ISSN 1211-0442


On Market Consequences of post-Communist Immorality

Ján Pavlík

This article has been elaborated in the frame of the research project
„F. A. Hayek and the Theory of Spontaneous Order“
supported by the Grant Agency of the Czech Republic (Reg. No. 402/99/0848)


Keywords: formal and informal rules, immorality, misinterpreted slogans, ”tunneling,” fraudulent conveyances, voucher rivatisation, bazaar economy, human capital

1. The heritage of Communist immorality

During its functioning, the Communist system exerted devastating impacts on almost all achievements of human culture and civilisation – on religion as supporting the observance of catallactic rules,1) on people’s respect for law, on their moral attitudes and veracity; it implies that it destroyed almost completely also what Douglas North calls ”informal constraints” (i. e. ideologies, altruism, and self-imposed standards of conduct) which prevent people from shirking, cheating and stealing even if offered to do so with impunity.2) Therefrom follows that among the people in the post-Communist countries, the worst kind of man’s relation to catallactic rules – legality in Kantian sense – has become widespread and taken as standard. This simply means that people breach the rules on each occasion when there exists a high degree of probability that their breaching the law will not be punished by law-enforcing institutions.

Here, it is necessary to show the specific circumstances and conditions which nurture people’s regarding the rules as a kind of necessary evil even after they freely imposed the corresponding legal structures and institutions upon themselves through the mediation of their freely elected representatives. First of all, it is necessary to keep in mind that under Communism, the moral attitudes of people were confined to personal interactions; people respected moral norms in relation to the members of their families, to their friends and maybe to some nomenklaturists who helped them notwithstanding that those Party aparatchiks always expected or required reciprocal services. On the other hand, people lost therewith the ability to feel a moral obligation to purely formal, abstract and impersonal catallactic rules. (When they came under the atheistic propaganda, they had no God who would personally guarantee the validity of the rules; nor were they educated in Kant’s philosophy which argued for the unconditional validity of formal rules.) Moreover, the exchange of privileges which was people’s most usual pseudo-market practice under Communism (and wchich was based on purely personal interactions) is in contradiction to the principle of rule of law and also to the Golden Rule (or the categorical imperative) because it has an immediately invisible consequence – namely, it inevitably damages some non-privileged persons. In addition, the practice of exchanging privileges was even at variance with the Communist law, which officially preserved the principle of rule of law. 

Thus, when the people who experienced under Communism that their most important economic problems had to be solved in the sphere of personal interactions, enter – in the transition period – into impersonal economic interactions where their action influences some other people who are not known personally to them, they feel no moral obligation to such people and have no hesitation to breach the rules prescribing the form in which the interactions should proceed.3)

In this context, it seems to be relevant to mention an important difference between the historical origins of capitalism in the 16th-17th century and its contemporary revival in the post-Communist countries. The members of the rising capitalist class sought to rank with aristocracy and therefore included into their value hierarchy also personal honour and dignity which were the principal values of aristocracy; precisely the acceptance of these values helped the early capitalists (and also their descendants) avoid the breaching of catallactic rules. Simply speaking, they regarded the observance of rules to be a point of honour. (The same is true about the Japanese capitalists since 1868.) In the post-Communist countries, however, it is fully impossible to repeat or reproduce those ethical developments not only because aristocracy and its values were attacked by the Communists in an especially furious manner, but also for the reason that the plebeian hatred of  aristocracy finds a massive support in contemporary democracy and in what Ortega y Gasset called the ”rebellion of the masses.” It implies that in breaching the catallactic rules, a post-Communist entrepreneur is not afraid of the fact that his dishonest behaviour will bring him dishonour or that he will lose face. In our anonymous society, such a person can move to another city or country where nobody knows his story and where he can contentedly spend his money. And even if his solecism were made public in media, it would be forgotten very soon due to the great amount of information, which attacks our mind in our post-modern age. Moreover, in a country where post-modernistic relativism penetrated deeply into the world of mass media, he could defend his ”honour” very effectively saying that from his point of view he is true and innocent.

