The economist’s concept of efficiency, as I’ve discussed previously, is quite distinct from the meaning associated with it among non-economists.
Most people think of the term in the context of production of goods and services: more efficient means more valuable output is wrung from a given bundle of real resources (which is good) or that fewer real resources are burned up to produce a given output (which is also good).
In economics, efficiency is also used to evaluate alternative distributions of an available set of goods and services among members of society. In this context, I distinguished in last week’s post between changes in public policies (reallocations of economic welfare) that make some people feel better off and none feel worse off and those that make some people feel better off but others feel worse off.
The first type of policy can unambiguously be said to enhance social welfare. But no such claim can be made for the second, which nonetheless is typical of virtually all major public policies.
To illustrate this point with a concrete example, consider whether economists should ever become advocates for a revaluation of China’s currency, the renminbi — or, alternatively, for imposing higher tariffs on Chinese imports.
Such a policy would tend to improve the lot of shareholders and employees of manufacturers competing with Chinese imports. Yet it would make American consumers of Chinese goods worse off. If the renminbi were significantly and artificially undervalued against the United States dollar, relative to a free-market exchange rate without government intervention, that would be tantamount to China running a giant, perennial sale on Chinese goods sold to the United States. If you’re an American consumer, what’s not to like about that? So why are so many economists advocating an end to this sale? Do they have a professional license, as social scientists, to become such advocates?