Knowledge, Transaction Costs, and the Problems of Transformation

In postsocialist societies, the character of economic behavior is determined in the short run by the decay of the party-state's structures. The salutary effects of liberalization are felt only somewhat later; in the interim, actors on the economic scene must shoulder the sizable costs associated with transformation. We can classify these costs into the following categories: (I) the costs of creating new economic units and reorganizing old ones; (2) the costs of rebuilding the network of economic transactions; and (3) the efficiency-damaging effect of weaknesses in economic competency on specialization and division of labor within, as well as among, enterprises. All three of these are related to the tacit nature of human knowledge and skills, as well as to the difficulties involved in passing them on to others. The development of markets and effective enterprise management structures will be accomplished first in those establishments and branches in which the expected size of transformation costs are relatively low.