Reviews
246
The Theory of Dynamic Efficiency
Jesús Huerta de soto
London and New York: Routledge, 2009 (360 pages)
Jesús Huerta de Soto is professor of political economy at King Juan Carlos University
in Madrid and has made a name for himself as a prodigious author on the history of eco-
nomic thought and on the Austrian School. This book contains twenty essays, sixteen of
which have already appeared elsewhere during the period 1994–2004. They span a wide
range of topics that include the methodology and history of economics, entrepreneurship,
socialism, nationalism, central banks and free banking, ethics, and liberal social thought
(in the European sense of the term). Dynamic efficiency is defined as “the capacity of an
economic system to stimulate entrepreneurial creativity and coordination” (29). It serves
as a cover term describing the ability of an economy to adapt quickly and at low cost
to changed economic conditions. It is meant as an alternative to Pareto’s criteria for the
efficiency of markets.
For three reasons, the concept of dynamic efficiency does not represent a good overall
title for the various papers. First, it is not a characteristic of the market process exclusive
to the Austrian view. Balancing between short-run (static) efficiency and long-run shifts
of production possibilities through innovation, new technology (or increased resources)
is part of neoclassical analysis. That dynamic efficiency can be enhanced through micro-
economic reform and increased competition, which provide incentives for businesses to
innovate and adapt, is also not a prescription limited to the Austrian school. Of course,
Schumpeter was the great theoretician of dynamic efficiency, but the book mentions “cre-
ative destruction” only once in its first chapter, which is an overview article. Additionally,
many “Austrians” in the narrow sense do not admit Schumpeter’s vision as part of the
“club,” mainly because of his different methodological assumptions.
Second, what efficiency actually means is largely left open in the book. If it means
something other than only an outward shift of a production possibility frontier, then is it
an allocative or technical, parametric or nonparametric, deterministic or stochastic notion?
Huerta argues against the static and therefore reductionist sense in which efficiency has
been used by Pareto, Walras, and welfare economics. However, creativity and coordi-
nation, as defining moments of entrepreneurship, raise more questions than they settle
(10f.). Kirzner, Rothbard, Cordato, Leibenstein, Schumpeter, North, and Coase are each
briefly mentioned but nothing close to a real definition emerges. “Ethics” is presented as
a “necessary and sufficient condition for dynamic efficiency” (19). If, however, ethics
is reduced to the single precept of property—“each person has the right to appropriate
the results of his entrepreneurial creativity” (20)—how is this a sufficient condition for
dynamic efficiency? Because entrepreneurial talent, as a resource at the personal level, is
stochastically distributed, how does it make some economies more dynamically efficient
than others? Assuming the absence of other resources for entrepreneurs to work with in a
closed economy, would an abundance of entrepreneurship alone cause an outward shift
of production possibilities and an expansion of welfare?
