The economist Armen Alchian said once that ever since the fiasco in the Garden of Eden, we have been living in a world in which what we want exceeds what is available. The desire for more satisfaction is a predictable behavioral implication of the fact of scarcity. In fact, it might have helped mankind to survive against competition from other forms of life. Man's desire for more utility gives rise to two interdependent issues that each and every society has to (...) face: how to increase the value of the community's wealth, and how to allocate the increment in wealth. We generalize those issues as the demand for economic development. (shrink)

The paper identifies the rule of law, the carriers of institutional restructuring, and the prevailing informal rules in the community as three critical determinants of the outcome of institutional restructuring in the community. The paper demonstrates that the analysis of the interaction among these three determinants – a claim I call the interaction thesis – explains why the transition from socialism to the market economy in postwar West Germany was a success, why the transition to capitalism in Eastern Europe is (...) still uncertain, and why the use of economic policies based on neoclassical economics have produced the rising strength of pro-socialist parties. The conclusion is that the interaction thesis is a powerful and perhaps necessary method for the analysis of institutional changes and their causes, directions and consequences.Cet article identifie l’état de droit, les supports des réformes institutionnelles, et les règles communautaires informelles qui y sont prévalent comme les trois facteurs explicatifs majeurs du succès ou de l’échec de la réforme institutionnelle dans un pays. Cet article démontre que l’analyse de l’interaction entre ces trois facteurs explicatifs – ce que j’appelle la thèse de l’interaction – explique, en premier lieu, le succès de la transition du socialisme vers l’économie de marché en Allemagne de l’Ouest de l’aprèsguerre, ensuite pourquoi la transition vers le capitalisme en Europe de l’Est demeure incertaine, et, enfin, pourquoi le recours à des politiques économiques fondées sur la science économique néoclassique a revigoré les partis politiques à orientation socialiste. La conclusion est que la thèse de l’interaction est une méthode féconde et peut-être nécessaire pour analyser les changements institutionnels ainsi que leurs causes, leurs directions et leurs conséquences. (shrink)

In the late 1980s, the actual accomplishments of capitalism finally made a convincing case against socialism. After several decades of experimentation with human beings, socialism in the former Soviet Union and Eastern European countries died an inglorious death. To an economist, the present value of the expected future benefits from socialism fell relative to their current production costs. And Marx was finally dead and, hopefully, buried.

The main objective of this essay is to show that the process of transition from socialism to capitalism in Central and Eastern Europe is a cultural problem rather than a technical one. In pursuing that objective I analyze two interrelated issues. First, analysis shows why and how cultural differences in Central and Eastern Europe have, via transaction costs specific to the process of transition, specific and predictable effects on the results of institutional restructuring, and, consequently, on economic performance. Second, I (...) argue that spontaneous changes in the prevailing culture could, under a set of credible and stable formal rules of the game, help to close a gap between the culture supportive of capitalism and the prevailing culture in Central and Eastern Europe. a Footnotesa My colleague and friend Fred Fransen made two major contributions to this essay: he helped me identify numerous inconsistencies in the essay, and he changed a number of my perceptions on the relationship between culture and economic performance. James Buchanan, Ljubo Madzar, Henry Manne, Milic Milovanovic, and Katarina Ott gave me useful suggestions and comments on earlier drafts. I am grateful to Victor Vanberg and Ulrich Witt for the opportunity to discuss this essay with their colleagues and students at the University of Freiburg and Max Planck Institute in Jena, Germany. (shrink)