How much efficiency is too much efficiency?

One of the salient markers of progress and development is efficiency and cost-effectiveness - is the work being done more efficiently and cost-effectively than earlier? So formal markets are more efficient than informal ones, technology enhances efficiency, machines make people more efficient, and so on.

So theoretically, a large share of the work in today's world could be parcelled out to be done either completely by machines or farmed out to a waiting army of low-paid and unprotected virtual workers. Amazon's Mechanical Turk is an illustration of this. This is efficiency enhancing. But what about its costs?

This view of the world overlooks two factors.

1. Efficiency from whose perspective? What is efficient from the perspective of the business need not be efficient (much less desirable) from the perspective of the economy or society as a whole.

For a business, the most efficient path is to reduce its costs and maximise its revenues and profits, return money to the shareholders, and make good quality products available to its customers at the lowest price possible. In the process, it can outsource activities to other countries, squeeze more out of workers, even parcel out work to the likes of Mechanical Turks. It can squeeze on wages, minimise its tax outgo (tax avoidance planning), and avoid paying workers benefits. It can seek to externalise all costs and appropriate all gains.

This can look efficient in the aggregate (profits go up, consumers are happy, share prices rises, and animal spirits become active). But do we care that these gains come with a social cost (welfare of the workers) and tax payer subsidy (social security, tax revenues foregone etc)?

2. The social contract. This search for efficiency creates its set of externalities. All economic activities come with costs and benefits. Businesses have always sought to internalise the benefits and externalise the costs of any activity. Governments and regulations exist to mitigate this risk and make businesses internalise at least some part of the costs.

With any innovation once it becomes commercial, it takes time for the externalities to get recognised and internalised. After that regulations kick-in to address the market failures. Indeed this initial run-way which allows the first-movers to internalise and appropriate gains and externalise costs is the incentive for innovation itself, the first-mover's advantage.

The regulatory arbitrage associated with e-commerce and aggregators is an example of this process at play. The Ubers, Lyfts, AirBnBs, Facebooks and Amazons are currently reaping the fruits of this run-way. It is only a matter of time before the costs are recognised and regulations put in place to internalise some of those costs. That has always been the case and will be this time too (Do valuations take this into account?)?

Any society, democratic or authoritarian, is built on a social contract among different socio-economic groups. The rich need the poor, owners need workers, lenders need borrowers, rural needs urban, shareholders need executives, landlords need tenants, sellers need buyers, and so on. The exact vice-versa holds in equal measure. The relationships are symbiotic.

Accordingly, its richer people agree to pay more taxes; poor people agree to live in less attractive areas; savers lend their money at cheap rates to borrowers who in turn make very high returns; shareholders allow their executives to payout exorbitant salaries, far disconnected from their inherent worth; workers agree to workplace conditions and benefits that are far less comfortable than their managers and executives; farmers agree to policies that lead to terms of trade that favours consumers; residents of rural areas (and slums) allow a higher absolute and per-capita investment and better infrastructure in urban areas (and posh colonies) and so on.

There is no iron law which states this should always be the case. We've had societies in not too distant past where these were not true. After all the majority could turn around and say why should these be the case?

It has generally been the case that the power relationships between these groups have been skewed in favour of one side. And ironically, the relationship has always been in favour of the few and against the many. But this dynamic of relationship has held for centuries. But this dynamic was generally tempered by the social contract.

In a world of brute force majority, the powerless many would always question and upend the powerful few. Indeed revolutions have been built on the back of this inequity in relationships, especially when the inequity exceeds reasonable proportions.

Update 1 (08.05.2020)

Louis Gave of Gavekal Research on the perils of pursuit of excessive efficiency,

One big hurdle in getting the economy up to speed again is the dislocation in supply chains. Say the Peugeot plant in Wuhan has opened up again, but it can’t get a crucial part from France. This is a result of the exponential optimization that has happened in our economies over the past twenty years. We have optimized everything; supply chains, balance sheets, portfolio construction. Every level in the capital system has been optimized. That works great as long as everything is humming along. It’s a bit like high performance athletes; they get injured pretty easily. Our economies are like super optimized athletes that have just received a big hit. How quickly can they be back on their feet? My fear is it will take longer than many market participants think.

Update 2 (22.05.2020)

Sam Blum talks about how the culture of productivity enhancements and self-help has seeped into everything we do in life, with disastrous consequences. 

A lot of that yearning for productivity comes from social media, he says, where people tend to broadcast their accomplishments, even in spite of the pandemic. “Seeing how productive everyone else is during this situation, [I] feel like even though I’m just as productive as I can be, I am nowhere near as productive as I can be.”