Essays on east European economies

Abstract

All economic systems are analyzed from the point of view of (a) whether or not they offer individuals opportunities to earn capital income; (b) whether the allocation of output between current consumption and investment is determined by the “invisible hand" of the market mechanism or "visible hand" of central planner. For the purpose of this study four economic systems are defined: Capitalist market, capitalist central planning, socialist market, and socialist central planning.

Ample evidence is provided to show that the economies of the East European Bloc represented almost a model cases of the socialist centrally planned system. In this sense these economies had the following three characteristics: 1. The state controlled almost all returns to capital in the economy, including the returns to human capital. 2. The state controlled the allocation of resources between investment and current consumption. 3. Households supplied labor to the state sector in exchange for compensation in the form of consumption, i.e., the state maintained only an indirect relationship with the labor factor of production. Labor effort could have been increased only by offering consumption-type incentives.

In part two of this dissertation the dynamic macroeconomic equilibria possible under socialist central planning, socialist market, and capitalist systems are analyzed. It is shown that under both socialist systems (where individual households are banned from earning capital income from their personal savings) the supply of labor is suboptimal compared to the first-best solution feasible under capitalist system. The socialist market system fails to invest optimally. This failure can be improved by the introduction of a central planner. In a socialist centrally planned economy, however, the issue of the time consistency of optimal plans arises when the planner avoids commitment to the level of real wages. In the rational expectations framework households can predict the planner’s behavior and respond to it by supplying even less labor than under socialist market system.

In part three an alternative program of economic reform of East European socialist centrally planned economies is outlined.