Re:Efficiency

[Paul Davidson <PB108928%UTKVM1.BITNET@xxxxxxxxxxxxxxxxx>]

FROM:  Paul Davidson
"      Economics Department
"      523 Stokely Management Center  (615) 974-4221
The term efficiency is borrowed (like most things in economics) from physics
and implies a ratio between ergs (a unit of measurement of energy) in to
ergs out.
    Way back in the 1963 AER I published a paper on "Public Policy and the
 Domestic Crude Oil Industry" in which I noted that "the geologist
desires that production plan which yields the maximum total volume of output
over the life of the resevoir. The geologist has therfore developed a
 concept of MER (the Maximum Efficient Rate of Production). MER is a rate of
output (determined by engineering and geological factors) which will maximize
the ultimate recovery from the reservoir. The economist in contrast seeks to
ascertain the oil production plan which maximizes benefits relative to costs
over time.  If the economist's plan tends to abandon oil in the ground
which might, under a slower rate of putput, be ultimately recovered, there
is no economic waste, only geological waste".
        This distinction between economic efficiency and engineering efficiency
involes a difference between measuring inputs and output in ergodic units
(ergs) and in nonergodic units (benefits and costs) where the latter vary
over time in unpredictable ways -- and may be market oriented (and therefore in
volve property rights via market prices and consts and economic rents. But
even on a non-entrepreneurial system  without markets, the production decision
maker (even in a kibbutz or monestary without any individual property rights
 and all propert held in common-- decisions must be made involving costs and be
nefits.
      This has important implications for the social costs and benefits
may differ from the private costs and benefits -- and Keynes'suser cost
concept is important here. Those who delve into my 1963 oil article will
see how Keynes's user cost concept is applicable to explanin economically
wasteful oil production in a market economy when an oil reservoir is fugacious
 -- even if all wells are operating at the geological MER.

Have a good day!____Paul Davidson
))))_ fax # (615) 974-1686