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The Transformation of the Czech Society: Retrospect and Prospect

English Pages, 17. 6. 1997

It is a great honor and a great pleasure for me to be here at the Institute of Economic Affairs and to be invited to deliver a lecture connected with the name of Friedrich von Hayek, a man from whom I have learnt so much. The fact that the 6th Annual Hayek Memorial Lecture is held today reminds us that it is six years since we have lost one of the greatest men of this century. Let me begin with several personal remarks. 

The day before the Velvet Revolution in my country in November 1989 I was - after more than 20 years - in Austria, at the University of Linz. I met the members of the department of economics in the afternoon and in the evening I participated in a panel discussion about reforms in the communist countries. To my great surprise, I was told that neither Hayek nor the Austrian School of Economics were included in the obligatory reading list for students at the university at that time. The night before the famous student demonstration in Prague which triggered the whole change, I assured the overcrowded aula that if the Austrian school of Economic had gone dead in Austria, we would keep it alive in Prague. It was a daring statement at that time, the audience reacted with a long-lasting applause and I have to admit now here that I did not know then how soon we would have a chance to start realizing this promise. 

I mentioned visiting Austria after a very long period of time. I had a unique opportunity to see Hayek when visiting Austria 21 years before that. But it was in the most curious moment. In August 1968 I took part in a well-known international conference organized in a beautiful Austrian Alpine resort called Alpbach. I was truly looking forward to it because the organizers invited very interesting speakers including Friedrich von Hayek. The third day of this conference was 21 August 1968, the day of the Soviet invasion into Czechoslovakia and as it happened, Hayek’s speech was held the afternoon after the invasion. I nevertheless came to the conference auditorium but I just came to see him as I was not able to pay any attention to the words he was saying. 

There is no doubt that Hayek was extremely important - for us in the former communist countries, but I am sure for you as well - both for the comprehensive criticism of communist society and economy as well as for the radical and very deep criticism of all softer forms of socialism and interventionism and for giving us the guidance how to build free society and market economy and for helping you not to enter the slippery road which inevitably leads to socialism. 

I myself discovered Hayek in the second half of the sixties, during the well-known Czechoslovak economic reform era. It was a period full of attempts to reform something which was in principle unreformable, to combine „plan and market“, or - to put it differently - to use market as an instrument in experienced and omnipotent hands of the planners. My country was at that time at the forefront of such reforms and we (or at least some of us) came across the famous „socialist controversy“ which went between Austrians Mises and Hayek on one side and neoclassical economists Lange and Lerner on the other. I was fully (and maybe even partly subconciously) on the side of Austrians. I knew that markets must be real, not fictitious or artificial, that we cannot „play the market“, that the players of the game must be economic agents, using their own, very real money, not symbols. I even translated excerpts of this controversy into Czech and published them in a widely read literary monthly. I became a true Hayekian for the rest of my life. 

Intelectually, the most important and most relevant Hayek’s contribution - at least for us at that time - was his well-known „Use of Knowledge in Society“ which was published in the American Economic Review in 1945. 

Hayek’s article explained very clearly and persuasively that the relevant economic information can be never transmitted to the planning centre because of the very nature of information (not because of the absence or insufficiency of information technology) and that planning is applicable only in a simple economy whereas complex economy needs market. This counterintuitive idea was absolutely crucial. He succeeded in fully reversing the socialist or social democratic argument of this century: the more complex society gets, the more we need government by saying that the more complex society becomes, the less competent governments become in regulating it. 

You may be surprised that I have not mentioned „The Road to Surfdom“. The reason is very simple. I did not know the book at that time. In a communist country, it was always easy to get the last copy of The American Economic Review or of The Economic Journal but very difficult to get a political or ideological pamphlet. I read „The Road to Surfdom“ much later than the main scientific contributions of Hayek. 

