Innovation in the Market and under Central Planning, 7th Nov., 2010

I thought I’d focus on the causes of change within a society.  Mainly, why do countries change their economic system?

Two reasons came to my mind.  The first is deteriorating conditions, such as lower standards of living or outright starvation. The second is comparison between living conditions between economies, or in other words: keeping up with the Joneses.

This may explain the background behind the People’s Republic of China and other Chinese societies that have chosen more market-oriented economies, such as Hong Kong, Singapore, and Taiwan.

However, this correlation would not be as strong in a closed, authoritarian country.  This theory does not hold up when compared to North and South Korea. (All data from Maddison, 2003.)

I borrowed Comparative Economic Transformations: Mainland China, Hungary, the Soviet Union, and Taiwan by Yu-shan Wu from the Armacost Library.  The key question he/she (?) asks is “What causes an authoritarian regime that fully controls a society to restructure its economy?” (Page 2.)  The three principles of Roman Law are considered in defining property rights, the foundation of an economy. (Page 4.)

1. usus (the right to use the thing)
2. fructus (the right to the proceeds of a thing)
3. abusus (the right to dispose of a thing)

Usually, command economies have transitioned to either market socialism or state capitalism.

“[T]hree historical cases stand out as offering the greatest potential for making comparisons with the PRC in the area of restructuring industrial property rights: Hungary in the late 1960’s and the 1970’s, the Soviet Union in the late 1920’s, and the Republic of China (ROC) in Taiwan in the 1950’s and early 1960’s. [ . . . ] Each had experienced a major liberal institutional change in agriculture before making the critical decision to reform is property rights structure. In Hungary, it was a marketizing reform in agriculture that followed the completion of the recollectization drive of the 1960’s. In the Soviet Union, it was the shift from requisitioning under War Communism (voennyi kommunizm) to a single tax in kind under the New Economic Policy. In Taiwan, it was the “land-to-the-tiller” reform of the 1950’s. In the PRC, similar changes were made in agriculture under the household responsibility system. The causes of these agricultural reforms are similar: the desperate desire of the elite to boost regime legitimacy by radically changing property rights structures in order to motivate peasants to increase food production in the aftermath of a major national disaster. The suppression of the 1956 popular uprising and the recollectivization campaign in Hungary, the catastrophic civil war and War Communism in the Soviet Union, and the effects of land reform in mainland China and the squashing of a serious local rebellion in Taiwan forced the ruling elite in each country to take drastic measures to assure that the most basic needs of the population were met. This was also the case in the PRC, which introduced agricultural reform in the aftermath of the disastrous Cultural Revolution decade.” (Page 12-13.)

This brings me to the next book that I am consulting: Diffusion of Innovations by Everett M. Rogers.  In it, diffusion is defined as “the process by which an innovation is communicated through certain channels over time among the members of a social system.” (Page 5.) The four main elements in the diffusion of innovations are “the innovation, communication channels, time, and the social system.”

Discussing centralization, Rogers writes,

 “Centralization is the degree of which power and control in a system are concentrated in the hands of relatively few individuals. Centralization has usually been found to be negatively associated with innovativeness; that is, the more that power is concentrated in an organization, the less innovative the organization tends to be. The range of new ideas in an organization is restricted when a few strong leaders dominate the system. In a centralized organization, top leaders are poorly positioned to indentify operational-level problems, or to suggest relevant innovations to meet these needs. Although the initiation of innovations in a centralized organization is less frequent than in a decentralized organization, the centralization may encourage the implementation of innovations, once the innovation-decision is made.” (Page 379-380.)

Sounds like Reform and Opening.