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Go figure: Does efficiency always save money?

Used computers

Popular belief in efficiency runs counter to basic laws of supply and demand. Make something cheaper and people want more - which could mean more spending in total, not less.

Efficiency makes things cheaper, yes? Good. So if things are cheaper, you don't have to spend as much, yes? Excellent. So basically, more bangs per buck = fewer bucks.

OK, which product has seen the most startling gains in efficiency or productivity, possibly ever, with huge falls in price relative to quality?

For my money, it's got to be computing and its spin-offs, like mobile phones, tablets and all that. Computing efficiency is said to follow Moore's Law. One version of this goes: "Every two years you can buy twice the processing power for half the price."

Way more bangs for our buck, repeatedly and often. You know the story - not so long ago one computer cost the crown jewels, filled a football stadium and ran all night to do seven sixes. Now look.

Put these improvements on a graph and the line goes through the roof. A good illustration of exponential growth is to imagine one grain of rice on the first square of a chess board and double the quantity on the next square, and so on. By the 30th square you're up to 536,870,912 grains, the 34th tops annual rice production in India, the last square would have maybe more rice than there's ever been. And still the cost is one square. Now that's what I call efficiency.

Next question, how much have we spent on this stuff?

Probably something like this.

There's no ideal measure of total spending on computing so I've used one for "information processing equipment" as an example - the lowest level of definition in the Office of National Statistics (ONS) data. It includes computers, printers, word processors and typewriters.

Far from falling, this suggests total spending on computing has risen sharply. Is anyone surprised? But this is exactly the opposite of our simple case. More bangs for your buck sometimes equals fewer bucks and sometimes, spectacularly, doesn't. This is amply demonstrated by the stuff in every high street, every home, office and pocket.

What we did with all that efficiency was to swallow it, lick our lips and ask for more. Efficiency did not satisfy demand but helped create it. In some ways, the popular belief that efficiency means less spending is at odds with basic laws of supply and demand - if it's cheaper, people often want more, and sometimes that means more spending in total not less.

Another question. What does this mean in areas where we're most concerned to raise efficiency, like the public sector?

Here, too, we often hear the case that efficiency is the answer - if we make our money work harder, there'll be less demand for more money. We see this in health, particularly, which faces huge pressure to cut costs. All parties make these claims.

One way of testing the analogy with computers is to think of another. How about drains? If the efficiency of having your drains done doubled every two years, you would not spend massively more on drains. You'd spend less. You only have your drains done if you need to.

So here's the final question, it's a weird one, but a big one for public services - is health more like drains or computers?

Few people want their drains done for fun and not many want a colonoscopy because there's nothing on TV. Maybe health has most in common with drains.

But we might want more colonoscopies as the population ages, unlike drains. More like computers, we might want more healthcare as the technological possibilities and treatments grow.

Also like computers, we might be influenced by trends that stretch the definition of healthcare - for more cosmetic procedures, maybe, or the optimum state of physical and mental well being, or elective caesareans. Like computers, health might be what we want to spend more money on if our incomes grow. Like computers, health might simply matter to us more.

You might say that this would be foolish, a waste, and certainly no business of the state's to pay for it. You could say the same about computers, though it would be a brave politician who told the world that much of that extra hard/software was stupid and, by the way, you could manage with a cheaper phone - even if true.

Does that mean more state spending? Not necessarily, though it might. It might mean more private spending. To those who say we have no money to spend either way, watch what happens to total spending on computers over the next 10 years. These are choices and priorities, not necessities.

It goes without saying that we should try to make healthcare more efficient. But efficiency is only part of an undiscoverable equation for supply and demand that includes hope, expectation, income, international comparisons, law, where we start from, fashion, innovation, need, political and moral values, institutional inertia, power and who knows what.

There's no simple relationship between bangs and bucks.