All of this prevents people from interiorising formal rules and keeps their attitudes at the lowest possible level (i. e. the level of Kantian legality); needless to stress that the secular character of contemporary society (which culminated in Communist atheism) and the widespreading of post-modernistic relativism, too, prevent people in the post-Communist countries from interiorising catallactic rules. Namely, the interiorisation presupposes to find an absolute basis for the observance of rules and this is possible only with the aid of religion and non-relativistic philosophy, precisely as it was in the case of the early capitalists. 

2. On the demoralising impacts of some incorrect or misinterpreted conceptions and slogans as applied to transformation policies

2.1. The fall of the utopian ideals of the ”Velvet” Revolution in Czechoslovakia

It must be stressed that the famous ”Velvet” Revolution in Czechoslovakia was a kind of moral revolt against the ”living a (Communist) lie” and in favour of democratic citizens’ rights. Its leaders, especially Vaclav Havel, did not understand at the beginning, that freedom of speech, freedom of thought, of the press, freedom of religion, freedom from imprisonment without trial cannot be preserved in the absence of economic freedom and private property.4) As dissenters living before the revolution in small informal groups, they wanted to install a version of distributive justice which was a synthesis of the Ancient Greek understanding of this principle and some existentialist motives inspired by Heideggerian philosophy; they even believed that the revolution would lead to the ”unpolitical politics,” i. e., to the subordination of politics to morality defined in terms of the ”care of the soul through the care of the POLIS.” The new morality, as brought about by an ”existential revolution” in man’s heart (instead of being based upon a return to the observance of catallactic rules), should have meant man’s emancipation not only from totalitarian ”living a lie” but also from his being ”alienated” in the market economy and pluralistic democracy. In a Messianist mood, Havel perceived himself as the saviour of both the Communist world and the Western civilisation lacking a deeper sense of human existence. In fact, this moral utopianism with its orientation against the capitalist ”alienation,” made people (in the first periods of the revolution) to believe that after the political changes they would, cynically speaking, ”work in the Communist way and live in the capitalist one.” 

Havel’s programme of the ”Velvet” Revolution was so unrealistic and utopian that it necessarily had to fail when it was face-to-face with reality. This became explicit when he tried to apply his extreme moralism to practical policies. In the first days of his being in the position of the president, he, e. g., tried to stop production in the Czech and Slovak armament industry – in order that the Czechoslovak approach should become the paradigm for the rest of the world.5) One of Havel’s adherents from the dissent era, being in the position of Minister of Education tried to apply the utopian ideals of the president in such a way that he even recommended all Czech teachers to repent their sins in having taught Communist ideology.

Later, the Czech and Slovak citizens found out that some of the dissenters were not so incorruptible as their ideology prescribed. Many of them were reformed Communists from 1968 and their behaviour after their being installed to various political positions corresponded to the image of arrogant Communist functionaries. Many citizens’ reaction was a standard one: after being disappointed by allegedly perfect moral leaders, they turned to the opposite extreme – to the distrust in moral principles and to a cynical materialism. This would not have proceeded if Havel and his followers did not evoke so non-realistic (and in some aspects anti-capitatalistic) moral expectations. Havel was disappointed, too – similar to the French Jacobins during and after the Thermidor when they found out that the ”selfish” citizens neither shared their abstract moral ideal of republican virtues nor wanted to be coerced to morality by the state power.

2.2. Public immorality as resulting from misrepresented slogans

In the course of the transformation process, the Czech reform politicians carelessly formulated some statements and slogans which have been promptly misrepresented by journalists and speakers of opposition parties; this led to a kind of serious misunderstanding because the misrepresented form of those statements and paroles, as having been broadly popularised in mass media, became accepted by the public (and, of course, by economic agents) as the official programme of transformation policy. E. g., at the beginning of the transformation process, Czech Prime Minister stated: ”We cannot discern between sound money and dirty money.” The journalists’ misinterpretations of this statement resulted in the fact that until now, the Czech citizens have a firm belief that Vaclav Klaus said that ”there exists no dirty money.” Klaus’s original statement, as being understood in this distorted form, had thus some very negative ”unintended results” consisting in the erosion of citizens’ moral relation to the catallactic rules and even their respect for law and order.

