230. "A Socio-Economic Perspective on Friction," Sven-Erik Sjostrand (Ed.) Institutional Change, Theory and Empirical Findings, M.E. Sharpe, Inc., NY, (1993). Also published: Futures Research Quarterly, Vol. 9, No. 2, (Summer 1993), pp. 5-22.


Two Views of Friction

During the deliberations of a faculty seminar on socio-economics at The George Washington University in 1986-7, before the dramatic developments in Eastern Europe, the question of the pace of socio-economic change kept coming up. For a while it seemed that regardless of the topic to which a particular session of the seminar was devoted, the main difference in perspective between those seminar members who were neoclassical economists and the other social scientists present, was their divergent assumptions about the pace of human adjustments to new situations and signals. The neoclassical economists tended to assume that the adjustments would be swift and basically unproblematic. That is, while foregoing the assumption which economics formerly embraced, of instantaneous and cost-free adjustments, the neoclassicists continued to hold that the hindering factors--or friction--were so low that they did not require significant modifications to the assumptions and basic model, nor to the lists of factors that need to be systematically studied, or the predictions of neoclassical economics. The possibility of slow and costly adjustments to changes--or high friction--was acknowledged. It was treated, however, as if it did not occur or was rare. Thus, while no one in the seminar denied that behavior was "sticky," when the discussion turned to specifics, (for instance to the effects of price increases on energy conservation,) neoclassical economists tended to suggest that conservation would follow once prices were increased. Similarly, it was recognized that prices are sticky on the downside, but that recognition did not leave any discernible imprints on the neoclassicists discussion about the use of short-order recessions as a way to curb inflation, and so on.

In contrast, other social scientists in the seminar tended to point to a long list of observations that people "just did not behave that way," that they were much slower to adjust than the neoclassical economists expected. Examples abound: many Americans were slow to open IRA accounts although it was clearly to their advantage to do so; they were slow to leave jobs in declining industries and move from those parts of the country to new and rising ones; they continued to buy about the same amount of tax shelters even after the 1986 tax law made them much less favorable; they keep inefficient corporations going right next to more efficient ones, and so on. While these members of the seminar initially put it in terms of absolutes, that is, behavior does not conform to the neoclassical expectations, gradually they came to express it in more relative terms. Rather than assuming that people do not change, the preferred formula became that changes in personal and social behavior, including economic, tend to be slow and difficult--that friction is high.

Once both groups of seminar members became aware that they were focusing on the same kind of factor, friction, the door opened to questions regarding the typical extent of friction, the factors which account for the particular level found, and the implications of high levels of frictions for various models and predictions. The seminar stopped, more or less, at this point. This article provides a preliminary discussion of these questions.

Another way to highlight the issue at hand is to return to an often repeated analogue neoclassical economists use when challenged that their theories are "unrealistic." They respond that their models are like those of physicists: they formulate laws for perfect conditions, e.g. a frictionless slope. These laws provide either an approximation or a model that can then be adjusted to the empirical situation. Socio-economists may respond, at least this one does, that a model may serve as a suitable approximation, when it actually does approximate, that is, comes reasonably close to the reality it seeks to model. However, just as the assumption of imperfect information implies that information is almost fully available, while in actuality decisions are made with only small fractions of the needed information, so with friction, the model of a frictionless slope is productive only to the extent that the relevant segments of the world under study are rather low in friction. If friction like ignorance, (in effect a form of friction) is typically high, the suggested logic of model-building favors the use of a model of complete friction and adjustments reflecting whatever movement one does encounter.

In the area of decision-making this suggests first that one should assume that poor decisions, made with little information and poor processing of the information that is available, are the norm. Well-informed, "good," not to mention optimal, decisions are the exceptions and the special factors that account for them need explaining. This is, of course, the opposite of the tack usually taken, in which one tries to account for irrationality, assuming rationality to be normal. (For additional discussion see Etzioni, 1988, Ch. 6). Second, unlike physicists, neoclassical economists do not provide, in most areas, transition coefficients, that is the formulae that allow one to move from generalizations about the idealized state, the frictionless slope, to movement on actual slopes. This omission is unimportant if friction is very low but critical if it is high. As we shall see immediately, at least in some rather important cases, friction is high indeed. Hence, the need for a new approach.

