2.The economy concept of dynamic efficiency

Dynamic Efficiency and Entrepreneurship

The standard of dynamic efficiency is inextricably linked with the concept of entrepreneurship, and in fact, a full understanding of the economic notion of dynamic efficiency requires a prior, if brief, review of the principle and basic attributes of entrepreneurship, understood as the main driving force behind the creativity and coordination which spontaneously arise in the market.

The word “entrepreneurship” derives etymologically from the Latin term in prehendo, which means “to discover,” “to see,” “to realize” something. In this sense, we may define entrepreneurship as the typically human ability to recognize opportunities for profit which appear in the environment and to act accordingly to take advantage of them. Entrepreneurship therefore involves a special alertness. Webster’s New World Dictionary and Thesaurus defines “alert” as “watchful; vigilant.”(23)Also fully applicable to the idea of entrepreneurship is the verb to speculate, which originates etymologically from Latin as well, in this case from the word specula, which referred to the towers from which lookouts could gaze into the distance and detect anything that approached.(24)

The most important features of the above concept of entrepreneurship with respect to the dynamic-efficiency criterion that interests us are as follows:

First, entrepreneurship always generates new information; that is, every entrepreneurial act involves the discovery of new information which the actor did not previously possess (a profit opportunity that had gone unnoticed before). This information which entrepreneurs constantly create when they act is subjective, practical (in the sense that it is only created through entrepreneurial action in its corresponding contexts), diffuse (since some portion of it exists in the mind of every human being), and tacit (very difficult to articulate).

Second, by its very nature, entrepreneurship is fundamentally creative, which means that any social maladjustment is embodied in a profit opportunity which remains latent until entrepreneurs discover it. For example, if B finds resource R of little use, yet A has a strong need for it, clearly a social maladjustment exists and gives rise to an opportunity for profit: entrepreneur C must only recognize this maladjustment to buy the resource from B at a low price and sell it to A at a high one, thus obtaining a “pure entrepreneurial profit.” In this way, when an entrepreneur perceives a profit opportunity that has not yet been heeded, in his mind he creates information which did not exist before and which, upon the completion of the entrepreneurial act, results in a pure entrepreneurial profit.

Third, entrepreneurship transmits information. If entrepreneur C inexpensively buys resource R from B, who has plenty and makes poor use of it, and then C sells the resource at a high price to A, who needs it urgently, C transmits to A and B the information that resource R is available and should be saved. He also communicates to the entire market, in consecutive waves, that someone is willing to pay a good market price for R (market prices constitute very strong signs in that they convey a large amount of information at a very low cost).

Fourth, entrepreneurship exerts a coordinating effect. In consequence of the entrepreneurial act we have been describing, A and B learn to govern and coordinate their behavior in terms of the other’s needs: in fact, once the social maladjustment has been discovered and eliminated, B saves resource R, which he took no advantage of before, in order to hand it over to A, who needs it urgently.

Fifth, entrepreneurship is competitive. The word “competition” derives from the Latin term cum petitio, which denotes the concurrence of multiple requests for the same thing, which must be allotted to an owner. Entrepreneurship is competitive in the precise sense that once a certain entrepreneur has discovered or created an opportunity for profit, that same opportunity, with its specific coordinates of time and place, cannot be created, discovered, or seized by another entrepreneur. This makes the entrepreneurial process one of rivalry, one of pure competition in which entrepreneurs vie with each other to be the first to discover and take advantage of the opportunities for profit which are created in the environment. Webster’s Revised Unabridged Dictionary provides this definition for the verb, “to compete”: “to contend emulously; to seek or strive for the same thing, position, or reward for which another is striving; to contend in rivalry, as for a prize or in business; as, tradesmen compete with one another.”(25) The above notion of competition patently has nothing in common with the so-called “model of perfect competition,” in which multiple offerers perform the same actions and sell the same good at the same price; that is, a model in which, paradoxically, no one can be viewed as competing.

