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Seminar notes for Technical Efficiency
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Seminar 3 Alternative perspectives:Technical Efficiency
(a) Explain why a firm may not be able to achieve technical efficiency through maximising
the productivity of labour.
Technical efficiency is defined as obtaining the greatest possible production of goods and services
from available resources. In other words, resources are not wasted in the production process. In
terms of labour this would imply that labour output is maximised and none of their potential for output
is compromised. Essentially they produce at their highest productive point, somewhere along the
production function line shown below. The production function is defined by Q = f (K, L). In orthodox
economics it is assumed that every firm desires technical efficiency and it is mainly the firm's
allocative decisions that are studied. Heterodox economics argues that it is not always the case that
firms achieve technical efficiency, especially in the case of labour. To begin, the production function
cannot be calculated, as it is difficult to assign a value to labour productivity whereby that is the
maximum that can be produced. The productivity of labour is assumed to have a finite value but
perhaps it can continue increasing to the point of exhaustion or death.
(b) Is technical efficiency desirable?
Technical efficiency is the effectiveness with which a given set of inputs is
used to produce an output. A firm is said to be technically efficient if a firm is
producing the maximum output from the minimum quantity of inputs, such as
labour, capital, and technology.
Technical efficiency requires no unemployment of resources.
From Sawyer textbook:
Leibenstein suggested 4 major reasons why enterprises usually operate with some degree
of X- or technical inefficiency. First, the contract for labour does and cannot completely
specify the tasks undertaken by a particular individual worker which took into account every
possible eventuality would be very long and time consuming and costly to draw up. It is likely
that there would still be eventualities which were not anticipated at the time the contract was
drawn up. Further, the firm may find it useful to maintain some element of flexibility in the
way labour is used, which would be ruled out by a fully specified contract. A fully specified
contract would have to include not only which range of tasks the employee is to undertake
and the hours of work, but also the degree of effort and dedication required.
Second, not all factors of production are available for purchase in a market, so some of the
factors required for technical efficiency may not be available to the enterprise.
Third, the production (which serves to define technical efficiency) is not something about
which firms are completely knowledgeable. Instead the production function is something
which firms discover through experience and trail and error. Thus a firms previous
experience and its willingness to experiment will be factors contributing to its knowledge of
the production function which it faces. If a firm does not know its production function, it may
have difficulty in reaching it, i.e. in achieving technical efficiency. Even if the firm is on its
production it may not realise it and continue to experiment.
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