Property and decentralization

Property Property is a bundle of rights telling what you can do with something and what other people are prevented to do with it Property ≠ possession –car or house as a collateral for the loan –intellectual property is non-rival and non- excludable without regulations

Modern version of the Coase theorem Clear property rights are absolutely essential for economic activities –if transaction costs (TC) are zero (not realistic assumption), then it does not matter who has property rights –if TC are not zero (in reality TC are substantial), then it is important who has property rights (i.e. Grossman and Hart)

Questions To what property to assign rights –land (Mongolia vs. Europe) –clean air When and who –new minerals –radio spectrum –internet and file sharing How property rights to be secured –property rules vs. liability rules Public vs. private –what is more efficient –under what circumstances (institutions)

Public vs. private: Historical overview 1800’s => issued aroused with the development of capitalism 1850 => left wing view public property could be more efficient (Marx) 1920’s-1940’s Market socialist debates –Austrians (Von Mises, Hayek): importance of capital market for efficient allocation of resources, decentralized information (informational argument)=> socialists economy is inefficient –Neo classical (Lange, Lerner): resource allocation argument about Pareto optimality=> get socialist managers behave as if maximizing problems (no info and capital market problems)

Historical overview 1950’s and 1960s Shumpetrians –evolutionary economics (natural selection) –role of business cycles in selection (creative destruction) –role of innovations, new organization of production processes, new products + disequilibrium “flawed, patched-up private enterprise” still better then socialist enterprise

Private enterprise Three virtues –administrative parsimony (poor managers have less resources, less influence on the economy; self selection process) –responsiveness (incentives, rewarding those who doing well) –innovativeness of the market (diversity of ideas generated by market > choose best in the process of evolution) Uncertainty, incomplete information, high transaction costs are inputs Firms are routines, only the fittest routines survive in the process of selection

Private enterprise and market economy Paradox: how rigid organizations (firms) generate flexible economic system Solution: natural selection throws away bad firms (creative destruction). Shumpeter’s view on business cycles as a cure for the economy Question: what institutional structure is the best for the natural selection process?

Public vs. private? Very much conditional on the institutions –economic theories (1930’s resource allocation, now transaction costs) –surrounding economic events empirical e.g. GB privatization failure of the Soviet socialism influences views on public property Size and corporate governance: –small, closely held firm (owner=manager)=> private is better –large firms: separation of ownership from control direct government regulation => no conclusive evidence

Politicians and firms Beginning of transition in the Soviet Union –need for privatization quickly or slowly? which firms to privatize first? was it for institutions to be constructed first or privatize immediately and create institutions later? Washington consensus – simple strategy of reforms that fits all countries: 1.stabilization 2.price liberalization 3.privatizations 4.institutions