Chapter 1: History of the Concept of Economic Efficiency
1. History of the concept of economic efﬁciency 1.1 INTRODUCTION James Buchanan won the Nobel Prize by proving that the process by which elected ofﬁcials enact policy in a decentralized polity, such as the United States, leads to spending patterns that are inevitably inefﬁcient. Ronald Coase won the prize for showing that traditional concepts of efﬁciency fail to account for costs that affect every trade and government action: the costs of transactions. Both Coase and Buchanan showed how institutional arrangements affect efﬁciency, and how changes in these arrangements can be either efﬁcient or inefﬁcient.1 If the concept of efﬁciency is to serve a useful role, it needs to rest on a ﬁrm foundation. To create such a foundation is the aim of this book. Practical people need practical measures of economic efﬁciency. Theorists want measures that are theoretically sound. Still others want measures that are ethically satisfying. No current measure of efﬁciency satisﬁes all of these requirements. The weight of moral and technical criticism promises to undermine the authority of the current efﬁciency criteria (Zerbe ‘Three Rules’ 1998b). Indeed, criticisms of legal and economic thinking about efﬁciency has reached the popular press (see, for example, Purdy 1988). The purpose of this book is to meet the critics’ challenges. Its purpose is not to argue, or to determine, whether or not their charges are true, but rather to provide a version of normative analysis, the foundation and use...
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