FROM SOCIALISM TO CAPITALISM
Karl Marx inverted
by
Patricia Dillon and Frank C. Wykoff*
October 23, 1998
**** DRAFT****
*The authors are respectively professor of economics at Scripps College
and Pomona College in Claremont CA. Please do not quote without permission
of the authors.
Contents
Theory Chapters
1. The Withering Away of Communism and the Rise of Capitalism
. . . . . . . . 6
0. The End of an Idea . . . . .
. . 6
1. Economic Reasoning . . . . .
. 8
2. Our Niche . . . . . .
17
3. Analysis of the Collapse . . . .
. . 18
4. Lessons from the Collapse . . . .
. . 23
5. Implications and the New World Order . . . .
. . 27
2. The Political Economy of Reform . . . . . .
. . 29
0. New Political and Economic Challenges . . 29
1. Political Impediments to Economic Reform . . 34
2. Transition to What? . . . . 39
3. Problems in Political Economy . .
. . 43
3. Why Private Markets Work . . . . . .
. . 46
0. Why These Reforms? . . . . .
. 46
1. Price Liberalization . . . . 48
2. Property Privatization . . .
. 51
3. Macroeconomic Stabilization . . .
. 56
4. Industry Deregulation . . .
. 60
5. International Trade Liberalization . . .
. 62
6. An Active Role for Government . . . . 63
7. Failure: Markets versus Plans . . . . 66
4. Growth Models for Assessing Reforms . . . . .
. . 70
0. Reforms Lead to Growth . . . . .70
1. Purposes and Limitations of the Growth Model . . . .
72
2. The Set Up . .. . . .
. . 82
3. The Workings and Outcome of Growth Models . . . . 86
4. Saving . . . . . . . . 90
5. Reforms in Growth Models . . . . . . . .
94
0. Budget Deficits as Ponzi Schemes . . . .
94
1. Economic Reforms and the Steady State . . 96
2. Additional Consequences of Reforms . . . . 99
3. Conclusions and implications . . . . 101
6. Challenges Facing Reformers . . . . . .
. . 102
0. Politics and Economic Challenges . . 102
1. A Public Choice Distinction. . . .105
2. A Model of Elections and Politics . . . . 107
3. Interaction between Politics and Economics . .
111
4. Common Problems facing Reformers . . . . 114
5. Unique Local Conditions . .
. . 121
Country Chapters
7. Bulgaria: Socialism Has the Upper Hand . . . .
. . . . . 125
8. The Czech Republic: Capitalist Superstar . . . .
. . . . . 138
9. Estonia: Liberalization since Independence. . . . .
. . . . . 149
10. Hungary: The Taste of Hungarian Goulash . . . .
. . . . . 163
11. Russia: Can the Russians Make It? . . . .
. . . . . 176
12. The Slovak Republic: New Country, Old Problems . . . . . . . . . 193
Technical Material
13. Empirical Evidence . . . . . . . . . 210
14. Growth Theory Models . . . . . . . . . 220
Data, Statistics, and Econometrics Appendix . . . . . . . . . 230
References . . . . . . . . . . 240
List of Figures & Tables
Chapter 2 The Political Economy of Reform
T-2.1 Why Do Some Economies Outperform Others? . . . . 32
F-2.1 Delayed Gratification . . . . 39
F-2.2 Tableau of Ownership and Control . . . . 40
T-2.2 Why Societies Resist Reforms . . . . 44
Chapter 3 Why Private Markets Work and How They Fail
T-3.1 Five Generic Economic Reforms . . . . 47
T-3.2 Why Communists and Socialists Resist Reforms . . . . 67
Chapter 4 Growth Models for Assessing Reforms
F-4.1 Decreasing Marginal Returns to Capital . . . . 83
F- 4.2 Exponential Growth of Labor . . . . 84
F- 4.3 Zero Capital Growth per worker . . . . 88
F- 4.4 Marginal Decision of the Firm . . . . 88
F- 4.5 The Golden Rules . . . . 89
Chapter 5 Reforms in Growth Models
T- 5.1 Growth Models Assumptions . . . . 92
T- 5.2 Steady State Conditions . . . . 95
T- 5.3 Reforms and Growth Outcomes . . . . 100
Chapter 6 Challenges Facing Reformers
F- 6.1 Election Process . . . . 105
F- 6.2 Candidates’ Decision Process . . . . 109
F- 6.3 Interaction between Politics and Economics . .
. . 110
Data, Statistics and Econometrics Appendix
Data Tables . . . .
Historical Political and Economic Tableaus . . . .
Regressions . . . .
Chapter Economic Data . . . .
End Notes by chapter
References by Chapter