Similarly, many citizens (and especially many economists and politicians) in the Czech Republic believed – and some of them believe until now – that the economic transformation under the leadership of market-oriented political parties proceeded in accordance with the following programme: “It is necessary to switch off the light and wait awhile in the darkness; then we will switch on – and will see an accomplished capitalism.” This very peculiar formulation of ”liberal” policy (where ”darkness” is a symbol for complete absence of not only morality but also legality) has nothing to do with classical liberalism;6) moreover, in the mind of Czech citizens (who, for the most part, were trained in Marxist economics under constraint), it very intensively recalls their previous learning of Marx’s theory of ”original accumulation.”7) 

The slogan about ”switching the light off and on” suggested that the re-establishing of capitalism in transition period could proceed only as a repetition of that ”original accumulation,” with the difference that the point of departure of contemporary transition was the system of Communist ownership where all citizens were formally equal co-owners of the state property. The privatisation is accordingly nothing but a division of the homogeneous mass of the co-owners of the state property into two different classes – into the class of the owners of means of production and into the class of non-owners or mere employees; this division proceeds inevitably by means of brutal power and political coercion and such practices as bribery and corruption. 

The historical experience after 1989 seems to confirm that such an era of ”darkness” between the beginning and end of the transition process has really proceeded and can have various forms. One of them is Slovak privatisation under Meciar’s government when the ruling party assigned to itself and its coalition partners such quantities of the property for privatisation which was in direct proportion to the ratio of votes they acquired in elections; this property was later distributed among the leaders of parties in accordance with their political weight. This practice had a kind of legal façade under the name ”direct privatisation.” 

Another version of privatisation ”in the darkness” can be found in Russia where the decay of the Communist party led also to the crash of the central authority of the state. The nomenclaturists used the networks of personal relations and acquaintances in the sphere of power (and also in economic sphere) and with the support of their ”feudatories” privatised large amounts of property. Bribes, blackmailing, breaking contracts, ordering murders of debtors, creditors and competitors, etc. have become an integral part of everyday economic life in this peculiar ”capitalism” in which there can be drawn no boundary between economy and crime. In this context it should be added that Gray’s characteristic of today’s Russian system as the ”anarcho-capitalism of the mafia” is not very correct because it suggests that mere strengthening of the authority of state would improve the situation; in fact, no state coercion can maintain the rule of law in a country where formal rules are not rooted in the vivid consciousness and conscience of people and where there exists even no historical memory of former legal traditions to which the contemporary policies could be related.8) The rise of state control (now without any unifying utopian ideology based upon distributive justice) would be ineffective because of the corresponding rise of bribery and corruption. 

The ”darkness” in the case of Czech Republic is somehow different. Having taken into account the expectations of people after the ”Velvet” Revolution (and, of course, the historical traditions connected with the Czechoslovak democracy before World War II), the leaders of economic reform in former Czechoslovakia decided to give the process of privatisation a solid legal framework. The reformers also knew that after forty years of living in Communist society, a major part of the population regarded the idea of economic and social inequality as unbearable and unjust; and, eventually, they became aware of the fact that transformation would be irreversible only if each citizen’s self-interest would nurture it. This is why they put into practice the voucher method of privatisation which consisted in each adult citizen’s having formally equal opportunity to acquire a portion of formerly state-owned property. Besides, in the process of changing vouchers for shares each citizen was supposed to be able to use practically the same amount and quality of information about the real value of shares (because of the simple fact that the real value of almost none of state enterprises could be known in advance, before the entering of those enterprises into real market relations).

