A NEW APPROACH TO MEASURING ECONOMIC EFFICIENCY-- THE CONCEPT OF SOCIAL PRODUCT DIFFERENTIATION1 D. B. Timmins, PhD Traditional political-economic theory has placed greatest emphasis on efficiency of production and distribution of goods. Liberal trade policies among nations and essentially free capital flows have been seen as a means for promoting such efficiency. Until recently it indeed seemed that the rate of convergence towards social and economic homogeneity was accelerating as many of the traditional mechanisms which nations have in the past relied upon to preserve economic sovereignty and national life-styles have been abandoned or restricted -- responding to the logic of greater productive efficiency. In recent years, however, "quality of life" and "life style" have become more important to many people than economic efficiency alone. This phenomenon is manifest in the Canadian demand that advertising from south of the border be limited in Canadian magazines and television, and current French insistence on reserving a certain proportion of screen and air time for French-produced films -- all in the name of preserving their distinctive culture. This paper will argue that there is not only political, but economic merit in such insistence. Perhaps we have been victimized by what Veblen called a "trained incapacity to see" which biases us towards ways of thought associated with the "efficient" attainment of such traditional measures as maximum GNP, even at some expense to other objectives, e.g. freedom to plan our own way, control our environment, preserve a desired level of domestic political and social sovereignty, and retain a nationally distinct way of life. People are beginning to feel seriously shortchanged in the achievement of a number of non-physical product goods intuitively recognized as important to society. As values in life other than the output of physical product are better appreciated, conflicts arise and lead to questions about social pluralism both in the United States and abroad. These attitudinal changes have significant meaning to businessmen, economists, and government administrators. Where the market fails to take into account these wants -- or is incapable of optimal balance between "physical product efficiency", narrowly defined, and "economic efficiency" (defined in the broader context of this article), society will, to some extent at least, recognize the gap, and non-market social institutions will arise to bridge it, even if unconsciously. This may explain what is happening internationally, illustrated by the growing disillusionment on the part of many societies with liberal trade and investment policies. Supporting the notion that we must include many nontraditional items in our calculus of overall "efficiency", Albert Hirschman attaches social value to a certain degree of laxness in the entire industrial process. Traditional arguments hold that the quicker the consumer responds to inefficient production or poor style or service, the better for the functioning of competitive markets. On the contrary, Hirschman argues that, "If all were assiduous readers of Consumer Reports , or determined comparison shoppers, disastrous instability would result and firms would miss out on chances to recover from their occasional lapses . . . . The firm will be competed out of existence in very short order . . . ." We must, therefore, conclude that the optimal arrangement is not one as close as possible to perfect competition, but one rather far removed from it under which firms have time to receive signals that they are doing something wrong and react to correct the situation. This might be defended as "the higher efficiency". None of this is to say that a nation should perpetually protect its non-competitive firms from foreign competition. The argument goes rather to the massive social and economic costs of manpower and resources idled by short-term shifts in technology and tastes. The new efficiency analysis urges the political-economic wisdom -- calculated in terms of the broader measure of overall social efficiency -- of pacing the rate of change to conform to internal economic desiderata and the structural adjustment capacity of the economy. While it is beyond the scope of this article to develop detailed policy recommendations, it is argued that wherever solutions are sought, the search should include non-market mechanisms since non-market problems (though not non-economic problems) are involved. Among other things, acceptance of this notion implies willingness to provide programs going far beyond accelerated depreciation allowances for industry or stop-gap unemployment compensation for labor. It is also suggested that in the field of international investment both source and host nations, and above all multinational firms themselves, must be prepared to understand and accommodate the interests of people who, with varying degrees of articulateness, insist on including many non-traditional items in their calculations of the benefits and costs of foreign ownership. Here, as so often before, experience may be preceding theory, and intuitively reacting Latins, Africans or Canadians may prove better politicians and economists than those who concentrate on calculating well-being in terms of physical product efficiency alone. This non-market reaction in taking into account matters political scientists and economists are not yet fully equipped to deal with in a theoretical sense, may prove to be a more sensitive instrument than market worshipers have realized. It would be a willfully blind or ill-informed economist who would today dismiss these reactions as mere "economic nationalism" or economically irrelevant "political static." When Robinson and Chamberlain introduced the concept of "product differentiation" as the operational principle in their theory of Imperfect Competition some fifty years ago, this was hailed as a breakthrough in economic analysis. Are we today on the threshold of identifying the importance of "social product differentiation" as an equally significant attribute of international exchange? What must be understood is that past economic policies have not suddenly become detrimental on net to the interests of either source or host governments. Rather, it is that new values and ways of measuring efficiency -- a whole new broadening of the theoretical framework--has occurred. Economists and political scientists are just beginning to see how rusty and inadequate their mechanisms are for taking the broader range of social expectations into account and for adjusting to a faster rate of change in technological developments and competitive forces in responding to the conditions of the coming decade. New modalities for investing are surely part of the solution as are the broader forms of domestic adjustment assistance mentioned above, just as many have come to accept a somewhat higher rate of basic inflation and of "frictional unemployment" as part of the post-industrial world. Much of the answer may lie in an acceptance by economists and policy officials that a pluralistic world in which people place different values on material and non-material goods is not only workable, but is probably more natural than the theoretical world of homogenous technology, free factor exchange, and eventual factor price equalization whhich many economists have become accustomed to think of as our stock in trade in analyzing the marginal efficiency of capital. The dialogue over foreign investments and multinational companies has far too long foundered over whether investment is "good" or "bad". Agreeing that it can be either or both--depending on one's underlying normative assumptions--and that individual companies may be either good or bad corporate citizens (or sometimes both depending on one's perspective), it seems time that unions and managements, governments and scholars, administrators and policy shapers, begin doing the grubby work of costing (imputing values where necessary) such "social purchases" as pursuing a desired development path, controlling the internal economy in the interest of higher employment, controlling major corporate hire/fire decisions in the interest of domestic tranquility, and the educational and growth effects of foregone research facilities where a specific investment entails location of the facilities abroad. Once such nominal pricing has been done, people can at least judge how much they would in fact have to pay in terms of foregone production to purchase a desired degree of freedom from, or control over, foreign investment. It would be interesting to see the results of a Canadian poll some years from now in which the question would be not merely "Would you be willing to accept a lower standard of living for more control over the Canadian economy by reducing or abolishing U.S. investment?", but "Your share of the potential income foregone, should the Ottawa government refuse the request for an investment license by company Y, has been calculated to be Canadian $X. Should the government refuse this license?" There is a non-market (though not non-economic) socio-economic dimension which people, if not economists and political scientists, have intuitively identified as essential. Man does not live by bread alone. The aspirations of people for social variety, substantial control over domestic economic and social planning, and preservation of desired national life-styles are as rational purchases in their own way as a decision to build a national highway system or expand national parks. This perception extends as well to nations, e.g., Canada and France, who are officially beginning to calculate benefits in terms other than increased physical product alone. When businessmen and officials of capital exporting countries view a considered action to refuse entry as a deliberate purchase of a social commodity (in this case a negative commodity), and when people can make investment policy decisions in full knowledge of the dollars and cents cost of their insistence upon such "social product differentiation", the world will be well on its way toward more meaningful communication in this important area. 1 Published in Encyclia , the Journal of the Utah Academy of Arts, Letters, and Sciences, 1988