Free-market myths in Eastern Europe

February 15, 2000|By Christopher Lord

PRAGUE -- The accepted wisdom about the transformation of Eastern Europe over the past decade is that the former communist bloc is moving toward democracy and a market economy. These two terms are used together so often that you might get the idea they are an inseparable double act: Abbott and Costello, Laurel and Hardy, Batman and Robin.

But each of these concepts has its difficulties in the post-communist world. With democracy, it is relatively easy to diagnose these difficulties: Crooked politicians paid by crooked businessmen are the biggest problem in many countries, and in others the general failure of democratic politics is an even bigger one.

But let's look at the other half of this pairing, and see how the market economy is progressing, and what the structural problems are in adapting.

To refresh our memories, let's think about general preference theory. This assumes that everybody has preferences, and the market is the social and economic mechanism that allows us all to maximize those preferences.

The way we do this is by regulating our consumption, and the way we do that is by exercising choice. This means that our income is distributed by us in the direction of whoever best satisfies our wants and needs. And since the whole of our society functions in the same way, the market economy works to express our personal choices and preferences.

In other words, the market represents the pursuit of happiness, and the way we pursue happiness is by consuming.

To an American, a German or a Japanese, this explanation of the basic rhythm of life in a market economy might look so obvious it is hardly even worth discussing. But in the former East Bloc, things are not quite so simple.

If you are a U.S. State Department official, an analyst for the World Bank or the International Monetary Fund, or someone else paying a flying visit to a former East Bloc capital to assess the development of the economy, you might get the impression everything is going smoothly.

You will stay in a Western-style luxury hotel, with a fitness center and cable TV, and the shops and restaurants in your hotel will be almost indistinguishable from those in any other European city. If you visit local government officials or bankers you will have more or less the same impression.

But when we talk about introducing a market economy, we are not just talking about making changes at government level. We are talking about transforming the whole society. While on one level capitalism and the free market are making changes everywhere, on another level things are going a lot more slowly. The intractable problem lies in teaching people to consume.

Under communism, it was simply not true that people regulated their personal preferences by exercising choice over their expenditure. In the first place, they didn't have any money. And in the second place, there was no choice available. You bought whatever goods and services the state provided.

This situation has changed for many people in the former East Bloc. But for others -- and if we include the countries of the former Soviet Union it is a big majority -- these basic facts of life are about the same. They still haven't got any money, and there still isn't much for them to buy anyway.

Even in the more prosperous countries of the region -- Hungary, Poland, the Czech Republic and Slovenia, for instance -- there are many older people especially who are still living under effectively socialist conditions. They have fixed incomes, state-controlled rents, subsidized heating in winter and economically dysfunctional jobs.

For consumerism to establish itself in these countries, it is necessary to establish the idea that consuming is fun. That shopping is essentially a happy leisure activity. That you can express yourself and fulfill yourself at the mall.

But unfortunately it is only when people get over a threshold level of income that they can really begin to think like this. In Moscow, people still hoard cans of food in case the ruble crashes again. Western advertising does its best to introduce the values of the market economy, but after generations of shortages and standing in line for whatever happened to be available that week, many people still stick to the old attitudes.

The market economy is a whole system of society. What governments and private businesses have done so far is to create little islands in the general economic chaos where the rules of the market are supposed to apply. But in many cases these experiments have not been successful.

Such attempts have failed because they do not address the grass-roots problem. You can make some attempt to kick-start a securities market or an industrial sector. But how are you going to convince a 60-year-old Pole or Ukrainian that they should have some fun by heading for the supermarket this afternoon? Their whole upbringing tells them to stay at home where it's free and to keep the money under the mattress where it belongs.

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