It have found this one, which seems interesting (adding the link to the word file https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=4&ved=0CEQQFjAD&url=http%3A%2F%2Fwww.en.kyushu-u.ac.jp%2Faslea%2Fapapers%2FADAPTIV%2520EFFICIENCY-lawreviewarticle-Yu_Zhang.doc&ei=-alyUtWLEqen4ASzsYCABw&usg=AFQjCNEss04F7Setv9_L8Z34RUs5aS8_4A&bvm=bv.55819444,d.bGE ):

Adaptive efficiency …. is concerned with the kinds of rules that shake the way an economy evolves through time. It is also concerned with the willingness of a society to acquire knowledge and learning, to induce innovation, to undertake risk and creative activity of all sorts, as well as to resolve problems and bottlenecks of the society through time.

In a world of uncertainty, no one knows the correct answer to the problems that we confront and no one therefore can, in effect, maximize profits. The society that permits the maximum generation of trials will be most likely to solve problems through time…. Adaptive efficiency, therefore, provides the incentives to encourage the development of decentralized decision-making processes that will allow societies to maximize the efforts required to explore alternative ways of solving problems…

Graham, while I'm not sure what North is referring to, in the context of efficient market theory, adaptive efficiency refers to a weaker form of the efficient market hypothesis. Instead of rational investors who take into account all available information and make the best decision, there is adaptive selection of investors in a Darwinian manner. I think this is the idea of Lo's paper:

Lo, Andrew W., “The Adaptive Markets Hypothesis: Market Efficiency from an Evolutionary Perspective,” Journal of Portfolio Management, Forthcoming. Available at SSRN: http://ssrn.com/abstract=602222

However, the idea was known before that date, and is ridiculed because of the possibility of selection bias in a famous defense of rational market theory by Rubinstein:

Rubenstein, M., “Rational Markets: Yes or No? The Affirmative Case,” Financial Analysts Journal, vol. 57 no. 3, May/June 2001. http://www.cfapubs.org/toc/faj/2001/57/3

Thanks Robert, I will certainly look into this.

Late answer, but I discuss this same question in my dissertation, so I can provide some handy quotes. The term appears in the main NIEH literature as early as his 1990 book "Institutions, Institutional Change and Economic Performance". There he defines it as follows: "the kinds of rules that shake the way an economy evolves through time. It is also concerned with the willingness of a society to acquire knowledge and learning, to induce innovation, to undertake risk and creative activity of all sorts, as well as to resolve problems and bottlenecks of the society through time" (80).

In later literature it's somewhat more refined than this, e.g. in North, Wallis and Weingast's "Violence and Social Orders" (2009). Here 'adaptation' as a property of so-called 'open access orders' is seen as a kind of robustness to exogenous shocks: "in comparison with natural states, open access orders more readily generate a range of solutions to problems; they more readily experiment with solutions to problems; and they more readily discard ideas and leaders who fail to solve them" (134). As far as I'm aware the term is not strictly defined in relation to efficiency, but the discussion in that book suggests that efficiency here means the (variably defined) concept of economic performance, and that therefore in 'open access orders' greater robustness is both cause and result of open and competitive markets in a kind of virtuous cycle (133).

Thanks Matthijs. How do North, Wallis and Weingast (2009) define an open access order'?

I've just been reading a 2012 article 'Transaction costs and institutional performance in market-based environmental water allocation' (Land Economics, 88(3): 536-560), by Dustin Garrick and Bruce Aylward which provides some useful further perspectives on adaptive efficiency. They define adaptive efficiency 'in terms of long-term efficiency of economic performance'. They state that 'neo-classical efficiency is a function of the institutional structure within which costs and benefits are assessed; in other words, the institutional constraints are taken as given ... Adaptive efficiency, on the other hand, reflects the institutional capacity to achieve efficiency over the long term ... Adaptive efficiency is helpful to understand long-term trajectories of institutional economic performance in contexts of entrenched path dependencies, complexity, uncertainty, and feedback between policy reform and implementation ...'

Everyone is right. In conclusion, the adaptive efficiency is the result of conditions that provide: (1) low level of negative market effects; (2) change coupled with the ability of subjects to adapt quickly; (3) any better alternative is stable (long term), but only until there is no more perfect.

