Professor Steven Horwitz Spring 2000

108 Hepburn Hall MWF 9:40 -10:40

229-5731 (office) 12 Hepburn Hall

379-9737 (home before 9pm)

Office Hours: T, Th 1 -3 and by appointment

Email: sghorwitz@stlawu.edu Web: http://music.stlawu.edu/shor

What makes nations prosperous? That question is as old as the discipline of economics, as Adam Smith's The Wealth of Nations demonstrates. That's also the question we are going to try to answer this semester. More specifically, we want to explain why the Western world offers a higher material standard of living (by most measures) than other places around the world. Are Westerners smarter, better people? Nope. Do we have better technology and education? Perhaps, but that could also be an effect of wealth, not its cause. What does seem different here is the kinds of social and economic institutions we have. It is those institutions that are the primary, although not only, explanation of "how the west grew rich." In this course we will take a broad perspective on the history of the economies of the West, East, and Third Worlds by comparing the kinds of economic institutions generally found in each. A discussion of the economic arguments for markets and planning will provide the theoretical framework for some detailed exploration of the rise of capitalism in the West, the rise and fall of socialism in the East, and the influence that both systems, along with colonialism, have had in the Third World.

With the collapse of non-market economic systems around the world, every economy is now a market economy of one sort or another. What does differ among the various economies of the world are the particular institutions they have used, both in the past and the present, to facilitate economic coordination. The historical development of these institutions, their relationship to political and economic theory, and the degree to which they can and have produced increases in human welfare will be our primary concern this semester. The "thesis" of this course is that those societies that have evolved and cultivated institutions that create and protect property rights and encourage the development of market exchange and financial intermediation have tended to be healthier and wealthier than those that have not. Furthermore, such institutions work well because they tend to evolve from the "bottom up" through the unplanned but orderly actions of the individuals who make use of them. The greatest failures in economic history have occurred when people thought humanity was smart enough to consciously override these spontaneously evolved institutions.

There is no textbook per se for this class, though there are four required books as well as a heavy outside reading list. If you have trouble either reading complex material or coming to class regularly, you may want to think twice about this course. This class will also involve more writing than most other economics courses. I take writing seriously and my standards are high and firm. If you have problems writing, you may also want to think twice.

ASSIGNMENTS AND GRADES

Your grade will be based on three medium-length papers, a comprehensive final exam, an interactive electronic journal, and class participation/attendance. The three papers will count 18% each and will be 5-7 pages in length and will cover one topic each. You will have a choice, though limited, as to the exact question you will address, but you all will be working on the same general topics at the same time. Topics will be distributed at least one week before the papers are due. Before the first paper is due, I will distribute a guide for writing papers that will indicate what I expect in terms of content, documentation, and presentation. READ THAT GUIDE. I will assume that you have read and understood it, and I reserve the right to lower grades for failure to comply with what is there.

You will also be required to rethink two of the three papers. You may choose the ones you wish to rethink, but keep in mind that I expect significant work on a second draft. You must decide to do a second draft before the next paper is due. In other words, you can't decide after the next paper to rewrite the previous one. As part of your process of rethinking you MUST schedule a writing conference with me, outside of class, to talk about how you plan to proceed on the second draft.

The interactive electronic journal requires that you understand how to use email with software such as Netscape or Explorer or Eudora, and know how to attach a Word file to an email. What will be required of you is to create a Word file that includes your reactions/responses to one of the readings or to the class discussion and send me that file at least 10 times during the semester. I will comment on your responses and pose some questions and issues of my own. Over the course of the semester, this be an intellectual journal of your experience in this course, as well as a way for us to interact one-on-one. I will grade your journals at mid-semester and again at the end of the course for a total of 15% of your grade.

The final exam (18%), which will be open books and notes, is a chance for you to address some of the term's major topics in a more structured way. Class participation/attendance is expected in a class this small and counts for 13%.
 

Assignment	Grade %		Grading scale:
Paper #1	18%		4.0 (93-100)
Paper #2	18%		3.5 (88-92)
Paper #3	18%		3.0 (83-87)
Interactive electronic journal	(7% / 8%) 15%		2.5 (78-82)
Class participation and attendance	13%		2.0 (73-77)
Final Exam Tues May 9th 8:30am	18%		1.5 (68-72)
			1.0 (60-67)

Topic (approximate # of classes) Reading

-----------------------------------------------------------------------------------------------------------------

INTRODUCTION (3)

Course overview/syllabus

First, second, and third world B (1), RB (1)

Capitalism vs. socialism H (intro)

We begin the semester with an overview of main themes and subjects. In particular, there are two central issues that we will want to address from the start: the relationships among the first, second, and third world, and the relative merits of capitalism and socialism. In this first week, we will introduce some terminology and try to lay the groundwork for the theory and history that will occupy us the rest of the course.