In furthering the step of the voucher method individual shareholders and mutual funds should have started to sell and purchase their shares on the stock market. In considering the undesirability of a Volkskapitalismus (where each citizen is a shareholder and thereby a capitalist, and where, consequently, the ownership is extremely spread out), it was tacitly expected that 1) only a certain part of population would participate in the voucher privatisation, and 2) the major part of new individual shareholders would be willing to sell their shares to other individual shareholders, or to mutual funds in order to get an amount of money in cash and simply spend it. Thus, the people who prefer consumption to investing, or the certainty of a smaller amount of money to the risky possibility of a larger amount, were expected to cease to be shareholders – and thereby become non-owners of the means of production. On the other side, people who will retain and purchase shares (e. g., for money borrowed in a bank), who in this way prefer investing to consumption, or the risky chance to certainty, will become capitalists.

We can see that inequality in the ownership of means of production starts here from voluntary exchange; in other words, the difference between capitalists and employees emerges here as a kind of spontaneous order. The deliberate activities of the legislation and government only build up and maintain the formal rules which are a necessary condition for that spontaneous emergence. As a matter of principle, the voucher method of privatisation is just the opposite to the alleged ”original accumulation.” Nevertheless, as concerns the other methods of privatisation used in the Czech Republic (direct sale and public tender), they still remain under suspicion of having been unable to face bribery, corruption and what we have called the ”exchange of privileges.”

The real results of voucher privatisation have come up to expectations only partly. After a massive advertisement done especially by the Harvard Investment Fund (Viktor Kozeny) which promised 10.000 CzK per voucher booklet, more that 70 per cent of Czechoslovak citizens decided to participate in this form of privatisation. The political consequences of this fact were positive because the majority of Czech population has become personally interested in the success of economic reform; nevertheless, the main economic target of voucher privatisation – i. e. the spontaneous emergence of clearly cut owners of means of production, who would be motivated by their self-interest to maximum effort in using their mental capabilities and to the maximum care for their property – has not been reached. Instead of this, a major part of privatised property was concentrated in the hands of several big investment funds founded mostly by state-controlled banks. The managers and trustees of these mutual funds were fully satisfied with the incomes coming from their positions (these incomes were derived from the overvaluated property in the funds’ portfolio) and did not care about the improvements in governance control in the privatised enterprises. 

The fact that besides big mutual funds there existed also a lot of middle-scale funds and investment companies and plenty of single shareholders, led to the dispersion of ownership. In addition, the funds preferred gaining profits from selling and purchasing their shares to the exertion of managerial activities. This resulted in permanent changes of owners precisely at those times when many enterprises were in critical situation and needed to be reformed by a truly capitalist owner; thus, voucher privatisation produced a very peculiar sort of indeterminate and anonymous ownership. The non-transparent character of ownership was strengthened by the fact that banks (through the mediation of their mutual funds) became shareholders of enterprises whereas mutual funds and investment companies owned, in turn, the shares of banks; these interconnections diluted the controlling function of banks, which prevented loss-making enterprises from going bankrupt.

Moreover, the managers and trustees of the mutual funds, having no feeling of responsibility to the masses of single shareholders whose interests they ought to have represented, started to apply very soon the practices of fraudulent conveyances. These and similar practices led to the expropriation of single and minority shareholders. Then, Tomas Jezek, one of the fathers of voucher privatisation and a persuaded Hayekian, started to call for a subordination of capital market to strict rules which would make the violating of minority shareholders’ rights impossible.9) And, as a reaction to this call, some important economists started to speak about the above mentioned ”switching off and on,” which should have expressed that from their standpoint, the forming of a concentrate ownership, be it via semi-legal or even illegal practices, was more important than maintaining a strictly legal form of economic transformation; their main reason was that insisting upon legality would preserve the dispersed and indeterminate character of ownership.10)

The dissemination of the ”switching off and on” slogan had really a devastating impact from the moral point of view, and contributed essentially to what President Havel called ”foul mood” in the Czech society; it evoked a wave of criticism of the voucher privatisation, especially among the Social Democrats who called it the ”greatest pilferage of our century.” In these cries, the positive impacts of the voucher method were almost entirely ignored.

