An Austrian Economists Perspective On Transitional Political Economy

In 1989, most economists thought the problem of transition was one of allowing prices to float to market clearing levels. After all one of the most observable problems throughout the former socialist economies was the existence of pervasive shortages. Indeed prices did need to be freed up. But we learned in the process that free pricing required a network of institutional reforms to define and enforce private property rights and secure the freedom of contract. By the mid-1990s economic attention had moved away from the macroeconomic stabilization, privatization and price liberalization agenda to a broader notion of institutional reform. Since that time, political economists have also learned that discussion of institutional reform is incomplete unless we can talk meaningfully about cultural attitudes and beliefs. There is no doubt that perhaps the most important advice an economist (of any stripe) can provide to a reforming government is to stress how much incentives matter. But we do not adequately understand incentive mechanisms unless we also understand how individuals within a specific context attribute social meaning to the incentives they face. Thus, we economists are faced with a dilemma at the beginning of the 21st century that was widely recognized in the 19th century - to do good economics one must study the interaction of the economy, polity, and society and that nothing is as dangerous as an economists who attempts to pro-offer advice based on a study of the economy isolated from all other factors.