THE POLITICAL ECONOMY OF MARKETS AND PLANNING (9)

Spontaneous order and social institutions H (1-6)

Marxism in one lesson Marx; E (pp. 31-75)

The socialist calculation debate Mises; Lange

The knowledge problem Hayek; Lavoie

One of the defining characteristics of many strands of socialism is a belief in the power of human reason to construct a social order that is more rational and more just than the status quo of supposed capitalism. We begin this section by critically assessing this belief in the power of reason and science and discuss whether society has in fact been created by reason, and whether it in theory can be so created. We will then turn to the fundamental concepts of Marxism, such as commodity production and the labor theory of value and provide an overview of his concepts of alienation and exploitation. In so doing we will try to show how Marx's theoretical ideas might be translated into political-economic action and institutions. After the deaths of Marx and Engels, socialism grew in popularity, culminating with the Russian Revolution in 1917. In the meantime, economists were trying to come to grips with Marx's theory. In 1920, Ludwig von Mises argued that because it did not have private property in the means of production, a socialist society would be unable to determine whether it was using resources in an efficient way. This struck at the heart of Marxian arguments that planning would be more rational, and hence more productive, than markets. We will look closely at Mises's arguments and the ensuing debate over the possibility of rational resource allocation outside of the market.
 

THE RISE OF THE MARKET ECONOMY IN THE WESTERN WORLD (9)

An overview B (3)

The role of financial and legal institutions B (2)

From the middle ages to industrialization RB (2-5)

Technology and economic institutions RB (8)

The results Cox and Alm

Western economies (i.e., North America, the former British empire, and Western Europe) are largely characterized by a wider scope of market-driven coordination than those of elsewhere in the world. This section looks at the historical evolution of market institutions in Western Europe to try to explain why markets arose when and where they did and why markets have produced the levels of economic well-being that they have. Our main conclusion will be that the keys to economic development are social institutions that protect property and facilitate exchange. Because of the decentralization of political power in Europe in the middle ages and afterward, such institutions were able to evolve in particularly effective ways. Contrary to what many believe, technology and science alone cannot explain the wealth of the west - rather technological development is one of the results of the increased wealth caused by sound social and economic institutions. We will also take a brief look at the historical increase in living standards experienced by the Western world.

THE RISE AND FALL OF THE "PLANNED" ECONOMY (and what to do now) (10)

The rise of Soviet planning Boettke (1988)

The institutions of planning Anderson and Boettke

The results Kornai; Schroeder

Problems of reform Boettke (1993)

Reform and corruption in China and Russia Sun

This section will examine the rise and fall of the "planned" or administrative-command economy (ACE). We will start by looking at Lenin's disastrous attempt to put his view of Marxism into practice in Russia (War Communism) and how that, and the New Economic Policy that followed it, unintentionally lead to Stalinism. Stalin's five year plans were the foundation of the former Soviet economy, and we shall examine how that system worked in practice, both then and in more recent years. We will also compare the performance of ACEs across Eastern Europe to Western market-based ones, and attempt to offer some explanations for the differences. In this discussion, we will apply the lessons of the calculation debate to help us make sense of the problems of ACEs. We will also discuss the difficulties in generating true reform when those in power are reluctant to part with that power, as well as the proper role of the governments of market-oriented economies. This will lead us to discuss the role of constitutional constraints on political power and the effects of corruption on the reform process, focusing on the differences between China and Russia.
 
