From Socialism to the Market Economy: Postwar West Germany versus Post-1989 East Bloc

Pejovich, Svetozar, Independent Review

Socialist writers all presume that socialist institutions can bring about a "just" society. This premise has provided both the philosophical foundation and the political justification for the practitioners of socialism to replace individual liberties and the rule of law with the rule of men (hereafter, "the arbitrary state") and a display of concern for "the people." The latter term, a favorite of all socialist leaders, is a mere facade behind which the ruling elite hide their own private ends.

The twentieth century witnessed the trial and failure of two major applications of socialist doctrine: national socialism and Marxism-Leninism. Like competing families in the underworld, national socialism and Marxism-Leninism went to war (hot and cold) with each other as well as with the rest of the world. Both failed to deliver on their promises. Defeat in World War II destroyed Hitler's socialism, whereas Marxism-Leninism decayed from within and ultimately collapsed as a rotten hulk.

National socialists and communists shared many basic political and economic premises of socialist doctrine. Both operated a command economy and made the individual a mere instrument for the achievement of the ends of their ruling elites. Both despised the private-property, free-market economy and its corollary, the society of free and responsible individuals. They favored a large, active state, created comprehensive welfare programs, and paid no heed to the rule of law. National socialism and Marxism-Leninism were equally unrelenting in the pursuit of their primary targets: inferior races and the bourgeoisie, respectively.

They also had some fundamental differences. Communists were openly hostile to the private right of ownership, whereas national socialists settled for monitoring and controlling the behavior of ostensible private owners. National socialists regarded the struggle for racial purity within national boundaries as the major mechanism for the development of their brand of socialism. Communists, on the other hand, considered the class struggle waged by the proletariat across national boundaries as the vehicle for the development of the Marxist-Leninist type of socialism. In 1972, Nicolae Ceausescu, the communist leader of Romania, tried to bridge the gap between nationalism and internationalism, declaring: "The dialectical process of bringing together nations presupposes their strong affirmation.... Between national and international interests not only is there no contradiction, but, on the contrary, there is a full dialectical unity" (qtd. in Berlin 1992, 253-54).

Clearly, it was the failure of socialist experiments that gave rise to the institutional restructuring of the former socialist states after 1989. The objectives of that institutional restructuring, however, are less clear. The leaders of former socialist states talk about achieving liberty, social stability, and sustained economic growth, but those stated objectives have frequently misrepresented these leaders' real goals. Indisputably, the economic reforms mirror the leaders' preferences, their philosophical premises, the political and economic constraints on their decision-making powers, and the incentives under which they operate. Observed results also incorporate the effects of uncertainties, incomplete information, and divergence of interests between policymakers and those who implement policies.

Institutional changes in former socialist states have produced results that raise some important questions. For example, why was the transition of West Germany in the 1950s more successful than the institutional restructuring of the Soviet Union and Eastern Europe in the 1990s? Why do the results of institutional restructuring within the former Soviet bloc differ from one country to another? Why do we observe no tendency in former socialist states for more-efficient institutions to replace less-efficient ones?

In this article, I identify the rule of law, the carriers of institutional restructuring, and the prevailing informal rules of the community as three critical determinants of the outcome of institutional restructuring. I argue that consideration of the interaction among these three determinants is a powerful and perhaps necessary method for the analysis of institutional changes and their causes, directions, and consequences--a claim I call the interaction thesis. Such an analysis treats as endogenous how the interaction among the rule of law, the carriers of institutional restructuring, and informal community rules affects incentive structures and the costs of transactions, and how incentive structures and the costs of transactions in turn affect economic behavior.

Framework for Analysis

For private-property, free-market countries, the rate of growth of real output is a good measure for evaluating economic performance, but it is not a reliable measure for a socialist state because such states calculate their gross national product (GNP) in arbitrary, state-controlled prices. As institutional restructuring proceeded in former socialist states, scarcity prices began to replace accounting prices in measuring the value of GNPs. A smaller GNP valued in scarcity prices could be worth more to citizens of former socialist states than a larger GNP calculated in accounting prices. Hence, slower and even negative growth rates during the process of transition do not necessarily signal economic retardation. (1) As James M. Buchanan has emphasized, "Economic performance can only be conceived in …

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Publication information: Article title: From Socialism to the Market Economy: Postwar West Germany versus Post-1989 East Bloc. Contributors: Pejovich, Svetozar - Author. Journal title: Independent Review. Volume: 6. Issue: 1 Publication date: Summer 2001. Page number: 27+. © 2009 Independent Institute. COPYRIGHT 2001 Gale Group.

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