no government end up receiving any money for the clean-up costs that it doesn’t have to immediately pay right back into the company.

So in effect, the role of government is to protect the polluters and to protect what you call profits, and I call economic rent, because increasingly, the profits of oil companies and mining companies and monopolies are unearned income. They’re not producing value. They’re producing a right to charge whatever you want to charge so that you don’t have to project the value of something in terms of the costs, the labor costs and the raw material cost.

Again, you’re getting a free lunch without working, without producing value just by collecting rent. And of course, the GDP accounts, the national income accounts calls all of this earnings. But they’re not really earned income, they’re not profits. Again, they’re economic rent. And that’s the kind of rent seeking economy that we’ve come into. It’s a tunnel vision of the economy.

You call it corrupt. The economics are corrupt. They’re really tunnel vision. They don’t want to take in the social costs because that would reduce the returns to the financial owners of the companies that are imposing these costs on society at large.

Richard D. Wolff: If I could add, I agree completely, but I want to take it kind of another step, if I could. There is a bizarre phenomenon going on here that we should understand.

When Michael says that the government is called in to clean up, the government is called in to protect, the government is called in to serve, whether it’s the cap, the employer class as a whole or a subdivision of it that gets into a dominant position like finance capital in recent decades.

Here’s the remarkable thing about that. Not only is the government called in to bail out the failed capitalist system. Let’s all remember in 2009, all of the major banks in the United States, the big ones were bankrupt by the definition of liabilities relative to assets. They were busted. They didn’t trust each other to give each other overnight loans the way they normally do every day because they weren’t confident that Bank of America or Citibank or Wells Fargo would give back in the morning what was lent to them the night before, because they might do on Lehman Brothers or a Bear Stearns or any of the others that folded.

Okay. Okay. Here’s the wonderful part about that. At the same time that the government is the servant, the faithful, desperate servant of the employer class, it develops an ideology which says that capitalism is a perfect system, except when the government messes up. We call these people libertarians but have nothing to do with liberty.

It’s an ironic Aldous Huxley kind of inversion of the word meaning. This has nothing to do with liberty. This is a hustle. This is a person selling you a major interest in the Brooklyn Bridge. Blame the government. Brilliant. Every flaw that capitalism has. You can now admit and use it to beat up on the government with the effect that all the government is left with the responsibility of doing is bailing out capitalism’s failures.

Because otherwise it has been beaten to death with demonization as if it were the problem. Most of the people who will become powerful in the United States if Donald Trump wins the election, it will be libertarian infused policy makers who are going to act on this lunacy with, by the way, the predictable results, which are not pretty.

Michael Hudson: I’m glad you mentioned the concept of liberty and libertarians.

You’re absolutely right. Libertarianism supports a centrally planned economy, much more centrally planned than a mixed economy. More centrally planned than an economy like China. But the central planning is done not by elected government officials, but by Wall Street and the financial sectors. So when people say they’re a libertarian, they say they want liberty from government regulation so they don’t have to follow rules to protect society.

They want liberty from being taxed so that it’s labor and the productive sectors that are taxed, not the corporate sector and the financial sector that owns the sector. So, the question is liberty from whom? And this is what again, the language has been inverted from what it was during the heyday of industrial capitalism from Adam Smith and John Stuart Mill and Marx into just the opposite.

The way to respond to these guys is, again, the meaning of words. And that’s what made George Orwell discussion of double think and double speak so great.

Richard D. Wolff: Enormously important, this topic, because these are not just pathological behaviors. These are not just the objects of what Michael and I can say critically.

These are symptoms of a system that is done, that is overreach, peak, that is in decline. Holding on to these nonsensical ideas becomes irrational because the system is spinning out of control. Here you have a again, I’m going to use Ukraine, even if it provokes some people. On one side, the United States, the G7, Britain, France, Germany, Italy, Canada, Japan and the United States.

I come blind to GDP and again, without lauding that statistic, it’s just a very rough measure. But a combined GDP, by my count, about $32 trillion in a war in Ukraine with a country, Russia with a GDP of one and a half trillion dollars. This is a joke. What kind of war is this? This is David and Goliath.

That we’re Goliath is ridiculous. And the fact that the Russians have actually won the war, at least so far, tells you that something is terribly amiss. Mr. Zelensky is explaining that they don’t have enough ammunition. They’ve used up the shells, the tanks, the missiles, not just from the United States, but from Britain, France, Germany and so on.

What in the world is going on? How does a one and a half trillion-dollar economy find itself inadequately producing, what, $32 trillion worth of economy is? Right. Something is crazy here. And I think that is where people ought to take this kind of thinking. If a university is teaching people that there is an efficiency, you learn how to count costs and benefits.

This is the exact modern equivalent of having taught medieval scholars how to count the number of angels that dance on the head of a pin. Angels have no dimensions. The head of the pin is very small. But how many angels can a very small pin accommodate an infinity if they have no dimensions? Those And then what? 

And we think it’s funny, but I can assure you in the future there’ll be people who look back on this nonsense about efficiency and the nonsense about libertarianism shaking their heads in disbelief that reasonably educated adults got caught up in this sort of stuff.

Photo by Denis Agati on Unsplash