International Economic Conference Progress Foundation 1991 The Challenge of Freedom: Fostering Market Enterprise in the Developing Democracies Proceedings Hotel Diplomat Prague, Czechoslovakia September 24, 1991 ECONOMIC EDUCATION BULLETIN Published by AMERICAN INSTITUTE for ECONOMIC RESEARCH GREAT BARRINGTON, MASSACHUSETTS About Progress Foundation Founded in 1968, Progress Foundation is an independent, noncommer- cial organization that supports scientific research concerned with ascer- taining the beneficial and detrimental influences in the progress of civili- zation. The seat of Progress Foundation is: Residence Falcieu, CH-6914 Carona, Switzerland. Communications address: Postfach 562, CH-8027, Zurich, Switzerland. About A.I.E.R. American Institute for Economic Research, founded in 1933, is an independent scientific and educational organization. The Institute's re- search is planned to help individuals protect their personal interests and those of the Nation. 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Subscription: $25 per year. POSTMASTER: Send address changes to Economic Education Bulletin, American Insti- tute for Economic Research, Great Barrington, Massachusetts 01230. The Challenge of Freedom: Fostering Market Enterprise in the Developing Democracies Contents Foreword 3 About the Participants 5 Proceedings 7 DEMOCRACY AND MARKET-ORIENTED REFORM — A LOVE-HATE RELATIONSHIP? Some Thoughts About the Interdependence of Systems in the Transition Stage from a Controlled to a Competitive Economy by Dr. Gerhard Schwarz 13 THE TECHNOLOGY OF FREEDOM by George Gilder 30 Questions and Answers 43 Conclusion 48 Foreword An advisor to the Politburo of the now defunct Soviet Union is said to have remarked on the eve of its collapse that trying to fashion a capitalist market economy out of the socialist rubble would be akin to trying to "make a stallion out of a gelding." Without question, the obstacles con- fronting a transformation of the command economies of Central and Eastern Europe to market-based enterprise are daunting. At the time of the demise of the communist order, most Eastem-bloc countries lacked even the most elementary features of a market economy — i.e., a legal struc- ture with the authority to enforce property rights, free pricing, open mar- kets, or sound money and credit. These features evolved only over centu- ries in the Western democracies and their development involved numer- ous conflicts, among them the American revolution and Civil War. And nowhere has the process of delivering productive resources into private hands or perfecting institutional safeguards to market-based enterprise yet been completed. Western economists nevertheless have been quick to offer advice to the former Iron Curtain countries on a wide variety of policy matters, from contracts and currencies to pricing and pollution. Not surprisingly, their analyses sometimes have been extraordinarily varied, if not contradictory. The presentations in the pages that follow generally reflect the diversity of views with respect to a number of crucial issues, notably the relation of democracy itself— and human freedom — to the process of establishing market economies in the formerly socialist nations. Provocative in this regard is Dr. Gerhard Schwarz's observation that, insofar as their capacity to effect change is concerned, authoritarian re- gimes possess many advantages over democratic ones. He cites recent experience as evidence that authoritarian regimes have demonstrated marked success in promoting market-based economies, and suggests that some form of "authoritarian democracy" may be necessary to manage a rapid transition from controlled to competitive economies. Far more controversial is his view that "An authoritarian regime es- pousing a market-directed economy ... limits automatically the duration of its power due to its unstable structure." The view that rising incomes tend to diminish and eventually promote the dissolution of authoritarian regimes is well known. As with Lord Acton a century ago, however, one is hard put today to find historical instances where charismatic leaders, such as Dr. Schwarz describes, established governments whose primary goal was to put themselves out of business. Where some analysts have identified obstacles to market-based enter- 3 prise in the emerging democracies, others have identified opportunities. Supply-side scholar George Gilder suggests that, if their leaders permit human freedom full expression, the technology of the microchip may enable countries such as Czechoslovakia to compete quickly and effec- tively in the world marketplace. Unhindered by the inertia either of bu- reaucracy, which threatens to thwart the entrepreneurial spirit elsewhere, or of the antiquated copper-and-wire technologies in which so much capital has been invested in the developed countries, the emerging democ- racies may enjoy a unique opportunity to leap frog their more developed competitors in the age of quantum technologies. Contrary to the view that authoritarian approaches may provide useful direction in this economic transformation, Mr. Gilder maintains that the new technologies will em- power individuals in ways that make hierarchical arrangements of almost any type, including government, obsolete. The remarks of Robert Holman, one of the leading economic advisors to the Czech government, suggest that whatever turn political and other events may take, the most valuable assets available today in Czechoslova- kia and the other developing democracies may be their human ones. Indeed, the Prague economists with whom the conference participants met would seem to have a far more sophisticated understanding of markets than do many Western economists. Equally important, as Mr. Holman's comments also may suggest, they would appear to have the political will to translate that understanding into action. In contrast to our own politicians, who toady to every interest group within reach, at least so far they appear to have the resolve to say: "Your concern is not government's business." Whether these champions of the market will become victims of a disappointed mobocracy, as im- plied by Dr. Schwarz's analysis, or whether they will end up "on top,*' as suggested by George Gilder's remarks, remains to be seen. In the mean- time, established democracies such as our own have the chance to observe an attempt to fashion what appears to be a genuinely liberal market order from which we ourselves might take lessons. About the Participants George Gilder, Senior Fellow of the Hudson Institute, is the author of the international best-seller Wealth and Poverty, which earned him worldwide recognition as one of the principal architects of the supply-side revolution in economics and provided the inspiration for the economic reforms, most notably the 1981 tax cuts, of the first Reagan Administration. A graduate of Harvard University, where he later taught as a fellow at the Kennedy Institute of Politics, Mr. Gilder was chairman of the Lehrman Institute's Economic Roundtable and Program Director of the Manhattan Institute. Currently he is a corporate Voting Member of the American Institute for Economic Research. He has written broadly on entrepreneurship and the promise of information technology and is a frequent contributor to a wide range of publications, including The Wall Street Journal, The Washington Post, and The National Review. Mr. Gilder is a leading critic of neo-liberal theories of "industrial policy" for high-tech industries. In this regard, two recent works, The Spirit of Enterprise and Microcosm: The Quantum Revolution in Economics and Technology, deal specifically with matters of vital concern to the emerging market economies of Central and Eastern Europe. Ing.