Abstract
We examine the “new comparative economics” as proposed by Djankov et al. (2003) and their use of the concept of an institutional possibilities frontier. While we agree with their general argument that one must consider a variety of institutions and their respective social costs, including legal systems and cultural characteristics, when comparing the performance of different economic systems, we find various complications and difficulties with the framework they propose. We propose that a broader study of clusters of institutions and such newly emerging forms as the new traditional economy may be better suited as ways to approach the study of comparative economics in the era after the breakdown of the old comparison of market capitalism and command socialism that came to an end with the breakup of the Soviet Union.
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Notes
Arguably the old comparative economics remains a topic as long as such remnant command socialist economies as the Democratic Peoples’ Republic of Korea (North Korea) and Cuba remain fundamentally unchanged. However, even these holdovers seem to be in various states of transition away from their previous forms as their relative economic performances continue to deteriorate.
Whereas many in the old approach spoke of capitalism versus socialism, we follow Rosser and Rosser (1996, 2004) in contrasting market capitalism and command socialism. This combines the allocation decision system (market vs. command) with the ownership system (capitalism vs. socialism) and allows for analysis of such intermediate forms as market socialism and command capitalism. The most important recent form of market socialism has been the Peoples’ Republic of China, although it is increasingly capitalistic, if of a distinctive form, with its widespread town and village enterprises increasingly owned by local citizens in various kinds of cooperative forms, some of them unique to China.
While Djankov et al. appear to be the first to use this term in this precise context, Arnold (1989) has used it as a modification of the traditional production possibilities frontier (PPF). His IPF is seen as having a similar shape as the traditional PPF, and hence different from that of Djankov et al. one, and it lies inside a society's PPF, representing how inefficient institutions may prevent a society from achieving its technically possible combination of outputs given by its PPF.
Peter Boettke has suggested that these should be labeled “costs of predation” by private or public agents. We have no problem with this formulation.
In further comments, Peter Boettke has also noted that if there are different costs of dealing with disorder versus dictatorship costs of predation, then this quasi-budget line may well not be at 45-degree angles to the axes. Of course, it may be that such enforcement costs may be contained within the shape of the IPF itself.
For a collection of classic articles on this topic see Prychitko and Vanek (1996), and for an overview of cooperatives around the world see Bonin et al. (1991). Arguably workers’ management dominated for several decades in the former Yugoslavia, but aside from questions regarding the actual power of the workers in those firms (Prasnikar and Svejnar, 1991), these firms were not cooperatives as they were officially state owned and were under strong influence from the dictatorial state, although remnants of this form persist in the most successful of the transition economies, the former Yugoslav republic of Slovenia (World Bank, 1999; Rosser and Rosser, 2004, Chap. 14).
See Putnam (2000) for discussion of these questions as well as a defense of the concept. Putnam grants that the distinction between bonding and bridging social capital is important.
Wittman (1989) has famously argued for the political efficiency of democratic systems, even as we express doubt regarding this matter here.
Another example of such non-convexity might be the case of the temporarily planned, command capitalist economies one sees in wartime in many peacetime market capitalist ones, such as Germany in World War I and the US and UK in World War II. The increase in social capital due to increased patriotic fervor may bend an IPF inward near the dictatorship end for the wartime and allow for a temporarily productive such economy, although such a system tends to stagnate in longer run peacetime. It should be remembered that Lenin was partly inspired to pursue planning by the example of the World War I German economic system, and Hayek's fear of the popularity of this model in the US and UK in World War II was a powerful impetus to his (1944) writing The Road to Serfdom.
Similar questions can arise within a more capitalist society, where a system can become more monopolistic with increasing costs of disorder or private predation. This is essentially the story discussed below that Djankov et al. tell about the rise of regulation in the US after 1900, but we note here that there are several different interpretations within this framework of what happened then.
Roman and Church law predominated in the south of France, while Germanic customary codes predominated in the north of France, both implemented by arbitrary local judges.
The original Visigothic code in Spain was the Code of Euric in 480, which Alfonso drew upon heavily.
Vance notes that elements of the Alfonsin Code persist in the legal systems of the states of the US Southwest, especially Texas. Louisiana is the one state whose legal code is based on the Napoleonic. One pattern seems to have been that those in Hispanic Latin America who adopted civil codes earlier (Oaxaca in Mexico, Bolivia, Costa Rica) were more likely to follow the anti-feudalistic and revolutionary Napoleonic Code than those who adopted ones later (Peru, Chile, Argentina). In Portuguese America, Brazil waited until 1917 to adopt a civil code reflecting influences of the Napoleonic, the German of 1900, and others.
A further irony is that France itself moved on beyond the Napoleonic Code and adopted a much more flexible system, while a very strict version of the code remains in place in most former French colonies such as in West Africa (Beck et al.), if not in as much of Latin America as widely claimed.
Yet another irony here is that some (Olson, 1982; North and Weingast, 1989) have argued that what the Glorious Revolution accomplished was a unification of jurisprudence throughout Britain over local rent-seeking elites during a period in which French jurisprudence was not so unified, which allowed for a greater defense of property and contract rights in Britain, thus paving the way for its period of more rapid growth and dominance in the Industrial Revolution.
Boettke et al. (2005, p. 290) state, “Andrei Shleifer is arguably the leading social scientist examining the questions of transition and development generally.”
It should be kept in mind here the role assigned by Acemoglu and Robinson to the role of income distribution in the determination of the movement to either democracy or dictatorship. Sonin (2003) reinforces these arguments in the transition context, arguing that with extreme inequality as in Russia, wealthy oligarchs may favor a weak enforcement of property rights.
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Acknowledgment
We thank Peter Boettke for his insightful and useful comments on an earlier version of this paper that was presented at the Southern Economic Association meetings in Charleston, SC, in November 2006.
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Rosser, J.B., Rosser, M.V. A critique of the new comparative economics. Rev Austrian Econ 21, 81–97 (2008). https://doi.org/10.1007/s11138-006-0011-z
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DOI: https://doi.org/10.1007/s11138-006-0011-z