On the new institutionalist story about the former socialist economies.

Author:Grossman, Peter Z.
Position:Response to Peter M. Lichtenstein, Journal of Economic Issues, vol. 30, p. 243, March 1996 - Includes reply
 
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Several recent articles in this journal have provided valuable appraisals of the New Institutional Economics (NIE). The paper by Peter M. Lichtenstein [1996] is among the most provocative of these articles. Lichtenstein critiques what he sees as the NIE analysis of the transition of the former socialist countries. In the article, Lichtenstein raises interesting questions and lays out some of the elements of the NIE argument. But the conclusions he attributes to NIE are not well founded. Indeed, they are contradicted by much of the NIE literature. They are even at odds with other articles about NIE that have appeared in this journal.

Admittedly, the NIE literature is wide ranging, and there is disagreement among NIE theorists on many points of emphasis. But the most visible new institutionalist, especially since his Nobel Prize, is Douglass C. North, and indeed, his work is cited frequently by Lichtenstein. Yet Lichtenstein oversimplifies North's arguments and misses some crucial points in North's analysis.

In his critique, Lichtenstein argues correctly that from an NIE perspective centrally planned economies (CPEs) typically become dysfunctional because of contracting and incentive problems. The solution then is for countries in transition to "get the institutions right" (not the prices, as neoclassical theorists have maintained) [Lichtenstein 1996, 258-9]. But what goes into getting the institutions right? According to Lichtenstein, the NIE offers only some laws on exchange, property, and bankruptcy to provide basic rules for what is otherwise a position of doctrinaire market capitalism.

NIE, in this view, sees the failure of CPEs leading to liberalization as "dominant groups feel it is in their benefit to promote change rather than avoid it" [p. 255]. The form of liberalization and change is inevitably toward efficiency, where eventually everyone "choose[s] capitalist market institutions" [p. 258]. Indeed, since former socialist countries have "high-performing institutional role models" in the West, their inescapable path, according to Lichtenstein's reading of NIE, is emulation of those models and the creation of free-market capitalist economies. This preordained outcome is, Lichtenstein tells us, "doctrinally ground in . . . faith in market institutions," but in fact he argues the NIE position is essentially tautological [p. 260]. People are rational and choose efficiently; capitalist institutions are the only efficient economic...

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