Sixth and lastly, the entrepreneurial process never stops nor ends. Though one might think that the social process driven by entrepreneurship could reach a state of equilibrium; in other words, that it could stop or end once entrepreneurs had discovered and seized all of the profit opportunities which embody social maladjustments (and, in fact, most members of our profession regard such a “final state of rest” as the only object of study worthy of research), there is no question that the entrepreneurial process of coordination is unbroken and never-ending. The truth is that as the entrepreneurial act coordinates, it creates new information which in turn modifies within the market the involved actors’ general perception of ends and means. New maladjustments ensue, and entrepreneurs begin to discover and resolve them, and in doing so, produce coordination in an ongoing process of ever-expanding knowledge and resources. A constantly increasing population sustains the process, which tends to be as coordinated as humanly possible in each set of historical circumstances (coordinated social “Big Bang”).

Now that we have described the fundamental characteristics of the entrepreneurial process, we are in a position to better grasp the economic concept of dynamic efficiency as well as the positions of the assorted authors who, in the history of economic thought, have approached the topic.

The Economic Concept of Dynamic Efficiency: Creativity and Coordination

From a dynamic standpoint, an individual, a company, an institution, or an entire economic system will be more efficient the more it fuels entrepreneurial creativity and coordination as we have explained them.

From this dynamic perspective, the truly important goal is not so much to prevent the waste of certain means considered known and “given” (the prime objective from the viewpoint of static efficiency), as it is to continually discover and create new ends and means, and thus to foster coordination while accepting that in any entrepreneurial process new maladjustments will always appear and hence a certain amount of waste is inevitable and inherent in any market economy.

Consequently, we can affirm that the dynamic aspect of efficiency is the most important. Even though an economic system may not have achieved a point on the production possibility frontier, all of its agents may profit if entrepreneurial creativity constantly shifts the curve outward and hence improves everyone’s possibilities with a continuous, creative flow of new ends and means which, prior to their entrepreneurial discovery, had yet even to be envisioned.

It is also true, and highly significant, that the dynamic aspect of economic efficiency incorporates the static aspect: for the same entrepreneurial force which propels dynamic efficiency through the creation and discovery of new profit opportunities is precisely the one which achieves the highest degree of static efficiency humanly possible at each moment by coordinating preexisting maladjustments. (Nevertheless, given the endless flow of new maladjustments, Pareto optimality can never conceivably be reached in a real market economy, as we have stated, and the possibility that existing resources may be wasted cannot be totally eliminated.)

Next we will comment on the contributions of various authors who, from one perspective or another, have approached the above concept of dynamic efficiency. It is not surprising that many of these authors have been heavily influenced by the Austrian economic tradition which, if known for anything, is known precisely for the emphasis it places on the dynamic conception of the market and on the leading role of entrepreneurship in market processes. For a more extensive treatment of these views, we refer the reader to the principal works of Mises and Hayek on the conception of the market as a dynamic process driven by entrepreneurship (Mises) and on the notion of competition as a process of discovery (Hayek).(26)

Israel M. Kirzner and the Idea of Dynamic Efficiency

Kirzner is the great contemporary scholar who, following in the footsteps of Mises and Hayek, has developed in extenso an analysis of entrepreneurship. He is also one of the most remarkable theorists to study the economic concept of dynamic efficiency, which he defines as the “ability to encourage entrepreneurial alertness to valuable knowledge the very existence of which has not previously been suspected.” Kirzner sees the entrepreneurial act as extraordinarily coordinating and views social coordination not in a static or Paretian sense, but in a dynamic sense; that is, as a “process during which market participants become aware of mutually beneficial opportunities for trade and, in grasping these opportunities, move to correct the earlier errors.”(27)

In addition, Kirzner has been careful to point out that his dynamic-efficiency criterion, which is based on creativity and entrepreneurial coordination, is free of all value judgements and therefore totally wertfrei: anyone who wishes to promote coordination must encourage and foster free entrepreneurship;(28) in contrast, anyone who prefers social maladjustments and conflicts must place all sorts of obstacles in the way of entrepreneurship. Economic theory alone cannot label ends good or bad, although it undoubtedly helps people to more fully grasp the ethical choices they face and to more easily adopt a consistent moral position.