Friction and Post-Communist Transitions

The extent of friction, the ease and the speed, with which socio-economic changes can be introduced, are pivotal to the evaluation of the policies pursued and urged on various post-communist countries since 1989. At the same time the lessons of these transitions help evolve theories about the levels of friction and the determining factors, theorems that, we shall see, apply to many other areas of socio-economic change from industrial development to movement toward freer trade.

Poland was the only post-communist country that has followed neoclassicists advice to jump from a command-and-control system into a free market, or "shock therapy" as others have put it. the most outspoken American proponent of such shock therapy is Jeffrey Sachs, a Harvard economist retained by Solidarity. Sachs's argument is neatly encapsulated by the remark of an Eastern European economist he quotes approvingly: "you don't try to cross over a chasm in two leaps." Sachs also stated in an interview with the Christian Science Monitor (3/1/90) "It is repeatedly shown throughout history that gradualism in such a deep crisis doesn't work...so if you don't act decisively, it constantly gets ahead of you." He explained earlier,

My idea is to create the market system as quickly as possible. Let people start to operate. The other idea is to say 'Well, we understand that we're punishing private sector brutally, that none of this makes any sense, but lets only change things very gradually so that maybe in ten years we'll have a normal business environment.' That's a crazy idea, frankly" (The New Yorker, 11/13/89, p. 89).

"The economic textbooks say such a program is to be preferred to a step-by-step program," Heinrich Machewskin, an economist with the German Institute for the Economy in Berlin, stated (The New York Times, 11/10/90). Gary Becker of the University of Chicago wrote (Business Week, 11/24/90) that: "Land, housing, retail establishments, and many services can become private property right away...It would even be technically possible to privatize many large factories quickly." And, "the duration of the pain can be reduced and benefits increased if the essentials of a market system are quickly put into place."

I predicted that the transition would either be slowed down or repudiated (The New York Times, 6/17/90.) The prediction was based on observing specific socio-economic factors (discussed shortly) that suggested that the friction level of transition would be high, and therefore attempts to move rapidly would generate stress that could not be overcome (at least within a democratic framework). The first sign that this seems to be a valid prediction might be seen in the results of the November 1990 elections. A Washington Post headline (11/27/90) read "Mazowiecki Steps Down as Premier: Government Policies Seen as Repudiated by Polish Electorate."

Neoclassical economists tend to assume that people are the same in all societies, cultures, and historical situations: They are rationally seeking to maximize their self-interest. According to neoclassicists in Communist societies, people are only held back by overbearing statist institutions and scrapping those will free their entrepreneurial spirit and lead in short order to a free economy. Building on these assumptions, urged upon them by neoclassical economists and backed up by pressure from international institutions (such as the International Monetary Fund and the World Bank) as well as the U.S. State Department and some American banks and private investors, Poland in 1990 slashed government subsidies, made the zloty convertible, closed or privatized a number of state enterprises, deregulated, and allowed freedom of labor mobility and otherwise made room for the market based allocation of resources. It was assumed that as resources were freed from state control, "privatized," the market would deliver them where they would be used most effectively.

For a short transition period, measured in a year or two, high inflation and unemployment were expected, but thereafter, the economy was expected to adjust without any particular state interventions to guide the new resources to this or that place, and without any social safeguards. In Poland, just prior to implementation of the new program, "Government officials predict[ed] that after a turbulent six months or so the economy should begin to stabilize." (The New York Times, 12/31/89.) "Sure there will be momentary dislocations; prices will undergo a sharp initial rise. But then they'll stabilize. People will know where they stand" (The New Yorker, 11/13/89, p. 90). The same held for the eastern parts of Germany, where rapid transition has also been attempted. In mid-1990 "The German Economic Research Institute predict[ed] stabilization [for eastern Germany] late next year and a turnaround in 1992." (The Wall Street Journal, 6/29/90, p. A10.) Eight months later with the bill for economic recovery still rising. "Estimates on the cost of rebuilding eastern Germany have been steadily raised as the region's economic woes multiplied. Many economists now predict that it will cost Bonn more than $1 trillion over the next decade. This year economists estimate, the Government will have to provide close to $100 billion" (The New York Times, 2/13/91). "Many economists still predict that an upswing will begin next year [for eastern Germany] that could eventually rival the 'economic miracle' of West Germany's postwar reconstruction..." (The New York Times, 2/13/91, p. A1.)

