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Subject Area: Political Theory
Topic: Progress

The Mirage of Economic Efficiency - Leonard P. Liggio, Literature of Liberty, Winter 1981, vol. 4, No. 4 [1981]

Edition used:

Literature of Liberty: A Review of Contemporary Liberal Thought was published first by the Cato Institute (1978-1979) and later by the Institute for Humane Studies (1980-1982) under the editorial direction of Leonard P. Liggio.

Part of: Literature of Liberty: A Review of Contemporary Liberal Thought, 20 vols. 19781-982

About Liberty Fund:

Liberty Fund, Inc. is a private, educational foundation established to encourage the study of the ideal of a society of free and responsible individuals.


The Mirage of Economic Efficiency

E.C. Pasour, Jr.

  • North Carolina State University

“Economic Efficiency: Touchstone or Mirage?” The Intercollegiate Review 17(Fall-Winter 1981):33–44.

Confusion over the different meanings of efficiency has led to the erroneous belief that market “inefficiency” requires that a centralized political regime restore “efficiency” by state regulation and planning. As an economist, Prof. Pasour: (1) discusses the elusive meaning of efficiency in a world of uncertain and partial knowledge, (2) shows how “efficiency” as interpreted by conventional welfare economics and its norm of “perfect competition” provides the rationale for government intervention into allegedly “inefficient” markets, (3) explains why inefficiency or waste cannot meaningfully be identified or measured by outside observers who lack the subjective evaluation of the relevant individual decision makers, and (4) argues that we should use the “principles approach” in analyzing government attempts to create efficiency rather than decide each issue case by case.

We need to be careful in not confusing economic with technical efficiency. Efficiency is inescapably subjective and cannot be known apart from the subjective values of the decision maker involved. An outside observer merely imposes his own standards of value when he labels other persons' actions “wasteful” or “inefficient.”

Nor should we misuse the efficiency concept by associating it with the “perfect competition” norm in evaluating real-world markets. Since the highly idealized notion of perfect competition can never be achieved in the real world, it is misleading to use it to discover that there is “market failure” (that is, that the real world is not as efficient as an ideal world). The “perfect competition” model is a device for justifying government intervention to correct “market failure” (such as “monopoly,” spillovers, advertising, and other information problems). It is unlikely that imperfect politicians subject to well-known interests will be any more efficient than market participants.

Efficiency can be a useful concept if improvements are attempted within the terms of the decision maker's own subjective values. However, the efficiency concept is not useful for public policy in evaluating other people, markets, or economic systems. Since costs and benefits are based on subjective considerations, efficiency cannot be determined independently of values and ethical considerations by some putatively neutral team of experts.

We need to evaluate government programs to achieve efficiency on the basis of economic principles rather than by an unfocused “case-by-case” approach. Economists are led astray in basing policy recommendations on the efficiency notion of Pareto-optimality, the cornerstone of welfare economics. Economics would better recommend leaving social and economic activity to informal market principles and their decentralized, non-governmental enforcement.