The second most important Hayek’s contribution was for me his criticism of constructivism, of social engineering, of immodest ambitions of intellectuals to set up an ideal social order. His works „The Results of Human Action but not of Human Design“, „The Intellectuals and Socialism“, „Counter-Revolution of Science“, „Scientism and the Study of Society“, „The Pretence of Knowledge“ (to name just some of them) helped us to understand the basis of society and the logic of its spontaneous evolution. 

This theoretical idea was not less important for the formation of a free society and market economy after the collapse of communism. It is connected with our experience that the fundamental transformation of a country is necessarily a complicated and fragile mixture of intentions on the side of politicians (and reformers) and spontaneity of human behaviour on the side of millions of free citizens, a mixture of revolution and evolution, a mixture of continuity and discontinuity, a mixture of successes and failures, a mixture of widely applauded measures and of moves that are neither welcomed nor appreciated. 

We - in the Czech Republic - are continuously in and out of the past, we are on one hand positively surprised how far and how fast we have already moved compared to more than forty years of communism but on the other hand, we are (or some of our fellow-citizens are) disappointed that the life at home has not yet reached the smoothness and easiness of life here in London where - if I am not wrong - the last episode of totalitarianism was hundreds of years ago. There have been many simplified and misleading propositions about the dismantling of communism and the formation of a free society and a market economy. And as usually, there were optimists and pesimists among us. The first group underestimated the heritage of communism and overestimated the human ability to mastermind such a complex task. The second group underestimated the strength of spontaneous activity of human beings when they are really free. I would argue that we were neither unconstrained optimists nor pessimists waiting for help from outside. 

As we see it now, we have to face a problem of enormous and necessarily unfulfilled expectations, connected with the end of communism. The gap between expectations and reality - described sometimes as the society’s coherence gap - has been undergoing several dramatic switches between 1989 and now and I will try to say a few words about it.

In the first period, immediately after the unexpected collapse of communism in November 1989 (unexpected in its rapidity and deepness), the expectations-reality gap, let’s call it the e-r gap, either did not exist at all or was in the opposite direction (r>e). The suddenly achieved freedom was valued so highly that no clouds on the horizon were seen or envisaged. To put it in economic terminology, everyone assumed (and I have to admit that the politicians - for understandable reasons - did not warn sufficiently against it) that transformation does not have almost any costs, transformation costs as we may call it, everyone assumed that the release of the latent, hidden, surpressed human energy after the elimination of all political, economic and bureaucratic barriers will bring gains which will be bigger than costs connected with the dismantling of the old system. Such assumptions were, however, overoptimistic because transformation costs had - inevitably - a non-zero level. Nevertheless, the more a country succeeds to achieve such a happy state, the better. 

In the second period, the transformation costs became apparent and somebody had to bear them. In the communist era, we lived in an artificial and irrational economic world, in a world of non-economic, and therefore non-equilibrium prices, in a world of a non-viable economic (sectoral) structure, in a world of sheltered markets (inside COMECON) and of almost fully protected markets at home. The rapid adjustment to a standard economic structure was composed of both contraction and expansion, but the contraction (I used to call it the transformation shake-out) was much bigger than the simultaneous expansion of new activities. Between 1989 and 1993 the industrial output fell by 33,6%, the agricultural output by 23,5% and GDP by 21,4%. There was, at the same time, a very rapid growth of services (of the tertiary sector) but their contribution did not make up for the decline in the primary and secondary sectors of the economy. 

As a result of it the e-r gap widened, but we succeeded in explaining and defending it. There were, of course, attempts to argue that a more gradual approach would have been less costly but we were - and are - convinced that the so-called gradualism would have produced new dangerous distortions. Not less important was the fact that the markets both at home and abroad were not „gradualistically“ waiting for such experiments and that something like a sophisticated gradualism could not have been realized in a complex, pluralistic, democratic, open society. There was, therefore, no other way out but to go ahead and to introduce deregulation, liberalization and privatization measures as fast as possible. I stress adjectives complex, pluralistic, democratic, open, because I am convinced that in such a world there is no room for social engineering and that there is no one who has a mandate, knowledge and capacity to do it. I quoted Hayek, but we got the same message from Milton Friedman who argued that „the error of supposing that the behavior of social organisms can be shaped at will is widespread. It is the fundamental error of most so-called reformers. It explains why they so often feel that the fault lies in the man, not the system“. 

