Efficiency is all about achieving the maximum output with the minimum input. It has become the bedrock of modern capitalism, with companies striving to optimise resources to improve profitability. However, this pursuit of efficiency can lead to unintended consequences that may undermine long-term economic growth and stability. Fossil fuels are more efficient than renewables but produce negative public health outcomes. Free trade can lower prices but undermine domestic industries. AI could increase the productivity of workers, but it could also replace them. These examples illustrate ways in which the most efficient options don’t always produce the best long-term outcomes. One of the most glaring examples of this paradox can be seen in global supply chains. The just-in-time system, developed by Toyota in the 1970s, revolutionised manufacturing by minimising inventory costs and improving production efficiency. But the pandemic exposed vulnerabilities in this hyper-efficient system. With supply chains stretched there were inventory shortages and production delays in several industries, which ultimately led to higher prices. The efficiency that had once been a competitive advantage suddenly became a liability. The macroeconomic equivalent can be found in the concentration of supply chains. Free trade produces amazing efficiencies because it drives down prices towards the lowest possible cost of production worldwide. But it can also see global productive capacity become concentrated in certain countries and regions. When global trade is disrupted, these highly concentrated supply chains can produce inflationary bottlenecks in the global economy. Free trade can also harm domestic industries and make various types of worker redundant in even slightly less competitive countries. Important skills and sources of employment are lost, leading to trade deficits and additional government welfare expenditure. So while economists usually argue that free trade is more efficient, it can also have negative consequences. Another example is welfare spending, which typically goes to individuals who are more likely to spend it right away on basic needs like food, housing and utilities. This immediate consumption boosts demand for goods and services, stimulating economic activity and increasing GDP. For politicians, welfare spending must seem like a great way of keeping economists and voters equally happy. On the other hand, education spending must appear extremely inefficient, taking decades to bear fruit. However, investing in education tends to produce more valuable stimulus in the long run by boosting productivity even if there is less of an immediate impact on growth. Even with respect to education we tend to focus on achieving outcomes like better grades, rather than helping young people develop their own ideas. This can stifle the type of thinking that produces the innovations most beneficial to society, and highly efficient processes often leave little room for the experimentation, creativity and serendipity that leads to innovation. To illustrate this point, imagine if Sir Isaac Newton had been mass-producing apple pies instead of lazing beneath a tree! As such, the increase in the student-to-teacher ratio in South African schools should concern anyone who believes alleviating poverty cannot be achieved simply through social grants. Despite what we might like to believe, markets actually thrive on inefficiency. If markets were perfectly efficient there would be no arbitrage opportunities and no incentives for entrepreneurs to identify unmet needs. In this respect governments and markets are the same. Despite what we might like to believe, markets actually thrive on inefficiency. If markets were perfectly efficient there would be no arbitrage opportunities and no incentives for entrepreneurs to identify unmet needs. It is the pricing inefficiency of the market that creates investment opportunities. When stocks become oversold, this creates a buying opportunity, and when they become overbought that is usually the time to sell. Imagine a world where asset prices tracked their long-term averages or even stayed perfectly constant because the market was so efficient at maintaining a balance between supply and demand. There would be no finance industry. The finance, insurance and real estate sectors combined account for 20%-25% of US GDP. That means a big chunk of the world economy relies on home renovations and stock market pricing inefficiencies. Add in all the discretionary spending on nonessential goods and services and the importance of inefficiency to the global economy becomes obvious. Likewise, some of the best emerging market investment opportunities occur from inefficiencies such as underdeveloped infrastructure and the untapped potential of a large informal economy. Once the inefficiencies are resolved economic growth tends to slow down, which is why growth tends to be slower in more advanced economies that have already gone through this process. The same could be said of AI, which might end up optimising production to such an extent that fewer workers are needed to produce the same or even a greater quantity of goods and services. This is already leading to job losses, including in the tech sector, with white collar jobs that pay the highest wages and stimulate the most spending, at risk. As jobs are lost this reduces household incomes, leading to a decline in aggregate demand. This reduction in spending could then have a ripple effect across the entire economy as businesses see their revenues decline in line with higher levels of unemployment. While some companies may make greater profits at first, in the long run the overall economy could suffer. As jobs are lost this reduces household incomes, leading to a decline in aggregate demand. This reduction in spending could then have a ripple effect across the entire economy as businesses see their revenues decline in line with higher levels of unemployment.As we can see, efficient systems tend to optimise for short-term gains, often at the expense of long-term sustainability. This is evident in industries such as agriculture, where intensive farming practices aimed at maximising yields can lead to soil degradation, loss of biodiversity and other environmental issues. In contrast, traditional agricultural practices that seem inefficient by modern standards often incorporate crop rotation, permaculture and the use of organic fertilisers. These practices may result in lower crop yields but contribute to the long-term health of the ecosystem. Similarly, in energy production the pursuit of efficiency has led to a reliance on fossil fuels, which are efficient in terms of energy output but have environmental costs. The transition to a more diversified energy mix, while currently less efficient, is an investment in sustainability that could reduce negative environmental impacts and health costs over time. It’s not just the source of the energy either. Globalisation is inherently energy inefficient because it moves goods over such long distances. However, because of specialisation in production and wage differentials, shipping goods from one side of the world to the other can be cost efficient. This exposes a paradox in the concept of economic efficiency as different types of efficiency can sometimes contradict one another. As the world becomes more concerned about energy efficiency and factors related to geopolitical risks, supply chains could be duplicated, adding inefficiency to the global economy while improving resilience and environmental outcomes. While rational individual decision-makers will always strive for increased efficiency, we should recognise the macroeconomic risks inherent in this approach to business. From fossil fuels and chemical fertilisers to AI and free trade, efficiency comes with downside risks just as inefficiencies sometimes have their uses. Shubitz is an independent Brics analyst.