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Can Neoclassical Economics Underpin the Reform of Centrally Planned Economies?

  • Peter Murrell

This paper addresses whether neoclassical economics can provide the intellectual underpinning for a theory of reform. I examine whether the neoclassical model satisfies an essential condition to qualify for this role: does it give us a satisfactory explanation for the vast differences in performance between capitalist and socialist economic systems? First, I focus on the theoretical arguments that have traditionally been used to examine the comparative properties of central planning and markets. I show that developments within theory over the last 20 years have substantially changed the tone of these arguments, making their message more equivocal. Next I discuss empirical evidence, but of a particular sort. Much research shows that centrally planned economies perform less well than market economies; but few studies test whether the superiority of market economies appears within empirical models derived using the framework of basic neoclassical economics. Those studies are the relevant ones for the present exercise. The central conclusion is that economists must look outside the standard models of competition, the focus on Pareto-efficient resource allocation, and the welfare theorems to build a theory of reform.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jep.5.4.59
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Article provided by American Economic Association in its journal Journal of Economic Perspectives.

Volume (Year): 5 (1991)
Issue (Month): 4 (Fall)
Pages: 59-76

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Handle: RePEc:aea:jecper:v:5:y:1991:i:4:p:59-76
Note: DOI: 10.1257/jep.5.4.59
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  1. Stiglitz, Joseph E, 1987. "The Causes and Consequences of the Dependence of Quality on Price," Journal of Economic Literature, American Economic Association, vol. 25(1), pages 1-48, March.
  2. Thornton, Judith, 1971. "Differential Capital Charges and Resource Allocation in Soviet Industry," Journal of Political Economy, University of Chicago Press, vol. 79(3), pages 545-61, May-June.
  3. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 630-49, November.
  4. Barreto, Humberto & Whitesell, Robert S, 1992. " Estimation of Output Loss from Allocative Inefficiency: A Comparison of the Soviet Union and the U.S," Economic Change and Restructuring, Springer, vol. 25(3), pages 219-36.
  5. Sah, Raaj Kumar & Stiglitz, Joseph E, 1988. "Committees, Hierarchies and Polyarchies," Economic Journal, Royal Economic Society, vol. 98(391), pages 451-70, June.
  6. Richard R. Nelson, 1981. "Assessing Private Enterprise: An Exegesis of Tangled Doctrine," Bell Journal of Economics, The RAND Corporation, vol. 12(1), pages 93-111, Spring.
  7. Kumbhakar, Subal C, 1987. "Production Frontiers and Panel Data: An Application to U.S. Class 1 Railroads," Journal of Business & Economic Statistics, American Statistical Association, vol. 5(2), pages 249-55, April.
  8. Kornai, Janos, 1990. "The Affinity between Ownership Forms and Coordination Mechanisms: The Common Experience of Reform in Socialist Countries," Journal of Economic Perspectives, American Economic Association, vol. 4(3), pages 131-47, Summer.
  9. Schmidt, Peter & Sickles, Robin C, 1984. "Production Frontiers and Panel Data," Journal of Business & Economic Statistics, American Statistical Association, vol. 2(4), pages 367-74, October.
  10. Novshek, William & Sonnenschein, Hugo, 1987. "General Equilibrium with Free Entry: A Synthetic Approach to the Theory of Perfect Competition," Journal of Economic Literature, American Economic Association, vol. 25(3), pages 1281-1306, September.
  11. Desai, Padma & Martin, Ricardo, 1983. "Efficiency Loss from Resource Misallocation in Soviet Industry," The Quarterly Journal of Economics, MIT Press, vol. 98(3), pages 441-56, August.
  12. Whalley, John, 1976. "Thornton's Estimates of Efficiency Losses in Soviet Industry: Some Fixed-Point-Method Recalculations," Journal of Political Economy, University of Chicago Press, vol. 84(1), pages 153-59, February.
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