The Evolution of Economic Systems

A scholar’s theory is part of his biography. It may be different perhaps in physics, but few economists would disagree entirely with this opinion. In any case, it is hard not to recognise the connections between the eventful life of Ota Sik and his theories.¹ Demonstration of this is facilitated by the fact that his biography falls into two easily distinguishable parts: the ‘Eastern’ and the ‘Western’.

Since we have had the pleasure of having Professor Sik in our midst some important events have taken place. They are important enough to reconsider the relationships between the centrally planned and the market economies. Until recently the first priority for the former was to establish a communist society and for the latter to prevent that from happening. The centrally planned economies were and are governed by the Communist Party and this party’s main vision of socio-economic history is that a country’s social order is moving from a feudal to a capitalist and from a capitalist to a socialist order. In the latter the means of production are owned by the community and the production and distribution processes carried out along the lines stipulated by the Central Plan. Whereas Karl Marx felt strongly convinced that these main features of social development could be anticipated on the basis of scientific research, he added that ‘recipes for the future’ on details could not be given.

The theory of the Interdependence of political and economic systems is one of the most important ‘dogmas’ of ordoliberalism which considers the market economy as a willingly created — and by the visible hand of the state controlled — system (or order) and not as an automatic mechanism. Walter Eucken outlined this theory on several occasions,¹ claiming that knowledge of it was ‘essential’ for understanding present-day problems in the fields of economics, law and politics.² As a result, Eucken’s thesis has almost become an integral part of general knowledge — at any rate as far as the German-speaking area is concerned, and at least as regards mainstream economics. It constitutes an essential analytic instrument in understanding the susceptibility to reform of Eastern systems, in judging socialisation trends in the West and within the context of convergence considerations.

By far the most dominant approach in the social sciences, particularly in economics, is a fundamentally ahistorically constructed theory of equilibrium, in which the actions of elements are conceived of as being voluntary. Apart from a reduction in the scope of the approach, resulting in momentary images being taken as the explanation, both of the whole and as a description and evaluation towards ends, the extensive loss of the historical dimension, the elimination of the parameter of time in the prevailing social sciences has resulted in the virtual disappearance of the analysis of economic and social development from theoretical discourse. Furthermore, this does not seem quite so strange when one considers Parson’s maxim that the ‘task of every scientific theory is to conceptually reduce what is changeable to what is constant’,¹ a view which can be regarded as representative of the access to the mainstream. This prevailing approach in economics is reflected in the ‘classical system theories in sociology’. The latter regard social change ‘in the sense of a structural change as a disruption of a normally stable social equilibrium’.² Despite the wish, for example in economic theory, to regard such constructions as indispensable: ‘as a standard with which the given state of the economic organism can be investigated and, where possible, evaluated’,³ and an ever greater emphasis on logical and highly formalised mathematical consistency, the ever-decreasing proximity to reality, as far as the provision of meaning and operationality is concerned, can no longer be overlooked.

When the editors asked me for a contribution to the Festschrift for Ota Sik, they suggested that I use the Long Wave concept for deriving some fundamental thoughts that appear equally interesting to East and West. Assuming that Easterners and Westerners are equally interested in the conditions under which reform plans emerge and either succeed or fail, it seems reasonable, indeed, to try to relate cumulative causes over long stretches of time to both the emergence of new needs (and reform plans) and the emergence of (sufficient) conditions for their favourable socio-political reception in the respective country.

In evolutionary economics, a range of alternative patterns of events can be studied on the basis of new micro-macro theory. Kondratieff waves are one special case, my Metamorphosis Model is another one; one that permits gradual evolution (steady growth) at some periods and breakthroughs (rapid phase transitions) at other intervals of time. Metamorphosis is structural transformation combined with transformation in the order of things (wihout chaos, though). At the core is the theory of structural readiness for basic innovation (and for clusters of basic innovations tied in with previous mishaps and subsequent series of improvement innovations). Throughout breakthrough and rapid change, however, the notion of what is good and bad doesn’t get lost. If it doesn’t, reform plans that emerge at the right time have a high probability of succeeding.

Underlying long waves and other patterns of economic change are causal relationships representing either an equilibrium path or a chain of events that can be characterised as ‘vicious’ or ‘virtuous’ circles. Only in the latter case can reformers expect to succeed. Part of the struggle is demonstrating reform benefits at an early stage of the reform process (such as cuts in military spending in the 10 to 20 per cent order of magnitude). Another part of the struggle is to point fingers at forces that are part and parcel of the ‘vicious circle’ (such as state monopolies, and vested interests that do cost the public dearly if you think it through, or care to figure it out). Without being able to prove it scientifically, I conjecture that the ultimate sufficient condition for success of reform plans is that state-funded institutions of socio-economic research dare, when the time has come for breakthrough, formally to announce research programmes which promise to think through, and figure out, the disbenefits of doing business as usual.