Kirzner’s idea of dynamic efficiency is also unaffected by the other criticisms we have outlined against the different static-efficiency standards prevalent until now. Finally, Kirzner indicates that from an analytical standpoint, the dynamic aspect of efficiency is a particularly useful tool for producing comparative analyses of different institutions and legislative possibilities. Indeed, the dynamic-efficiency analysis makes it possible to perform an evaluation which leads to a much clearer and in many cases much different position than the one which usually follows from a mere static-efficiency analysis.(29)

Murray N. Rothbard and the Myth of Static Efficiency. Roy E. Cordato’s Attempt at Summation

Rothbard has also made valuable contributions to the field of dynamic-efficiency analysis. This author has stressed that the “static efficiency” ideal, to which the theorists of welfare economics attach primary importance in their studies, is no more than a myth, since its operative management requires a given framework of ends and means which can never come to exist, much less be known, in the constantly changing social environment of the real world. Furthermore, Rothbard is perhaps the author who has most plainly revealed the connection between the dynamic conception of economic efficiency and the sphere of ethics. Considering the lack of knowledge of the ends, means, and utility functions that truly exist in society, Rothbard finds it imperative to first establish an appropriate ethical framework which stimulates dynamic efficiency. This framework comprises the set of rules which govern property rights and permit voluntary trade in which the different economic agents invariably demonstrate their true preferences. Rothbard maintains that ethical principles alone can act as a standard of efficiency by which to make decisions.(30)

Roy E. Cordato has published an interesting book in which, from the perspective of welfare economics, he examines the main contributions of Austrian economists in general, and of Mises, Rothbard, Hayek, and Kirzner in particular. Cordato arrives at the conclusion that rather than the achievement of “optimum” results (the objective of static efficiency), the chief goal in the market should be the predominance of a suitable institutional framework which furthers entrepreneurial discovery and coordination. Economic policy must be directed toward identifying and removing the artificial obstacles which interfere with voluntary trade and the entrepreneurial process.(31) Cordato’s attempt is especially admirable in that through it he aims to throw open the windows on welfare economics, now stale and long rooted in purely static assumptions, and thus to open it up to the subjectivist, dynamic view of the market, a view which until now has developed almost exclusively under the leadership of Austrian theorists.

Joseph Alois Schumpeter and the “Process of Creative Destruction”

Joseph Alois Schumpeter is perhaps one of the most widely known authors to apply a distinctive conception of the dynamic angle to the analysis of economic efficiency. Schumpeter initiated his plan of research in this area as early as 1911, when he published the first German edition of The Theory of Economic Development.(32) In this book, Schumpeter, following a purely Austrian line of research, writes of the entrepreneur as innovator, one who imagines and discovers new goods, combinations of goods, and sources of supply, and who introduces technological innovations while constantly creating new markets and expanding the existing ones. Thirty years later, in 1942, Schumpeter continued in the same line of research in his book, Capitalism, Socialism and Democracy, particularly in chapters 7 and 8. This last chapter is even entitled “The Process of Creative Destruction,” and in it the author describes the process of economic development which triggered the evolution of capitalism and thus gave rise to the tension inherent in the two dimensions of efficiency, the dynamic and the static. Schumpeter is very critical of the traditional static-efficiency principle employed in neoclassical economics and concludes that “perfect competition is not only impossible but inferior and has no title to being set up as a model of ideal efficiency.”(33)

