Why the Ex-Communist Countries Should Take the "Middle Way" to the Market Economy

The Eastern European countries have been trying to move to a market economy for the last six years. Most advice has been to go immediately to a fully capitalist market economy, but the difficulty of this route has become clear. No country has succeeded in making this great leap, and the attempt has entailed a great deal of suffering. This paper argues that a "middle way" with many socialist elements is an attractive path for these countries, particularly in the transition. The argument is that a society's economy should be compatible with its economic culture and its institutions, which change slowly. A model of the difficulty of institutional change is sketched. Moving to a workable market economy requires two things: stable property rights under the rule of law, and free markets in which firms must compete. Nevertheless, a genuine middle way can exist. While firms must be responsible for earning profits, the owners can include governments, workers, banks, and social institutions. Markets and property rights, as institutions, can benefit from government guidance and regulation in societies that lack accepted norms and laws to govern productive market behavior.