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Journal of Economic Perspectives: Vol. 25 No. 4 (Fall 2011)

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Retrospectives: X-Efficiency

Article Citation

Perelman, Michael. 2011. "Retrospectives: X-Efficiency." Journal of Economic Perspectives, 25(4): 211-22.

DOI: 10.1257/jep.25.4.211

Abstract

In a 1966 article in the American Economic Review, Harvey Leibenstein introduced the concept of "X-efficiency": the gap between ideal allocative efficiency and actually existing efficiency. Leibenstein insisted that absent strong competitive pressure, firms are unlikely to use their resources efficiently, and he suggested that X-efficiency is pervasive. Leibenstein, of course, was attacking a fundamental economic assumption: that firms minimize costs. The X-efficiency article created a firestorm of criticism. At the forefront of Leibenstein's powerful critics was George Stigler, who was very protective of classical price theory. In terms of rhetorical success, Stigler's combination of brilliance and bluster mostly carried the day. While Leibenstein's response to Stigler was well reasoned, it never resonated with many economists, and Leibenstein remains undeservedly underappreciated. Leibenstein's challenge is as relevant today as it ever was.

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Authors

Perelman, Michael (CA State U, Chico)

JEL Classifications

D21: Firm Behavior: Theory
B21: History of Economic Thought: Microeconomics
B31: History of Economic Thought: Individuals

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