Svetozar Pejovich

Understanding the transaction costs of transition: it's the culture, stupid

The process of transition in Central and Eastern Europe from socialism to capitalism is a cultural issue rather than a mere technical one. To support this proposition, economic analysis must explain why and how informal rules affect the results of transition.

Property Rights, Economic Decentralization, and the Evolution of the Yugoslav Firm, 1965-1972

THE Yugoslav experiment with socialism has captured world-wide attention because of the originality and frequency of the institutional reforms undertaken, and because of the increasing concern shown with decentralization and individual decision making. Since 1965, especially, the system has taken on a unique character; the economy has operated with a virtual absence of planning from the center, business firms have enjoyed significant independence from administrative control and, in general, many features of an idealized labor-managed system have been incorporated into the legal and institutional structure. Moreover, the practical results of the governments search for new and more effective organizational forms have not been negligible; relative to other Eastern European states, the Yugoslav economy has performed well. The liberal economic policies followed since 1965 have, no doubt, contributed to the material well-being of the Yugoslav people but, despite certain successes, the present labor-managed system is beset with very serious problems. And the basic cause of these problems is not difficult to see. Inherent in the special structure of property rights in Yugoslavia are forces conducive to conflict between the interests of society as a whole and the interests of the labor-managed firm. The latter organization is of central importance to the Yugoslav system, of course, because it promises to end the alienation of labor and to insure democratic participation of workers in the formation of the firms policies. In its pure, theoretical form, the labor-managed firm has a structure that allows the collective to seek its own best interests free of any coercion by the state. But this arrangement means that the collective may choose to pursue policies that are not consistent with efficient allocation of the nations resources or with community welfare. Certainly, recent events in Yugoslavia suggest that disharmonies between the collective and society are quite real. The record reveals a series of painful and seemingly chronic * The writing of this paper was facilitated by a grant from the National Science Foundation.

Institutions, Nationalism, and the Transition Process in Eastern Europe

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.

A Property-Rights Analysis of the Yugoslav Miracle

The Yugoslav experiment with labor participation in the management of business firms captured worldwide attention. The critics of capitalism seemed confident that the labor-managed economy would provide a long-sought alternative to the accomplishments of capitalism. Instead, the labor-managed economy has produced a crisis of enormous proportion in Yugoslavia. The article argues that the economic crisis in Yugoslavia is a predictable consequence of the system of labor participation in the management of business firms. It demonstrates that inherent in the structure of property rights of the labor-managed economy are some positive transaction costs and negative incentives that are specific to its institutional structure. Those transaction costs and disincentives are responsible for inflation, unemployment, declining income, and other economic problems in Yugoslavia. The conclusion is that the labor-managed economy is not a viable institutional arrangement.

Law, Informal Rules and Economic Performance

Capitalism has outperformed all other systems and maintained a positive growth rate since it began. Svetozar Pejovich makes the case within this book that a major reason for the success of capitalism lies in the efficiency-friendly incentives of its basic institutions, which continuously adjust the rules of the game to the requirements of economic progress. The analysis throughout is consistent and is supported by evidence. Key components of the proposed theory are the rule of law, the market for institutions, the interaction thesis, the carriers of change, and the process of changing formal and informal institutions.

Towards a general theory of property rights

The literature in the field of comparative economics contains only passing references to the role and importance of property-rights structures. This is not to say that the differences in property relations have not been appreciated by the economics profession at large. The point is that the fundamental role of the property-rights structures as a specification of the set of opportunity choices about resource uses has yet to be formally incorporated into the theory of economic systems. The purpose of this paper is to demonstrate that the effects of various property-rights structures on the pattern of human behavior can be incorporated into traditional economic analysis and that in the process the scope of economic analysis is broadened1. The paper is intended to be a contribution to the pure theory of human behavior under various property-rights arrangements, which (property arrangements) are, it is asserted, a powerful and possibly necessary condition for the very existence of different economic systems. The study will concentrate on the problem of short-run adjustments in the rate of real income voluntarily diverted to gross investment under four different forms of ownership in capital goods.

THE UNEVEN RESULTS OF INSTITUTIONAL CHANGES IN CENTRAL AND EASTERN EUROPE: THE ROLE OF CULTURE

APSTRAKT: Uveliko je zapa`eno da ista formalna pravila, izglasana u skup{tinama u obliku pisanih zakona, daju izrazito razli~ite rezultate u razli~itim dru{tvenim i kulturnim ambijentima. Ova pojava je posebno uo~ljiva u procesu tranzicije biv{ih socijalisti~kih zemalja u tr`i{ne privrede i politi~ki pluralizovana dru{tva . Jako sli~ne i tu i tamo identi~ne institucionalne promene ispostavljaju se kao nejednako prihva}ene u posmatranim dru{tvima a daju nagla{eno razli~ite rezultate u materijalnom prestrukturiranju privreda. Postalo je jasno da se pojam institucija mora pro{iriti tako da obuhvati i neformalna pravila: obi~aje, tradicije, kulturne vrednosti i nacionalne mitove. Neformalna pravila defini{u ograni~enja za realizaciju formalnih i, s druge strane, odre|uju njihove stvarne u~inke kad budu ostvarena. Nametanje formalnih pravila tranzicionim dru{tvima ne mo`e da bude uspe{no ako se ne obezbedi prethodno ili istovremeno izvr{enje promena u neformalnim pravilima. Rad se zavr{ava shemom strategije odsudno va`nih promena u vrednostima i drugim komponentama neformalnih pravila. KLJU^NE RE^I: institucije, kultura, tradicija, tranzicija, tr`i{te, preduzetni{tvo. ABSTRACT: It has been widely observed that the same formal rules, enacted in the parliaments in the form of written laws, give vastly different results in different social and cultural environments. This phenomenon came to be particularly pronounced in the proces of transition of the formerly communist countries to market economies and politically pruralized societies. Highly similar and occasionally identical institutional changes turned out to be unequally accepted by the societies under consideration and produced widely different results in the material restructuring of the economies. It became clear that the notion of institutions had to be widened so as to encompass the informal rules: the customs, the traditions, cultural values and national myths. Informal rules define the constraints for implementing the formal ones and, on the other hand, determine the actual effects of the latter once they are implemented. Forcing the formal rules upon the transition societies cannot be successful unless preceding and/or contemporaneous changes of informal rules are provided for. The paper ends with a design of the strategy for the decisively important changes in values and other components of informal rules.

The Capitalist Corporation and the Socialist Firm

The Standard theory of production and exchange has provided fundamental insights into social problems that find their source in scarcity. It has demonstrated that, in a competitive equilibrium, the extent of exchange is consistent with the equimarginal principle. The theory has suggested testable implications for a number of world events and, most significantly, explained the efficiency characteristics of competitive markets.

The Case of Self-Management in Yugoslavia

Most research by western scholars has traditionally emphasized the macroeconomic aspects of socialist economies. A predictable outcome of this emphasis on the system of planning and macroeconomic analysis has been a rather poor ex ante understanding of the economic forces at work in socialist countries. Let us look at two examples.

Institutions and Economic Development

All societies have to allocate resources between present and future consumption, evaluate investment alternatives, provide an orderly flow of consumer goods between production dates (e.g., wheat between harvests), and encourage the growth of wealth.