Does productive efficiency guarantee that markets are operating efficiently?

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kipling2448 | (Level 3) Educator Emeritus

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Productive efficiency does not mean that markets are operating efficiently.  In fact, the two are only marginally related.  Markets operate according to principles of supply and demand.  Those two phenomena should track each other efficiently.  As demand rises, supply should rise to meet it.  Markets operate according to their own dynamics.  

Productivity, on the other hand, is a function of a number of factors unique to specific factories or industries.  Simply because demand rises, especially demand that could have been predicted to rise, does not mean that the manufacturing or service sector as the case may be is prepared to respond.  Failure to recapitalize a manufacturing plant, for instance, can result in that company's being unable to support demand.  That is why a certain percentage of profits must be channeled into maintenance and modernization of the industrial base.

Other problems that can contribute to inefficiency on the productive side of the equation irrespective of efficiency of the markets include managerial incompetency and labor disputes, or a failure of the labor pool to prepare itself for advances in manufacturing developments.  Rigidity in either the management or labor sectors can seriously impede productivity.  That means supply will not meet demand, which can result in inflationary pressures.

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