Comparative Economics

A. Ben-Ner, J. Montias, E. Neuberger

• Publisher: Routledge
• Year: 2013
• eBook ISBN: 9781136472541
• Edition: 1
• Topic: Betriebswirtschaft
• Subtopic: Business allgemein

The reasons, methods, and outcomes of system change in general, and in Russia and Eastern Europe in particular are analyzed, using the analytical apparatus developed in the monograph.

Comparative Economics

 

 

JOHN MICHAEL MONTIAS

Yale University, New Haven, Connecticut, USA

AVNER BEN-NER

University of Minnesota, Minneapolis, USA

EGON NEUBERGEN

State University of New York at Stony Brook, Stony Brook, USA

1. INTRODUCTION

1.1 Approaches to the study of comparative economics

Until the last ten or fifteen years, two partly overlapping approaches dominated comparative economics: the ideological and the straight-forward-descriptive. Writers following the ideological (or ‘isms’) approach stressed the essential features of broad types of economies (‘capitalist,’ ‘socialist,’ ‘labor-managed’), which they regarded as a seamless web of interdependent institutions. The descriptive approach concentrated on the precise description of the system’s institutions and practices, including both its formal and informal features. However informative, it was short on general verifiable statements concerning the impact of system features on outcomes of interest to the economist. It was also short on explicitly comparative analysis. The modern analytical approach that we try to follow in this monograph differs, implicitly or explicitly, from the ideological and descriptive approaches in two major ways: (1) it treats the economic system and its components, for analytical purposes, as conceptually separate from the social and political system in which they are embedded; and (2) it applies the tools of economic theory to analyze the workings of different system components, in preference to the more general social-science discourse that characterized the older writings on the subject.

The present synthesis of the literature on comparative economics, while it concentrates on analytical contributions, should not be viewed as an unqualified or exclusive endorsement of the modern approach. Careful system descriptions, in particular, such as the studies of the Soviet management by David Granick (1954) and Joseph Berliner (1957, 1983), made indispensable contributions to our knowledge of these systems. They still stand as monuments to be emulated today. It is noteworthy that the Yugoslav economic system, which first attracted the attention of Western economists in the late 1950s, has never been as completely and systematically described as the Soviet system in the 1950s and 1960s.¹

Irrespective of methodological differences, there is growing agreement among the students of comparative economics concerning the ultimate objectives of their analysis: to isolate and measure the impact of the economic system – more precisely the system’s rules, laws, customs and regular procedures – on basic economic outcomes (such as the level and growth of per capita income, the distribution of incomes, stability, and national power) and to distinguish and separate this impact from (1) the influence of variables associated with the environment and (2) the decisions and policies of the economy’s participants. At times we shall study the constraints that system rules impose on decisions and policies at the level of the organization, at times at the level of the economy as a whole. While there is also agreement that the influence of policy variables on economic outcomes is worthy of study as a subject in itself – taking the system as given – the investigation of alternative policies is already so central to both microand macro-economics, and so much research has been done on the relative merits of policies adopted by different countries, developed and undeveloped, that it may be reasonable to concentrate our analysis on the differential effects of the system on economic outcomes, in line with our comparative advantage.

In all but the last chapter of this monograph, we adopt a static approach and take the system as a set of rules, customs and regular procedures that remains fixed for the period of description or comparison. In the last chapter, we examine system change and its effect on outcomes successively as an evolutionary response to changes in the environment and as a purposeful, coordinated initiative by public or private organizations to perceived inadequacies in economic outcomes (e.g. privatization in ex-communist countries, deregulation in traditional market economies).

While there is, so far at least, no unifying theory that would allow us to predict the impact of system traits on economic outcomes, such as efficiency in production, income distribution, or stability, contemporary economic theory does provide a large number of propositions and conjectures that can be applied to study the impact of specific system features under well-defined environmental conditions.

