Academic journal article The Cato Journal

Lange and Hayek Revisited: Lessons from Czech Voucher Privatization

Academic journal article The Cato Journal

Lange and Hayek Revisited: Lessons from Czech Voucher Privatization

Article excerpt

Since the sudden demise of communism in the late 1980s, economists have regarded the transition from command to market economies in Central and Eastern Europe with intense interest. In addition to studying the transition, they have begun using the region as a testing ground to investigate the validity of classic propositions. Vouchers were used to privatize substantial portions of the economy in several transition countries in Central and Eastern Europe. The core of these voucher schemes was use of artificial money (vouchers) to purchase shares of privatized companies in several waves of closed auctions. Since policymakers in these countries were typically afraid to employ open financial markets even in the few cases where such markets existed, most countries used administrative price committees to set the prices of shares in these auctions.

Voucher privatizations, therefore, quite unintentionally provided an empirical test of one of the key issues in an almost forgotten, but once famous, controversy in the economic theory of socialism: whether a socialist economy (whose differentia specifica was the public ownership of the capital and natural resources) could allocate its resources to replicate a perfectly competitive outcome. Simply put, the question was whether a system of government price administration could "get the prices right" in comparison with the competitive market.

Although the theoretical possibility of such an outcome has been known since the introduction of market socialism by Oskar Lange in the 1930s (best summarized in Lange 1936 and 1937 and Neuberger 1973), the assumptions necessary for Lange's model to work were heavily criticized by Hayek and others (see Hayek 1935 for a good example), who argued that Lange's model is, in terms of information flows, equivalent to perfect competition.

Lange, referring to Wicksteed (1933) and Schumpeter, pointed to the so-called generalized meaning of price as being not only the exchange ratio between two commodities on the market but also (at a more fundamental level) the "terms on which alternatives are offered." He claimed that an actual market was unnecessary in order to find out these "indices of alternatives." Since this argument was inherently untestable, the focus of the controversy shifted to whether, in practice, a "nonmarket" solution could work. Robbins (1934) and Hayek claimed that practical application of the concept would require the price-setting authority to possess a great deal of information as well as solve hundreds of thousands of simultaneous equations that, once solved, would be obsolete. Lange, however, rejected these claims by asserting that both markets and planners operated using a "trial-and-error" algorithm. In fact, since both systems were operating by trial and error, Lange believed that convergence to the efficient outcome would be faster under planning due to the superior information content at the disposal of the planning authorities.

These predictions by Lange about the required informational content and the speed of convergence of such a "nonmarket" (or simulated market) approach represent the motivation for the current paper. Elsewhere, we have demonstrated that Czech voucher privatization was able to incorporate all information about future equity market prices into the administrative voucher prices and that, therefore, these prices were "efficient" in the sense usually used with respect to financial markets (Filer and Hanousek 2001). We now turn our attention to the more fundamental question in the Lange-Hayek debate: Was the administrative authority able to establish an equilibrium set of prices that was able to clear the relevant markets without significant excess demand or supply?

The Voucher Privatization Scheme

There were 1,664 companies that had some or all of their equity included in the two waves of voucher privatization. …

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