Efficiency, economically speaking, generally refers to improvements: higher production, superior service, faster innovation. But there’s another definition: An efficient economy is one that is better at putting less competent firms out of business.

The differences between the most and least productive companies can be startlingly high. By one estimate, in the U.S. alone the most productive firms in a sector can be more than two to four times more cost-effective than the least productive ones. Given the size of those discrepancies, any expansion of trade or innovation that makes it possible to replace less efficient producers could help a sector economize a significant part of its production costs.

Before their free-trade agreement, U.S. firms on average were more productive than Canadian firms. Fully opening up trade boosted productivity in the Canadian manufacturing sector by 8.4% in a short period of time, due mostly to selecting for more efficient companies and reallocating more production to them.

Thinking of my own activities — writing, teaching and making videos — I can see that some people in the sector are at least 10 times productive than others. If some of us end up replaced by generative AI, it will most likely be the less productive creators.

You might wonder how more and less productive creators can coexist, offering the same kinds of goods and services. The answer is that it is hard for superior firms to take away all of the business of inferior ones. Not all goods and services scale easily, and more productive companies can be constrained by talent or a desire to maintain focus. There is also inertia, and many commercial relationships persist because of personal connections. Less productive firms do not vanish simply because of a new innovation or competitor.

One underappreciated benefit of free trade is that it helps put less efficient producers out of business. American productivity is doing so well in part because the U.S. has let foreign competitors discipline domestic markets and companies. That’s one reason Donald Trump’s proposed hike in tariffs is such a bad idea, despite JD Vance’s insistence to the contrary. Freer trade can help save on costs.

Productivity differentials across firms help explain other aspects of modern economies as well. Almost four decades ago, Robert Solow famously remarked that you see computers everywhere but in the productivity statistics. Why might that have been? Well, computers could do a lot of the routine office work otherwise done by mid-tier white-collar workers. Just compare using basic office software with putting actual files into file cabinets. Yet not all companies made the transition to software smoothly, and sometimes bankruptcy or a merger was required to enforce the switch to new technologies. These processes can take years and may require a new generation of leadership.

Some parts of an economy may remain relatively unaffected by competitive pressures. Nonprofits, for example, often do not face direct profit and loss constraints, and many of them may hold substantial endowments or receive regular donations from supporters who do not monitor quality closely. It is also difficult for competition to pare back cost burdens imposed by government. So the larger its public and nonprofit sectors, the longer it may take for an economy to become more efficient.

There is a converse worry about efficiency changing an economy too quickly — such as the current panic in some quarters over the speed of change that AI might bring.

What I see, however, is that a lot of institutions are unwilling or unable to adopt new, AI-intensive methods of doing business. Another year or two of prodding probably will not change that reality. Then, as AI becomes more important as a competitive edge, firms that do not deploy AI effectively will go out of business. This process could take 10 years or more, coming in fits and spurts, as has happened with most previous major technological innovations.

Overall, and understandably, business coverage tends to focus on innovation and success. But every economy also has a highly unproductive underbelly, which can persist for long periods of time. Not only do trade and innovation help the more efficient parts of an economy grow more quickly, they also help shrink the less efficient sectors — though not always as quickly as we might like.

Tyler Cowen is a professor of economics at George Mason University and host of the Marginal Revolution blog.