Harvey Leibenstein called attention in an influential article (1966) to a source of economic inefficiency which was given the awful name of X[in]efficiency. He cited studies in which misallocations of resources due to monopoly or tariffs had trifling social costs, whereas simple failure to attain the production frontier apparently led to social losses of a vastly greater magnitude. I propose to argue that this type of inefficiency can usefully be assimilated into the traditional theory of allocative inefficiency. It is a question (to be discussed below) whether one ascribes failures to reach the ultimate limits of output from given inputs in any state of technology to inadequacy of knowledge alone, or adds also inadequate motivation. Leibenstein (1966) separates the two:

The criterion employed to judge successes and failures has been the acceptance or nonacceptance of Smith's theory by his immediate successors. This judgement has been supplemented with a more personal one of scientific fruitfulness. He had one overwhelming and proper success--the theorem on resource allocation under competition--and several minor successes. He also had one modest success that was improper (i.e., unfortunate)--the distinction between productive and unproductive labor. Smith's most important analytical failure was the hierarchy of employments of capital. Three failures that should have been successes receive special attention: his wage theory, his rent theory, and the analysis of the division of labor. The reasons for the differing fates of these theories are examined.

The criterion employed to judge successes and failures has been the acceptance or nonacceptance of Smith's theory by his immediate successors. This judgement has been supplemented with a more personal one of scientific fruitfulness. He had one overwhelming and proper success--the theorem on resource allocation under competition--and several minor successes. He also had one modest success that was improper (i.e., unfortunate)--the distinction between productive and unproductive labor. Smith's most important analytical failure was the hierarchy of employments of capital. Three failures that should have been successes receive special attention: his wage theory, his rent theory, and the analysis of the division of labor. The reasons for the differing fates of these theories are examined.