The fact that Klaus’s government did not react more resolutely against various semi-legal and illegal methods in transferring property (it applied some legal measures in order to stop them but these measures showed to be insufficient) evoked an impression among the public that the government tacitly supported the ”switching off and on” programme and that the reformers admitted that economic reform in the frame of rule of law was impossible. In consequence, all frauds and pilferers felt to be justified in their dirty methods – especially when they adopted also the misrepresented version of the above mentioned statement about dirty money. 

On the other hand, honest citizens’ confidence in a possibility of a legal way from serfdom was eroded. Since some of them believed that instead of the principle of rule of law the reformers recurred to a sophisticated version of the theory of ”original accumulation,” they started to support the Social Democrats’ criticisms of the liberal approach to the transformation. Thus, Marxist theory of ”original accumulation” which forms the background of all these critical attitudes, is something like a Parthian shot of decaying Communism, a shot penetrating very deeply into the thought of both some important economists and ordinary people, and causing heavy wounds to serious reform movement.

Moreover, the citizens in post-Communist countries had many opportunities to experience that the practice of allowing the economic agents to use semi-legal or even illegal ways to acquire ownership would hardly lead to the forming of truly capitalist owners; they saw that pilferers would always prefer pilfering to hard and creative work.11)

As concerns Klaus’s statement about the inability to discern between sound money and dirty money, it referred originally to the impossibility to find any legal instrument for investigating the origin of money which came into economy in the transition period. It was known that a supply of money existed among the people who under Communism had grown rich in a non-capitalist way. They were especially the former Communist bosses (who had used their political power to effect an illegal appropriation of state property); they were state officials who had access to important economic information; and they were simply pilferers, swindlers, underhand moneychangers and thieves. But, to start with a form of general investigation of the way in which these people acquired their money (in order to take this money back from them) was in fact impossible because it would lead to dangerous tensions in society. Nevertheless, a mistake was done by uttering that statement (even in its original, non-misrepresented form) to the public. Instead of this, a realistic politician who knows that under given conditions it is impossible to take back the illegally acquired property should tacitly acquiesce with this historical injustice; in contrast with it, in his public statements he should promise to do as much as possible in order to discern between sound and dirty money. (He must simply be able to know about the difference between ”is” and ”should be.”) Here, he should learn from Machiavelli who forbade the prince to make publicly known the injustice which is inevitably connected with ruling and who even recommended the prince to pretend moral sentiments.

Being misinterpreted in the sense that ”there exists no dirty money,” the unhappy statement by Klaus suggested that in the situation when Czech enterprises needed large amounts of investments in order to be effective and able to compete with Western industries, the dirty money of the above mentioned Communist bosses, pilferers, etc. as well as their ruthlessness, their rapacity and their ”entrepreneurial” spirit were necessary for the rapid re-establishing of a free market system. Being under influence of the misinterpreted version of Klaus’s statement, the Czech citizens believed that he actually followed Machiavelli: Any means is correct if the goal is correct. Later, after becoming commonplace, the misinterpreted version of Klaus’s statement was understood by the economic agents as a kind of justification for any form of breaching moral and legal rules.

3. The insufficiency and inconsistency of legal institutions

The second important point which should be emphasised in connection with the market consequences of post-Communist immorality is the fact that in the transition period, people have very many occasions of breaching the catallactic rules without being punished by law-enforcing institutions.

There are various sources of these occasions. First of all it is necessary to mention the fact that privatisation is inevitably a continuous process in the sense that it cannot be completed in one day, and also the fact that privatisation is organised and managed by governments; it implies that in a period, there should co-exist at the same time both private and state-owned enterprises. Here arises a lot of occasions to perform bribery and corruption. The breaching of the catallactic rules is especially explicit in relations between state-owned banks and private entrepreneurs. A well-premeditated breaching the rule prescribing the observance of contracts proceeds in this sphere as follows: after accepting a bribe from the entrepreneur, the banker settles matters in such a way that the briber is granted a credit against a security which is in fact worthless (e. g. a real estate); this presupposes that the entrepreneur has to give a bribe also to a sworn appraiser in order he would be willing to overvaluate the concerned property. This was a widespread practice in the Czech Republic; in consequence, banks own until now a lot of practically worthless real estates (due to the fact that there is a very low demand for them).