Our primary criticism of Schumpeter is that he continues to hold that the basic point of reference in economic analysis should be the equilibrium model, since he considers that the economic world would usually be in a state of routine flow if it were not for entrepreneurs. Hence, Schumpeter sees the entrepreneur as a solely distorting or unbalancing factor. In other words, he focuses on only one of the facets of the entrepreneurial process, that which he refers to with the now stock expression, “the process of creative destruction.” Schumpeter overlooks the fact that, as we have set out in the preceding sections, economic analysis should concentrate on the dynamic entrepreneurial process rather than on the model of equilibrium. For at the same time that the real market process driven by entrepreneurship possesses a capacity for “creative destruction” (the only feature Schumpeter mentions), it also has an essentially coordinating capacity which tends to drive the social process toward a state of equilibrium, though this state never arrives because new maladjustments continually emerge as it approaches. Schumpeter regards the entrepreneurial process as a sort of explosive force which, due to entrepreneurial creativity, distorts the preexisting order, yet he fails to realize that the same force which provokes creative destruction tends to coordinate the system and therefore make the social “Big Bang” as harmonious as possible in all historical circumstances. In contrast with the outlook of Schumpeter, who sees the entrepreneur as a wholly unbalancing factor, our dynamic approach begins with a view of entrepreneurship as both a creative and coordinating driving force which continuously urges the market and civilization forward.

Harvey Leibenstein’s Concept of X-Efficiency

Harvey Leibenstein first introduced the concept of x-efficiency in his article, “Allocative Efficiency vs. X-Efficiency,”(35) published in 1966.(34) In this paper, Leibenstein conceives x-inefficiency as the degree of inefficiency which arises in the market because many of the contracts which govern entrepreneurial relationships are incomplete, above all because they fail to properly specify the tasks each person must complete. Leibenstein also identifies as sources of inefficiency the psychological pressure the different economic agents face and the burden of the habits, inertia, and routines which confine to an indefinite state of inefficiency many tasks that could yield improved results.

Above all, we should note that Leibenstein’s concept of x-efficiency is rather ambiguous, or at least was in its initial formulations. It seems as if Leibenstein had intuited an important idea (that there exists a type of inefficiency which goes unnoticed in equilibrium models), yet he is unable to articulate it with total clarity. Ten years later, in an article ironically entitled “The Existence of X-Efficiency,” Stigler (1976) responded to Leibenstein that in any case, the amount of ignorance and inertia existent in the market will always be optimum, since the effort to overcome them will cease right when the marginal cost derived from them begins to exceed the expected marginal revenue. Later, Kirzner offered support to Leibenstein with the argument that there would always be at least one important source of x-inefficiency, namely the genuine entrepreneurial error which arises precisely when one fails to recognize a profit opportunity in the market. Such an opportunity then remains in a latent state for other entrepreneurs to discover and seize.(36)

To put it another way, Kirzner makes the basic point that when we admit that, by definition, x-efficiency does not exist in a context of equilibrium and perfect information (such was Stigler’s patently irrelevant argument), the only way to preserve the concept of x-efficiency in an analytical and operative sense is to equate it with the concept of dynamic efficiency presented here, an idea which Leibenstein himself seems to have ultimately accepted. Ironically, the father of x-efficiency has been obliged to admit that his originally hazy concept can only retain its (high) degree of relevance if we eliminate its vagueness and ambiguity and identify it with the concept of dynamic efficiency as defined in this paper.(37)

Douglas C. North and his Concept of “Adaptive Efficiency”

A Nobel Laureate in Economics, Douglas C. North has criticized the merely allocative, Paretian concept of efficiency prevalent among neoclassical economists, and he proposes the alternative idea of adaptive efficiency, which he defines as “the willingness of a society to acquire knowledge and learning, to induce innovation, to undertake risks and creative activity of all sorts, as well as to resolve problems and bottlenecks of the society through time.”(38)

As is evident, North includes in this definition a number of attributes which fully agree with those we have already analyzed in connection with dynamic efficiency: the acquisition of knowledge, creativity, innovation, etc. Moreover, and perhaps more characteristic of North, the author focuses particularly on the institutional framework of guidelines which further different societies’ creativity and ability to adapt, and he speaks of Europe and the United States as historical models of flexibility and adaptive capacity.

