LANDMARK REPORT False economies | Definitions of efficiency

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Three kinds of efficiency

Definitions from False economies: decoding efficiency

The field of economics has developed a thorough understanding of the concept of efficiency.

Unfortunately, this knowledge is generally expressed in the jargon of the field and has not tended to inform the public debate on efficiency of the public sector. This is a shame because the concepts are readily expressible in plain English.

 

One kind of efficiency is doing the work you are doing with the fewest possible resources, getting ‘more for less’ or ‘value for money’. This means producing each item and delivering each service with the least expenditure of time, money, materials, etc. Taking a quicker route to work, shopping at a supermarket that is cheaper and just as close, and printing documents double-sided, are all examples of increased technical efficiency.

 

Another kind of efficiency is about doing the right work, by allocating resources to produce and provide items and services of the highest total value. Value is often thought of as the amount of money someone is willing to pay, but this is not always reliable for all circumstances. Also important is best meeting needs in a wide range of circumstances, whether or not payment is involved. A print-out of a document that is read and used by many people can be more valuable than a print-out that is read by only a few, or no-one at all. Buying more nutritious and flavoursome foods gives more value than buying unhealthy and unappetising food. Using paper on printing the most useful documents and getting the best food for the weekly budget are examples of increased allocative efficiency.

 

A third kind of efficiency involves ensuring future needs are met and finding new ways to fill them. This includes ensuring that new technologies, new ways of operating and new ways of thinking are able to be used. Saving time and petrol by working from home, or using electronic paper instead of printing, can be examples of increasing dynamic efficiency. This kind of efficiency is in many ways the least understood. While technical and allocative efficiency are well-grounded in economic definitions, dynamic efficiency is a more fluid concept.

 

To illustrate the differences with a public sector example:

  • Technical efficiency: Building a road using the best mix of labour and capital. Using picks and shovels when machinery can do a lower-cost job is technically inefficient.
  • Allocative efficiency: Building a road where it is most needed. Even if a road is built with the optimal labour-capital mix and no waste, if it is in the wrong place, or if a more heavily trafficked road is neglected, that is inefficient in an allocative sense. Those resources could have been used elsewhere with better outcomes.
  • Dynamic efficiency: Attending to transport needs as opportunities or needs change over time. That may mean taking on new modes, such as high-speed rail.

 

All three kinds of efficiency are important. But often the pursuit of one can get in the way of achieving the others. This is particularly important in complex and continuously changing areas, which is very often the case in public services. A simplistic approach to efficiency often fails to recognise that resources are necessarily devoted not only to produce current outputs, but also to make sure these generate the most value to citizens (for example, by tailoring them to different needs in different locations or to different groups), and also to make sure that the outputs change and improve over time as new technologies and needs emerge.

 

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