The rise of street vendors in Poland was hailed as a sign that the transition was taking place as expected. It was seen also as evidence that Poland was full of entrepreneurs and managers that could run private businesses given a free market.

Tens of thousands of Poles have turned streets, open spaces, even whole sports stadiums into vast bazaars, selling everything imaginable at rock-bottom prices: from shoelaces to fur coats, plastic flowers to ghetto blasters, denim jackets to skateboards (The Independent, 11/2/90. p. 21).

The new free-market forces were at work...on the sidewalk in front of an official state grocery store...where on Thursday afternoon hundreds of shoppers were crowding about to buy fresh meat, sausage, butter, sugar and coffee. In the not too distant past, inquiries for these goods in stores notable for their bare shelves would bring the response 'nie ma,' or 'we don't have any.' The merchandise was being sold on Thursday from more than 20 trucks, private cars and even upturned cartons on the sidewalk clustered about an old sign in front of the government store proclaiming, 'It is forbidden to sell around this building.'...what is going on here is precisely the kind of capitalist initiative and competition that Finance Minister Leszek Balcerowicz and other officials hope will bring prices down and renew the economy [italics added] (New York Times, 3/3/90, p. A1.).

What are the socio-economic factors that suggest that Poland will be forced to slow down its economic transition or abort its democratic government, and to what extent can they be generalized to other situations?

Human factors

Far from having fixed self-interested preferences, individuals are penetrated by the institutions and cultures in which they spend their formative years and various parts of their adulthood. True, underneath their acculturation there are elementary basic human features. However, these are not the quest for profit, but the quest for affection, self-esteem and self-expression aside from the need for basic creature comforts. In addition these needs can be significantly perverted by the particular societal structures in which people are formed and function.

Many, (albeit not all), Poles, citizens of other post-communist societies, and citizens of many less developed countries, have acquired specific personality traits and work habits that cannot be modified on short order. These include working slowly, without undue exertion, not taking initiatives or responsibilities, stressing quantity over quality, featherbedding, using work time for other purposes (especially shopping), promotion based largely on irrelevant considerations such as party loyalties and connections, barter of work time and material for other favors, and low-technology approaches.

The transition to western style of work and competition will meet resistance. In Yugoslavia, 40 percent of the workers at McDonald's quit because the work was too strenuous. (New York Times, 6/17/90. p. F13). Others, especially older workers in manual labor such as shipyards and steel mills, are hard to retrain for work in new, high-tech industries, say computer programming. All this holds, only even more so, for the many who serve a lifetime as bureaucrats, party commissars, teachers of Marxism and Leninism, and those who spend their life verifying that others tow the line.

Management and entrepreneurial skills are particularly in short supply. The skills and personality attributes of street vendors, as already pointed out indirectly by Max Webber's discussion of the difference between mercantilism and capitalism, are not those needed. The typical orientation of these street "capitalists" is toward quick bucks, achieved by short order responses to immediate demands, with next to no investments (and hence, no capital management) nor management of a significant labor force, not to mention longer run planning, innovation, or R&D. They are after quick profits, not reinvesting back into enterprises, to build major businesses. This observation is supported by the fact that despite the explosive growth of small traders in Poland, the country is very short of managers for sizable enterprises. In Poland, "it is no small feat to find people who are both experienced managers and untarnished by links to the discredited old system. There is a prejudice against filling posts with people who managed state-run enterprises under Communist rule. But often they are the most qualified, or the only qualified, people available." (The New York Times, 7/24/90, p. A8.) Many of those that function successfully, are repatriated Polish Americans (far from enough to make a difference for the economy as a whole). The shortage of true managers and entrepreneurs is reflected in that the Polish-American Enterprise Fund is reliably reported to have been unable to find qualified takers for most of its funds (private communication). Typically loans are below the $50,000 level. (In Third World countries, in similar stages of development, it is common to refer to the lack of or low absorptive capacity.) All this is not to suggest that the needed capitalistic skills and traits cannot be developed in Poland, that its people are somehow inherently inferior; only that their development requires years, if not decades (as it took in the U.S. under much more favorable circumstances). Introducing large-scale capital, in the form of foreign aid, at this stage is often largely wasted.