Economists often charge that politicians turn a deaf ear to their advice, whereas politicians find that economic analyses seldom provide them with workable guidelines. The cognitive-evolutionary approach is an outgrowth of this situation with improvement of the quality of economic consulting as its objective. It is intended as a contribution to the solution of communication problems between politician and economist. Because we believe that these problems arise largely from inadequate representation of the politician’s actual situation in economic models, we stress the importance of uncertainty and power.¹

In contrast to Marxism, based on the idea of evolution, the market economy is characterised by quite different factors. It received its early impetus from Adam Smith, a son of the Enlightenment and thus estranged from the idea of evolution. He emphasised self-regulation of the market, and it is therefore no coincidence that illustrations from the mechanical world as well as the concept of equilibrium are employed even today. These categories, however, are so far removed from evolution that there is no chance even to begin to construct an evolutionary concept. Thus it is not surprising that evolution has been approached from an entirely different side, namely from that of history. This development, as we all know, was so pronounced in the German language area, that in the nineteenth century national economics was for a while dominated by history.¹ Undoubtedly, history is concerned with developments, but also with the opposite, with regression. Both elements are part of man’s history in general and thus also of economic and social history.

Self-organisation of the economy is an old topic. But what is its nature? Is it akin to a valve which regulates a machine through a feedback loop, to the dynamic stability of a thermodynamic system, to the evolution of spontaneous order or to the self-reproduction of biological systems? In this chapter, I will introduce a particularly radical form of self-organisation. We will assume that the economy continues through a process of ongoing self-reproduction. Very much like a biological cell, the economy not only structures but generates the elements of which it consists. More precisely: the economy is defined as a network of elementary operations that recursively reproduces elementary operations.

Our knowledge about evolutionary change is limited. Evolutionary economics is still in its infancy; indeed we are on thin theoretical ice in linking evolution and innovation.

Among the long-term economic changes of Western industrialised nations one can readily discern between long periods of above average economic impetus with rapid growth and periods of little or no economic growth at all. In the attempt to explain this alternating behaviour a wide range of theories have evolved about the so-called ‘long waves’. Most theories reach back to the initial ideas of Kondratieff (1926) who actually only became well known through the further developments in the work of Schumpeter (1961). Because of an overall faint development of world commerce in the late 1970s and early 1980s the long-wave theories have experienced a rebirth.² The majority of these theories describe four ‘Kondratieff waves’ since the onset of industrialisation, each wave having an approximate duration of fifty years. The fourth Kondratieff cycle started accordingly with the upward trend at the end of the Second World War. Today, we consider ourselves as being near the end of this cycle.

The twentieth century has witnessed periodic revivals of discussion of the relation of the market mechanism to centralised economic planning. These discussions, usually restricted to pure theory, have concluded that there is no basic difference between ‘market’ and ‘plan’, because the central planner could always replicate the basic features of the Walrasian ‘auctioneer’ in the market mechanism, adjusting prices to eliminate excess demands.

During the last decades, a tentative revival of the Classical theory of prices has been observed. It originated from diverse sources. The broad social outlook, the theoretical coherence and the political impetus of the Classical authors had never lost its fascination for economists but some distinctive traits of their analysis had been obscured by attempts to minimise the fundamental difference between the classical approach, based on the surplus principle, and the neo-classical one, based on the idea that supply and demand for factors of production, as governed by subjective preferences, regulate an equilibrium at full employment. Keynes had used the neo-classical theory of value and generalised the equilibrium concept to encompass labour unemployment. This led, in the age of growth theory, to a reconsideration of the classical processes of accumulation, as revived by Harrod and the followers of Keynes in Cambridge, who considered Classical paths of accumulation where the growth of capacity did not automatically adjust through the supply and demand mechanism to the growth of the labour supply and productivity.

‘To combine plan and marfket is like being a little bit pregnant’, wrote a (female) Soviet economist. This view is wrong, but is to be found both among the adepts of the Chicago school and among Marxist dogmatists. Indeed, the latter have good textual evidence to support their ideological interpretation. Recently, the Soviet professor, A. Sergeyev, put the point well:

It is known that Marx and Engels held that socialism and commodity production were not only contradictory but also incompatible. Lenin adopted the same position. Even today no one would have the theoretical effrontery (naglost’) to claim that Lenin was the founder of the theory of commodity production under socialism. Was the theory of Marx, Engels, Lenin about socialism then incorrect?¹

In appreciation of Ota Sik’s distinguished career-long concern with the evolution of economic systems. I wish, in this chapter briefly to sketch fundamental theoretical characteristics of institutional economics and, in this context, to develop the institutionalist argument that the problem solving process accounts for the evolution of economic systems.²

European societies had been developing capitalist institutions for a couple of centuries before — in the first half of the last century — the term capitalism appeared. Thus, the term simply denoted the socio-economic system that already existed. At about the same time the term socialism was also introduced. But it denoted a system which did not exist, which was yet to be created. Of all known social systems, socialism is the only one that exists as a project, not as a fact. A project can be accomplished in different ways or fail to be accomplished at all.

