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E P I L O G U E The Results and Some Questions They Raise Do not speak lightly of the three volume novel, Cecily. I wrote one myself in those earlier days. . The good ended happily, and the bad unhappily That is what Fiction means. Miss Prism in The Importance of Being Earnest In this epilogue I summarize the principal features of the preceding pages— the nature of the differences between Schumpeterian and neoclassical paradigms , and the empirical results that most directly reflect on those differences. I then reflect briefly on an issue that has been ignored thus far—the significance of the results for the future of the socialist countries. I do this by posing a number of questions about the process of economic reform, questions that arise naturally only on acceptance of the Schumpeterian framework. The central message of this book has focused on the differences between two views of the nature of economic activity. The neoclassical approach emphasizes analysis of the equilibrium allocation of physical resources in an environment in which there is a fixed set of institutions. That approach leads one to stress the incentives facing economic agents who make production decisions, the informational role of prices, and the cumbersomeness of largescale bureaucracy in allocating resources in a complex modern economy. The Schumpeterian approach downplays the significance of analysis of the equilibrium allocation of resources. Instead, as the key aspect of economic performance, Schumpeterians emphasize the generation of technological and organizational innovation, the adoption of those innovations, and the means by which the economy adapts to those innovations. In the Schumpeterian view, the process of economic innovation under capitalism is best characterized as an evolutionary mechanism in which many new ideas are generated, often by new entrants into an industry, and in which the economic system chooses the most successful innovations. A major component in the spread of innovations is change in the relative size of organizations—the growth of the successful organization and the possible demise of those that made the wrong choices or that were less innovative. Thus, in analyzing the economic performance of socialist economies, Schumpeterians would emphasize the rigidity of institutional structure and the absence of mechanisms to select efficient organizations and foster their growth. A Summary and Some Questions 223 When viewed in the composite, the evidence in this book shows that the essential differences between capitalist and socialist economies lie in the factors emphasized in the Schumpeterian perspective and not in those stressed by the neoclassical model. Some of the principal features of that evidence are the following: • When examining how closely the trade data of different countries fit a neoclassical model of efficient static resource allocation (the HeckscherOhlin model of trade), the socialist economies appear to be as efficient as the capitalist economies. Moreover, the socialist countries have a comparative advantage in sectors whose behavior leads to static inefficiencies in Western economies—the sectors with high concentration levels. Hence, it is difficult to argue that inefficiency in static resource allocation is the particular problem of the socialist economies. • When one examines a model of trade that better captures aspects of the Schumpeterian paradigm, the peculiarities of the socialist economies become apparent. Capitalist trade data fit much better than the socialist data. • Many of the traditional hypotheses formulated from a neoclassical perspective are not evidenced in trade data. For example, trade patterns do not evidence a strong capital-intensive bias. In contrast, the hypotheses of the Schumpeterian model fare well. For example, the socialist countries perform less well on product innovation than on process innovation and have a comparative disadvantage in sectors in which there is a large amount of entry of new firms. • When one uses the HO model, the decentralized socialist economies, Hungary and Yugoslavia, seem to be less efficient than the orthodox centrally planned economies. On most of the results reflecting the Schumpeterian perspective, these two economies look very much like their socialist neighbors . Hence, decentralization as presently undertaken in Eastern Europe— the type that is consistent with the neoclassical model—does not seem to improve the allocation of resources. This is a prediction of the Schumpeterian model, which emphasizes that natural selection, not decentralization, is the essence of the market. • In many sectors in which the socialist countries have a low level of exports, because of intrinsic weaknesses in their economies, there is also a low level of imports. This is the case, for example, where multinationals are important , even though these are high-technology...


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