Our chief criticism of Douglas C. North is that he neglects to expressly mention entrepreneurship as the vital force behind all market processes. That is to say, North concentrates almost solely on the ability of societies in general to adapt to the “external” changes and shocks which affect them and which are supposedly always of external origin, and it is precisely this viewpoint that leads North to suggest the term “adaptive efficiency.” Thus North’s approach is much more reactive than proactive. In fact, North does not appear to realize that the entrepreneurial drive which characterizes dynamic efficiency and its coordinating capacity is precisely that which simultaneously provokes the (endogenous rather than external) changes and shocks that trigger the problems to which different societies must adapt.

Hence, North and Schumpeter work from totally opposite perspectives. While Schumpeter focuses exclusively on the aspect of entrepreneurial creativity and its destructive power (the process of “creative destruction”), North concentrates on the other aspect; that is, the adaptive or coordinating capacity of entrepreneurship, and he completely overlooks the simultaneously creative facet it invariably possesses. In this sense, we may consider that our theory of dynamic efficiency fueled by entrepreneurship appropriately combines the creative and coordinating dimensions which Schumpeter and North have studied separately and partially, in a reductionist manner, each excluding important elements.

Dynamic Efficiency and Ronald H. Coase’s Transaction Costs Theory

It now seems fitting to make a few remarks about the possible relationship between the concept of dynamic efficiency and Ronald H. Coase’s transaction costs theory, which has gained considerable influence in many areas of economic analysis, especially in the study of law and institutions.(39)

Perhaps the essential difference between the two approaches is the one Israel Kirzner has noted. According to Kirzner, the main obstacle to dynamic efficiency is not posed by transaction costs, but by what he calls “pure or genuine entrepreneurial error,” which appears in the market in the absence of sufficient entrepreneurial alertness.(40) To put it another way, even if we could imagine a hypothetical nirvana (41) or “ideal world with zero transaction costs,” such a system would fail to achieve the ideal of dynamic efficiency if, due to pure or genuine entrepreneurial errors, multiple opportunities for profit remained undiscovered or were not created or seized. Ultimately, despite the appearances, the transaction-costs approach has many of the deficiencies we covered with respect to the static dimension of efficiency. Specifically, a comparative institutional analysis based on the different transaction costs of each institution implies the assumption that these costs are given and known, and that it is even possible to redesign an institution to modify the transaction costs in any particular situation. Nonetheless, the entire structure of transaction costs that is chosen as a frame of reference in the analysis can change radically and without warning if an act of pure entrepreneurial creativity leads to the discovery of new alternatives, production possibilities, and in general, new solutions which entrepreneurs had completely overlooked up to that point.

Consequently, as we shall see in detail, the initial distribution of property rights can never be irrelevant from the perspective of dynamic efficiency, rooted as it is in creativity and entrepreneurial coordination (not even in the extreme case of a complete lack of transaction costs, as the Coase theorem erroneously implies). In fact, the distribution of property rights, within in the ethical framework which makes dynamic efficiency possible and which we will analyze later, is precisely what determines, in each specific time and place, who will be motivated by the particular incentives necessary to awaken entrepreneurial activity, with its dual aspects of creativity and coordination. In other words, from the standpoint of dynamic efficiency based on entrepreneurship, Coase’s theorem, regardless of how it is interpreted, is scientifically invalid, since not even in a hypothetical, institutional scenario with no transaction costs will the distribution of property rights be irrelevant when dynamic efficiency is the goal.(42)


The Concept of Dynamic Efficiency in Economics Textbooks

The dynamic aspect of economic efficiency has been virtually ignored by most writers of economics textbooks. Once again, this reveals the fixation with comparative statics and equilibrium prevalent thus far among economists and exposes the resultant urgent need for a paradigm shift to bring in the dynamic analysis of markets, along with the concept of dynamic efficiency.

