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C H A P T E R 1 An Overview of the Research, the Theories Underlying the Interpretation of the Results, and the Conclusions The stationary condition is that point of equilibrium to which we conceive all forms of economic activity to be tending and which would actually be obtained if new factors did not, in the meantime, create a new equilibrium. In the imaginary state of equilibrium all the units of the factors of production are employed in the most economic way, and there is no reason to contemplate any changes in their number or their disposition . . . It is quite easy to postulate a socialist economic order under stationary conditions. —von Mises, Socialism (1932) The bourgeoisie cannot exist without constantly revolutionising the instruments of production , and thereby the relations of production, and with them the whole relations of society.... All fixed, fast-frozen relations, with their train of ancient and venerable prejudices and opinions, are swept away, all new-formed ones become antiquated before they can ossify. . . . [The bourgeoisie] has drawn from under the feet of industry the national ground on which it stood.... In place of the local and national seclusion and selfsufficiency , we have intercourse in every direction, universal interdependence of nations . And as in material, so also in intellectual production. —Marx and Engels, The Communist Manifesto (1848) In the closing paragraphs of The General Theory, Keynes remarks on the powerful influence of the ideas of economists, both when they are right and when they are wrong. This remark comes easily to mind at present, on reading the extended analyses of the problems of the Eastern European economies and their possibilities for economic reform. Much of the discussion of the properties of the socialist economies, both academic and popular, is cast in terms that are directly derived from the standard paradigm of Western economics —the set of ideas that economists call neoclassical economics. The present book examines whether that paradigm is truly an adequate tool for 4 Chapter 1 analyzing the nature of socialist economies. In answering this question, the book develops new methods for analyzing the comparative behavior of economic systems and presents new evidence on the nature of the differences between capitalist and socialist economies. This book originated in an attempt to view the basic differences between socialism and capitalism through the lens of neoclassical theory. By applying neoclassical theory in an empirical framework, I sought to discover the characteristic features of socialist economic behavior, but as the analysis proceeded it became clear that marked differences between the two types of economic systems were not a significant element of the results derived from the traditional economic models. Once the empirical analysis stepped outside the confines of these models, however, distinctive features in the behavior of the socialist economies became readily apparent. Hence, it seems that the most important determinants of the contrasting behavior of capitalism and socialism lie outside the scope of neoclassical theory. To understand the comparative behavior of the two systems, one must seek an alternative analytical framework. In explaining the results of the empirical analysis, I have sought refuge in a Schumpeterian theory of economic behavior.' The Schumpeterian view point does not attach great significance to the claim that price systems achieve static efficiency in the allocation of resources, which is the focus of neoclassical economics. To Schumpeterians, the decisive factors in economic performance are the generation of institutional and technological change and adaptation to this change. In the Schumpeterian view, change can be best accomplished in a process akin to Darwinian evolution, in which new ideas come disproportionately from new competitors and in which adjustment occurs through the increasing dominance of the successful. The ensuing chapters examine the neoclassical and Schumpeterian paradigms as rivals in interpreting the behavioral regularities of socialist systems. I use a particularly rich data source—foreign trade statistics —to discover those regularities. The approach is unabashedly empirical: the data analysis is descriptive, rather than centering on formal tests of theories. Nevertheless, this study does present new analytical techniques for dissecting the behavior of socialist economies, techniques that constitute a contribution to the empirical methods of comparative economics. The present chapter guides the reader through the thickets of the analysis and foreshadows the most important conclusions. The orientation is provided in two ways. Sections 1.1-1.3 outline the theoretical framework by contrasting the Schumpeterian and neoclassical perspectives. These sections summarize the main sets of economic ideas that are used when interpreting the 1 For the most...


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