Dynamic efficiency and industrial policies

The principal, and almost exclusive, criterion of the economic policy options outlined in chapters 6 and 7 has been (static) allocative efficiency.

Other important microeconomic problems arise when the objective is to increase dynamic efficiency. Here, too, we can speak of market failures that call for some form of public intervention (see sections 2.14 and 3.6).

As we know, dynamic efficiency is the ability to manage change and/or react to change introduced by others, making it possible to secure higher profits and faster growth. The ability to do this is linked to many important features of the productive structure of an economy – i.e. the lasting rather than transitory aspects of an economic system. In addition to certain macroeconomic characteristics (such as the size of the economy, the degree of international openness, etc.), this includes microeconomic features (sectoral composition and regional division of production; technical, economic and financial concentration; production technologies used and the innovative content of products; entry and exit barriers; productive organisation; integration among firms; the available factors of production – i.e. ‘natural capital’, physical and human capital). Note that some of the microeconomic features also have an impact on allocative efficiency.

We briefly discussed the effects of monopoly on innovation in section 2.15. Other microeconomic features of the productive structure appear to have a clearer impact on dynamic efficiency.