Capital

Neoclassic economists tend to assume that if state enterprises are closed or "privatized" (by which they mean legal title is changed from the state to stockholders), the capital assets that are released will float, on their own, where the highest "price" or return is available for them, in the free market. Capital will thus be much more efficiently used and productivity will rise. (They correctly point to "horror" stories of the result of capital being allocated not where users are most willing to pay for it but by government allocations based on national or social ambitions, lending grossly to excessive production of expensive steel, etc.)

Recent experience, however, raises serious doubts about the assumption of the ready transfer of capital either by private corporations using previously state-owned assets or by selling them and using the yield for new investments. As an American economist who works in Poland put it (private communication), an observation also confirmed in eastern Germany and other post-Communist countries: "when you open them to the free market, communist's capital assets dissolve like an Alka-Seltzer pill in a glass of water." Large amounts of the assets, used in Communist economies, are neither transferable not sellable. Barbara Piasecka Johnson's much publicized plan to buy a controlling share of the Gdansk Shipyard "ran into many of the obstacles that have tripped up other Westerners seeking to invest in Eastern Europe: difficulties in assessing the value of enterprises, daunting investments needed for modernization..." (The New York Times, 4/9/90, p. D5.). "Interflug, the East German state airline, once touted as one of the country's jewels, will be shut down. The Treuhand [the holding company created by the government to privatize 8000 enterprises controlled by the former East German state] could not find a buyer..." (Washington Post, 3/10/91, p. H1.). The Wall Street Journal reports that potential investors are reluctant due to "the lack of infrastructure such as telecommunications and transportation, a weak network of suppliers, and East German companies' debt..." (6/29/29, 1990, p. A10). Hence, often the short run effect of privatization is not a rise in output, but a sharp decline in the GNP, mass unemployment and recession. In Poland, "The economy also fell into a deep recession, with industrial output falling 30 percent. Farm production slowed and real pay declined by 40 percent, according to estimates." (The New York Times 5/25/90, p. A10). A year after the new economic program was implemented in Poland, "unemployment has climbed to one million, and next year could reach two million, or more than 11 percent." (The New York Times 2/13/91, p. A1).

Like other developing nations, post-Communist societies will have to raise new capital mainly from gradually saving, a very painful and slow process in face of a sharply declining standard of living. (A major socio-economic point needs to be mentioned here. Two facts combine to make such saving particularly difficult in post-communist societies; first that the standard of living is in part a subjective matter, and second that losses raise much more resistance than foregone gains of similar magnitude. (On the first point see Duesenberry, 1952; on the second, Kahneman, Slovic, and Tversky, 1982) Hence, while a country that always had a very low standard of living might be able to save when its standard of living rises above the subsistence level, this is more difficult for a country like Poland that had a higher standard of living but is losing part of it due to transition. Theoretically, other counties could provide a steady flow of capital, as the capacity to absorb is gradually increased, but the amounts involved and the long run commitment needed are such, that this is unlikely to obviate the need for slow self-generation of capital.

It should be noted that even under the much more favorable conditions, in the contemporary U.S., closed steel mills are not readily converted into high-tech industries, and so on. The notion that capital is readily convertible and it can be accomplished without substantial losses--a reflection of what might be called capital friction--is seen clearly when attempts were made to convert corporations that specialize in military production to other usages. Weidenbaum states: "Every comprehensive study of past attempts by large defense contractors to use their capabilities beyond the aerospace market has failed to find a single important example of success" (quoted in the Christian Science Monitor, 8/7/90, p. 7). For more on economic conversion see Lynch, 1987).

Infrastructure

Generally, for an economy to take off into higher reaches of development, certain elements must be in place. I spelled out elsewhere the reasons for the particular list that follows (Etzioni, 1983): these include reliable flows of inanimate energy, means of low cost expeditious and reliable transportation, ditto for communication, and supportive financial and legal institutions. Post-communist countries, like many less developed countries, are short on all these. Poland, for example, is suffering from its dependance on oil from the USSR, and needs time to adjust to the reduction of oil from this source or its rapid increase in price. Poland's telecommunications are woefully unadapted: Poland has seven phone lines for every 100 people (Businessweek, 11/20/89). Its banking system is primitive: transactions are done in cash; there is no tradition of check writing or bank credits, not to mention stock markets, private savings, and investments).