 

MARKETS, PLANNING, AND DEVELOPMENT IN THE THIRD WORLD (8)

The west and the third world Bauer

Population and institutions Simon; H (8)

Institutions and results in India and Africa B (5, 6)

The radical case of Tanzania Scott

The role of international aid B (7)

Privatization and indigenous institutions B (11)

The theoretical debates over markets and planning and the historical lessons of really-existing socialism surely have implications for the recommendations we might make to policy makers in the Third World as they try to increase economic growth. Determining those implications requires that we ask whether Third World poverty is a result of Western exploitation, overpopulation, or mistaken policies and missing institutions in those countries. After exploring (and rejecting) the first two explanations, we will look at the interaction between government intervention and indigenous institutions in India, Africa, and Tanzania. The dominant policies since World War II have assumed the need for political planning and foreign aid for underdeveloped economies. We will critically assess those claims. The major question that will interest us is to what degree can the historical experiences of the economic growth in the western world be transplanted or repeated elsewhere? Were the experiences of Western Europe unique? Were some unique and some transferrable? If so, which? What does the rise of the west suggest about how to get the south to rise as well?

SUMMING IT ALL UP: IDEAS, INSTITUTIONS, AND DEVELOPMENT (1)

Grand conclusions? RB (10)

In the final week of class we will try to summarize our main discussions and draw some general, if not grand, conclusions from the course. The final chapter of the Rosenberg and Birdzell book does a nice job in comparing their perspective on the rise of the west to several competing ones. Those issues will be come to the forefront as we conclude the course.

BIBLIOGRAPHY

Books:

Boettke, Peter, ed.. 1994. The Collapse of Development Planning, New York: NYU Press.

Engels, Frederick. 1892. Socialism: Utopian and Scientific, New York: International Publishers.

Hayek, F. A.. 1989. The Fatal Conceit: The Errors of Socialism, ed., W. W. Bartley III, Chicago: University of Chicago Press.

Rosenberg, Nathan and L. E. Birdzell. 1986. How the West Grew Rich, New York: Basic Books.

Articles:

Anderson, Gary and Peter J. Boettke. 1997. "Soviet Venality: A Rent-Seeking Model of the Communist State," Public Choice 93: 33-53.

Bauer, P. T.. 1981. "Western Guilt and Third World Poverty," in Equality, the Third World, and Economic Delusion, Cambridge: Harvard University Press.

Boettke, Peter. 1988. "The Soviet Experiment with Pure Communism,"Critical Review 2, 4: 149-82.

___________. 1993. Why Perestroika Failed, New York: Routledge, chs. 5-6.

Cox, W. Michael and Richard Alm. 1997. "Time Well Spent: The Declining Real Cost of Living in America," 1997 Annual Report, Federal Reserve Bank of Dallas: 2-24.

Hayek, F. A.. 1940. "The Competitive Solution," in Individualism and Economic Order, Chicago: University of Chicago Press, 1948.

Kornai, Janos. 1992. The Socialist System: The Political Economy of Communism, Princeton: Princeton University Press, ch. 13.

Lange, Oscar. 1936. "On the Economic Theory of Socialism," (abridged) in On the Economic Theory of Socialism, ed., Benjamin Lippincott, New York: McGraw-Hill, 1964.

Lavoie, Donald. 1985. National Economic Planning: What is Left?, Cambridge, MA: Ballinger, chapter 3.

Marx, Karl. 1871. Capital, New York: Modern Library, selections.

Mises, Ludwig von. 1920. "Economic Calculation in the Socialist Commonwealth," reprinted in Collectivist Economic Planning, F. A. Hayek, ed., Clifton, NJ: Augustus M. Kelley, 1975.

Schroeder, Gertrude. 1991. "The Dismal Fate of Soviet-Type Economies: Mises Was Right," Cato Journal 11 (1), Spring/Summer.

Scott, James C. 1998. Seeing Like a State, New Haven: Yale University Press, ch. 7

Simon, Julian. 1996. The Ultimate Resource 2, Princeton: Princeton University Press, ch. 34.

Sun, Yan. 1999. "Reform, State, and Corruption: Is Corruption Less Destructive in China than in Russia?" Comparative Politics, October.

SUPPLEMENTARY READING LIST

If you are interested in following up on any of the ideas or topics we discuss this semester, you might consider looking at other parts of the books on the required reading list or some of the books or articles below. Many of these books can be obtained at ODY or through inter-library loan.

THE EVOLUTION OF THE MARKET ECONOMY

Hayek, F. A., Individualism and Economic Order, Chicago: University of Chicago Press, 1948.

Ayittey, George B. N., Africa Betrayed, New York: St. Martin's Press, 1992.

DeSoto, Hernando, The Other Path, New York: Harper and Row, 1989.

Osterfeld, David, Prosperity and Planning, New York: Oxford University Press, 1992.