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Political Life with Academic Mentality

English Pages, 13. 11. 1997

I have in my hands at least three explicit invitations to make a speech at Stanford - one from Anne Krueger, one from Michael Boskin and one from Kurt Leube. In my interpretation, the first one is about the experiences of a politician with academic background, the second is about economic and economic policy issues in a transforming country and the third about free society and its enemies. All three topics are very inspiring but I decided that I have to obey the „ladies first“ principle and to start with some recollections of a politician who wanted to be an academic economist.

I came to politics at the age of 48 without thinking about it and without consciously preparing for it. Such an unexpected entry to a political scene was  possible only at the moment of a revolution (luckily a velvet one in our case) and in this respect it is unrepeatable and can not be imitated.  Such rapid evolution of a political carrier - from the position of the minister of finance to the chairmanship of a newly established political party and finally to the position of the prime minister, all within less than three years - would be probably impossible in a standard political setting. 

On the other hand, the life in the communist system was highly politicized, the horizontal relationships of individuals and institutions at the microlevel were suppressed (or blocked), everything was done in the vertical scheme, and, therefore, everything was political. Paradoxically, we were excessively political, because we were constantly talking about the irrationalities of the old system. Although such debates were rather theoretical and abstract, and we never envisaged entering politics in the future, on the „day after,“ it happened and we suddenly became politicians. The preconditions for success of our entry into politics included:

- the profound and conceptual understanding of the old communist system and its unconditional rejection  and refusal (much stronger than among Western academic community);

- no flirtations with any variants of slippery „third ways“, with convergence theories, with social engineering dreams, with technocratic, constructivistic approaches to finding solutions of human problems;

- oversensitivity as regards various elements of creeping socialism in Western societies;

- clear vision of where to go;

- no „pretense of knowledge“ (in the Hayekian sense) and no ambitions to mastermind either the economy (or society), or the transition process from communism to a free society. To put it differently, we believed in the spontaneity of social processes, which is something we are permanently criticized for.

I would like to stress my strong conviction that there is a special advantage in studying economics which gives much different and, in my opinion, more productive instrumentarium than other social sciences. I have in mind its methodology, its main conclusions, its dispute between market and plan or between monetarism and Keynesianism, the ideas of public finance and especially of public choice school, the invaluable contributions of the economics of property rights and of transactions costs, the works of Friedman, Stigler, Becker, Buchanan, Tullock, and many others.

I consider extremely important the ability of those who are genuine economists:

- to simplify complex  problems and to concentrate on crucial issues;

- to be able to deal efficiently with statistics;

- to strictly distinguish positive and normative thinking;

- to divide variables into exogenous and endogenous, to separate economic categories into constants and variables, to subconsciously and immediately differentiate between Marshallian short, medium and long run, etc.;

- to apply economic thinking not only to explicit markets;

-  to be aware of transaction costs, and in particular of the fact that there are major transaction costs in delegating authority to others, and that there are  transaction costs whenever we move to a new institutional setting (there is, of course, no such thing as a free reform);

- the idea of the margin, e.g. that most decisions involve a little more or little less, etc.

Without having these basic but non-trivial principles „deeply rooted,“ it is impossible to be a good academic economist or a good politician. 

To illustrate the close connection between economics and politics, I would like to share with you one unique problem we encountered during the transformation in the Czech Republic - the problem of huge and necessarily unfulfilled expectations connected with the end of communism. The gap between expectations and reality has been undergoing several drammatic switches between 1989 and now and I will try to make some generalizations about it (1).

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. Everyone assumed (and I have to admit that the politicians - for understandable reasons - did not warn sufficiently against it) that transformation has almost no costs. Everyone assumed that the release of the latent human energy after the elimination of all political, economic and bureaucratic barriers would bring gains which would be bigger than costs connected with the dismantling of the old system. Such assumptions were over-optimistic because transformation costs were - inevitably - non-zero.

In the second period, the transformation costs became apparent and somebody had to bear them. 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 - especially at the beginning - much bigger than the simultaneous expansion of new activities. Between 1989 and 1993 industrial output fell by 33,6%, agricultural output by 23,5% and GDP by 21,4%. There was, at the same time, a very rapid growth of services but their contribution did not make up for the decline in the primary and secondary sectors of the economy.

As a result, the e-r gap widened, but at that time 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 introduce all deregulation, liberalization and privatization measures as fast as possible. I stress complex, pluralistic, democratic and 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 fully agree with Milton Friedman 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, was characterized by relatively rapid GDP growth and by 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 we enjoyed a relative social peace. The e-r gap was lessened and, as a result, the ruling coalition succeeded twice in winning the parliamentary elections which is an achievement unique in the post-communist world. However, the elections in 1996 were very narrow, which was mostly because they took place already at the beginning of the next period.

The fourth period started 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 a huge list of unsatisfied demands. Our fellow citizens want to be „in Europe“ already now.   Their collectivistic organizations - trade unions, professional chambers and similar entities - are involved in standard rent-seeking and by doing it they push for collectivistic solutions to their demands;

- our health-care system, which is partly privatized, excessively based on output or performance incentives (which leads inevitably to the oversupply of health-care) and on overall compulsory health insurance, is running out of money and needs a radical systemic change;

- government bureaucracy is slower in understanding all the magic and all the fallacies of the market mechanism than its individual participants at the micro-level. As a result, the economic agents 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 more than the rest of the world to us. That creates difficult problems with our balance of trade and 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 product structure, etc.);

- the government and the private sector are squeezed between powerful and very vocal pressure groups which - together with the left-wing political opposition - succeeded in converting the atmosphere in the country and in widening the e-r gap.

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 alley of populism and empty symbolism with all their well-known consequences.

I hope we will keep on moving ahead.

Václav Klaus, Stanford University and Hoover Institution, 13. November 1997

1 - The following text uses part of my 1997 Annual Hayek Memorial Lecture, London, The Institute of Economic Affairs, June 17, 1997