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. stabilization2. price liberalization3. privatizations4. institutions