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East meets West The Role of Western Economic Theory in Russia’s Transition John Hamilton November 2009.

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Presentation on theme: "East meets West The Role of Western Economic Theory in Russia’s Transition John Hamilton November 2009."— Presentation transcript:

1 East meets West The Role of Western Economic Theory in Russia’s Transition John Hamilton November 2009

2 The theory The reforms The institutional background The legal system

3 of Process of selection of laws by effic iency Priority is creation of efficient rules rather than efficient institutions Assimilation of laws to prices Atomistic view of man as rational utility maximiser Coase theorem: “if one assumes rationality, no transaction costs, and no legal impediments to bargaining, all misallocations of resources would be fully cured in the market by bargains.” Economic analysis of law NEOCLASSICAL ECONOMICS Laws of economics are like the laws of engineering

4 Ordo-liberalism and the Freiburg school Problem of how to create an appropriate "economic constitution" Focuses on the kind of legal framework required in order to create a market economy Used as a basis of reforms in Post WWII Germany Prescribes the need for an "economic constitution" and a role for government

5 THE REFORMS – the objectives Create private property Reverse Marxism and create right incentive structure Weaken the state "Depoliticise" Create a demand for law and institutional reform Suppression of alternative interpretations

6 THE REFORMS – implementation Mass voucher privatisation Face value RUR 10,000 Transferable Concentrations of ownership Loans-for-shares privatisation in 1996 Financed Yeltsin's re-election campaign Assets sold at an undervalue The 'privatisation of state power'

7 THE REFORMS - consequences Ownership concentration Performance Corporate governance Demand for law and the rule of law Dissatisfaction The return of the state

8 THE INSTITUTIONAL BACKGROUND Marxism Disappearance of law and the state Pashukanis The return of law Punishment as payment Commodity theory of law Gulags Terror and repression

9 THE INSTITUTIONAL BACKGROUND Networks Personal and institutional trust Decriminalisation of illegal activities Unemployment Organised crime Corruption Transparency Trust

10 THE LEGAL SYSTEM The courts Civil law - advantages Civil law - disadvantages Law and governance Continuity Rigidity Uncertainty

11 THE LEGAL SYSTEM Corporate law - assumptions Simplicity Slow and unreliable enforcement Unsupportive norms Problem of public enforcement

12 THE LEGAL SYSTEM Corporate law – self enforcing model Bright line rules Direct enforcement Minority shareholder protection Procedural protection Strong legal remedies

13 THE LEGAL SYSTEM Corporate law – interested party transactions - 20% or more of shares - relatives - 20% or more of shares - relatives Uncertainty moved from law to fact Conclusion

14 MARXISMNEOCLASSICAL ECONOMICS An economic theory with implications for law. An economic theory with implications for law Law and the state will ‘wither away’. There should be deregulation and a ‘night watchman’ state. Bourgeois law is based on the principle of commodity exchange and laws are like prices. Laws may be assimilated to prices. The means of production will need to be wrested from the owners (if necessary by a minority and by force). Economic reform must be introduced (by a minority if necessary) whatever the cost. Criminality is due to exploitation, and will cease when exploitation ceases. Creation of wealth will produce institutional reform. Once property is nationalised, exploitation will cease and the new social order will be created. Once property is privatised a market will be created and a market democracy will emerge. Man is motivated by the notion of service and social benefit will accrue spontaneously. Man is motivated by maximising his utility and social benefit will accrue spontaneously. Once the initial conditions have been created, reform toward the new order is an inexorable and linear process. Once the initial conditions have been created, reform towards the new order is an inexorable and linear process. COMPARISON

15 CONCLUSION Authoritarianism?


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