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Viability, Economic Transition and Reflection on Neoclassical Economics

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  • Justin Yifu Lin

Abstract

Many transition policies, based on the existing neoclassical economic theories, failed in Eastern Europe, the former Soviet Union, and China. This paper argues that the failure is due to the implicit viability assumption of neoclassical economics. The existing neoclassical economics implicitly assumes that a firm is expected to earn a socially acceptable profit in an open, competitive market as long as the firm has normal management. However, many firms in socialist as well as transitional economies are not viable, that is, they will not be able to earn a socially acceptable profit in an open, competitive market even if they are under normal management because they are in sectors that are inconsistent with their economies' comparative advantages. Under the viability assumption, neoclassical‐based reform policies focus on issues related to property rights, corporate governance, government interventions and other issues that may obstruct a firm's normal management. However, many of these issues are in fact endogenous to the firms' viability problem. Therefore, without resolving the firms' viability problem, such reforms fail to achieve their intended goals. Not only in socialist and transition economies but also in many developing economies there exist many nonviable firms. This paper suggests that the viability assumption in neoclassical economics should be relaxed when analyzing socialist, transition and developing economies.

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  • Justin Yifu Lin, 2005. "Viability, Economic Transition and Reflection on Neoclassical Economics," Kyklos, Wiley Blackwell, vol. 58(2), pages 239-264, May.
    • Handle: RePEc:bla:kyklos:v:58:y:2005:i:2:p:239-264
    DOI: 10.1111/j.0023-5962.2005.00287.x
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    Cited by:

    1. Justin Yifu Lin & Peilin Liu, 2005. "Development Strategies and Regional Income Disparities in China," Development Economics Working Papers 21984, East Asian Bureau of Economic Research.
    2. Weede Erich, 2006. "Globale Ordnungspolitik im Zeitalter amerikanischer Hegemonie: Kritische Anmerkungen dazu, wie man Demokratie und Kapitalismus nicht verbreiten kann / Global Order in the Era of American Hegemony," ORDO. Jahrbuch für die Ordnung von Wirtschaft und Gesellschaft, De Gruyter, vol. 57(1), pages 371-392, January.
    3. David Aristei & Cristiano Perugini, 2014. "Speed and Sequencing of Transition Reforms and Income Inequality: A Panel Data Analysis," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 60(3), pages 542-570, September.
    4. K. Thomas, 2022. "Amending China’s Notion of a “Consumer”: Lessons from Comparative Analysis of the PRC Consumer Protection Law," Journal of Consumer Policy, Springer, vol. 45(3), pages 435-456, September.
    5. Pasquale Tridico & Maria Lissowska, 2010. "Approaches, Hopes and Reality in Transition Economies," QA - Rivista dell'Associazione Rossi-Doria, Associazione Rossi Doria, issue 4, December.

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