From a sample of twenty economics manuals chosen among the best known in English and Spanish, only four included explicit mentions of dynamic efficiency. Furthermore, most of these honorable exceptions provided only a very limited discussion of the concept and failed to consistently incorporate the discussion into an overall analysis to permit the evaluation in terms of dynamic efficiency of the different institutions and alternatives covered by each textbook. An overview of the most striking approaches to dynamic efficiency follows.(43)

Although Gwartney and Stroup’s textbook, Economics: Private and Public Choice,(44) does not explicitly include the term “dynamic efficiency,” it does explain that the world is in a permanent state of change as a consequence of entrepreneurial creativity and the process of competition among entrepreneurs. According to the authors, this constant change obliges economists to reassess traditional notions of static efficiency.

Dolan and Lindsay (45) provide a much more explicit analysis of dynamic efficiency, especially with respect to the distinctions between static efficiency and dynamic efficiency, which they define as “a measure of the rate at which the production possibility frontier shifts outward over time”. In contrast, they describe static efficiency as “a measure of how close an economy comes to its production possibility frontier”. Moreover, Dolan and Lindsay refer to Schumpeter’s pioneering contributions in the area of dynamic efficiency, and they consider innovation and technological discoveries the main forces behind it, though they do not neglect to mention the creative power of entrepreneurship, nor that the recognition of it has been a fundamental contribution of Austrian theorists. In fact, the authors of this manual go so far as to estimate the possible losses to the American economy in static efficiency from the Second World War to today, and they deem this figure equal to an average of 2.5 percent of the U.S. gross domestic product. In addition, the authors state their belief that these losses have been more than amply compensated for by the gains in dynamic efficiency which over the same period have resulted from the creativity and coordinating force of American entrepreneurship.

In 1998, Wolfgang Kasper and Manfred E. Streit published an important manual on the economic analysis of institutions. In this book, the authors define dynamic efficiency as “an inherent quality to adapt, respond or develop new knowledge.”(46) As we see, in this book Kasper and Streit come very close to the theory of dynamic efficiency we have presented. Furthermore, these authors join Demsetz in criticizing the “nirvana approach,” which is typical of the neoclassical methodology and revolves around comparisons of reality with the utopia of static efficiency. Kasper and Streit conclude that many supposed “market failures” cannot be considered as such from a dynamic standpoint, since they either foster creativity and the introduction of new technology (as would be the case of “monopolies”), or they constitute the most basic characteristic of real markets (as is the case with “asymmetric information,” uninsurable moral hazard inherent in each entrepreneurial act, etc.). Therefore, according to these authors, the analyst must compare actual institutions not with ideal, unattainable models (as welfare-economics theorists have done up to now), but with alternative institutions which are feasible and promote creativity and the coordinating power of entrepreneurship. Hence, Kasper and Streit supplement Demsetz’s intuitions with Hayek’s theory on the emergence and creation of the knowledge which entrepreneurs continually discover in market processes.

Along the same lines, O’Driscoll and Rizzo explain in their book, The Economics of Time and Ignorance, that it is inappropriate to criticize the real market process, as neoclassical economists often do, for falling short of the production possibility curve; that is, because supposed market “failures” prevent it from being statically efficient. According to these authors, such criticism implies that we can come to know information which emerges only from the real market process and which, if we knew it a priori, would render the process unnecessary and redundant. In other words, no one can be acquainted with the production possibility curve because it is not given, but is always being disrupted and shifted to the right by entrepreneurial creativity. To find fault with the market because it fails to reach a limit which no one has knowledge of and which varies continually not only constitutes a serious methodological error, but can also lead to the absurd justification of interventionist economic policies which ultimately hinder the real market process, when this very process is the driving force behind the perpetual quantitative and qualitative increase in the possibilities of the production frontier.(47)

