and Economics of f Transition Session III November 9th Vilm - - PowerPoint PPT Presentation

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
• r technology), production organization
• Impact on distribution
• Economic x cultural or geographical factors

(Acemoglu, et al. 2002) 𝑓𝑑. 𝑗𝑜𝑡𝑢𝑗𝑢𝑣𝑢𝑗𝑝𝑜𝑡𝑢 ⇒ ቊ 𝑓𝑑. 𝑞𝑓𝑠𝑔𝑝𝑠𝑛𝑏𝑜𝑑𝑓𝑢 𝑒𝑗𝑡𝑢𝑠. 𝑝𝑔 𝑠𝑓𝑡𝑝𝑣𝑠𝑑𝑓𝑡𝑢+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. 𝑗𝑜𝑡𝑢𝑗𝑢𝑣𝑢𝑗𝑝𝑜𝑡𝑢

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. 𝑗𝑜𝑡𝑢𝑗𝑢𝑣𝑢𝑗𝑝𝑜𝑡𝑢 ⇒ 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
• f state evolution → persistence
• Sufficient de facto PP can cause a change

𝑞𝑝𝑚𝑗𝑢𝑗𝑑𝑏𝑚 𝑞𝑝𝑥𝑓𝑠

𝑢 ⇒ 𝑞𝑝𝑚. 𝑗𝑜𝑡𝑢𝑗𝑢𝑣𝑢𝑗𝑝𝑜𝑡𝑢+1

Theoretical Framework

Source: Acemoglu & Robinson (2006)

Summary

 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 19th 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 19th 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.

The Socialist Controversy (5)

• The feasibility of Socialism doubted especially by Austrian

economists

• L. Mises (1920s and later) and F. A. Hayek (e.g. 1935)
• Mises: with no private property in factors of production there cannot be

market prices for them. Hence economic calculation is impossible

• Mises (1920): "Economic Calculation in the Socialist Commonwealth"
• Hayek:
• Hayek (1935)
• Mathematical systems proposed as solutions of central planners’ problems

(Taylor, Dickinson) are way to complicated and may require unavailable

• data. Also economic incentives would be an issue.
• Later Hayek’s work [Hayek (1945): "The Use of Knowledge in Society“]
• Focused on problems with dispersed information

Hayek (1945): "The Use of Knowledge in Society"

• What is the problem we wish to solve when we try to construct a

rational economic order? On certain familiar assumptions the answer is simple enough.

• If we possess all the relevant information,
• if we can start out from a given system of preferences, and
• if we command complete knowledge of available means,

the problem which remains is purely one of logic.

• This, however, is … not the economic problem which society

faces.

• The reason for this is that the “data” from which the economic

calculus starts are never for the whole society “given” to a single mind which could work out the implications and can never be so given.

Command Systems Practical Experiments

USSR – “War Communism”, 1918-1921

• Hirshleifer (1963): “the most extreme effort in modern

times to do away with the system of private property and voluntary exchange“

• Market illegal, private enterprise, ownership were abolished

(and illegal), property of higher classes confiscated

• Farmer’s surpluses confiscated and distributed to cities and

army

• Labor organized in a military way
• Consumer goods distributed at artificially low prices and even

for free

• How would you behave
• If you were a farmer?
• If you were a worker in a city?

Source: Hirshleifer (1963)

Source: Hirshleifer (1963)

Economic Impacts of “War Communism”

• Catastrophic
• Industrial production:
• in 1920 cca 20% of pre-war level
• Agriculture production:
• 69 mil. tons in 1909-1913, only 31 mil. tons in 1921
• Cultivated area: decrease from 224 mil. acres to 159 (response to

confiscations)

• Impacts on population:
• Population “decreased” by up to 16 mil. (does not include war

losses and emigration!)

• 1918-1920: 8 mil. inhabitants left the cities and went to the

countryside

• Number of inhabitants of Moscow and St. Petersburg decreased by

58.2%

Results and their Implications

• Effects of “War communism”, 1918-1921
• Together with Civil War led to economic catastrophe and famine
• Lenin:
• “On the economic front, in our attempt to pass over to Communism, we had

suffered, by the spring of 1921, a more serious defeat than any previously inflicted on us“

• Trotsky:
• “The Soviet government hoped and strove to develop these methods of

regimentation directly into a system of planned economy in distribution as well as production. In other words, from “war communism” it hoped gradually, but without destroying the system, to arrive at a genuine communism…. Reality however came into increasing conflict with the program of war communism.”

• Response of the Party?
• Reprisals
• Blame the circumstances, enemies….
• Eventually forced to change the policies

The Actual Causes of the Problem?

• How would you summarize the causes?
• Based on the reading of Richman (1981)?

“New Economic Policy”

• NEP – “New Economic Policy“, 1921-1928
• Reaction to famine and protests (farmers’ uprising, Kronstadt

uprising)

• Shortage solved by small deviation back to market economy (and

negation of the war communism)

• Elimination of requisitioning, normal proportional tax (in currency)

instead

• 1922-23: private trade accounted for 90% of distribution
• Miraculous economic recovery, agricultural production back to

pre-war levels by 1925

Source: Hirshleifer (1963)

After the NEP?

• After NEP
• Three ideological factions in the Soviet Communist Party: left (Trotsky),

“right”(Bukharin), centrist (Stalin)

• Problem of NEP – too successful, worries about power monopoly of the party
• From 1927/1929 on – collectivization in agriculture
• Central plan introduced (5-year plan), but with more traditional (money, taxes)

mechanisms

• In general the lesson of war communism still remembered, new

policies were to (some extent) less radical

• Resulting system: centrally-planned economy
• More details: e.g. in Temin (1991)
• This system was also later exported to CEE countries

Collectivization – from 1929 on

• Objective: consolidate individual landholdings into collective

farms

• Sovkhoz – state farms
• Kolkhoz - cooperatives
• Motivation
• 1928 problems with availability of food
• Improve control and distribution
• Possible efficiency gains which can generate resources for

industrialization

• Attempts at simultaneous modernization
• Fast progress, but without resistance (and oppression)
• September 1929 – slightly over 7%, by February 1930 almost 60%
• Tragical results
• Original high targets not achieved (e.g. 50% increase in output)
• Instead: massive fall in agricultural output 1929-1932
• Famine
• Ukraine: Holodomor
• Probably 4-10 mil. people perished…

USSR in 1930s

• Official story: attempt at scientific methods that would replace

anarchy of the market

• Main features
• Uniform planning indicators since 1934
• Centralized plan: Gosplan planning agency
• Party loyalty more important than skills and experience
• 1936-7 “a coherent planning system did not exist)
• Commissariats for light industry, heavy industry, timber
• Collectivized agriculture
• Permanent prices
• Capital provided for free
• Controlled and restricted international trade
• Five-year plan (4-year in Nazi Germany)
• Primary goal: production in heavy industry (related to military sector)

USSR in 1930s: Reality

• Often chaos and ad hoc management
• Mixed lines of authority
• Planners: “Learning by doing”
• “Evolution rather than intelligent design”
• Brutality as motivating factor

References

• G. Roland: Transition and Economics, Introduction, chapter 1
• A. Aslund: Chapter 1
• F.A. Hayek (1945): The Use of Knowledge in the Society. AER
• Levy & Peart: Socialist Calculation Debate
• Richman (1981): War Communism to NEP: The Road to Serfdom
• Temin (1991): Soviet and Nazi Economic Planning in the 1930s.

Soviet and Nazi Economic Planning in the 1930s