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The Economic and Political Liberalization of Socialism: The Fundamental Problem of Property Rights*

Published online by Cambridge University Press:  18 June 2009

William H. Riker  and
David L. Weimer
William H. Riker
Affiliation:
Political Science, University of Rochester
David L. Weimer
Affiliation:
Political Science and Public Policy, University of Rochester
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Extract

All our previous political experience, and especially, of course, the experience of Eastern Europe and Central Asia, offers little hope that democracy can coexist with the centralized allocation of economic resources. Indeed, simple observation suggests that a market economy with private property rights is a necessary, although not sufficient, condition for the existence of a democratic political regime. And this accords fully with the political theory of liberalism, which emphasizes that private rights, both civil and economic, be protected and secure. At the same time, our previous experience also indicates that market economies are more successful than centrally planned economies not only in producing, but also in distributing, both private and collective goods. This economic experienee is supported by neoclassical economic theory, which treats clearly defined and secure rights to private property as essential to a market economy.

Type
Research Article
Information
Social Philosophy and Policy , Volume 10 , Issue 2 , Summer 1993 , pp. 79 - 102
Copyright
Copyright © Social Philosophy and Policy Foundation 1993

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References

1 Lindblom, Charles E., Politics and Markets (New York: Basic Books, 1977)Google Scholar, ch. 12. The most extreme cases of centralized planning in democracies seem to be the wartime experiences of the United States and Great Britain. In the context of our discussion, it is worth noting that these episodes did not radically alter the existing system of property rights.

2 We take voting as the central method and ideal of democracy. By “voting” we mean, of course, all of the institutional environment of elections, e.g., political parties, free speech, etc. The degree to which a political system is democratic depends on the practical effectiveness and political relevance of voting in terms of participation (the promotion of popular choice), liberty (the freedom to pursue one's goals), and equality (the facilitation of self-respect and self-realization). Liberalism emphasizes the role of voting in controlling officials (by expulsion, or threat of expulsion, from office) and the value of individual rights in protecting liberty against tyranny by the majority. In contrast to populism, it does not interpret majority opinion as necessarily right and therefore vests in it no special moral character. See Riker, William H., Liberalism against Populism (San Francisco: W. H. Freeman and Company, 1982).Google Scholar

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13 See, for example, Jensen, Michael C. and Meckling, William H., “Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure,” Journal of Financial Economics, vol. 3, no. 4 (10 1976), pp. 305–60.CrossRefGoogle Scholar

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16 In the case of Russia today, and previously in Poland and Hungary, a considerable amount of reallocation by de facto users to new owners or new de facto users seems to be underway. See Johnson, Simon and Kroll, Heidi, “Managerial Strategies for Spontaneous Privatization,” Soviet Economy, vol. 7, no. 4 (10–12 1991), pp. 281–316.Google Scholar

17 As we write, Poland is restricting foreign ownership generally, perhaps as a way of precluding German investment in the formerly German territories. Russia and Czechoslovakia are restricting foreign participation in aspects of their privatization plans. Only Hungary seems to have fully embraced investment by foreigners. In any case, no Eastern European country yet has an active stock market on which capital can be freely exchanged.

18 See Baumol, William J., “Entrepreneurship: Productive, Unproductive, and Destructive,” Journal of Political Economy, vol. 98, no. 5, pt. 1 (10 1990), pp. 893–921.CrossRefGoogle Scholar For a very explicit exposition of the consequences of ineffective property rights in Peru, see De Soto, Hernando, The Other Path: The Invisible Revolution in the Third World (New York: Harper and Row, 1989).Google Scholar

19 Some observers see the problem of establishing “economic legality” as fundamental to liberalization. See, for example, Litwack, John M., “Legality and Market Reform in Soviet-Type Economies,” Journal of Economic Perspectives, vol. 5, no. 4 (Fall 1991), pp. 77–89.CrossRefGoogle Scholar

20 In the theory of rights offered by Wesley Hohfeld, the claims of right-holders and the respect of those claims by duty-bearers constitute the first-order relations defining rights. Second-order relations include the power to change, and immunity from changes in, the first-order relation between claims and duties, and thus encompass the notion of credibility. See Hohfeld, Wesley Newcomb, Fundamental Legal Conceptions (New Haven, CT: Yale University Press, 1919).Google Scholar Most modern legal writers concentrate on the first-order relations, taking for granted immunity, perhaps because of the stability and continuity of our legal institutions—just as neoclassical economists assume an effective system of property rights.

