Economics Made Easy: Think Friction

The New York Times:

CRITICS of Mitt Romney’s activities at Bain Capital have been described, somewhat hysterically, as critics of capitalism. They’re not. But they are attacking something. And understanding that something can have enormous implications for the shape of our economic institutions and activities going forward.

What Bain Capital, and firms like it, do is try to increase the efficiency of the companies they buy. They try to get more with less — to eliminate waste. They are not interested either in creating jobs or in destroying them. Nor are they interested in improving the lives of consumers by making products and services better and cheaper. They are interested in profit — for themselves and their shareholders. Sometimes a Bain success will lead to more jobs and better products. Sometimes it will not.

It may seem heartless to worship efficiency at any cost, including lost jobs and decimated communities, but it is important to understand that increased efficiency is the only way a society’s standard of living will improve. If your company raises your pay without becoming more efficient, it will have to raise its prices in order to pay you. This is true of all companies. And if all companies raise their prices to allow for higher wages, you will end up just running in place, with your higher wages exactly matched by the higher prices of the things you buy. It is only if your company and others find a way to pay you more without charging more that your living standard goes up.

So if we want to make material progress, we must become more efficient. In addition, as markets have become ever more globalized, increased efficiency of American companies has become a condition for their very survival.

Read the whole story: The New York Times

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