The Economic Transformation of Eastern Europe: Views from Within

Jiri Hlavacek

The behavior of both the firm and the consumer is the basic characteristic of every economy. Their behavior is akin to the law of gravity in mechanics: They determine the direction of movement in space without barriers or external force.

Mainstream economic theory does not deal with the problems of the behavioral characteristics of firms and consumers to any great extent. It is simply assumed that firms wish to maximize profits, while consumers seek the maximization of utility. Other forms of behavior are simply dismissed as deviations from the norm.

The presumption of standard economic behavior is not an isolated assumption; rather, it is connected to other assumptions of neoclassical economics. The most important assumption of neoclassical analysis, as it pertains to this chapter, is the independence of the firm.

This independence, in Western market economies, takes for granted the idea that the firm has the right and the will to make its own decisions for its own purposes. No one beyond the firm is allowed to dictate to the firm, and the firm's position is determined only by its own decision making and by the conditions of the market. It is only the firm and the invisible hand of the marketplace that influence the firm's prosperity or failure.

A centrally planned economy (CPE) cannot be taken as an economic system with firms free to do what they wish. It is this basic tenet that separates the CPE from the Western market economy.

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