21 Obviously, the most urgent kind of innovation for the countries of Eastern Europe and the former Soviet Union is in the area of organization. Whereas more efficient physical processes for converting inputs to outputs can be relatively easily imported from abroad, organizational innovations, such as various forms of corporate ownership and credit systems, cannot as easily be replicated, because the prerequisite systems of property rights and economic law are not yet in place. See, for example, Cooler, Robert D., “Organization as Property: Economic Analysis of Property Law as Applied to Privatization,” in Clague, Christopher and Rausser, Gordon C., eds., The Emergence of Market Economics in Eastern Europe (Cambridge, MA: Basil Blackwell, 1992), pp. 77–97.Google Scholar

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24 Bialer, Seweryn, “Is Socialism Dead?” Bulletin, The American Academy of Arts and Sciences, vol. 44, no. 2 (11 1990), p. 25.CrossRefGoogle Scholar A1990 study based on random samples of New Yorkers and Muscovites, however, failed to find many significant differences in attitudes toward the fairness of allocation by price and income inequalities, and in their understanding of market processes. Shiller, Robert J., Boycko, Maxim, and Korobov, Vladimir, “Popular Attitudes Toward Free Markets: The Soviet Union and the United States Compared,” American Economic Review, vol. 81, no. 3 (06 1991), pp. 385–400.Google Scholar One may not necessarily be reassured by the finding of little difference in attitudes between a U.S. city that embraces residential rent control and a Russian city that has been at the forefront of liberalization! Nevertheless, in the U.S. case the popular attitudes are only occasionally an impediment to market freedom, while in Russia such attitudes pose a risk to free institutions at the threshold.

25 The notion that wealth as a general social resource contributes to stability by making society more resilient against shocks is developed by Wildavsky, Aaron in Searching for Safely (New Brunswick, NJ: Transaction Publishers, 1988).Google Scholar

26 Spatial voting theory represents the considerations for a political choice as dimensions in (usually) Euclidean space. Voters are assumed to have ideal points (most desired policy outcomes) that can be represented as points in the Euclidean space. For each voter, assume that, as between two alternatives, the voter prefers the alternative closer to her ideal point. And, of course, she is indifferent between any points of equal distance from her ideal point. Then an indifference curve, a set of points that give equal utility, can be drawn for each voter. By constructing indifference curves that include, for each voter, the status quo, it is possible to identify any alternatives that would win a majority of voters as points that lie inside the indifference curves of a majority of voters. Assuming a single dimension with an odd number of voters, the equilibrium—that is, the alternative that cannot be beaten in a head-to-head vote by any other alternative—is the median of the ideal points (the Median Voter Theorem). With two or more dimensions and three or more voters, with the exception of a few special cases, it is always possible to find an alternative preferred by a majority to the status quo. Thus, in the absence of restrictions on the introduction of alternatives, there is no equilibrium. For an excellent introduction to spatial voting theory, see Kreh-beil, Keith, “Spatial Models of Legislative Choice,” Legislative Studies Quarterly, vol. 13, no. 3 (08 1988), pp. 259–319.Google Scholar

27 On the fundamental problem of instability, see Arrow, Kenneth, Social Choice and Individual Values, 2d ed. (New Haven, CT: Yale University Press, 1963)Google Scholar; and Sen, Amartya K., Collective choice and Social Welfare (San Francisco: Holden-Day, 1970).Google Scholar On instability under majority-rule voting, see McKelvey, Richard D., “Intransitivities in Multi-dimensional Voting Models and Some Implications for Agenda Control,” Journal of Economic Theory, vol. 12, no. 3 (06 1976), pp. 472–82.CrossRefGoogle Scholar On the notion of structure-induced equilibria, see Shepsle, Kenneth A., “Institutional Arrangements and Equilibrium in Multidimensional Voting Models,” American Journal of Political Science, vol. 23, no. 1 (02 1979), pp. 27–59.CrossRefGoogle Scholar

