Creating Capitalism

Creating Capitalism

Transitions and Growth in Post-Soviet Europe

Patricia Dillon and Frank C. Wykoff

Employing historical analysis and building on growth theory and modern political economy, Dillon and Wykoff explain Soviet disintegration and analyze efforts to create capitalism in newly independent states. They show how five fundamental economic reforms generate growth, and use an original model to test the connections between reforms, elections and economic performance. The authors examine the progress of six countries (Bulgaria, Czech Republic, Estonia, Hungary, Russia and Slovakia) in terms of each country’s history and its successful application of the five reforms. Anyone interested in how capitalism works and why pro-market reforms encounter resistance in spite of their potential for generating higher living standards will find this book essential reading.

Chapter 1: The Withering Away of Communism

Patricia Dillon and Frank C. Wykoff


1 Why did the USSR self-destruct? We offer an economic analysis that implies that the collapse was inevitable. The collapse of the Soviet system is treated here as an aftershock of the economic quake of the industrial revolution. The USSR failed because it was unable to deal with the social, economic and political consequences of that revolution. Its disintegration demonstrated the failure of central planning to meet the needs of a modern state. It signaled the terminal weakness of a highly centralized economic system that despite extreme efforts could not resist the pressures of modern industrial society. Standard economic models based on incremental analysis can explain the process that built up to the collapse. But standard neoclassical analysis does not address serious discontinuities that result in radical sociopolitical changes. We differentiate between incremental economic analysis and analysis of major historical discontinuities which we call economic quakes. Adam Smith appreciated the social benefits of capitalism; Karl Marx did not. Marx was unable to foresee the staying power of capitalism and the ability of democracy to ameliorate its worst weaknesses. Lenin was a reactionary who perverted Marx by installing communism in feudal Russia. He and his followers removed everything that made capitalism work and built a system that would inevitably fail to adapt to the inherent demand for flexibility of modern industrial and commercial society. Instead of capitalism withering away, communism inevitably collapsed. THE END OF AN IDEA The Soviet Union, once powerful and feared, by 1989 had decayed socially, politically...

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