At the beginning of privatisation in the Czech Republic, banks granted loans practically to everybody in a tacit agreement with government and with a tacit hope that one’s having money at his disposal will automatically lead to his metamorphosis into a truly capitalist entrepreneur. In fact, the major part of those loans (which have never been repaid) was not used in the form of investments in those industries in which the borrowers were involved when they requested for loans. After several years, the state banks reacted to these practices by heavy restrictions in granting credits, which led to the decay of many small and middle-scale private enterprises. 

The other sources for the above mentioned occasions to breach the rules with impunity are incomplete and inconsistent legal rules and a poor level of rule-enforcement.12) In addition, Jan Winiecki speaks in this context about the role of rule-learning process; he is undoubtedly true when saying that post-Communist judges, public administrators, professors of law, business lawyers and the economic agents themselves badly need to upgrade their skills, and that this process raises the transaction costs. But this factor is relevant especially in the countries (as Russia) which have practically no traditions in performing legislation typical for Western civilisation. As concerns the Czech Republic, its citizens learned the system of legal rules very easily and quickly and have been able to identify all loopholes in the law – instead of interiorising the catallactic rules which are the basis for the legal system as a whole.

It may be agreed with Winiecki that legal rules in the post-Communist countries are inconsistent, ambiguous, and badly written. This, of course, prevents people from respecting and accepting in the way of interiorisation. People simply do not give credence to laws because they suspect their authors of keeping the laws inconsistent knowingly and wittingly so that some lobbies could misuse them. The very fact that a lawyer who compiled the Czechoslovak Communist Constitution in 1960, participated also in making out the new constitution after the ”Velvet” Revolution, can shake a disinterested observer, too.

Actually, the post-Communist laws do not fulfil its function of protecting private property. E. g., in the Czech Republic, the legal protection of the property of creditors is very poor. Moreover, procedural law is compiled so badly that lawsuits concerning debt collection are delayed for several years. Dishonest debtors are well informed that debt collection through law-courts is practically impossible and settle the things accordingly. In addition, such practices exert an demoralising impact also on the entrepreneurs who do not still apply them: the mere fact that they see through their neighbours that there exists a possibility of not repaying the loans with impunity, diminishes their incentives to the maximisation of efficiency of their business activities because they are sure that they possibly will use these practices as a last resort.

There is also a more controversial phenomenon, which can be formulated in terms of incomplete or inconsistent law. In the Czech legal system, there exists the law, which prohibits the conflict of interests. At the same time, the Czech law enables the managers and trustees of enterprises, mutual funds, etc., to found subsidiary companies including limited liability companies. Therefrom arises a possibility of making fraudulent conveyances which are familiar in the Czech Republic under the name ”tunneling.” E. g., some managers and trustees of a big enterprise found a subsidiary company (say, company No. 1); misusing their position in the enterprise, the managers and trustees arrange a massive transfer of assets from the enterprise to this subsidiary company. Then, they found another subsidiary company (No. 2) and transfer the assets from company No. 1 to company No. 2. Later, the company No. 1 claims its insolvency; the shareholders of the enterprise can initiate a compulsory liquidation of that company but gain nothing because company No. 2 has been founded as a limited liability company, which means that relative to it, company No. 1 has only a lot of dead assets. Consequently, the big enterprise goes bankrupt, too. This usually leads to a domino effect when the insolvency of an enterprise causes the insolvency of many other enterprises and these cause the insolvency of other ones, etc. Accordingly, many honest entrepreneurs must go bankrupt. When they experience that they innocently suffer from others’ breaching the rules, they lose their confidence in the market system. 

