Examples of economic concepts are all around you, if you just know how to recognize them.
Just yesterday I experienced a great example of “Pareto optimality” while installing new copper water pipes in the bathroom of my century-old house.
“Pareto optimality” is a measure of economic efficiency: how many goods and services a society gets from the resources it uses up. If you use up given amounts of labor, capital and other resources and produce more goods with “Plan B” than with “Plan A,” then B is more “efficient” than A.
This matters because, all other things being equal, more goods and services means that more of society’s needs and wants are satisfied than would be possible with fewer goods and services. More is usually better.
However, as economists toyed — or wrestled – with ideas of efficiency, a daunting question arose. How do you know when you have achieved maximum efficiency?
Vilfredo Pareto (1848-1923), an Italian engineer/sociologist/economist, proposed the following test: Run society a certain way and look at the results. If you can make some change that would result in at least one person being better off, without making anyone else worse off, then there still is room for improvement. You have not yet achieved what economists consider maximum efficiency.
If, however, you find there is no way to change things to make one person better off without hurting another, then things are as good as they can get. You have achieved “Pareto optimality.”
Two points need to be made. This is a test of efficiency, not of equity. It doesn’t have anything to do with the fairness of who gets what or how much. Second, it is a minimal definition of efficiency.
In a situation that seems Pareto optimal, you still may have room to make society better off if the amount you increase one person’s well-being exceeds the amount your change makes someone else worse off. So there are other definitions of efficiency beyond Pareto.
This is all pretty abstract and esoteric. Let me explain it with a do-it-yourself example. The galvanized piping in my 103-year-old St. Paul house started to leak so I have been replacing it with new copper. You make connections in copper water lines by soldering or “sweating” the joints.
Sweating copper piping is easier than it looks, if you follow a few rules. One rule is the surfaces of the pieces you want to join must be scrupulously clean. Before assembling the joint and heating it to apply solder, you have to vigorously rub the pieces with a wire brush or with emery cloth until the copper glistens.
Do-it-yourselfers like me buy fittings — tees, elbows, adapters, etc. — in small quantities. Modern, big-box building-supply stores depend on bar coding for everything they sell. Thus, every 59-cent copper pipe fitting you buy has an adhesive tag with a bar code and SKU number on it.
This doesn’t matter for most pieces, but there is a particular fitting called a “street ell” that is male on one end and female on the other. The outside of the male end is a surface to which solder must adhere, so it needs to be exceptionally clean. When retailers stick the bar-code tag on this end, the polishing process is vastly complicated. The adhesive is very sticky and it takes a lot of rubbing with a wire brush and emery cloth to remove the last trace.
This leads to frustrating situations in which one spends five minutes cleaning one 59-cent fitting when all the other fittings brighten up in 30 seconds or so. Here is where Pareto optimality comes in. If it is not any more difficult for the supplier to ensure that the tag only touches an area that won’t be soldered, then its doing so will make me happier and the supplier will not be any worse off.
Keeping the tag away from the soldered end will move our little society from a situation of less satisfaction to one of greater satisfaction: In other words, to Pareto optimality.
This may sound trivial, but the underlying process of looking for ways to use resources more efficiently is why people in Minnesota have more plentiful lives than people in the high plains of Bolivia or the jungles of Papua-New Guinea. The theory may be pedantic, but the process is vital.
As long as we are on the subject of copper pipe, let me illustrate two other economic concepts. I can reduce my frustration with annoying SKU stickers if I sit down and methodically remove at one time the offending scraps of paper and glue from several fittings. This takes me less time per fitting than if I do them piecemeal. This is an example of “economies of scale” and of the “division of labor” that Adam Smith described in his famous book, “The Wealth of Nations.”
I can also take all the offending fittings out to the garage where I have a wire brush wheel on an electric bench grinder. This machine takes little tags off with a vengeance. It is a good example of the “substitution of capital for labor” that explains why we spend so much less time in drudgery than our grandparents did.
Copper plumbing: It provides little economics lessons everywhere you turn.
© 2003 Edward Lotterman
Chanarambie Consulting, Inc.