At the PKO bank in Warsaw, [Andrzej] Makacewicz [president of the Polish Foundation, a private organization set up to assist economic change]...had been standing in line for an hour, trying to deposit 100 million zlotys--about $10,500--that he had hand-carried from a PKO branch bank in Gdansk, a four-hour drive away, because interbank transfers can take months. (The Washington Post, 5/9/90, p. A22).

Transportation facilities are inadequate for a modern economy: in eastern Germany, "The region's roads, railways, airports and telecommunications are so rundown that a recent report by western Germany's Kiel Institute described them as 'wholly inadequate for the rapid development of the five new federal states.'" (The New York Times, 3/12/90, p. A8.)

One of the reasons Western capital has been so reluctant to rush in, is the confusion of laws and the dangers of political instability. It will take time to demonstrate to the West a reasonable measure of political continuity. Foreign investors realize that just as it is easy to slash confiscatory and restrictive laws, they can be quickly reinstated, unless they are supported by considerable tradition, political culture and public support. (The rapid way China flip-flops on its "democratization" is a case in point).

Labor mobility

Closing down industries that the state maintained for non-economic reasons (ship yards, steel mills) and developing new ones, more responsive to the market, often entail labor mobility. In the U.S., if the car industry (sustained in part by state supports in the form of bailouts and limitations on imported cars) is in decline and oil on the rise, labor moves from Michigan to Texas. Such movement assumes, first of all, a tradition of mobility that is strong in the U.S. but much weaker in other countries. People in Poland are much less accustomed to leaving behind their extended families, communities, and graves. Additionally political conditions often prevented a tradition of free mobility to grow. (The fact that some people do immigrate does not show that the rest are equally mobile, on the contrary, those less adaptable are those who are predisposed to stay.)

Last but not least there is an interaction effect between labor mobility and the shortage of capital. Since houses, schools, hospitals, shops, etc., obviously cannot move with labor, the greater the capital shortage, all other things being equal, the more difficult for labor to move and the slower the transition from one industry to another.

Values

Neoclassical economists assume that once a people overthrow the tyranny of communist political institutions they exhibit their basic human proclivity--self-interest and quest for self-satisfaction. Actually, while it is true that some Communist followers made a surprisingly rapid transition to Western values (or at least slogans), and for some, privatization has acquired the same standing of a simple cure-all that once nationalization had, most members of these societies have kept a variety of social values, not easily compatible with capitalism, especially the raw kind urged on Poland. Mieczyslaw Kabal, an economist with the Labor Research Institute in Warsaw, stated: "In the Eastern European value system, the right to work and job security are very important values" (The New York Times, 2/5/90). "There have been reports [in Hungary] of enterprise managers cutting sweetheart deals with Western investors offering to take their firms private for artificially low prices in return for guaranteed jobs and pay" (The Washington Post, 1/23/90, p. D1). In Poland Minister of Privatization Waldemar Kuczynski, "is also frustrated that many managers of newly privatized companies have sharply raised prices to increase profits, rather than improve production and service" (The New York Times, 10/29/90, p. D4).

The evidence shows, especially from China and the USSR, that successful farmers and "cooperatives" (private enterprises) do not invoke in others the American desire to keep up with the Joneses and thus multiply the capitalist spirit at "making it." Instead these ventures frequently bring forth a strong yearning for egalitarianism, combined with pressure to tax heavily those who are successful. Charles P. Wallace reports, "the relatively large sums being earned by cooperatives [in the USSR] have aroused a considerable amount of jealousy, both from state institutions that work far less efficiently and private workers who grumble about the disparity in their take-home pay." (Los Angeles Times, 5/2/88.) These are hardly the sentiments that foster entrepreneurial capitalism.

