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Notes for Fraser Institute Student Seminar: Moving to a Market Economy and the Difficulties of such a Transition

English Pages, 14. 11. 2004

I try to be consistent in my views. I looked, therefore, at the speech I gave here on the occasion of getting an honorary doctorate degree in February 1997.

Reading my speech after 7 years, I was pleased to find out that I tried to make several important points then which are worth repeating now:

1. The communist system collapsed, it was not defeated. It collapsed because it already was in an advanced stage of decomposition, because it gradually lost its two strongest constitutive elements - the fear on one hand and the faith on the other. In its final days, the communist system became both soft and unconvincing and such a state of affairs was not sufficient for safeguarding its further continuation. It is an irony of history that communism - sort of - melted down.

2. It has often been stated that the collapse of communism created a very strange vacuum. I was not sure. At first sight this seems plausible, but it was not true. We do not live in a black and white world of textbooks.

What remained was not a vacuum. We – citizens of the country –were alive and there was an air to breath. What kind of air? We inherited weak and therefore not efficient markets and - similarly - a weak and not fully efficient democracy. Both the economic and political mechanisms were shallow, the political and economic agents (players of the game) were not properly defined and established, some of them were new, all of them were weak and fragile and the outcomes of their interplay were less efficient than in a full-grown free society as you know it in the countries which have never experienced communism.

3. Another point is that it was not possible to overcome such a state of affairs by introducing a ready-made, imported, from outside delivered system. We had to undergo a difficult transformation process. No master-minding of the evolution of a free society by means of social engineering was possible. What we had to go through was a complicated mixture of deliberately introduced measures and of unconstrained, spontaneous activities of millions of suddenly free citizens.

4. At the same time we understood very rapidly that it was not possible to wait for textbook conditions, to wait for a sufficient degree of market efficiency. The quick abolition of old institutions was a sine qua non for success because it was the only way how to minimize the large transition costs. We had to privatize, to liberalize and to deregulate as fast as possible.

5. When I say „we“, it brings me to another point. What about the people? Were they ready for such a rapid change? Does free society presuppose - in addition to the creation of its basic institutions - some set of values or moral standards that would properly anchor the society? Do the people need an interim period of „schooling“? Is such schooling realizable? Are there teachers for such a procedure? Are the people willing to be educated? Etc. My answers to these and similar questions were simple. The people are always ready and they do not need a special education. What they need is a free space for their voluntary activities, the elimination of unnecessary controls and prohibitions of all kinds.

6. After the collapse of „hard“ communism, we succeeded in rejecting reformed communism, we succeeded in avoiding romantic nationalism (with its very negative systemic consequences), we succeeded in overcoming utopian and, therefore, dangerous attempts to forget everything and to start building a brave new world based on aprioristic moralistic and elitist ambitions (of those who are better than the rest of us), but we have lost with statist, interventionist, paternalistic social-democratism, which is something we see in many free societies west of us. I stressed that it was our permanent task and duty to attack the expanding state. This was - and still is - an overwhelming tendency of the 20th century, of the century of socialisms with the whole variety of confusing adjectives. We - in the Czech Republic - wanted to demonstrate that to make a return to a free social order is possible.

This is what I said 7 years ago. I was right in describing the process of transition, I was wrong, I was overoptimistic as regards the possibility to win with socialdemocratism.

I would add several points to the first question:

- transition is a process, not a single act;

- transition has to be started by “a critical mass” of deep and radical measures;

- there are important transaction costs associated with shifting from one system to another;

- sequencing issue is theoretically interesting, but practically almost irrelevant (whenever there is a chance to make any measure, do it!);

- the difference between classical privatization and transformation privatization ( to privatize individual firms at the margin of a standard market economy vs. to privatize the whole country);

- good legislation, good institutions, and good rules are necessary, but it is impossible to make the markets efficient by means of legislation and to solve economic problems by legislating them out;

- no linearity of development, the inevitability of economic fluctuation is an imperfect, fragile, immature market economy with a vulnerable banking and financial system.

We did not, however, succeeded in creating a free market economy Fraser Institute would prescribe us. We do not have a minimal state, we have a high degree of redistribution, we have paternalism of the state, we have the German version “soziale Marktwirtschaft”, not an American, much more free, less regulated, less interventionist system. Part of it was home-made, part of it was imported from the EU. But to discuss the EU would be a different topic.

Václav Klaus, Fraser Institute Student Seminar, Sheraton Centre Toronto, November 13, 2004