The third period, which in our case started in 1993 (and was partly post-phoned by the termination of the Czechoslovak Federation or, more precisely, of the Czechoslovak monetary union), was characterized by a relatively rapid GDP growth and by an apparent growth of real personal incomes (especially wages). In the period 1992-1996 the growth of real wages reached 32,3%. Because of low unemployment (around 3% only) we enjoyed a relative social peace. The e-r gap was lessened and as a result of it the ruling coalition succeeded twice in winning the parliamentary elections which is an achievement absolutely unique in the post-communist world. However, the second elections were very narrow, which was mostly because they took place already at the beginning of the next period. 

The fourth period was at the moment when basic transformation measures and dislocations had already been completed. Because of that, more or less standard problems of a free society and market-economy together with relative carelessnes on the side of citizens about the fragility of a free society began to dominate the societal atmosphere but with the following, unpleasant qualifications:

·       as an inevitable heritage from the communist era there remains in such a country a huge list of unsatisfied demands. We have citizens waiting for the generous supply of various public goods they see in the countries West of us, we have employees, especially in the public sector, waiting for generous benefits, salaries and working conditions - they want to be „in Europe“ already now. I am talking especially about professions like scientists, teachers, physicians, police and army personel, railway workers, etc. Their collectivistic organizations - trade unions or professional chambers - are involved in the standard rent-seeking and by doing it they push for collectivistic solutions to their demands. This is something you know but it has - in our case - a special „catching-up flavor“;

·       our health-care system, which is partly privatized, excessively based on output or performance incentives (which leads inevitably to the oversupply of the health-care) and built on the overall compulsory health insurance, is running out of money and needs a radical systemic change. However, it is difficult to realize it against powerful vested interests, both on the side of patients and doctors;

·       government bureaucracy is slower in understanding all the magic and all the fallacies of the market mechanism than its individual participants at the microlevel. As a result of it, they are able to use or misuse all the deficiencies of the still unmature, shallow markets and the government is - necessarily - blamed for that;

·       we have opened ourselves to the rest of the world, especially to the European Union, more than the rest of the world to us. First, it brings about difficult problems with our balance of trade and with the current account of the balance of payments. Second, it complicates the life of some of our industries (rapidly growing imports of heavily subsidized agricultural and food products from Europe, increasing imports of extensively export-promoted products of the European manufacturing sector, the impact of foreign chains of department stores with their biased products structure, etc.);

·       new political, social and economic structure as regards its organization and institutionalization is more or less complete. The government and the private sector are, however, squeezed between powerful and very vocal pressure groups which block both rational behaviour of the government and rational systemic evolution. These pressure groups - together with the left-wing political opposition - succeeded in converting the general atmosphere in the country and in widening the e-r gap. This is where we are just now. 

Looking into the future, the fifth period will be characterized either by the continuation of existing, more or less consistent transformation policies and the subsequent reversal of the e-r gap or by a fall into the blind ally of inconsistency and incoherence, of populism and empty symbolism with all their well-known consequences.

Hayek would give us a straightforward suggestion. Do not try to mastermind the systemic evolution. Do not intervene into microeconomic decision-making. Do not try to accelerate economic growth by means of expansionary, Keynesian-style fiscal and monetary policies at the macrolevel. He would advise us to continue deregulation, liberalization and privatization. To take care of rules, not of outcomes. To take a long term, not short-term position. To believe in impersonal social mechanisms, not in elitist engineering of social phenomena. 

We are aware of such recommendations. We will follow them but I hope they will be taken seriously not only in the post-communist world.  I have in mind Europe in general and this country in particular. 

Václav Klaus, The 1997 Annual Hayek Memorial Lecture, IEA, London, 17 June 1997.