A thermodynamical critique of efficiency

Apparently, in economics efficiency is evaluated by comparing actual output to potential output. If you want to increase efficiency, increase production, regardless of costs! To me this sounds like the runaway train scene in The Marx Brothers' Go West. In Samuelson's first chapter on macroeconomics, he relates efficiency and whether or not the economy is within its PPF to the ratio of GDP to potential GDP, clearly conflating productivity with efficiency.

In thermodynamics, efficiency is the ratio of work done to energy spent or, in economic terms, the ratio of production to resource use. The amount of work done per unit time is called power.
To make an analogy, it seems that if a new fridge cools ten times as much as an old one at 100 times the energy cost, it might be called "more efficient" by an economist. A physicist would call it "more powerful" but "less efficient".
If standard economic analysis of the energy market confuses productivity with efficiency in this way, it's no wonder we're running out of fossil fuels as quickly as we are.

Markets and Command in a Modern Economy

The market mechanism is a system of economic organization in which buyers and sellers determine production and prices by free competition. The way that this system solves the problems of how, what and for whom without central planning was dubbed the invisible hand by Adam Smith in his book The Wealth of Nations.
The market only works as advertised in the presence of perfect competition, meaning that no single buyer or seller can affect a price. Perfect competition is compromised by, among others, monopolies and unions. Another cause of market failure is when an economic agent can transfer costs to others involuntarily through spillovers or externalities such as environmental damage. It is also possible that unintended positive effects occur, or that beneficial activities are not undertaken because they are not profitable or cannot be bought and sold in the market or on a pay-per-use basis. The latter are called public goods.

Samuelson formulates the market mechanism with the electoral analogy of dollar votes, and points out the consequence that income inequalities determine for whom the market produces goods. This means that even a perfectly functioning market may result in socially undesirable outcomes, in the sense that some needs of the society are not met because the few agents with the most resources do not have those needs.
Modern mixed economies are based on the market mechanism with the government acting as moderator. The government can help the market operate more efficiently by introducing regulations to improve competition, take into account externalities, and divert resources to public goods. Also, the government can use progressive taxation and transfer payments to reduce income inequalities so the needs of a larger part of society are met by the market mechanism. Finally, the market displays instability, that is, cycles of growth and stagnation that can be extremely damaging to society and the economic system itself, and one of the roles of government is to mitigate the effects of these cycles or reduce their intensity thought fiscal powers (taxing and public spending) and monetary powers (regulating interest rates and the amount of available currency).

Experience seems to indicate that "a market economy cannot simultaneously attain full employment and stable prices".

Economies increase their efficiency through specialization, the use of money and capital investment. Specialization increases the productivity of labour by assigning each individual tasks they can perfom best and fastest. Money streamlines transactions which could otherwise be carried out only through barter. Investing in capital means diverting resources from production of consumer goods to production of tools to imcrease future production, that is, economies grow by trading consumption today for increased production tomorrow. In a market economy, how much is invested in capital versus production of consumer goods is determined by the price of capital, which is interest.

The difference between capitalism and communism is the private versus government ownership of capital.

Critique
Samuelson is unapologetic in stating that "Those without property or education and with skills, color and sex that the market does not value will receive lower incomes", and therefore are less likely to see their needs satisfied by the market. It sounds reasonable when one talks about inefficient businesses being eliminated from the market, but what happens when people themselves get eliminated from the market?

Samuelson calls the economic crisis of the 1970's "foul economic weather" as if the oil crisis, commodity shortages, and a breakdown of international finance and excessive regulation were external to the economic system, and on the same category as bad harvests. More on this later.

It seems that the role of the government in a mixed economy is both that of judge and party: the government judges the quality of competition by ensuring that no single agent can affect prices, but in order to promote public goods it must have the ability to itself affect the prices of public goods favourably. For this the government must have access to a substantial fraction of the available money, and the only way to obtain it is by taxation. Since the government regulates the market, it makes sense that economic activity is taxed (income tax, sales tax, etc). Poll taxes make less sense because they tax entities whether or not they take part in economic exchanges in the market.
If, as in communism, the government has a monopoly on capital, it leads to imperfect competition. In a market economy, everyone should have a share of the capital. But this is not what happens in modern self-described market economies: capital is owned not by people but by corporations. So maybe we are not living in a capitalist system but in a corporatist system, and we all know what Mussolini said about corporatism: "Fascism should more properly be called corporatism because it is the merger of state and corporate power". What we need is a system where individuals not only have their own labour, but they have a share of the capital, and collective ownership of the means of production just does not cut it, whether the collective is the state or a corporation.

