Academic journal article Journal of Economic Issues

A New-Institutionalist Story about the Transformation of Former Socialist Economies: A Recounting and an Assessment

Academic journal article Journal of Economic Issues

A New-Institutionalist Story about the Transformation of Former Socialist Economies: A Recounting and an Assessment

Article excerpt

Almost all of the former socialist countries are now undergoing revolutionary transformations from central planning to market economy. New-institutionalist economics (NIE) is one prominent school of thought that has attempted to explain why these transformations began, how they should be conducted, and where they should end up. NIE explanations and prescriptions are growing in popularity not only within mature capitalist nations, but also within the transforming nations themselves.

I define new-institutionalism as an amalgamation of (1) evolutionary theory, as originated by Alchian [1950] and Nelson and Winter [1982]; (2) the Austrian process-oriented theory of Hayek [1948]; (3) the property rights theory of Coase [1937]; (4) the transactions cost theory of Williamson [1979]; (5) the contract and organization theories of Alchian and Demsetz [1972] and Cheung [1983]; and (6) the economic theory of social institutions developed by North [1990].(1)

NIE's chief claim to scientific achievement is its treatment of social institutions as endogenous to the structures and forces elaborated by neoclassical theory. NIE economists, like "old institutional economists"(2) [OIE], find neoclassical economics to be excessively narrow and mechanistic, to ignore the irreversibility of time, and to fail to account for the allocation of resources to such nonproductive activities as transacting and contracting. However, unlike OIE, NIE adopts the same individualistic, rationalistic, and hedonistic methodology as neoclassical theory.

The purpose of this paper is to articulate and to evaluate NIE explanations of, and prescriptions for, post-socialist transformations. My strategy is in two parts. First, I assemble the disparate elements of NIE thought and integrate them into a coherent general theory, or story, of post-socialist transformation. The telling of this story comprises the main part of the paper. I forewarn the reader that I will tell this story uncritically as if I were an ardent NIE proponent (which I am not). I make no effort whatsoever to evaluate the tale as I relate it. I am metaphorically "trying the NIE shoes on for size."

In the second section of the paper, I evaluate the NIE story and offer some general conclusions about its contribution to our understanding of post-socialist transformation. My conclusion is that, while NIE is a robust and logically consistent theory of post-socialist transformation, it is flawed by its reliance on the neoclassical article of faith: that free choice, voluntary exchange, and natural selection will result in efficient, welfare maximizing, capitalist market institutions. It is true that NIE expands the scope of orthodox neoclassical investigation to include the historical dynamics of institutions. Many view this expansion of scope as disciplinary progress. I conclude, however, that NIE is less an extension of neoclassical theory to the study of social institutions than it is a reduction of social institutions to the narrow confines that can be treated in a model of rational choice and methodological individualism.

The NIE Story of Institutional Dynamics

The Structure of Social Institutions

A social institution is a set of rules that governs human behavior and shapes social relations. Institutions are ". . . regularities in repetitive interactions among individuals" [North 1990, 231]. These regularities stem from interactions in which actors find it to their advantage to agree to certain sets of long-term strategies and practices. These agreements, or institutions, emerge because of the uncertainty that otherwise surrounds repeated decision making. Bounded rationality and opportunism motivate agents to agree to the rules that shape social institutions.

Some rules are formally codified, as in national laws, while others are informal, as in social customs, conventions, and codes of conduct. Institutional rules constrain individual choices by discouraging some kinds of actions and by explicitly sanctioning or encouraging others. …

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