[Pen-l] Re: The Mirage of Economic Efficiency

["Julio Huato" <juliohuato@xxxxxxxxx>]

Craig Freedman wrote:

> You are forgetting that competition combined with
> uncertainty leads firms to discount the future and
> opt for short term efficiency over long term
> flexibility. There is an inevitable trade-off.

Claiming that the economists cling to a static notion of efficiency =
apples.  Claiming that "competition combined with uncertainty leads
firms to discount the future and opt for short term efficiency over
long term flexibility" = oranges.  One could be true without the other
being true.

That said, time preference = apples.  Uncertainty = oranges.  You
don't need uncertainty to analyze time preference.  You can look at
time preference (discounting) in an entirely deterministic setting.
In practice, even with assets deemed virtually "risk-free" (say, short
run Treasuries), people discount time.   Similarly, in principle, you
can think of purely cross-sectional uncertainty.

In the theory, the discounting of the future depends ultimately on the
time preferences of people, as consumers, stockholders, neighbors,
etc.  The firm is only a conduit of the choices made by people.  In
other words, with no externalities or principle/agency conflicts of
interest, in the theory, firms operate as perfectly communistic units
of production.  If people don't discount the future (or discount it
negatively) in their choices *and* all social costs and benefits are
somehow made internal to the firm, then the firm won't discount the
future either (or discount it negatively).  In that setting, if
people's subjective discount rate were zero (or negative) but firms
insisted in positive discount rates, then new entrants could arbitrage
the discrepancy all the way to the bank.

In case it's not clear, I'm not saying that the capitalist firms we
observe are not biased towards short-term profiting (or outright
profiteering at the public's expense, including here the abuse of the
environmental commons).  The issue is, what is the source (or are the
sources) of such behavior.  Is lack of "flexibility" to shifting
conditions (due to exclusive focus on short-term "efficiency")
inherent to capitalist firms?

It is clear that some capitalist firms have been around for a long
time -- and I'm not talking about the Catholic Church, but more like
GE or citi.  They wouldn't stick around for so long if they didn't
exhibit some degree of flexibility to shifting conditions.  It is
likely that their robustness has something to do with their
*learning*, which under capitalist conditions has a lot to do with
competition (which, Craig seems to believe, makes firms less
flexible).

IMO, the big problem with the efficiency of capitalist firms is that
no matter how dynamic or sensitive to uncertainty it gets, it is still
inimical to the public interest.  In other words, *private* ownership
(not static efficiency or ignorance of uncertainty) is the real
problem.
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