Problems of Economic Organization

So, according to Samuelson, what are the basic concepts of economics, anyway?

The central problem of economics is the allocation of scarce resources to satisfy the unlimited needs of society, usually involving the production and distribution of goods to be consumed. Plentiful goods are dubbed free or non-economic and are excluded from the analisis. The law of scarcity is the basic fact that resources are scarce and wants unlimited.
The basic economic decisions that must be made by any society are what goods to produce, in what quantities, and who gets to enjoy them. Societies' economics organization is a mixture of custom, control and market.

The state of an economy can be specified by listing the amounts being produced of every possible good, and the economy is said to function efficiently if it is impossible to produce more of one good without reducing the production of others. In the state space, the locus of the efficient states is called the production possibility frontier.

The law of diminishing returns states that the higher the production of a given industry, the less it will improve with the same increase in resources allocated to it. This law is equivalent to the PPF being convex. The law of diminishing returns does not always hold, but it "eventually sets in".

Finally, the cost of an economic decision is not only the price of carrying it out, but also includes the loss of the benefits that would be obtained from an alternative decision. This is called opportunity cost.

Critique
I have issues with the way the law of scarcity is presented: often the problem is not insufficient production but inadequate distribution. Our capacity for food production is already enough to feed the entire population of the earth (and Samuelson mentions that an adult's nutritional needs can be satisfied for about $1 a day), yet people still starve all over the world. Amartya Sen has pointed out that the cause of famines is often lack of freedom and not lack of resources. Dennis Kucinich recently argued that Americans already spend enough for health insurance to pay for top-tier health care for everyone, but because they pay for insurance and not for care there is a large population without access to medical care. The problem goes away if one includes among the wants the demands of the agricultural industry or of the health insurance companies, which for one reason or another outcompete the demads of ordinary people for food or health care.

Of more concern are Samuelson's implicit assumptions about efficiency and scarcity. He says that the PPF gives a precise meaning to the term scarcity, but this implies comparing actual production to possible production, and not production to needs as he originally stated. In another troublesome passage, he says that there is no free lunch unless the economy is operating below efficiency. More precisely, to paraphrase his example, there can't be gift-giving or genuinely generous or disinterested behaviour unless there are idle resources available. The problem is that permeating Samuelson's exposition is the idea that achieving efficiency is good in itself, because it is impossible to produce more than is needed (an assumption contrary to fact in certain cases). But wait! Who was it that said that they dedicated themselves to state affairs so their children could dedicate themselves to law and industry and their grandchildren to art and science? Isn't increasing efficiency always justified on the grouds that it will free people to apply their time to nobler pursuits than just work? Aren't Americans working harder and more productively now than in the 1960's. yet their income has gone down in real terms? What is the difference between enjoying free time and idle laziness in the eyes of the economist? Am I being caught by the value-loaded terms efficiency and idle, or is there something perverse about the pursuit of efficiency (in its technical sense) for its own sake?

Finally, it is unclear to me whether the production possibility frontier is supposed to reflect the limits of a given economic organization (in which case the only way an economy can operate below efficiency is by having idle resources), or whether is is supposed to reflect the maximal production possibilities under any conceivable economic systems (in which case inefficiency can be ascribed to organizational flaws). In other words, does liberalization shift the PPF of an economy already operating at efficiency, or does it move the economy closer to its PPF? Is a planned aconomy on a low PPF, or deep inside its PPF due to inherent inefficiency of planning? Samuelson appears to contradict himself when he states that the USSR was "already on their rather low PPF" when WWII broke out and could not improve efficiency because it "had little unemployment", and then that "an economy is inside its PPF [...] because a command economy is subject to arbitrary decrees by inept bureaucrats" and so "deregulation [...] can improve efficiency and move the economy towards its frontier". I suspect the answer is both, depending on whether one is analyzing decisions about production of goods or about the organization of the economic system itself.

Looking for books on economics: part 0

When I decided to seriously teach myself economics, I started looking for books that one might describe as economics for mathematicians. The problem is that most books on mathematical economics (if not all, from what I've seen) are more aptly described as mathematics for economists because they assume a broad knowledge of economic phenomena, terminology, and even the history of economic thought, which I lack, and introduce mathematical techniques with which I am already familiar. The epitome of this situation is Paul Samuelson's classic Foundations of Economic Analysis. Initially I wanted to stay away from freshman economic textbooks because freshman textbooks are usually verbose, bulky, distractingly colourful and overpriced, but after briefly taking the high road I eventually settled on borrowing Samuelson's Economics textbook, which seems to be the all-time best-selling economics book, from the library.

I'll come back to my literature search later.