The phenomenon of ”tunneling” shows very explicitly what is the behaviour of entrepreneurs who feel no moral constraints and have occasions to perform a single action (or a series of simple actions) which – on condition that they breach the catallactic rules – will enable them to gain such a great amount of money which exceeds many times their expected incomes as gained from honest entrepreneurial activities during their life-long activities. Such entrepreneurs know that for the law-court, it will be extremely difficult to prove that they acted with the intent to fraud; and know, too, that they will have enough money to bribe the judges, policemen, investigators etc. 

We may ascribe those entrepreneurs also another characteristic: such persons usually belong to people who are well experienced (or simply talented) in performing the practices of exchange of privileges typical for the Communist regime; from the psychological point of view, their skills, capacities or talent, and the complex character of their personalities differ radically from capacities and character of a true entrepreneur who is able to identify himself with his ”calling” and work with maximum effort face-to-face risk and uncertainty which are inseparable from impersonal market relations. 

Unfortunately, the character of the process of privatisation (and this concerns more or less the voucher method) in which a portion of political activities must be willy-nilly involved, enables precisely the representatives of the latter type to be more successful in becoming post-Communist property owners. This has also harmful impacts on the rise of the market-system because if such people play the role of active managers (due to the fact that they still have not had an occasion to get rich by breaching the rules), their results are usually very poor. In addition, they have no notion about the Calvinist-Puritan ethics which prescribes to reduce consumption in order that accumulated savings could be used as investments; for example, when having been granted an investment credit, the first thing they do is buy the most luxurious cars in order that they could look like the most successful Western entrepreneurs. 

4. The market consequences: A bazaar economy

If we take into account that it is the observance of catallactic rules which enables our self-interests to co-exist peacefully, i. e., in such a way that none of them harms the others, then it implies that people’s expectations that the rules will be actually observed in the long run enable them to develop the pursuit of long-term economic interests and objectives. (At the beginnings of modern capitalism, it was the pressure of the Calvinist-Puritan religion, which strongly stimulated people in some countries both to observe the catallactic rules and to pursue long-term interests.) As concerns people who have not any similar religious motivation, they must have an opportunity to live a long time in a society where the catallactic rules are observed and maintained, in order that they may make an experience that the pursuit of the long-term interests can be more useful for them than the pursuit of the short-term ones; they can even arrive at the conclusion, formulated in terms of utilitarian rationality, that the very observance of catallactic rules is useful in relation to their long-term interests.13) 

It implies that the benign impacts of Smithian ”invisible hand” on the growth of the civilisation as a whole (consisting in the fact that economic agents are oriented prevalently to the pursuit of long-term interests) can occur in the most efficient way just on the condition that the general observance of the catallactic rules should endure in such a period of time that the economic agents could acquire a sufficiently high degree of certainty in expecting that their pursuit of long-term interests would not be harmed by their neighbours’ breaching the rules;14) another condition is that the general observance of the rules should last so long that the economic agents could experience that the long-term projects of some of their most courageous colleagues bring high profit.

On the other hand, when economic agents experience (as it is in the post-Communist countries) that the catallactic rules are breached with impunity in mass extent, they either decide to breach the rules, too, or – if they have some moral background or have no occasion to breach the rules with impunity – they prefer to pursue short-term interests and objectives. This orientation to short-term activities is caused by the fact that the pursuit of long-term interests is expected to be more endangered by the non-existence of general observance of catallactic rules than it is in case of the short-term ones.

We can arrive at the conclusion that any single act of breaching the catallactic rules is to the detriment of other economic agents’ willingness to prefer long-term interests and objectives requiring maximum entrepreneurial effort, savings and investments, to the short-term ones. Thus, in consequence of the rise of the proportion of the rule-breaching individuals, economy shifts from its ideal state – where its movement unconsciously (through the accumulated wisdom which is invisibly present in the catallactic rules) incorporates the fact that the decisive majority of economic agents pursue long-term interests – to a degenerated state which Niskanen calls bazaar economy15) and which, instead of missing long-term perspectives, consists rather of short-term trading and financial operations or speculations.16) 