In Poland, ownership of houses and apartments, land, and factories is returned to those who had title before the communist take over, allowing fairness and justice to take precedence over economic efficiency. (In Moscow, the city council decided to privatize the ownership of residences. However, instead, of selling them--which would have provided the USSR with the ability to increase production and purchasing by increasing the incentives for the Soviets to work harder (so that they could afford to buy a home)--they decided to award them scot free to the current residents, on the social ground that they suffered enough.)

My argument is not that economic considerations in these and other cases should have been given precedent. On the contrary, as I have shown in The Moral Dimension (1988), all people find some mix that is appropriate to them between their values and their economic needs. The U.S. is also far from a free market, a country of raw capitalism, but is one mitigated by many social considerations reflected in Medicare, Social Security, unemployment insurance and numerous other measures.

To urge post-communist societies to shift to raw capitalism is to ignore the inherent social instability (which led all Western countries to welfare capitalism) of such a system, and to invite social tensions that are explosive and will contribute to removing both democratic institutions and--the drive to capitalism. These societies need time and encouragement to find their own balance between whatever social values are dear to them and economic efficiency. To view their rejection of communist tyranny as an unmitigated taste for raw capitalism, is to misunderstand their social orientation and render their transitions much more difficult if not outright impossible.

External Factors

All that has been suggested above must be "corrected" by taking into account external factors that can increase or decrease the levels of friction and associated stress, in the cases of socio-economic transition at hand. There is, however, a tendency to greatly exaggerate what can be accomplished by foreign aid and forgiveness of debt. When an economy is very large, like that of the USSR, and external help is proportionally puny, the ability to ease the transition is particularly small. Even for a country the size of Poland, external help is likely to be far from sufficient to make rapid transition tolerable. This is the case in part because some matters cannot be rushed (e.g. retraining of workers, building roads, modernizing ports) and because aid tends to be used for immediate ameliorative purposes such as buying food (as Poland did in the Seventies), which in the longer run builds up demand but no productive capacity. Thus the political gain (of sustaining the regime) is temporary. Even in a smaller economy (eastern Germany, pop: 17 million, Poland pop: 38 million), with a practically unlimited commitment of resources and skills, as well as the infusion of western values, as is the case for Germany, the transition, though somewhat more hurried, proves to be much more difficult and exacting than has been widely expected. "Henry Maier, a professor at the University of Flensburg and an expert on eastern German economics, said the Government had failed to grasp the immensity of the problems in shifting an industrial economy from socialist central planning to free-market capitalism. `The Government had the naive notion that the free market would take care of everything,' Mr. Maier said, `Instead, it has been a disaster.'" (The New York Times 2/13/91, p. A1).

All said and done, transition to post-Communist societies shows: first, that friction is generally high; and second, provides a list of the factors that slow down transition, familiar from other less developed economies. The inability to modify most of these factors on quick order has clear policy implications. The main one is that external pressures to rush transitions will cause them to be aborted (as the pain and costs of transition exceed the public tolerance at least within democracy). It also suggests that foreign aid is best disbursed at a lower level for the longer run than massively for the shorter run. (Those who argue that our political system is unable to sustain such commitments, should examine the long commitments of aid that the U.S. has maintained to Israel, Egypt, Turkey, and Korea. True, particular mixes of national security considerations and ethnic pressure played a role in these cases, but aid to Poland has its own ethnic base and there are at least as good security reasons to support transition to post-communism as there are to support Egypt.)

The Unevenly Paced Clocks and Political Commitment.

Aside from the generally high level of friction, difficulties are caused for socio-economic transitions, that point to specific policy conclusions, from what might be called the problem of the unevenly paced clocks. Reference is to the fact that some socio-economic processes are inherently more friction laden than others. To the extent that changes must be multifaceted--which all major societal, economic, and political changes are--pushing the relatively quicker processes to proceed at full haste generates major imbalances because the other processes cannot keep up.

In particular at issue is the respective pace of three kinds of processes. Those that can proceed at a relatively rapid pace: Deconstructive acts such as closing down state plants, collective farms, deregulation, slashing of subsidies, and removing currency controls. Much slower in pace are the processes of reconstruction, such as the opening of new plants, development of the infrastructure, and retraining of the labor force. Fastest and most volatile are expectations. Expectations are a social-psychological variable which neoclassical economists often assume they can model but actually is one of the least understood factors, precisely because it is highly volatile and driven largely by social and psychological factors and not by economic ones. It seems that one of the few things we can say with certainty about expectations is that they move with less friction than most processes. Thus, very shortly after the beginning of the transition from communism, expectations shot up with Poles expecting democratization to quickly result in prosperity and a Western life-style. When this did not follow on short order, the mood swung quite sour, resulting in the rejection of the Mazowiecki government in November 1990.