At times, the same theoretical approach can yield insights into situations that at first glance may seem totally unrelated. If it were not for recent contributions to economic theory, for example, we might not be aware of the common problem underlying the ‘ratchet principle’ in a centrally managed economy and the ‘market for lemons’ in a decentralized market economy. The common denominator turns out to be ‘hidden information’ problems at work in two distinct economic processes: managers’ one-sided knowledge about the true production capacities of their enterprises in the first case (which makes them reluctant to increase their reported output for fear that their superiors, having learned the capacity of their enterprise, would raise their target) and the sellers of potentially defective products in a competitive market on the other (who know but will not reveal to their customers whether their product is or is not defective). Both are examples of ‘adverse selection’, since agents, in the first case, represent themselves as being capable of producing less than they actually do and, in the second, as having better cars than they actually have on hand for sale. ‘Bounded rationality,’ ‘opportunism’, and principal-agent theory may be used to investigate the behavior of individuals subject to a wide variety of system rules. The opportunistic behavior of individuals pursuing their own objectives in the presence of asymmetric information has been modeled along lines giving valuable insights into the workings of alternative system arrangements. This appears to be so whether the focus is on organizations (analyzing the strategic behavior of agents and principals, employees and employers) or on macro-coordination mechanisms such as market and planning (analyzing the behavior of sellers and buyers, or planners and firms). This is in obvious contrast to the theory-of-teams approach (Marschak and Radner, 1972), which, by assumption, rules out differences in the preferences or objectives of agents in an organization.

In addition to emphasizing the analytic approach to the comparison of economic systems, we also seek to shift some of the emphasis away from the traditional counterposition of ‘plan versus market’ in the system-wide coordination of resource-allocating decisions to coordinating mechanisms at a more micro level, including especially those lodged in firms and other organizations. In the same vein, we draw attention to the role of coordinating mechanisms in intermediate-level ‘superorganizations’ that include cartels, industrial associations and franchises.

The enhanced interest in the operation of organizations was not driven only by intellectual pursuits and advances. It also reflected the dramatic changes that were unfolding in the Soviet Union and Eastern Europe, as these communist-ruled nations wrestled more or less unsuccessfully with the inefficiencies rooted in the way their enterprises operated (as well as in their mode of system-wide coordination). The debate in predominantly market-oriented economies over the merits of privatizing government-owned enterprises converged on a similar set of concerns. In the ex-communist nations, a crucial problem lies in reconciling the goals of efficiency and equity that the increasingly democratized political systems are seeking to pursue. This is especially important in view of the legacies left over from the old systems in these countries, including the lack of privately owned capital and limited entrepreneurial experience.

In industrialized market economies, slowdowns in worker productivity, prolonged high levels of unemployment, and the ascendancy of Japan and other newcomers in the world economic arena have spotlighted organizational innovations as a promising source of economic rejuvenation. Management ‘gurus,’ Japanese style management, employee ownership (including Employee Stock Ownership Plans) and mergers and acquisitions can be viewed as the market counterparts to organizational reforms in centrally planned economies.

After this introduction to some of the principal ideas informing our comparative approach, it is hardly necessary to stress that we reject the notion of ‘system integrity’ at least in its extreme form, according to which the component parts of a system are welded so tightly together that they cannot be separated out or even studied in isolation from each other (let alone grafted onto another system). We do not deny that the participants in every system are ‘socialized’ and that their routines and habits and their fear of change help to keep every system churning along in spite of its inefficiencies. Yet systems do evolve and undergo reforms, sometimes borrowing successful features from others (central bank institutions, patent provisions, stock exchanges, etc.). If systems were really so corseted, they would be impervious to change. This said, we cannot ignore the difficulties of legislating fundamental changes in systems. The strains (and occasional convulsions) that most of the excommunist economies have undergone in moving from state ownership of enterprises and central planning to private enterprise and markets testify to the difficulties they have faced in overcoming the legacies of the past.

The monographs in the comparative economics series in the present series on the Fundamentals of Pure and Applied Economics – on planning (by Paul G. Hare), non-profit organizations (by Estelle James and Susan Rose-Ackerman), technological progress in Soviettype economies (by Philip Hanson and Keith Pavitt), trade between centrally planned economies (by Thomas Wolf), and the economics of labor management (by John Bonin and Louis Putterman) – provide choice examples of the application of the comparative method to the study of well delineated subsystems of contemporary economies. We do not propose to cover the same ground again or to investigate in detail areas that have been dealt with in these contributions to the Encyclopedia. We will confine ourselves to a more or less representative sample of recent work, including some in these volumes, illustrating fruitful uses of the comparative method. Our general approach is consistent with, and at times draws substantially on, the work of Neuberger and Duffy (1976), Gregory and Stewart (1992), Koopmans and Montias (1971) and Putterman (1990). It overlaps to some extent with one of the authors‘ previous monographs on comparative systems (Montias, 1976), although we have tried to keep the extent of duplication as small as possible, in part by concentrating our survey of the literature on work published since its appearance.

1.2 Outline of the monograph

The monograph is organized as follows. Chapter 2 introduces the basic concepts and summarily describes the component parts of economic systems, which concepts and components we plan to use in all subsequent parts of the monograph, as consistently and systematically as possible.

