Comparative Economics and Economics of f Transition Session III November 9th Vilém Semerák vilem.semerak@cerge-ei.cz CERGE-EI
Topics: Scheduling • Introduction. Relevance of comparative economics • Nonmarket alternatives: theories. • How systems change/evolve? • Applied non-market systems: introduction. Selected problems. • Economics of soft budget constraints • Reforms: strategy. • Liberalization and deregulation: price liberalization • Transformation recessions • Privatization: objectives & policies • Privatization and performance • Economic, social and political implications of reforms • State capture and oligarchization • Chinese reforms: specific features • Chinese state capitalism: where it can go from here?
Outline of the Session • Finishing from Wednesday • Endogeneity of political and economic institutions, and economic efficiency: Acemoglu & Robinson (2006) • Alternative economic systems • Theoretical foundations: Socialist Calculation Debate • First experiments: War Communism (and its aftermath)
Reading for Today • Acemoglu & Robinson (2006): Paths of Political and Economic Development • What is the main driving force of the development? • Can you very shortly summarize their theoretical model, i.e. linkages between institutions and power? • When does the elite choose a repression as a reaction to democratization of society? • Richman (1981): War Communism to NEP: The Road to Serfdom • Try to identify the key factors which caused the failure of War Communism. • Additional texts (if you have time): • Hanousek & Palda (2003): Mission Impossible III: Measuring the Informal Sector in a Transition Economy using Macro Methods (available in the shared folder) • Fernandez & Rodrik (1991): Resistance to Reform: Status Quo Bias in the Presence of Individual- Specific Uncertainty. The American Economic Review, Vol. 81, No. 5 (Dec., 1991), pp. 1146-1155 • Roland – chapter 2: The Politics of Reforms under Uncertainty
Reading for Wednesday • Levy & Peart: Socialist Calculation Debate • Li & Yang (2005): The Great Leap Forward: Anatomy of a Central Planning Disaster (pages 840-848 will be sufficient for us) • Additional sources (for those who would be more interested on such issues): • Hayek (1945): The Use of Knowledge in the Society. AER • Temin (1991): Soviet and Nazi Economic Planning in the 1930s. Soviet and Nazi Economic Planning in the 1930s
Acemoglu & Robinson (2006): Paths of Economic and Political Development
Theoretical Framework • Authors: Acemoglu & Robinson (2006) • Synthetic work • Focus: development, institutions - linkages and causality • Two key building blocks: economic and political institutions • Political institutions as main driving force (+ resource distribution )
Theoretical Framework Economic Institutions • Shape incentives of key actors • Influence on investments (physical, human capital or technology), production organization • Impact on distribution • Economic x cultural or geographical factors (Acemoglu, et al. 2002) 𝑓𝑑. 𝑞𝑓𝑠𝑔𝑝𝑠𝑛𝑏𝑜𝑑𝑓 𝑢 𝑓𝑑. 𝑗𝑜𝑡𝑢𝑗𝑢𝑣𝑢𝑗𝑝𝑜𝑡 𝑢 ⇒ ቊ 𝑒𝑗𝑡𝑢𝑠. 𝑝𝑔 𝑠𝑓𝑡𝑝𝑣𝑠𝑑𝑓𝑡 𝑢+1
Theoretical Framework Endogeneity • EI as collective choices of society → conflict of interest • Resulting EI depends on the political power of the proponents • Efficiency second-rate factor 𝑞𝑝𝑚𝑗𝑢𝑗𝑑𝑏𝑚 𝑞𝑝𝑥𝑓𝑠 𝑢 ⇒ 𝑓𝑑. 𝑗𝑜𝑡𝑢𝑗𝑢𝑣𝑢𝑗𝑝𝑜𝑡 𝑢 Commitment problem?
