Challenges of social transition

1. Challenges of social transition David Lipka, Ph.D. Anglo-American University

2. Where is the place of economics? • Criticizing utopian proposals to change status quo (liberty principle) • The type and complexity of social order depends on how it emerges • Human design (organization); singular interpretation • Unintended consequences of human action (catallaxy / markets); competing interpretations

3. Good institutions lead to coordination Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice: all the rest being brought about by the natural course of things. • The system of natural liberty - peace, easytaxes, and a tolerable administration of justice COORDINATION of self-interested actions • "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.“ Adam Smith WN I.ii.2

4. Economic implications of liberalism (PROPERTY) • Economic calculation • Without property: tragedy of the commons “That which is common to the greatest number has the least care bestowed upon it.” Aristotle, Nicomachean Ethics • Coordination / Efficient allocation – optimal use of existing information • Selection (impartial judgment among different interpretations) • Innovation (new / disruptive interpretations)

5. Why is transition so difficult? • People might have wrong ideas • „Denial of reality“ • Rational irrationality • Even good ideas need not be expressed • Preference falsification (Timur Kuran) • Even expressed ideas need not lead to coordination • The PD

6. Denial of reality “[ a]ny discussion of institutional change must embody the recognition that we start from here, and that here defines both time and place.“ James Buchanan • Unity  • Plurality --> new unity X consensus X property rights

7. Strategies for reforms • building reform packages that give compensating transfers to losers from reforms; • making reforms only partial to reduce opposition; • creating institutions that make credible a commitment to compensating transfers; • waiting for a deterioration of the status quo to make the reform more attractive.

8. Rational irrationality • Preferences over beliefs • False beliefs are costly  tradeoff between beliefs and wealth  Demand for beliefs. • Democracy = low (zero) cost of beliefs (one vote does not matter) • Biases: • Anti-market bias • Anti-foreign bias • Make-Work bias • Pessimistic bias

9. Coordination problem • Reforms are attempts to shift a coordination equilibrium: • Reform strategy must be credible • Credibility requires commitment of reformers • Lustration laws; restitutions • EU accession?

10. What is special about social reality? • it exists only because we think / believe it exists.  social facts are observer relative MONEY Piece of paper: 156 × 66.3 × 0.11 mm One hundered dollar bill

11. What are institutions? • Institutional facts: X counts as Y in C • Constitutive rule: • Rules defining types of activities = roles • Status function: • a function performed not in virtue of physical features of the entity but because people collectively accept the status;

12. How to change institutions? • Change interpretation (education) • Change relative prices of behavior • By individual action • By exchange

13. Should we try to use government to reform? • Legitimate governments provide deontic power necessary for change • Governments may change relative prices of behavior • Government action has unintended consequences: even good intentions may lead to bad outcomes

14. Thank you for your attention