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Institutions, Nationalism, and the Transition Process in Eastern Europe*

Published online by Cambridge University Press:  18 June 2009

Svetozar Pejovich
Svetozar Pejovich
Affiliation:
Economics, Texas A&M University
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Extract

In the late 1980s, the actual accomplishments of capitalism finally made a convincing case against socialism. After several decades of experimentation with human beings, socialism in the former Soviet Union and Eastern European countries (hereafter, Eastern Europe) died an inglorious death. To an economist, the present value of the expected future benefits from socialism fell relative to their current production costs. And Marx was finally dead and, hopefully, buried.

Type
Research Article
Information
Social Philosophy and Policy , Volume 10 , Issue 2 , Summer 1993 , pp. 65 - 78
Copyright
Copyright © Social Philosophy and Policy Foundation 1993

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References

1 Brown, J., “The Resurgence of Nationalism,” Report on Eastern Europe, no. 2 (06 1991), p. 35.Google Scholar

2 “The Nationalist with a Dash of Paranoia,” The European, 05 28, 1992, p. 11.Google Scholar

3 The reason for this reduction in exchange has to do with the nature of interactions. Voluntary interactions among individuals are vehicles by which they seek to increase their well-being (utility). However, interactions are frequently not simultaneous (e.g., A pays B a sum of $1,000 for the right to use water from B's well over a period of five years), and most interactions have consequences that occur after the agreement is concluded (e.g., X marries Y believing that Y is a good person). The problem with these interactions is that their future consequences might and often do differ from those expected at the time of the agreement. Some of those unintended consequences are inevitable, but many are man-made (e.g., B could decide to build a fence around his well). A major purpose of the rules of the game is to protect interactions among individuals by alleviating risks and uncertainties associated with those problems.

4 It is frequently said that there was more of a Western tradition in Czechoslovakia, Slovenia, and perhaps Hungary, than in other Eastern European countries. That is certainly true. However, classical liberalism, which is only a part of the Western tradition, does not have deep roots in the region. Classical liberalism usually is taken to mean individual liberty, openness to new ideas, tolerance of all views, and a government under law. The liberal community does not have a preordained set of outcomes: a common good. Methodological individualism is a method for understanding social phenomena. Its main postulate is that the individual is the only decision maker. That is, governments, universities, corporations, and other entities do not and cannot make decisions, only individuals can and do. To understand the behavior of any social, economic, or political entity, it is necessary to identify incentive structures under which individuals operate.

5 It is probably an oversimplification to blame Communist rule for the current turmoil in the multi-ethnic states. It is like blaming labor unions for inflation. Inflation happened before labor unions were organized, and ethnic wars happened before Marx was born. Former Communists trying to cling to their positions of power are only exploiting the opportunity provided by the old unsettled scores.

6 The system also provides people with a right to give up some of their freedoms. For example, when a person joins a religious community, he or she freely chooses to give up the right to make decisions over a range of issues.

7 “Two Measures of Household Income,” New York Times, 07 24, 1992, p. A10Google Scholar. Median household income for Asian Americans is $36,784 and for whites is $31,435.

8 In a long and interesting article, Keith Richburg discusses the issue of why African development has lagged so far behind that of East Asia, which suffered from a similar set of obstacles: “Why has East Asia … become a model of economic success, while Africa, since independence, has seen increasing poverty and hunger … ?” Richburg offers several possible explanations for those differences in economic development. Two of them are related to my discussion in this essay: the economic choices and the ethos. First, after independence, most countries in Africa opted for government ownership of enterprises, due to a distrust of private-sector initiative and foreign investment. Asians chose a brand of capitalism. Second, the ethos in Africa turned out to be less adaptable (relative to the ethos in East Asia) to the requirements of efficiency in production and exchange. Richburg, Keith, “Why is Black Africa Overwhelmed While East Asia Overcomes?” International Herald Tribune, 07 14, 1992, pp. 1 and 6.Google Scholar

