Transitions and Growth in Post-Soviet Europe
3. Why private markets work In order for reforms to be sustained, citizens must appreciate their beneﬁts. Economic analysis demonstrates the value of ﬁve economic reforms. (1) Price liberalization is essential for the creation of a market system in which prices reﬂect social costs and in which these costs are paid by those who receive the beneﬁts. (2) Private property is essential for capitalism. If property rights are well deﬁned, the private owner is the residual claimant and therefore acts as the consumer best able to satisfy his own wants and as the producer inclined to satisfy consumer demands while husbanding resources and minimizing production costs. (3) Well-designed ﬁscal and monetary institutions and policies ameliorate business cycles, reduce crowding out and promote price-level stability. This last facilitates private decision-making by not allowing inﬂation to vitiate price signals. (4) Industry restructuring and deregulation reduces bureaucratic rent-seeking and empowers producers to maximize proﬁts, which minimizes costs while satisfying consumer demand. (5) International trade liberalization exploits countries’ comparative advantages, maximizes the beneﬁts of specialization and fosters technology transfer. Free trade also eliminates the rents that local monopolies would otherwise enjoy and thus reduces the concentration of power in the hands of former apparatchiks and state managers. Even though the political system may resist these reforms, each will improve economic efﬁciency. Inefﬁciencies are “failures” in both private markets and in government. Central and Eastern Europe continue to be troubled by the evident failure of planners...
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