The collapse of Communism in the regimes in Eastern Europe and the former Soviet Union has brought forth a plethora of alternative political and economic models for the reorganization of those societies. The vacuum that has been left could be regarded as an ideal laboratory for the testing of competing theories, and the temptations to experiment with the more benign forms of constructivist rationalism are likely to prove irresistible. If liberal capitalism is to be successfully created, it will clearly not have the same biography as it has had in the Western European and Anglo-American countries, where its emergence was the result of slow evolution: often its appearance and survival were due to a quite fortuitous combination of circumstances. In those countries it was not the result of any deliberate democratic choice but the outcome of a happy confluence of traditional rules and customary practices, and the participants in them had little idea of the form of the system that they were creating. Indeed, ideological sanctification was almost an afterthought, and democratic approval was belated and in most cases not enthusiastic. Britain was a liberal capitalist society, and possessed the necessary body of private law, some time before the franchise was significantly democratized (which did not occur until 1867). It is, of course, recent theoretical and empirical research which has revealed that the political choice mechanisms that developed haphazardly after the success of the market are a potential threat to it.

For virtually all the major schools of Western opinion, the collapse of the Communist regimes in Eastern Europe and in the Soviet Union, between 1989 and 1991, represents a triumph of Western values, ideas, and institutions. If, for triumphal conservatives, the events of late 1989 encompassed an endorsement of “democratic capitalism” that augured “the end of history,” for liberal and social democrats they could be understood as the repudiation by the peoples of the former Soviet bloc of Marxism-Leninism in all its varieties, and the reemergence of a humanist socialism that was free of Bolshevik deformation. The structure of political and economic institutions appropriate to the transition from post-Communism in the Soviet bloc to genuine civil society was, accordingly, modeled on Western exemplars—the example of Anglo-American democratic capitalism, of Swedish social democracy, or of the German social market economy— or on various modish Western academic conceptions, long abandoned in the Soviet and post-Soviet worlds, such as market socialism. No prominent school of thought in the West doubted that the dissolution of Communist power was part of a process of Westernization in which contemporary Western ideas and institutions could and would successfully be exported to the former Communist societies. None questioned the idea that, somewhere in the repertoire of Western theory and practice, there was a model for conducting the transition from the bankrupt institutions of socialist central planning, incorporated into the structure of a totalitarian state, to market institutions and a liberal democratic state. Least of all did anyone question the desirability, or the possibility, of reconstituting economic and political institutions on Western models, in most parts of the former Soviet bloc.

Western visitors to those parts of the world that before 1991 were politically organized as the Soviet Union have been impressed by the attitudes of persons toward behavior in ordinary exchanges, attitudes that seem to be so different from those in Western economies. The essential elements of an “exchange culture” seem to be missing, and this absence, in itself, may be central to the effective functioning of market economies. Individual participants in ordinary exchange relationships in Western economies act as if they understand the simplest of all economic principles, namely, that there are mutual gains from trade, that the benefits are reciprocal, that exchange is a positive-sum game. This “as if” understanding, which remains perhaps below our level of consciousness in the West, is largely missing from the public attitudes of citizens of the former Soviet Union, who behave as if the gains from trade do not exist, or at least are one-sided rather than mutual.

In the late 1980s, the actual accomplishments of capitalism finally made a convincing case against socialism. After several decades of experimentation with human beings, socialism in the former Soviet Union and Eastern European countries (hereafter, Eastern Europe) died an inglorious death. To an economist, the present value of the expected future benefits from socialism fell relative to their current production costs. And Marx was finally dead and, hopefully, buried.

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.

On the extreme wing of libertarian ideology are the individualist anarchists, who wish to dispense with government altogether. The quasi-legitimate functions now performed by government, such as the administration of justice, can, the anarchists claim, be provided in the marketplace.

George H. Smith

Political liberalism began in the eighteenth century with the effort to establish a secular state in which religious differences would be tolerated. If religious views include universal principles to apply to all by force if necessary, diverse religions must conflict, perhaps fatally. In a sense, then, political liberalism was an invention to resolve a then current, awful problem. Its proponents were articulate and finally persuasive. There have been many comparable social inventions, many of which have failed, as Communism, egalitarianism, and perhaps socialism have all failed to date. The extraordinary thing about political liberalism is that it seems to have succeeded in its authors' initial hope for it. It may have helped end the turmoil occasioned by religious differences. Political liberalism has since expanded in various ways under other influences, and, if it were not for Islamic fundamentalism with its seemingly coercive theocratic program, we might no longer today associate religious conflict with the core of liberalism in its actual practice.