9 There is a tendency among intellectuals, especially those inclined toward social engineering, to deprecate the ability of “ordinary” people to make their own survival choices (an economist would say “to maximize their utility”). One has to wonder how ordinary people—and there were only ordinary people around some million years ago—managed to survive against competition from other forms of life. They must have somehow managed to make some right choices. Survival of any species is based on its adaptive behavior rather than on someone's foresight. With uncertainty and incomplete information, people make choices which are, in effect, their best bets. It is from those behaviors that are actually tried that “success” is selected and copied by others. Some Eastern Europeans will eventually try new types of behavior, which others will copy if and when they decide that those behaviors have strong survival potentials. Ordinary people might then choose capitalism when the time is right for them to make that decision, provided they have freedom of choice.

10 Legal changes can be of two sorts: adjustments in the rules to the new requirements of the game that social and economic developments have made possible; or changes in the rules that are imposed from above by those in political power. The term “fiat” in this essay means the latter.

11 The term “supposedly” is used to suggest a few doubts about the real extent of price liberalization. The distribution sector in Russia has a markup ceiling of 25 percent, which is a form of price control. Local governments are issuing regulations that often contradict or ignore price liberalization decrees issued by Moscow. Prices of basic foods are still controlled by the state.

12 It appears, from time to time, that economists working for the International Monetary Fund (IMF) and the World Bank have a monopoly on economic nonsense. In one of the IMF's recent publications we read: “A mass privatization of the state enterprise sector is the centerpiece of the transition to a market economy” (Odling-Smee, J. et al. , “Russian Federation,” Economic Review, IMF, 04 1992, p. 35)Google Scholar. Some people think that the freedom to choose the methods of organizing production is the centerpiece of a free society. Also, at the Hayek Symposium in Freiburg in June 1992, when Professor Jermakowicz, a leading “expert” on privatization, presented a paper on the aims and methods of privatization in Poland, V. Naishul, a free-market economist from Russia, remarked that the language the Polish bureaucrats use today is exactly the same as the language Soviet planners used yesterday.

13 Quoted in Dallas Morning News, 08 4, 1991, p. 28.Google Scholar

14 The term “big bang” means a quick change in the system. It is hard to find a better example of a big bang than the October Revolution of 1917. Yet it took Lenin and his cohorts quite a few years to implement changes—and they were willing to spill blood in order to get things done.

15 An explanation of the difference between endogenous and exogenous change is in order. Suppose there is an event that creates new opportunities for individuals to interact. If the prevailing institutional structures are poorly attuned to those opportunities and fail to enforce new interactions, utility-seeking individuals will generate spontaneous pressure to modify the rules of the game to embrace the novelty. For example, technological developments made mass production of goods relatively cheap. However, exploiting new opportunities required a large initial investment in capital assets. But the rule of unlimited liability made contractual agreements for raising large sums of capital difficult. A new rule eventually emerged: limited liability. This was an endogenous change that adjusted the rules of the game to the new requirements of the game.

Instead of adapting the rules to the changing requirements of the game, exogenous changes force the game to adjust to the rules. For example, codetermination (labor participation in the management of business firms) in Germany was introduced by law. However, prior to this law there was no law in Germany that prohibited codetermination. Managers, workers, and the owners of resources were free to write any contract they chose. Indeed, we observe a large number of different types of business firms in the West, including Germany. All those firms have emerged voluntarily and survived competition from other types of firms. The fact that the German government had to impose codetermination by fiat is evidence that the value to the employees of their participation in management was less than the costs to the owners and managers of providing it. Most exogenous changes in institutional arrangements are brought about by ideologists, pressure groups, and bureaucrats in pursuit of their own private ends, while hiding behind the facade of the public interest.

16 In order to give capitalist institutions enough time to tell their story, a stable social environment is a necessity. This means that the government might have to subsidize a number of large state enterprises over a limited number of years.