This is a companion piece to “Enough: Toward A Sustainable Economics”
https://www.science20.com/fred_phillips/enough_toward_a_sustainable_economics-256755.
Economic theory has centered on achieving efficiency. My own original field of Operations Research similarly focused on optimizing. Both “efficient” and “optimal” can be translated as getting the most bang for the buck. The most output for the least input.
My earlier article proposed satisficing as an alternative to optimizing. Today we’ll look at flexibility and resilience as alternative ideals of economic performance. Why? Because efficiency and optimizing just don’t work in the modern world.
Economic efficiency and its limits
You’re efficient when you can do a Task X over and over, and get really good at it, and your world continues to regard Task X as valuable and continues to reward you for it. The economic system in which you’re embedded is efficient if all players in it contribute efficiently to the value chain.
The first obvious problem with this is that your world, if it was once regularly encouraging your efficiency, is no longer stable. Most pundits now consider the business environment to be VUCA – volatile, uncertain, complex and ambiguous. It’s still worthwhile to get really good at producing semiconductors or conducting surgeries, for example, while attending to global risk and technological change. But what with artificial intelligence, pandemics, climate change, and weird geopolitics, if you’re not in a chip fab or an operating theater, your business model in most cases will be lucky to last another year.
Later, we’ll see how efficiency also fails us in the arena of globalization.
Flexibility and resilience
For your business to survive in a changed world, you must do Task X in a different way, or maybe switch to Task Y. To do this, you must be flexible. (A pedantic aside: If you already have the knowledge and resources to succeed on this alternative path, you are flexible. If you achieve it by learning something new, you are resilient.)
Whoa now: If you had that task-changing capability in reserve all this time, and didn’t use it, economic theory condemns you as inefficient! And that’s true: The capability was just like any other idle asset. It cost you money. It carried an opportunity cost. But it enabled you to survive. In a VUCA world, that’s worth a lot.
Optimizing, and a new information principle
Business students are taught an elementary optimizing formula, the EOQ or “economic order quantity.” The formula balances inventory holding cost against any available purchasing volume discounts, considering how much retail flow-through is expected. So far, so good – or at least it was good in a world gone by. The formula doesn’t consider how your order quantity and frequency might screw up your supply chain. If your supplier doesn’t have enough trucks and drivers to serve your EOQ, what will it cost you to find another supplier who does? If you can’t find a supplier who can do it, what then?
The EOQ was justifiable in a bygone era, because acquiring information about suppliers could take a lot of time, too much time to allow incorporating that information into an urgent decision. “Local optimization” was justified by assuming other actors in the supply chain would eventually do their own local optimization, and all would be well. (Ah, academics and our assumptions!)
Now, though, information is there for us instantly on the internet. Professor Herb Simon said satisficing (an idea he originated) was appropriate when a decision maker didn’t have sufficient information to support optimizing. Now we see that ubiquitous, instant information has made local optimization unsupportable. There’s no excuse for ignoring available, useful data. Decision makers must take a more systemic view, rather than optimizing their own little fief and saying screw you to everything outside its walls. It’s not easy, but today’s world requires it.
I haven’t checked, but I’d bet that text-mining the Operations Research journals would show a steady decline over time in titles that include the word “optimization.” Mathematical optimization, like the math of economic efficiency, is helpful when organizational or political complexity is low and is changing only slowly. It now seems well recognized that today’s important problems fit those descriptors only rarely. We’ve learned that all optimization is suboptimization.
Externalities, and the social harm of efficiency
Our supply chain example showed how an efficient, optimized inventory system can generate “negative internalities,” affecting only one’s own business. Efficiency also creates negative externalities, shifting costs from the firm to society at large. A company’s very lean production system chokes local roads with truck traffic, due to frequent deliveries, making commuting by car more difficult for office workers. NAFTA, the North American Free Trade Agreement, brought efficient cross-border exchanges of partially finished components in the San Diego-Tijuana region’s manufacturing industries. Increased truck traffic created long lines at customs points, impacting the automobile tourism on which many in northern Mexico depend for their livelihoods. U.S. tourists no longer wanted to deal with the truck fumes and road congestion.
Economics holds that competition results in winners (more efficient producers) and losers (less efficient producers). Globalization of production leads to an efficient economic system – theory of comparative advantage, and all that. Losers, in the U.S., had access to welfare assistance until they could find new jobs.
However… the theory didn’t account for the huge number of (mostly rural) towns across the U.S. that utterly depended on industries that are now off-shored. It didn’t account for the huge ongoing welfare needs of thousands of families that could not afford to relocate, the feeling of depression engendered by long-term unemployment, the family stresses when a breadwinner must separate to work in another city. It didn’t anticipate the need for government programs to help the “losers” to retrain, i.e., to be flexible, or to clean up toxic environments left behind by the departed industries. In short, it ignored scale.
When those programs did not materialize, residents of the devastated towns wrongly but understandably blamed foreigners and “globalists” for their troubles – and elected jingoistic, nationalistic representatives in statehouses and in Washington. Who then said, yeah, it’s okay to remain uneducated, and yeah, it’s all the foreigners’ fault.
Government economic advisors had stuck to their price-driven mathematical formalism, when what was needed was “political economy” taking scale, psychology, ecology, and politics into account.
“So efficient it didn’t work at all”: We need a theory of flexibility.
Stevedores used to hump individual crates off of cargo ships. Today, container ships, unloaded by huge cranes at specialized docks, are far more efficient. Container ships full of emergency supplies headed to Haiti when a huge earthquake hit the island in 2010. Haiti’s only container pier, however, had been destroyed by the quake. The ships languished offshore, remaining fully laden, while the islanders suffered. Containerization was so efficient it didn’t work at all.
Disasters like the one in Haiti are events “out of the ordinary.” Measures that are efficient in ordinary times do not perform well in unusual times. Externalities that could be ignored in the less-connected world of the past are now, at scale, physically and politically incendiary. A company’s throw-aways harm large numbers of litigious victims. (And a company that throws off waste was never really efficient in the first place, theory be damned!) Anthropogenic climate change has Mother Earth ready to strike back at us.
Climate change and fast international transmission of pathogens mean disasters are going to be more frequent in coming years. The efficiency and optimization principles that guided a more stable world no longer serve us. Should we still be concerned about things like “energy efficiency”? Of course. But the future depends on satisficing, flexibility, and resilience.
Readings
2. Ed Chen, The Audacity of Economists. https://www.science20.com/alchemist/blog/audacity_economists-78819
3. F. Phillips, J. Chang, and Y-S. Su, “When do efficiency and flexibility determine firm performance? A simulation study.” Jour. Innovation&Knowledge, 4 (2019) 88-96.
4. F. Phillips, “The Globalization Paradox,” Technological Forecasting&Social Change, 143 (2019) 319-320.
5. Phillips, F. and Angela Chao, Rethinking Resilience: Definition, context, and measure. IEEE Transactions on Engineering Management, 2021, DOI: 10.1109/TEM.2021.3139051.
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