OP-ED: Relentless focus on efficiency has costs
Free markets are very good at helping the economy function efficiently; when prices rise, profit seekers are attracted to that sector and try to cash in on the profit potential by creating supply, helping society allocate resources where the demand is.
With the creation of the internet and the use of computers – ironically, both primarily created by non-market-oriented government spending – markets have expanded in scope and efficiency. More recently, dynamic pricing, where prices change rapidly as demand changes, can take efficiency to the next level.
But sometimes efficiencies can create unhappy customers or employees.
Airlines are a good example of this. Until the 1970s, airlines were highly regulated for safety and to ensure profitability. But tickets were expensive. In the 1970s, a period of “stagflation,” a combination of economic stagnation and inflation, encouraged President Jimmy Carter to deregulate air travel, among other things, to boost the economy, and by most measures, it was a success. Ticket prices are now lower, more people can fly, and investors still make money.
In their search for profits while still keeping prices low, airlines have looked for revenue in new places. Initially, airlines charged different prices to different customers based on their demand – business customers were the most profitable because their travel schedules were often not flexible and companies, not individuals, were paying the bills. Flexible bargain travelers were able to fill vacant seats at lower prices. But this meant that on any given flight, passengers were paying widely different prices for essentially the same service.
When the internet allowed flyers to find the cheapest prices easily, airlines began to make up the revenue lost to competitive pricing by increasing other fees, such as charging for luggage, checked bags, food and drinks, or being able to choose seats. They even started charging extra to allow you to sit next to the person with whom you’re traveling. I am waiting for the day they start charging to use the bathroom.
Some pricing to improve efficiency makes sense. Charging more for passengers using transit during rush hour means people who can use transit during non-peak times are incentivized to do so, which reduces crowds and spreads out the use of existing capital equipment. Grocery stores that put fruit and vegetables on sale when they’re in season encourage people to consume these products when they are most abundant. Congestion pricing for Uber encourages supply to meet demand by paying Uber drivers more to work during peak hours.
Sometimes not maximizing the profit allows other people to do so. For example, suppose a pop star wants seats at her concert to be inexpensive so all of her fans can afford to attend. But if people are willing to pay a higher price, scalpers will buy up a lot of the tickets and resell them at the market price, and the scalper will be making the money rather than the artist.
Although economists historically thought of people as homo economicus, always seeking the best deal, that can be exhausting. Has my life been improved because I can now shop for my natural gas company or electricity provider? Shopping for electricity does allow a consumer the option of paying a little more to purchase green energy, but with gas, the choice is basically, do I pick a set rate or do I get the variable market rate? Do I take the risk of a rise in market price or do I want to pay the gas company to take that risk for me? I shouldn’t need to have the skill of a futures trader to pay my gas bill. I don’t need to get the best deal on everything, I would just like to pay a fair price and not have to think about it.
Employees are also subject to this drive for efficiency, which can lead to poor working conditions. Businesses don’t like to pay employees who aren’t doing anything, as I remember from my stint in the fast food industry, when we were told, “If you’ve got time to lean, you’ve got time to clean.” But if there are no customers, who pays for the cost of having someone available when a customer does come in? In an effort to improve profits, companies have shifted the risk of lack of demand to employees.
When my daughter was in high school, she worked part-time at a retail shoe store. They would schedule her to be “on call” to come in if there was enough business, but stay home if there wasn’t. So she could not plan to do anything else, but got paid nothing for being on call. That “efficient” use of labor was only efficient for the store, not my daughter.
Amazon famously focuses on efficiency and getting maximum production out of its employees by relentlessly monitoring them and forcing them to meet ever higher goals. While consumers may get better prices, that’s often at the expense of the employees’ physical and mental health, and sometimes even at the expense of innocent bystanders as drivers rushing to fill deliveries get into more accidents.
If market pricing is truly efficient, it will set the maximum price I am willing to pay for a product. On a hot day, I may be willing to pay more for ice cream than on a cold day. With individualized shopping data available, a store may know that I’m willing to pay more for chocolate, so the price of chocolate goes up when I’m on the chocolate aisle. But even if stores could do this, it would be agonizing for customers, since every decision would be a painful one. Never would you be able to rejoice at getting a good deal, because every deal would be at the actual market price.
I like efficiency, but sometimes efficiency can come at too high a cost. Efficiency should be in the service of improving lives, not just maximizing profit.
Kent James is a member of East Washington’s borough council.