Abstract

This paper presents a view of the process of transition from planned command socialism to mixed market capitalism involving nonlinear complex dynamical phenomena. After the former institutional structure disappears a coordination failure can bring about macroeconomic collapse as in almost all of the former Soviet bloc or macroeconomic boom as in China. A closely linked phenomenon is the rise of the underground economy as inflation and income inequality increase. This can lead to a jump from one equilibrium to a very different one as nonlinear social feedback processes operate in the transition.