Don't really know the context of the phrase but it may have some resonance with Joseph Schumpeter's following quote (which is in reference to structural change)?

"What has not been adequately appreciated among theorists is the

distinction between different kinds of reaction to changes in "condition."

Whenever an economy or a sector of an economy adapts itself

to a change in its data in the way that traditional theory describes,

whenever, that is, an economy reacts to an increase in population by

simply adding the new brains and hands to the working force in the

existing employments, or an industry reacts to a protective duty by

expansion within its existing practice, we may speak of the development

as adaptive response. And whenever the economy or an industry

or some firms in an industry do something else, something that is outside

of the range of existing practice, we may speak of creative response"

Source: pg 149-150 of: Schumpeter, J. A. (1947). The creative response in economic history. The journal of economic history, 7(02), 149-159.

I learned about this debate with a great delay, so I do not know if anyone is still interested in it. But I feel obliged to say a few words, as I am the main culprit who introduced and tried to define the notion of 'adaptive efficiency' four years before North, in my 1986 IUI Working paper 'Institutions, self-organizations and adaptive efficiency.' North knew about it: we had many discussion about it (and about the need to make a distinction between the rules of a game and its players) during his many visits to Stockholm by the end of the 80s. Concerning 'adaptive efficiency,' he duly referred to me in his 1990 book, but after that he started to use this term without this reference, and indeed without a very clear definition. I was recently reminded of this issue by a Ph.D. student, which made me add the WP to the texts available through ResearchGate. If anyone had the patience to read it and comment on it, I would be most interested in, and grateful for, the comments!

Thanks Pavel, I read your paper with great interest, and it's great to make contact. I will make sure to cite the paper if I write on adaptive efficiency again. It is clear from the paper that North was influenced greatly by your ideas, and it's a shame you haven't received ongoing recognition for originating the important concept of adaptive efficiency, and also for distinguishing institutions and organisations as the rules and the players. I'd appreciate you elaborating on your definition of adaptive efficiency, since the definition you present doesn't actually make it clear how the concept relates to efficiency of any kind. I see from the paper that you understood adaptive efficiency as potentially 'in competition with' allocative efficiency, rather than a more inclusive efficiency metric than allocative efficiency. In my own work I've interpreted it as a more inclusive metric of economic efficiency, one that accounts not only for the costs and benefits of (technological or institutional) options that are accounted for by the mechanistic approach of neoclassical economics but also for the costs and benefits of the options that arise in respect of increasing-return (or positive-feedback) dynamics that the mechanistic approach assumes away. I see those dynamics as equivalent to the dynamics of self-organisation that you discuss in your paper. In the literature with I'm familiar these are characteristic of complex adaptive systems. My work is concerned with micro-level choices (between particular technologies or institutions), while your is concerned with macro choices between economic systems (capitalism versus socialism), but I think we're on the same page. I first wrote on adaptive efficiency in my 2005 book Economics for Collaborative Environmental Management, and then in Marshall, G.R. 2013. "Transaction costs, collective action and adaptation in managing complex social-ecological systems." Ecological Economics 88:185-194. Feedback most welcome!

For those without time to read Pavel's fascinating paper I thought I'd record some excerpts here. Pavel states that "'Adaptive efficiency" denotes the abilities of an economy to self-organize -- that is, to suitably modify its structure" (p. 4). "In order to be adaptively efficient, the economy must, in essence, allow new production organizations to form, induce existing organizations to keep adapting to economic and technological changes, and force the organizations which cannot adapt to dissolve" (p. 5). "Like an organism which has lost its immunological defence, even the richest and most efficient administered economy today would eventually decay, with catastrophic consequences for social welfare, if its adaptive efficiency were insufficient -- that is, if its structure could not properly develop, adapt to changing circumstances, and neutralize the ever present tendencies to pathological bureaucratization" (p. 5). "... [T]he relationship between adaptive efficiency and the usually studied allocative efficiency is far from simple. While on some occasions the two types of efficiency may go hand in hand, on other occasions they must be traded off against each other" (pp. 5-6). "... [T]his view of economic behavior can no longer refer to the paradigm of mechanics, on which mainstream economics has been built ... Economic agents can no longer be regarded as organizationally passive parts of a given 'mechanism', but must be recognized as actively and selectively 'reacting' with each other, forming and reforming themselves the structures of which they are parts" (pp. 9-10).

