The Changing Determinants of Economic Performance in the World Economy
New Horizons in Institutional and Evolutionary Economics series
Chapter 9: Organizational efficiency
Economists, particularly those of the neoclassical tradition, have paid very little attention to the issues of economic organization because markets have been assumed to organize economic activities efficiently. However, if one looks around, it becomes evident that modern economies are not predominantly organized by the market (price) mechanism: private and public sector organizations, cooperative alliances and networks as well as non-profit organizations and associations coordinate a large part of economic activities (Simon 1991; Lazonick 1993; Salamon and Anheier 1996).1 As a result the neglect of different organizational arrangements and their efficiency implications is probably the single most important weakness of the mainstream economic theories. If we drop the assumption of efficient (perfect) markets, the organizational arrangements and efficiency of the economic system immediately become an important determinant of its competitiveness and growth. As we have noted earlier (Chapter 3, section 1) modern economies are highly specialized and complex systems that face the ‘problem of order’. Together with the available technologies the organizational efficiency of the system determines the output from a given set of productive resources. The importance of organizational efficiency for economic performance is not a big surprise to management practitioners and theorists who specialize in solving the ‘problem of order’. The following sections will break down the analysis of overall economic efficiency into its four components: 1. 2. 3. Allocative efficiency The efficiency with which the system’s resources are distributed among different organizations and uses. Technical or X-efficiency The efficiency with which the resources are used in...
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