Are socialists best regarded as those who are most truly and consistently committed to democracy, under modern industrial conditions? Is the underlying issue that divides liberals from socialists the degree of their wholeheartedness in affirming the ideal of a democratic society? On the liberal side, Friedrich Hayek has remarked: “It is possible for a dictator to govern in a liberal way. And it is also possible that a democracy governs with a total lack of liberalism. My personal preference is for a liberal dictator and not for a democratic government lacking in liberalism.” No doubt many socialists would wish to quibble with Hayek's free-market oriented conception of liberalism. But I am wondering whether the conceptual map implicit in Hayek's remark is apt. Hayek appears to assume that there are two independent lines of division, one marking greater and lesser commitment to liberal values, the other marking greater and lesser commitment to democratic procedures. According to the conception of socialism as democracy that I wish to examine, a better picture of the political landscape would show one line of division with gradations indicating greater and lesser commitment to democracy. On this continuum, socialists are located at the extreme pro-democratic end, those who favor autocracy at the other end, and liberals somewhere in the middle. The analyst who finds this latter conceptual picture the more illuminating of the two will say that Hayek reveals his rejection of socialism by being less than wholehearted in his support of democracy.

With the collapse of the centrally controlled economies and the authoritarian governments of Eastern Europe and the former Soviet republics, political leaders are, with appreciable public support, espousing “liberal” economic and political transformations—the reinstitution of markets, the securing of civil and political rights, and the establishment of representative governments. But those supporting reform have many aims, and the liberalism to which they look for political guidance is not an unambiguous doctrine.

Events in both Eastern Europe and the former USSR illustrate the intimate connection between economic and political processes. Those events also remind us that political and economic institutions are human creations, and that when those institutions are poorly designed, political-economic failure is a direct consequence. It is axiomatic, then, that the transition to stable and prosperous societies in those former Communist states requires careful attention to the design and implementation of democratic institutions.

Today we are witnessing two dramatic processes: the fragmentation of old states and empires, followed by the emergence of new states and new forms of political association; and the construction of new economies out of the ruins of state socialism. These two processes—the redrawing of political boundaries and the creation of economies—are not independent of one another. In some cases, the desire for a new, more productive economy supplements other motives for state-breaking and state-making. In others, even if the fragmentation of political union results from other factors, such as ethnic divisions or the resurgence of nationalism against a weakened imperial center, the fragments may sort themselves out into new states, federations, or commonwealths, according to what they believe to be maximally productive economic units.

Recent decades have seen a resurgence of contractarian thinking about the nature and origins of the state. Scholars in this tradition ask what constraints rational, self-interested actors might deliberately impose upon themselves. In response, Hobbes, Rousseau, Locke, and other early contractarians answered that laws of property were an attractive alternative to “the war of all against all.” More recently, James Buchanan, Russell Hardin, Mancur Olson, Gordon Tullock, and others have used contractarian principles to justify laws that solve a variety of Prisoner's Dilemmas and other collective-action problems. And in the distributional realm, John Rawls and others have applied contractarian analysis to investigate how material wealth ought to be allocated among people.

Since the publication of John Rawls's A Theory of Justice, normative democratic theory has focused principally on three tasks: refining principles of justice, clarifying the nature of political justification, and exploring the public policies required to ensure a just distribution of education, health care, and other basic resources. Much less attention has been devoted to examining the political institutions and social arrangements that might plausibly implement reasonable political principles. Moreover, the amount of attention paid to issues of organizational and institutional implementation has varied sharply across the different species of normative theory. Neoliberal theorists, concerned chiefly with protecting liberty by taming power, and essentially hostile to the affirmative state, have been far more sensitive to such issues than egalitarian-democratic theorists, who simultaneously embrace classically liberal concerns with choice, egalitarian concerns with the distribution of resources, and a republican emphasis on the values of citizen participation and public debate (we sketch such a conception below in Section I). Neglect of how such values might be implemented has deepened the vulnerability of egalitarian-democratic views to the charge of being unrealistic: “good in theory but not so good in practice.”