Graham, many thanks for your appreciation and propagation of my old research. At its time, my 1986 working paper was not appreciated, with the exception of Douglass North, who took from it the notion of 'adaptive efficiency.' Otherwise 'mainstream' economists disliked it because it was too far from the mainstream, and 'heterodox' economists, of whom many were believers in socialism, because it was damaging this belief (4 years before it was fatally damaged by the real world itself). A striking example of what a difference in adaptive efficiency can do appeared in 1990, after the unification of the East and the West German economies. The capitalist institutional rules in the West both allowed a much greater variety of entrepreneurial trials and imposed much stronger pressure for correcting or eliminating wasteful errors than could do the socialist institutional rules in the East. This double difference was logically bound to lead, after some 40 years, to the then actually observed enormous differences in the firms' average productivity: the ones in the East was hardly 25% of those in the West. Note that the main difficulty of the reunification was not the in theory so much debated 'plan vs. market' issue, concerned with static efficiency - replacing plan with market turned out to be trivial - but in the enormously different quality of firms, implied by the long-lasting difference in adaptive efficiency. Note also that North abstained from using the notion of adaptive efficiency for such specific implications: in 1991 he spent a year in Prague, but did not dare to say anything about the problems of privatization of the inefficient socialist firms, which was then hotly debated issue by the Czech economists.

Allow me to add that my research did not stop in 1986, but tried to elaborate many points of that old paper, and add new ones - such as those about unequally bounded rationality (see, e.g., in my article in Kyklos in May 2010), and about the split of economic change into evolution and development (see, e.g., my article in the Journal of Evolutionary Economics in May 2011). More lately, I have turned to institutional economics, as I started to discover the importance of institutional rules not only for transaction costs, but, more broadly, on the processes of economic development - including adaptive efficiency!!! ... I am most interested in, and grateful for, all related comments!

Pavel's paper cited Marris and Mueller (1980, JEL, 'The corporation, competition and the invisible hand') as coining the term 'adaptive efficiency'. Here's the relevant text from that source: "Clearly, a market economy is not a simple problem-solving machine. It is what cyberneticists have called a Self-Organizing System, a system that can and does modify its own structure and programming in the course of and as a result of its own operations. Economic theory has traditionally ignored self-organizing processes and has traditionally concentrated attention on the behavior of systems with given structures. Intuitively, however, it seems likely that the economic welfare of the citizens of the modern state is as likely to be affected at least as much, if not more so, by the way economic structure develops as by the performance of the system within a given structure. This consideration leads to a third concept of efficiency-which might be called "adaptive efficiency"-to be added to two existing concepts of allocative efficiency and what is now ... called X-efficiency. Self-organizing systems are not easy to analyze. There may have been a good case in the early history of our discipline for conducting analysis as if self-organizing forces were of secondary importance. This case, however, is surely well overdue for re-consideration."

Mea culpa! Than I am as guilty as Doug North for borrowing a notion and taking it for mine. I did not reread my old paper, and forgot this reference. Graham, thanks for reminding me of it. But I believe that I did a little more with it - Marris and Mueller only called attention to it, while I tried to draw from it implications for specific policy issues. I also did a little more on self-organization by anatomizing it into micro-actions of specifically instructed elementary agents - see, e.g., my article on generalizing Darwinism in JEE, May 2011, and my 2013 VSE-Working Paper: "A conceptual instruction-centered model of evolutionary and developmental processes as a source of insights into the issues of group selection, multilevel selection, and the origins of order", https://keke.vse.cz/wp-content/uploads/page/569/PP-instruction-centrism-and-multilevel-selection.20131.pdf. Many thanks for more comments!

A new article of mine, involving an empirical application of adaptive efficiency in evaluating water policy options, has just been published. You can request a copy via the following link. Thanks Pavel for putting me onto your work, which I've cited, as well as that of Marris and Mueller (1980)

Article Evaluating Adaptive Efficiency in Environmental Water Recove...