Theoretical Framework Endogeneity of “de jure” pol. power • Political power • De jure (institutional) • De facto • Political institutions determine incentives • E.g. monarchy x constitutional monarchy 𝑞𝑝𝑚. 𝑗𝑜𝑡𝑢𝑗𝑢𝑣𝑢𝑗𝑝𝑜𝑡 𝑢 ⇒ 𝑒𝑓 𝑘𝑣𝑠𝑓 𝑞𝑝𝑚. 𝑞𝑝𝑥𝑓𝑠 𝑢
Theoretical Framework Endogeneity of “de facto” political power • Other forms of pol. power: revolt, private army, economically costly protests • Source of de facto political power • Ability to solve collective action problem • Economic resources • Main focus 𝑠𝑓𝑡𝑝𝑣𝑠𝑑𝑓 𝑒𝑗𝑡𝑢. 𝑢 ⇒ 𝑒𝑓 𝑔𝑏𝑑𝑢𝑝 𝑞𝑝𝑚. 𝑞𝑝𝑥𝑓𝑠 𝑢
Theoretical Framework Endogeneity of Political Institutions • PI also collective choices • Distribution of political power as a key determinant of state evolution → persistence • Sufficient de facto PP can cause a change 𝑞𝑝𝑚𝑗𝑢𝑗𝑑𝑏𝑚 𝑞𝑝𝑥𝑓𝑠 𝑢 ⇒ 𝑞𝑝𝑚. 𝑗𝑜𝑡𝑢𝑗𝑢𝑣𝑢𝑗𝑝𝑜𝑡 𝑢+1
Theoretical Framework Summary Source: Acemoglu & Robinson (2006) Sources of persistence → wealth disparity reproduction ◦ PI durable ◦ Richness of leading groups
Non-market Systems: Theory & Introduction
Marxism, Planning, Socialism, Communism • Be careful: at least according to theorists • Marxism ≠ communism ≠ socialism ≠ central planning ≠ welfare state • Marxism: political philosophy • Communism and socialism : “stages” of economic and social development • Feudalism → capitalism → ( socialism ) → communism • Communism: • “People would work according to their abilities and interests and would consume according to their needs” • Classless system, communal ownership of means of production • Socialism or “lower” Communism: • Distribution according to labor contribution • State ownership, means of production owned and controlled by state • Central planning: system of economic coordination and management • Also: welfare state (and significant redistribution) are compatible with market economy (i.e. it is not socialism in the traditional sense)
Does Socialism require Central Planning? • Marx did not provide the answer and 19 th century socialists held quite diverse opinion on this issue • Majority seems to have assumed that market mechanisms (or most of their features) should not survive • But decentralized models also mentioned • Some utopian socialists, Proudhon (anarcho-syndicalism) • Economic centralism • John Gray (1799-1850/1883) • Suggested that a central body (the National Chamber of Commerce) should control all economic activity
The Socialist Controversy (1) • Doubts about feasibility (achieving balance without prices and markets) expressed already in 19 th century – Gossen (1854) • A long debate on launched by Mises (1920) • Sides: • Skeptics: especially Austrian economists • But others – not just Marxists but also neoclassical economists considered it plausible and in some cases possibly even superior to market economy
The Socialist Controversy (2) • Socialist calculation debate • How a socialist economy would perform economic calculation given the absence of the law of value, money and financial prices for capital goods and the means of production. • Crucial issues: • Can a socialist system replicate market economy? • Can it lead to even better results than market economy? • Problems highlighted by laissez-faire proponents: • Prices cannot be separated from money and market and profit from private ownership • The drive for achievement cannot be socialized • Technical issue: how to gather and process information and how to coordinate the whole economy?
Socialist Controversy (3) • V. Pareto • Lausanne school, collaborated with Walras • Since the equilibrium is merely a solution to a set of simultaneous equations, then it is at least theoretically possible that a socialist or collectivist economy could "calculate" this solution and so attain exactly the same outcome as in a system guided by free markets. • However, he also did not like attacks on economic freedoms and doubted that the optimum can be solved in the real world • E. Barone (1908): mathematical model for a socialist economy • "Ministry of Production in a Collectivist State" • A socialist economy could do as well as a capitalist one as prices should be seen merely as the solution to a set of equations in a Walrasian system - whether these were solved by the government or the market was irrelevant.
Socialist Controversy (4) • F. M. Taylor (1924): state can be at least “as efficient as a private enterprise economy • H.D. Dickinson (1933, 1934) • Mathematical solution - the problems of a socialist economy could be solved by a central planning agency • Criticism of Mises’ objections to planning • O. Lange (1936) – Langer-Lerner model • Model of socialism inspired by neoclassical economics • Prices are merely rates of exchange • Who provides them is irrelevant - irrelevant as long as managers of state enterprises are given instructions to act as cost-minimizers • Central planning board allocates investment and capital goods with markets reserved for labor and consumer goods (a sort of “capitalism without capital markets”) • If all production is performed by a public body, and there is a functioning price mechanism, this economy will be Pareto-efficient, like a hypothetical market economy under perfect competition.
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