A distrustful economy: an inquiry into foundations of the Russian market.

Author:Oleinik, Anton

Strengthening network capitalism implies that a common economic space does not exist even within national borders. Does this mean that one cannot speak about the national market, or economic transactions made on a national scale, in post-Soviet Russia? The first section of this paper is devoted to a discussion of the minimal prerequisites for arriving at an arrangement between the participants of a transaction. Then, the analysis will focus on the parameters of the arrangement that conditions the reproduction of economic institutions in Russia. We will pay particular attention to two basic parameters of the institutional environment: the level of trust and the character of authority relationships.

Minimal Prerequisites of the Arrangement in Economic Activity

Since Adam Smith, economists have been committed to a search for a monistic explanation of the reasons for economic activity. Smith's interpretations of economic motives given in his two most influential books seem contradictory and mutually exclusive. In his early work, Theory of Moral Sentiments, Smith discussed moral prerequisites for market play and particularly emphasized the necessity of sympathy between the participants in economic exchanges. By contrast, in his classic work, Inquiry into the Nature and Causes of the Wealth of Nations, Smith concentrated his attention exclusively on egoism and a natural inclination for trade. In its modern form, what is known as "Smith's problem" consists in opposing ethics and neoclassical economics. "Economics has two rather different origins: 'ethics' and 'engineering.' ... The nature of modern economics has been substantially impoverished by the distance that has grown between economics and ethics" (Sen 1987, 3, 7).

One could hardly deny that many economic transactions are reduced to a simple search for individual profit. However, the thesis about the universal character of the egoistic motivation is refuted by the existence of pre-capitalistic relationships and a plurality of the models of capitalism itself. The relative importance of the various motives varies in space and time; moreover, they can coexist within a given market society. "Individuals are, simultaneously, under the influence of two major sets of factors--their pleasure and their moral duty (although both reflect socialization)," emphasized Amitai Etzioni. "There are important differences in the extent each of these sets of factors is operative under different historical and societal conditions, and within different personalities under the same conditions" (1988, 63). For example, moral considerations prevail over utilitarian considerations during the first stages of market evolution. "Economy was embedded [till the end of seventeenth century] in a more broad system of social relations" (Polanyi 1995, 75). In modern societies, there still exist some spheres of everyday activities, like volunteering, in which transactions between individuals can be governed by morality or feelings of affinity and sympathy (Schmid 2002).

Arguments in favor of a new rapprochement between ethics and economics sound persuasive. Its advocates argue that transaction costs arise as a result of the interference of different motives. According to this point of view, a society populated exclusively by profit seekers would be free of transaction costs. For example, the term "opportunism" reflects a moral evaluation of profit seeking to the detriment of the partner's interests. When both partners are equally free of moral bonds, the unilateral search for individual profit seems rather natural (Thevenot 1997, 70-73; see also Etzioni 1988, 68).

Morality does not create a credible danger for the market. By contrast, market expansion renders any ethical considerations relative, making them absolutely irrelevant. Michael Walzer referred to "market imperialism" as the "the ability of wealthy men and women to trade in indulgences, purchase state offices, corrupt the courts, exercise political power" (1983, 120). Market imperialism took on especially manifest forms in the post-Soviet countries in the 1990s. Sociological interventions (i.e., focus groups organized in a special way) conducted by French scholars with respect to several groups of Russian businessmen showed that ethical considerations dominated the discourse in 1991-1992. Only one year later, in 1993-1994, statements made by the same parties were characterized by extreme cynicism (Berelowitch and Wieviorka 1996, 160, 176).

Despite the relative strength of utilitarian motives--they can annihilate moral considerations-such a result calls the stability of the market itself into question. Profit seeking in its "pure" form destabilizes the market. Economic theory accepts that a perfect egoist is unable to produce public goods due to the free-rider problem. Consequently, the interaction of egoists leads to a suboptimal result. In other words, "free exchange can not sustain itself, it must rely on institutions, rules, customs and traditions" (Walzer 1992, 114; see also Fukuyama 1996, 11).

The list of the determinants of economic action was reduced to the two motives for the sake of simplicity. It should include affect and coercion as well. Property, one of the basic economic notions, implies the exercise of control over material resources as well as over human actions. John R. Commons described "an evolution of the notion of property from the ownership of visible things to the ownership of invisible encumbrances on behavior and opportunities" (1939, 237). If we set aside coercion, the list looks very similar to Max Weber's typology of action. He discussed four types of action: instrumentally-rational, value-rational, traditional, and affective (1968, 24-25). The influence of these four factors on economic action might be visualized with the help of figure 1. Then we reformulate the question about relative importance of each motive in the following way: what is the distance from point X (a particular everyday action) to the four nodes of the quadrangle? (1)

[FIGURE 1 OMITTED]

Now we turn to the issue of the minimal arrangement between the participants of a transaction. Institutional arrangement between economic units "governs the ways in which these units can cooperate or compete" (Davis and North 1971, 7). (2) From a functionalist perspective, institutional arrangement enables economic subjects to adjust their expectations, to make them mutually compatible.

We will focus our attention on particular features of the institutional arrangement on which the post-Soviet market is based. These features concern both formal (e.g., law) and informal (e.g., moral) frameworks of transactions. Prerequisites to the arrangement do exist if the afore-mentioned four factors determine the behavior of most economic subjects in the same way. For example, the economic subjects' geometrical location lies in the surroundings of the same point, say, point X. Even if this point coincides with the "utility" mode, there are no problems in interpreting actions and, consequently, in coming to an arrangement about what these actions should look like. The neoclassical model of the market then becomes the special case of a more general model of economic action. In contrast with the previous instance, divergent motives (for example, some economic subjects pay attention to moral considerations--they lie close to the "moral" node, whereas the others are profit seekers and are found closer to the "utility" node) make arriving at an arrangement more difficult, virtually impossible.

Institutional Environment of the Post-Soviet Market

Although each person fixes a proportion between the different motives in an individual way, as a result of the sometimes difficult search for an "internal equilibrium,'' (3) the parameters of the balance depend on the institutional environment in which the individual acts. Institutional environment influences basic characteristics of the arrangement between the participants in economic exchanges. "Institutions operate at a higher level of generalization than do markets and organizations: they delineate the rules of the game within which such 'governance structures' actually operate. As an illustration, the legal system, which most economists would agree to call an institution, is a framework that defines the social acceptability of possible actions, e.g. the ways in which property rights can be implemented and enforced" (Menard 1995, 163). The preference for the market or, rather, for a type of market (e.g., a network market) derives from the institutional environment reflecting a particular combination of behavioral motives. The basic characteristics of institutional environment (its place on a map such as in figure 1) are an independent variable, whereas the parameters of governance structures, including the market, are a dependent variable. In other words, institutional environment is a set of the values, both formal and informal norms, that influence the combination of different behavioral motives and condition the arrangement as the cement of a transaction.

The influence of institutional environment on institutional arrangements such as the firm, the network, and the market can be conceptualized in the following way. Institutional environment attaches a relative "weight" to each behavioral motive (let [p.sub.i] be the relative weight of the factor i, for example, the utility, then 0

If an economic system is stable over the long term, this proves the existence of an arrangement between economic subjects. It is worth emphasizing that the arrangement made in the economic sphere plays a stabilizing role even if its parameters do not coincide with those prescribed in the neoclassical model (i.e., profit seeking as the only significant motive). The command economy has been characterized by an arrangement, too; it resulted from a combination of coercion (fiat) and the moral considerations linked with the communist...

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