A political economy approach to the neoclassical model of transition

Abstract

The neoclassical model of transition from a centrally-administered socialist economic system to a market-based economic system was implemented in Russia and Eastern Europe. The neoclassical process took the form of either shock therapy or gradualism. However, each approach actually involved a combination of shock therapy and gradualist policies, making the distinction between the two approaches unfounded. In addition, both approaches suffered by the innate inadequacies of neoclassical economic analysis as being politically/institutionally naked. Both shock therapy supporters and gradualist neoclassical economists did not provide a specific process of institutional development, favouring a gradual market-driven institutional outcome. With regard to the political structure, democracy was inconsistent with shock therapy, while active state intervention during transition was inconsistent with the ultimate goal of the gradualist neoclassical economists of competitive capitalism.