There is now a general agreement that the Soviet-type economic system (STES) displays great resistance to change: most of its attempted reforms have been rejected and practically none of them has produced — while it lasted — a radical increase in overall economic efficiency. One way of conceptualising the reasons for these failures is to say that the reforms did not reach a required ‘critical mass’ or — in other words — that they did not pass a necessary ‘threshold’. This conveys the idea that one cannot depart from the STES by accumulating successive partial changes. For while the next such changes are envisaged, the previous ones remain ineffective or are simply discarded outright. Thus the main problem is that the reform of the STES is largely indivisible.

Ideological and economic motives have been shaping the relation between socialist countries and the world economy in different ways in various periods of development. In the 1950s, this connection was considered a still necessary evil to be eliminated as soon as possible, because it demonstrated the dependence of the socialist economies on the world market and proved to be a disturbing element in the implementation of the closed, planned economy. From the second half of the 1960s relations with the international economy were regarded as an additional, supplementary growth factor, in accordance with the increasing exhaustion of the traditional domestic and regional factors of development, due to the changing international political framework. Nevertheless, these additional sources were meant to be used for maintaining the unchanged priorities based on national and regional (CMEA) autarky. Increasing trade relations, a large inflow of credits and technology and a limited transfer of manpower characterised this period. By the end of the 1970s the strengthening of international economic relations became one of the highest priorities in almost all socialist countries. Credit repayment obligations, increasing debt servicing intensified the necessity for exporting and looking for new resources.

The technological gap in the CMEA countries¹ has evidently widened since the middle of the 1970s. There are many instances substantiating this statement which, besides, can be observed by every Western tourist visiting these countries. Looking at the commodity composition of East-West trade one will find that the share of manufactures, and especially of investment goods exported by the OECD countries to the European CMEA countries, is much higher than the respective import share. The CMEA countries have also persistently lost market shares in exports of manufactures to the West, partly because their export orientation was concentrated in fields where demand in international trade was weak but mainly because the goods offered could not compete in quality, technical standards or after-sale services. Some of the developing countries, especially the newly industrialised countries, were far more successful in penetrating Western markets and the CMEA countries had to accept severe price reductions in the face of competition from these countries.

In the early 1970s, the phase of rapid economic growth which had lasted since the end of the 1940s came to a world-wide end. All countries were confronted with the problem to manage the changeover to a new ‘technological-economic paradigm’.¹ As historical experience shows, this is a complicated social process of search which can only be successful if a flexible approach to technological, economic and social structures and a new equilibrium of interests between the different social groups is reached. The basic innovations constituting the new ‘technological-economic paradigm’ not only offer a new efficiency potential for economic development, but they also devaluate and destroy existing products, processes, production and power structures, as well as traditional decision mechanisms.

Ever since Stalin’s death, successive Soviet leaderships have endeavoured to improve the functionability of the USSR’s planned economy system by way of a variety of reforms from ‘within the system’. Khrushchev’s unsuccessful attempt at administrative decentralisation on a regional basis was followed in the 1960s by Brezhnev’s broad-based but half-hearted and inconsistent programme of reforms. More recently, Brezhnev’s attempts to ‘muddle through’ with ‘improvements’ to and ‘perfectings’ of the administration of the economy (Nove, 1982, pp. 17–44) instead of embarking on any real reforms have given way to Gorbachev’s ambitious project of a ‘radical reform’. While the periodic repetition of attempts at reform only presses home the fact that it has still not proved possible to give the Soviet planned economy a modern, efficient structure, Gorbachev’s unprecedented determination underlines the realisation that the need for effective reform has by now become so urgent as to brook no further delay.

The market-oriented economic reform of 1967, of which Professor Ota Sik was the main architect, turned out to be a brief episode in the post-war history of Czechoslovakia. On the one hand, it remained a matter of nostalgia for reform-minded economists both in the country and in exile; on the other hand, it continues to be a butt for fierce criticism for those in power since April 1969 up to now, within the country. Was the reform of the late 1960s a move into a blind alley which resulted in a collapse of the economy instead of bringing about the promised improvement in economic performance, or was it a sound set of measures whose successful implementation was only prevented by the foreign intervention?

The course of China’s economic reform in the past thirty years witnessed a gradual evolution from traditional Stalinist economic theory to a socialist market economic theory that makes full use of modern economics. In the course of this evolution, the following schools came into being: (i) the traditional, ‘classical’ theory of centralised socialism; (ii) decentralised administrative socialism; (iii) ‘revised’ administrative socialism; and (iv) socialist market economic theory. These four types constitute competing schools of socialist economic theories.