Economic Transition of Centrally
Planned Economies to Liberal Market
Economies
Miscellaneous on Philosophy, Methodology and
Theories
 Central Planning
 Economic Transition
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Basic Task
Basic Facts
Basic Mechanisms - Reallocation, Disorganization, Restructuring
Partial Analysis - Start of Transition and the Initial Adjustment
of State Firms
Global Analysis - The Benchmark Model
Miscellaneous on Philosophy,
Methodology and Theories
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Methodological Individualism x Methodological
Collectivism
Liberalism x Intervencionism
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Austrian School
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Methodological Individualism
Methodological Subjectivism
Theory of Marginal Utility (Carl Menger, Leon
Walras and William Stanley Jevons)
Theory of Value (classical, neoclassical and
Austrian) - Israel Meir Kirzner on Value
Miscellaneous on Philosophy,
Methodology and Theories
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Neo-Austrian School
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Ludwig von Mises:
extreme liberalism and individualism,
 Methodological apriorism (individuals decide and act
purposefully)
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Friedrich August von Hayek
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Spontaneous order (Netlogo – flocking model as example)
Israel Meir Kirzner
Miscellaneous on Philosophy,
Methodology and Theories
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French Sociological School in Economics
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Basic method - structuralism
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Parts of a system get their meaning only from relations with
each other and with the system as a whole
This method has been applied in anthropology,
lingvistics, sociology, politology etc.
 Michel Paul Foucault, Claude Lévi-Strauss, André
Marechal, Raul Prebisch
 Indicative Planning and Dirigism
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Central Planning
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Marx did not want to „give recipes for the
kitchen of the future“ – he never analysed how
the socialist system would work
Ludwig von Mises 1920 – planned economy
cannot work – prices are needed for basic
decisions and only market can set prices
But: Theory of General Equilibrium is based
on a system of equations, it can be solved for
equilibrium prices (Enrico Barone 1908)
Central Planning
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What are prices? – coefficients of scarcity
Friedrich von Hayek, Lionel Robbins(1935):
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It is theoretically possible, but practically not,
calculations are too difficult
Oscar Lange (1936, 1937): admits problems
with calculations, planning possible when
based on a mechanism copying market
mechanism, it can be even more effective than
the market mechanism
Central Planning
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Maurice Dobb 1955: problem of calculation is
not important for planning - effective use of
existing fonds is not the basic problem, basic
problem is accumulation of fonds
Wassily Leontief 1941: input – output analysis
Leonid Vitalijevič Kantorovič 1931: linear
programming
Central Planning
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Practical experiences
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Command central planning (e.g. in former
Czechoslovakia)
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Problem of calculations – was not overcome
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Size of calculations
Quality of information (importance of informal institutions
Quality of information: plan – after approval –
became a law => incentives for managers to
behave as „homo se assecurans“
 Excellent analyses of „how it really worked“:
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Janos Kornai: Economics of Shortage
Central Planning
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Practical experiences
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Indicative central planning
It has been used in different countries with mixed results
 Examples in Wikipedia indicative planning
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Transition – Basic Task
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Before: Totalitarian Dictatorship
Rule of one party - Nomenclatura system
 Central Command Planning
 Years of (not only) economic stagnation (creative
destruction did not work, in fact, basic behavior of
firms was rent seeking)
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Revolution: What opened the window of
opportunity? What was the leading force?
Basic Task: Change to Liberal Democracy
Basic Facts
Basic Facts
Basic Facts
Basic Mechanisms
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Reallocation
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From Public to Private Sector = Privatization
Basic Mechanisms
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Disorganization
Collapse of CMEA (Council of Mutual Economic
Aid = COMECON)
 The role of time horizon
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Firms experience shortages of material
 Long term relationships with suppliers had been broken
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Macroeconomic Policies – problem of inflation
Basic Mechanisms
Basic Mechanisms
CPI inflation
Basic Mechanisms
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Restructuring
Aim of restructuring is increase in productivity
 Either decrease of employment or increase of
output
 Fears of unemployment slow down restructuring
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Basic Mechanisms
Time on the
horizontal ax
Basic Mechanisms
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Real development
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Specific situation of East Germany
The role of social factors in Russia
Basic Mechanisms
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Restructuring and Privatization
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Barriers to Restructuring
Opposition of Insiders
 Lack of Capital
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Privatization to
Insiders
 Outsiders
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From Insider Ownership to Resale
Basic Mechanisms
Partial Analysis
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Start of transition
price liberalization + removal of
subsidies
triggered
the collapse of state firms
 growth in the new private sector was
insufficient to take up the slack
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Partial Analysis
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The Initial Adjustment of State Firms
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Situation
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The Hardening of the Budget Constraint
Reactions
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The Appropriation of profits
Delays in Payments of taxes and to Suppliers
Bad Loans
The Choice of Employment and Wages
Partial Analysis
Global Analysis
The
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Benchmark Model
Interactions among
Growth
of the new private sector
Restructuring of the state firms
Unemployment
Two
Phases of Transition
1st
: High unemployment prevents restructuring, action
comes from private sector growth only.
2nd : Economy proceeds along a balanced path, where
private sector employment creation absorbs the employment
losses from restructuring. Output grows as a result of both
reallocation and restructuring and unemployment remains
constant until transition has been achieved.
Global Analysis
Assumptions
of the benchmark model
State and private sector
Pre-transition is no unemployment
Just after the start of transformation (price
liberalization, elimination of subsidies),
employment in state firms decreases and
unemployment is generated
Global Analysis
Summary
of the first half of the
model
Private employment creation depends on
the profit rate. The profit rate depends in
part on the wage. The wage is a decreasing
function of unemployment. Thus, other
things being equal, higher unemployment
leads to higher private employment
creation.
Global Analysis
Summary
of the second half of the
model
Restructuring of state firms implies both an
increase in output and an increase in
unemployment. The decision to restructure
depends, among other things, on the state
of the labor market: the higher the
unemployment rate, the less likely
restructuring is to take place.
Global Analysis
Putting
If
two halves together
initial unemployment is below some
critical value, then some restructuring takes
place instantaneously until unemployment
is equal to that critical value. Transition
then takes place at the constant
unemployment rate, with the flow of layoffs from restructuring equal to the flow of
hirings in the new private sector.
Global Analysis
If
initial unemployment is above some
critical value, then there is no restructuring
until private employment creation has
decreased unemployment down to that
critical level. At that point, the flow of
restructuring starts and the economy
follows a balanced transition path with
constant unemployment.