Efficiency and economic principle

Since needs are generally assumed to be unlimited, while goods to satisfy them are only available in limited quantities, a scarcity problem arises. From this, the norm of efficiency can be derived, which is at the centre of economic activity and finds its expression in the economic principle (also the principle of economy, rational principle).

Efficiency can generally be defined as the ratio of result to expenditure. The concretisation of the 'result' depends on the respective question. For example, it can be expressed in units of benefit or monetary units and applied to different reference groups (individuals, groups, companies, total population). In this respect, efficiency can also be interpreted as a benefit-cost ratio. It is considered a measure of economic efficiency.

I can concretize the economic principle in three variants:

• Maximum principle: For a given effort, the result should be maximized, for example, earn as much money as possible (goal/result to be maximized) in five hours (given effort).
• Minimum-principle resp. principle of thriftiness: At given result the effort should be minimized, for example earn 100 Euro (given goal/result) with as less working time (effort to minimize) as possible.
• Optimum principle: Neither result nor effort are fixed, rather an optimal combination of result and effort is aimed for. In relation to the above example of earning money, the optimum principle would be fulfilled if the net hourly wage is as high as possible. Depending on the concrete framework conditions, overtime bonuses (which would argue for the highest possible working time) and tax progression (which would argue for lower working time) would have to be taken into account. Determining optimum conditions can be considerably more demanding in individual cases than acting according to the minimum or maximum principle and requiring mathematical procedures. However, it satisfies the criterion of efficiency in a special way and is pursued above all in business contexts, for example to determine the optimum order quantity.

If several objective functions are aimed at (for example, increasing the benefit of A, B and C), the criterion of Pareto efficiency or Pareto optimum is also important. Pareto efficient is a state when it is not possible to achieve one goal better without this being at the expense of another goal.

Pareto Efficiency should always be aimed at against the background of scarcity, as no other relevant value issues are involved here. By contrast, the efficiency beyond this in the sense of the above definition is only suitable to a limited extent as the sole value yardstick for assessing situations or alternatives, since the objective function (the desired result) is initially arbitrary and normatively neutral, but economic activity usually involves other norms such as equity.

Here is an example: Assuming that in a society 90% of the (net) income falls to 5% of the population and there is no redistribution. Such a situation is Pareto-efficient, because you cannot improve someone's situation without worsening the situation of another person. Also Pareto-efficient would be the situation after a fiscal redistribution, as a consequence of which the 5% of the population with the highest income may only account for 40% of net income. However, redistribution measures can have a negative impact on the motivation to work or on the quantity of goods produced. If efficiency in this context is determined by the ratio of the quantity of goods produced to the working population, the efficiency of the redistribution measure would decrease. However, assessing such decisions only from the point of view of efficiency and ignoring other criteria such as equity may lead to undesirable results.