While the knowledge of how to keep expectations realistic is far from established, certainly policies of over-sell fan further inflated expectations rather than help keep them closer to reality and more frustration proof. During a 1990 visit to Poland, a social scientist colleague, pointed to my published statement that such expectations were unrealistically high, by stating that "we are very pessimistic, indeed maybe too much, we do not expect to catch up with the West before the end of the century." At the time the Polish income per capita was a fourth of that of Greece, at roughly $1,750 per capita. Expecting the GNP to increase four-fold was an extremely optimistic projection. For comparison sake the U.S. only doubled its income once every generation, under much more favorable circumstances.

Neoclassical economists sometimes added privately that a main reason they favor rapid transitions is that they fear a lack of political commitment to a longer-run, more gradual transition. If, however, we are correct that rapid transition cannot be accomplished, one must ask under what conditions a more gradual transition could be attained. The answer seems to be (a) if one could keep expectations low, so that results would be fulfilling rather than frustrating; (b) if the rewards of the transition could be kept high compared to the pain, which a "pull" strategy (see below) seems to offer, and (c) if the moral case for the new regime could be strongly made, which is easier to do for the more humane and less brutal transition.

One way to ensure that the slower paced processes, after they have been hurried all they can be, will set the pace for the total socio-economic change, is to build on a "pull" instead of "push" strategy. In post-communist Poland this has been suggested in the form of not closing profitable state enterprises but providing favorable terms (say, of credit) to the new, private ones and allowing those, as they grow, to pull labor and other resources (to the extent that they can be salvaged) away from state ones, which will then die on the vine.

The term "profitable state enterprises" may by surprising on two accounts, first, could they be? and second if they are, why close them? Poland's mid-sized car industry is useful to illustrate the point. In 1990, after state enterprises were forced to work under commercial conditions (their subsidies abolished, etc.), the said auto industry was quite profitable because while they made fewer cars they could more than increase prices due to their monopoly status and the high demand for cars. The champions of the rush to the free market, planned nevertheless to close these factories (before the November 1990 elections) because they were state owned and because they were less efficient than Western ones. According to one economist, Polish workers were each making about three cars per year compared to ten cars per worker at Chrysler. It was suggested that plants be privatized or their monopoly status attacked, by increasing car imports, even if that would use up scarce foreign currency. However, privatization was delayed because, among other reasons, no investors could be found to take over, and mere privatization would not have increased efficiency because, among other things, Chrysler has a much higher capital outlay per worker than the Polish plants. While it is true that competition with Western car makers could have been achieved "right away" by opening the border, the result would have been mainly a decline in Polish production of cars, without any pick up elsewhere. Hence, in the short order, idling more resources particularly workers, would not have increased output, but would have increased pain, costs, and social stress. If instead, private Polish industries, say animation, were given time to grow and expand, they would have drawn workers from the no longer subsidized state industries. As long as the "pulling" industries determined the pace, rather than those being shut, there would be much less transitional imbalance and resulting economic, human and political strain.

In Conclusion

Friction (psychological, sociological, political) is a major social science variable. The beginning assumption in socio-economics should be that friction is high for most changes. The perils of disregarding this generalization is illustrated by examining the transition from command-and-control economies to freer ones.

BIBLIOGRAPHY

Duesenberry, James S. 1952. Income, Saving and the Theory of Consumer Behavior. Cambridge, MA: Harvard University Press.

Etzioni, Amitai. 1988. The Moral Dimension. New York: The Free Press.

----------. 1983. An Immodest Agenda. New York: McGraw-Hill.

Kahneman, Daniel, Paul Slovic, and Amos Tversky. 1982. Judgment Under Uncertainty: Heuristics and Biases. Cambridge: Cambridge University Press.

Lynch, John ed. 1987. Economic Adjustment and Conversion of Defense Industries Boulder, CO: Westview Press.

 

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