Finally, we would not wish to conclude this review of the manuals that have covered, even if superficially, the notion of dynamic efficiency, without mentioning the curious case of the textbook by Wonnacott and Wonnacott, who insist on defining “dynamic efficiency” in strictly “static” terms; that is, as the “optimal” rate of technological change. The reference rate used to determine whether or not an economic system is approaching the “optimal” rate is left unspecified. These authors contend that it is the model of perfect competition which stimulates dynamic efficiency, to the extent that it obliges companies to rapidly implement new technologies. They also point out that a certain amount of debate exists over whether competition or monopoly is the system which most encourages the creation and discovery of new technologies. In any case, Wonnacott and Wonnacott’s handling of dynamic efficiency is not only entirely dependent upon their static view of the economy, but is also quite confusing (and disconcerting). It appears as if the authors inserted the corresponding paragraph in the textbook to cover a topic considered important, yet they neglected to support it with any dynamic analysis of the real market processes that are driven by entrepreneurship.(48)

In conclusion to this brief overview of the scientific literature most widely used in teaching, we can affirm that, despite the isolated exceptions cited above, economists are still very far from generally accepting the principle of dynamic efficiency, and from beginning to systematically implement it and consider its ramifications. When they do, and no study in applied economics excludes the aspect of dynamic efficiency, its analysis will eventually filter into the textbooks and become essential, standard material in all economics manuals, to be used by students worldwide.

 


Jesús Huerta de Soto
Professor of Political Economy
King Juan Carlos University of Madrid, Spain

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(23) Webster’s New World Dictionary and Thesaurus. 1996. Simon and Schuster: New York.

(24) On the theory of entrepreneurship and its essential elements and characteristics, see Huerta de Soto 2001b, chapter 2.

(25) Webster’s Revised Unabridged Dictionary. 1913.

(26) Huerta de Soto 2001a, chapters 5 and 6.

(27) Kirzner 1997, 67.

(28) Kirzner 1998, 187-200.

(29) Kirzner 1997, 64.

(30) Rothbard 1979, 95; 1997, 211-254.

(31) Cordato 1992.

(32) Schumpeter 1968.

(33) Schumpeter 1976, 106. Blaug (1998, 7) has expressly used the term “dynamic efficiency” in reference to Schumpeter’s point of view.

(34) Leibenstein 1966, 392-415.

(35) Stigler 1976, 213-216.

(36) Kirzner 1979, 120-136.

(37) On x-efficiency, see also the book by Frantz (1988).

(38) North 1990, 80-82, 99, 136; 1999, 17-18. Stromberg has written the best critical, Austrian evaluation of North’s view. See Stromberg 2002, 101-137.

(39) Of the most recent discussions on the subject, see Zerbe 2001..

(40) Kirzner 1973, 225-234.

(41) Harold Demsetz has criticized the nirvana approach of many neoclassical economists (Arrow and others) who insist on comparing actual institutions with ideal ones that could never exist in the real world, since the transaction costs involved in transporting the existent system to “nirvana” would be impossible to bear. Though we regard Demsetz’s position as an admirable step forward in the realism of the analysis, it is nevertheless not completely suitable, since it still fails to acknowledge that the fundamental problem is not one of transaction costs, but one of a purely entrepreneurial nature. See Demsetz 1989, chapter 1, 3-24.

(42) Coase’s thesis on the irrelevance of the layout of property rights (with zero transaction costs) has been labeled by Gary North as the “Don Corleone theory of property rights,” and it radically contradicts the approach we present, one based on the relationship between ethics and dynamic efficiency. See North 2002, 75-100.

(43) The sample of manuals consulted comprises well-known textbooks by the following authors: Samuelson, Lipsey, Friedman (Milton), Friedman (David), Stiglitz, Kreps, Fisher-Dornbusch-Schmalense, Mankiw, Wonnacott and Wonnacott, Alchian and Allen, Sloman, Boulding, Bresciani-Turroni, Gwartney and Stroup, Dolan and Lindsay, Barre, Kasper and Streit, Hardwick-Khal-Langmead, Gimeno and Guirola, González Paz, Mochón, and O’Driscoll and Rizzo.

(44) Gwartney and Stroup 1983, especially 416-419.

(45) Dolan and Lindsay 1988, 489-492.

(46) Kasper and Streit 1998, 58

(47) O’Driscoll and Rizzo 1998, especially 88 and following.

(48) Wonnacott and Wonnacott 1986, 492, 771.