28 Riker, William H. and Sened, Itai, “A Political Theory of the Origin of Property Rights: Airport Slots,” American Journal of Political Sdcnce, vol. 35, no. 4 (11 1991), pp. 951–69.CrossRefGoogle Scholar

29 Demsetz, Harold, “Toward a Theory of Property Rights,” American Economic Review, vol. 57, no. 2 (05 1967), pp. 347–59Google Scholar; and Libecap, Gary D., Contracting for Property Rights (New York: Cambridge University Press, 1989).Google Scholar

30 Specifically, we accept the four necessary conditions for the emergence of a right identified by Riker and Sened: (1) scarcity—the content of a right is scarce, driving its value above enforcement costs; (2) right-holders desire the right—if they do not, then they will not seek the right; (3) rule makers (government) desire to recognize the right; and (4) duty-bearers must respect the right at the levels of enforcement made by the rule makers. See Riker, and Sened, , “A Political Theory of the Origin of Property Rights,” p. 955.Google Scholar

31 See Umbeck, John R., A Theory of Property Rights with Application to the California Cold Rush (Ames: Iowa State University Press, 1981).Google Scholar

32 See Libecap, , Contracting for Property Rights.Google Scholar

33 Our account is based primarily on Marrese, Michael, “Hungary Emphasizes Foreign Partners,” RFE/RL Research Report, vol. 1, no. 17 (04 24, 1992), pp. 25–33.Google Scholar

34 Our discussion is based largely on Havel, Jiri and Kukla, Eugen, “Privatization and Investment Funds in Czechoslovakia,” RFE/RL Research Report, vol. 1, no. 17 (04 24, 1992), pp. 37–41.Google Scholar

35 We rely on Brada, Josef C., “The Mechanics of the Voucher Plan in Czechoslovakia,” RFE/RL Research Report, vol. 1, no. 17 (04 24, 1992), pp. 42–45Google Scholar, for our sketch of the voucher plan.

36 See Deis, Michael and Chin, Jill, “Czech and Slovak Views on Economic Reform,” RFE/RL Research Report, vol. 1, no. 23 (06 5, 1992), pp. 64–65.Google Scholar

37 For an overview of privatization in Poland, see Slay, Ben, “Poland: An Overview,” RFE/RL Research Report, vol. 1, no. 17 (04 24, 1992), pp. 15–21.Google Scholar

38 Bienkowski, Wojciech, “Poland's Bermuda Triangle,” RFE/RL Research Report, vol. 1, no. 17 (04 24, 1992), pp. 22–24.Google Scholar

39 Under pressure of threatened strikes by the Federation of Independent Trade Unions, representing sixty million workers, the government agreed to guarantee work collectives access to 51 percent of shares, though at a price to be established by the State Committee on Property. See “Quality Versus Speed in Privatization Discussed,” Moscow interfax, 05 7, 1992Google Scholar, in Daily Report, Central Eurasia, Foreign Broadcasting Information Service, 05 12, 1992, pp. 40–43.Google Scholar

40 Olson, Mancur, “The Hidden Path to a Successful Economy,” in Clague, Christopher and Rausser, Gordon C., eds., The Emergence of Market Economies in Eastern Europe (Cambridge, MA: Basil Blackwell, 1992), pp. 55–75.Google Scholar

41 Encompassing interests are to be contrasted with distributional coalitions (special-interest groups) that can gain at the expense of social output. Olson, Mancur, The Rise and Decline of Nations (New Haven, CT: Yale University Press, 1982), pp. 36–74.Google Scholar

42 In September 1992, we assembled political scientists with specializations in China, Czechoslovakia, Hungary, Poland, and the former Soviet Union for a nine-month seminar at the University of Rochester devoted to theories of property rights and to the design of a common research protocol for studying the evolution of property rights in these countries. After spending three to five months executing the protocol in their countries of specialization, the seminar participants will contribute to a comparative volume on the evolution of property rights in the transition from socialism to market economies.