Chapter 3 deals with technical-administrative and agency problems in organizations. These problems concern, respectively, the effects of members‘ bounded rationality and self-interest on common elements of the structure of different types of organizations.

Chapter 4 focuses on the structure and behavior of the primary economic organizations for making production, consumption, distribution and saving-investment decisions. These organizations are divided into five basic types, depending on the property rights (ownership) arrangements that govern them and the identity of those who own them: (1) proprietary, (2) employee-owned, (3) resource-pooling, (4) government-owned, and (5) user-oriented (stakeholder firms and fiduciary organizations carrying on a public purpose). Owners may be suppliers of inputs (capital or labor), as in the first two types of firms, or may make joint use of some resource or product, as in the case of resource-pooling firms (such as milk producers‘ cooperatives that process into dairy products the milk produced by their members). Owners may also be consumers or sponsors of consumers of output, as in stakeholder firms, or both, as in the case of many government-owned firms. Government-owned firms deserve a separate designation because their property rights arrangements are substantially different from those of other types of firms. Rather than postulating a goal function for each of these types, such as profit maximization or the maximization of members’ dividends, and instead of assuming the organizational structure of firms, we attempt to derive the objectives and the structure of the various types of firms from the property rights that shape and constrain the behavior of their members, the opportunities for members‘ selfish behavior that they afford, and general principal-agent relations. We extend the notion of user-oriented firms to households as well as other forms of joint activity, whose members derive utility from the interactions in which they engage. Decisions in such firms are generally agreed upon by members after consultation; their members are not generally hierarchically related to each other, even though they may differ in power and influence (as the relative power of members of law firms and professors in academic departments do). To the extent that members of these firms enjoy equal decision rights, they are organized as associations (at least for some of their activities). Most firms, however, are structured as hierarchies, a basic form of organization to which we will devote a good deal of attention. Some organizations confer power on their decision makers that enables them to issue laws, regulations, and orders nominally binding on participants in the economy who may or may not be members of these organizations. We call ruling organizations those government organizations endowed with the power to issue such laws, regulations, and orders (bureaus at the national or local level, judicial courts). Government-owned firms, however, are government organizations that do not normally have this power.

Chapter 5 deals with ‘superorganizations’ that coordinate the activities of primary organizations, such as government organizations responsible for national or regional planning, Japanese keiretsus, cartels and franchising firms in market economies and ministries in centrally planned economies.

Chapter 6 analyzes in greater detail than in previous chapters the determinants of power in, organizations, focusing, in particular, on the relative power of employees organized in unions on the one hand and owners/management on the other.

Chapter 7 outlines the basic elements of a comparative approach to macroeconomics, featuring financial intermediaries and the role of government organizations in coordinating fiscal and monetary policy.

Chapter 8 sets forth a framework for the quantitative analysis of macroeconomic outcomes. It discusses the (limited) possibilities of making inter-system comparisons from aggregate data gathered at the national level, including average per capita consumption and its rate of growth, the distribution of incomes, stability of consumption and employment, and national strength, as indicators of relative welfare.

Chapter 9 discusses the complex ways in which systems may evolve, or be radically transformed, in response to changes in their political, technological and external-economic environment. Particular attention is given to system reforms as ways of coping with perceived malfunctions in existing systems.

¹ Comisso (1979), Milenkovitch (1971), and Tyson (1980) made substantial contributions to the systematic description of the Yugoslav system. Comisso’s findings were based chiefly on information she gathered in one enterprise. Milenkovitch and Tyson did not delve into the informal, uncoded aspects of the system, at least not to the same extent as Granick (1954) and Berliner (1957) had into those of the Soviet.

2. INITIAL CONCEPTS AND BUILDING BLOCKS

2.1 Primitive term

Participants in different systems frequently disagree on the precise meaning of such words as ‘planning’, ‘welfare’, ‘market’ and other socially conditioned concepts. To avoid this ambiguity, one would ideally wish to construct precise definitions of such concepts f...

Table of contents

• Cover
• Half Title
• FUNDAMENTALS OF PURE AND APPLIED ECONOMICS
• Full Title
• Copyright
• Contents
• Introduction to the Series
• 1. Introduction
• 2. Initial Concepts and Building Blocks
• 3. Technical-Administrative and Agency Problems in Organizations
• 4. Types of Organizations: Households, Firms and Government Organizations
• 5. Superorganizations
• 6. Coalitions in Organizations: Labor Unions
• 7. Comparative Macroeconomics
• 8. Aggregate System Performance and Comparisons
• 9. System Change
• Bibliography
• Index