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Evan Davis on... trade-offs

Updated Wednesday 13th October 2010

Evan Davis talks about trade-offs in the world of economics and business


Copyright open university


Copyright open university


Evan Davis

Life delivers lots of dilemmas and trade-offs.  You can have more of one thing but then you have to take less of another.  You can spend more time with the kids, but then you won't do so well at work and you won't get paid so much.  You can spend more time out partying, but you won't get as much sleep.  It would be nice to have both, but you can't.  Well that’s what life delivers us; economics is really the study of trade-offs, of thinking about them, understanding them and articulating them.  And it’s interesting that in business there are lots of trade-offs, and companies employ logicians and mathematicians to understand and calculate how to optimise some of the choices that are made within those trade-offs.

If you keep lots of stock of an item then you’ve always got it to hand when you need it, but it costs a lot to keep stock so it’s a drain on your profits if you do.  These are the sorts of decisions that companies can work out in a reasonably scientific way.  Should they have a lot of warehouses close to customers which don’t have the same economies of scale as fewer warehouses but are closer to the customers, or should you have one big warehouse with lots of economies of scale but then have long lorry drives to customers and to suppliers?  These are the kinds of things that companies work out.  But there are a lot of other trade-offs in companies and in business, where almost the rhetoric is to deny the existence of a trade-off at all.

Health and Safety’s a very good example.  You don’t hear companies say well we've got to weigh up the cost of safety versus the benefit of it, you just generally don’t hear them put it that way.  You don’t hear them say, hang on a minute, for every bit of extra pound we put into keeping our customers safe, that means we have to keep the prices high, we don’t want to keep the prices high, do we?  You don’t hear companies put it that way; they’ll tend to talk in absolutes.  You don’t hear companies say Oh customer service, terribly expensive, let’s have some dissatisfied customers because frankly it’s not worth the cost of trying to satisfy everybody.

Companies find it’s better to talk often in terms of absolute objectives rather than trade-offs and dilemmas, and there’s a reason for that, human beings tend to be rather one dimensional.  They work better when they're facing in one direction and they're not trying constantly to weigh off one thing against another.  So I understand why companies deny trade-offs where there are trade-offs, but it does mean that sometimes the costs and benefits of activities are rather obscured, that the real trade-off that is there, the real trade-off that does exist between passenger safety for example on the railways and the price of railway tickets, that these real dilemmas are not articulated.

So here’s the way I would do it if I was running a company.  I would have a department of people, the scientists, let’s call them, whose job is in a very rational, cold, unpleasant way to think about the costs and benefits of everything in money terms, seeing the price of everything and the value of nothing, and to let the bosses, the human relations people, the public relations people, to let them try and put it all in human terms in a very one dimensional way that doesn’t talk about the trade-offs at all.  It seems that as humans we don’t like to face trade-offs, but as businesses and as rational businesses, you have to face the fact that they do exist and there is a price to everything, and it may not have a value sufficient to cover that price. 

That’s my opinion; you can join the debate with the Open University.



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