Local versus global efficiencies
Jul 17, 2010

Local versus global efficiencies

We are preferentially more aware of our local surroundings than we are of others. The result is that seeing when a product or service is locally inefficient - your local chain store doesn't carry products tailored to your local communities needs for instance - is very easy but seeing efficiencies at a larger scale is much less obvious. The result is we often grumble about a big company or the government being inefficient because it is genuinely locally inefficient while not seeing the larger global efficiencies tha make the company or government worthwhile.

Global efficiencies are things like only having one group of product procurers for the chain store compared to many buyers doing similar jobs for a series of independent stores or having a centralized supply chain. Any indivudal buyer may be capable of choosing a slightly better array of products for their local community but the local inefficiency is more than made up for in the chain store by the global efficiencies of centralized supply chains and procurement. As Thomas Freidman points out, the advantage in purchasing power for walmart, often naively considered the reason for their cheap prices, is dominated by their highly efficient supply train.

Perhaps nowhere else are local inefficiencies lamented more than with respect to government where we might, say, have to jump through all sorts of bureaucratic hoops - unnecessary for our indivudal need - to get a service. However the global efficiencies of having a single standardized all encompassing bureaucratic procedures for a given service often completely trumps these local inefficiencies. For example, one can compare the provision of health insurance in the Canadian versus American models. In the private system in America, a large number of competitors in many jurisdictions puts pressure on each company to be as locally efficient as possible to stay competitive. Very often the local efficiency of the private sector greatly exceeds that of the public provision. However the unified governmental approach as in Canada allows for considerable global efficiencies that result from only having one group work for everybody opposed to many groups reproducing similar tasks (like advertising or financial management) many times over. Add in the removal of profit in the private system and other factors and the comparison between the two systems makes it unsurprising that the US spends far more for moderately lower quality of care than much of the rest of the western world.

Of course, it is not a priori true that either the local or global efficiencies will dominate and each case requires a unique analysis but the point of this post is merely to ensure we remain cognizant of both global and local efficiencies and not focus too unduly on the failings of the latter when it comes to dealing with big instituitions like government.

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