Adding efficiency is one of the key ways an economy grows. It is the difference between healthy growth and a zero sum game.
Here are some of the ways that efficiency is introduced and how well various types of entities are able to implement that efficiency.
Specialization & Division of Labor
Simply put, have the people that are best at something do that thing, and other people do what they are best at. Imagine a company that employs 100 craftspeople – 50 of them can produce either 1 table or four chairs per hour – the other fifty have slightly different skills and can either produce 2 tables or three chairs per hour.
If everyone spends half of their day working on each, the company will end up with 600 tables & 1,400 chairs per day. If the company lets those that are best at making tables, focus on that task and those that are good at making chairs focus on that task – they will instead end up with 800 tables and 1,600 chairs per day. Same people, same day – just a 15-30% boost in production.
This very simple example demonstrates a process that happens on a much larger scale in an efficient economy. Those that are best at a task become the ones to complete it.
Businesses are one of the more efficient means to create specialization – their drive for profit forces them to evaluate production, select the best producers and reject those that aren’t as efficient.
Government is generally poor at creating this type of efficiency.
People coming together can create this kind of efficiency, but only of a very small scale. A family might be able to do so, or even a community. It would be impossible for 300 million people to come together and coordinate in this manner.
If two people are working on the same knowledge task independently, they are creating redundancy. If instead, they coordinated, one could work on a different task, or they could work together to finish sooner and move on to something else. This is especially true in the knowledge fields where scale is cheap and discovery is expensive. Areas like process design, research, product design or software for example.
The real life barrier to coordination and cooperation is the competition between companies. For example imagine two furniture makers each wanted a software system to track their supplies so they could ensure they wouldn’t run out – neither wants to share this with their competitor, because they have no reason to want to help them. These companies might both undertake efforts to build that software for themselves, thus introducing redundancy.
If instead a new company were formed that built that software, redundancy could be reduced. That new company could invest as much in the creation of the software as either of the two furniture makers, but due to having two customers, sell the software at a lower price to each of them and still make a profit. This introduces efficiency to the economy – that money saved by either company can now be used to invest in something else.
This is also possible with volume – perhaps 10 smaller companies each had someone designing an orientation handbook for new employees. If those companies merged into one much larger company, the new employee handbook task would still likely be one person worth of work – thus freeing the other nine people to work on something else.
Business tends to be a good way to create efficiency in these manners because of the cost savings and scale possible. The drive for profit forces them to reduce costs and opens opportunities for centralized vendors. The friction that exists is that it removes the centralized area from being a competitive advantage for any party, since it will become widely available.
Governments can be effective at introducing this sort of efficiency in the short term – but often fail for other reasons in the long run. One example is a centralized bank that prints currency that everyone agrees on the value of, which is a much more efficient system than the bank notes that existed prior to that and required reference books to use effectively.
Groups of people can coordinate and create efficiency in this manner, but often struggle to do so at scale. One example being the open source software movement where many people contribute to shared tools they can all use. The struggle being that often divisions in viewpoints arise causing fissions and thus introducing redundancy.
New technology can create efficiency by creating levers that allow us to achieve the same result for less input. A simple example is the cart – a person might be able to carry 50lbs in their arms for a short distance, but by using a cart, can likely carry 100lbs over a very large distance.
Some effort goes into the invention of the cart and some effort goes into the production of each cart, but ideally the energy saved via the use of the cart makes up for that effort in the fullness of time.
Businesses are somewhat good at creating efficiency in this manner in certain circumstances. In order to justify the inefficient process of finding efficiency, companies must feel the long term benefits outweigh the cost – either through their ability to leverage that technology as an advantage secretly, sell that technology for a profit or use that technology for some other benefit, such as creating a brand image. It is important to note that a company’s ability to sell a technology for a profit is affected by how quickly it can be replicated – one reason why intellectual property law can encourage innovation – though it can also harm it if not calibrated properly.
Governments are typically horrible at creating efficiency through innovation on a general scale because they do not have the broad vision to look. They can be incredibly effective when focused on a specific goal however – N.A.S.A. comes to mind – though business is certainly involved in many regards.
People coming together are incredibly effective at applying technology efficiently but lack the scale to innovate in many areas due to the centralized capital needed to do so. In many ways they compliment the abilities of businesses. People, for example, would be hard pressed to coordinate and focus enough to create self driving cars – the undertaking is too large and the time span to long. Businesses can and will because they know there are huge profits available for doing so effectively. On the other hand, businesses won’t often tackle niche problems where the solution has no market – but the people affected by those problems would be willing to come together to innovate.
Reduction of Process or Transactions
The fewer steps it takes to get raw inputs into a the final state, the lower the investment required to get an item to a finished state. Each step in the process introduces waste in time and possibly materials.
Imagine a piece of furniture that was manufactured in five stages, each at a different company, located in different cities. By the nature of that setup, the materials must travel around those cities, the businesses must coordinate timing and prices must be negotiated. In the end the item requires a large amount of time and coordination to produce.
A company that figured out how to manufacture the item under one roof, by itself, with a single coordinated process, will be able to produce the item more efficiently, thus allowing that extra energy to be focused elsewhere.
Businesses are very good at creating this kind of efficiency. Their ability to do so allows them to sell their product at a lower price, which is a competitive advantages. In a very Darwinian way, the businesses that are most able to find this efficiency are the ones that survive.
Governments are theoretically able to introduce this kind of efficiency via their scale and centralization – but in practice fail to do so because they artificially keep inefficient process alive.
People working together are incredibly inefficient in this manner.