Such a degenerated economy applies bribery and corruption in a widespread manner, which seriously harm the functioning of competition and its positive consequences. If bribery is applied to the interactions between producers and consumers (for example, when an enterprise in which some of its managers accepted bribe buys, as a consequence, some goods which are more expensive or worse in quality than some other goods actually supplied on the market), then producers’ financial amounts used as bribes for the consumer have their source in the past – their being at the producer’s disposal is a confirmation that his enterprise was once successful in competition; but, as Hayek argues, the past success of a product on the market does not mean that this product must win the competition in the present or even in the future, too. Bribery thus means that the producer’s ill success at present times (i. e. his failure in competition) is compensated by the past success of his goods (i. e. by the consequences of the fact that once he succeeded in the competition). The predominance of the past over the present as represented by bribery also implies that bribery is literally an antithesis to economic agents’ long-term self-interests which are (by definition) oriented to the future. 

Being uncertain, as concerns the observance of the catallactic rules by their neighbours, people in the post-Communist countries apply a high degree of the discount of the future – being afraid of the future, they collect savings without using them as investments or they become addicted to gambling which promises a very quick return of ”investments.” The possible foreign investors, being acquainted with the extended disrespect for catallactic rules in transition economies, react usually very promptly by stopping the flow of investments; this has fatal consequences for any post-Communist economy.

In order to encourage people in their long-term interests, governments apply a massive policy of secured deposits, bonds, etc. which requires heavy expenses. Moreover, the governments must try to increase the efficiency and power of law-enforcing institutions (among others, by raising the salaries of judges and policemen, by implementation of advanced technologies, etc.). This means a steady increase of the transaction costs. Nevertheless, under the condition of a full (or almost a full) absence of man’s moral relation to the catallactic rules, nor such a massive support of law-enforcing institutions and the corresponding growth of external constraints would be able to eliminate frauds, pilferage, ”tunneling,” bribery and corruption. We can learn from experience that the more complicated and stricter the purely external (i. e. non-interiorised) constraints, the more sophisticated the ways and methods people invent to evade them.17) Thus, the efficiency of purely legalistic methods serving as instruments for enforcing people to observe the catallactic rules is limited; we can even think theoretically of a moment when the negative impacts of the increase of transaction costs on the development of economy would exceed (due to an extreme rise of taxation) the negative consequences of people’s breaching the rules.

Moreover, the post-Communist politicians who should establish the conditions for an intensification of law-enforcing activities as performed by judicial power (and whose relation to the observance of catallactic rules is usually purely legalistic in Kantian sense, too) must take into account that there exist large and influential parts of the electorate, who are simply afraid of any improvement of the maintenance of laws and do not wish it. This means that even some pro-market political parties which claim to represent the (classically) liberal or even conservative orientation do not insist in their programmes and policies on the maintenance of law for the reason that otherwise, they would lose the support of a large number of entrepreneurs who misuse the poor level of law-enforcement and are getting rich by breaching the catallactic rules; it is even a usual practice that some of the frauds directly finance those parties or give bribes to their representatives. In consequence, the parole ”law and order” is adopted by the extreme right or left wing political parties.

As concerns post-Communist politicians, it should be added that they, as coming prevalently from lower classes, regard their political career only as an instrument for their growing rich. It implies that for them, the marginal utility of any increment of money or property is extremely high, and this fact prevents them from being oriented to such unexchangeable goods as, for example, being respected by their neighbours for honest work for what is considered as ”public benefit,” or being satisfied merely by the possibility to exert power over other people. In other words, the temptation to get themselves and their families out from the post-Communist misery via accepting bribes and becoming corrupted is so strong that they cannot resist. Accordingly, they differ from the classical type of Western politicians (coming frequently from aristocracy or upper classes) whose material needs were fully satisfied before they started their career; in order that they could acquire the above mentioned unexchangeable goods, they had to work in such a way that they could have been elected again and again, and, in turn, this was possible only when their politics was oriented to the pursuit of the long-term interests of people. On the contrary, when a post-Communist politician primarily wants to grow rich, it is sufficient for him to be in office only for one term; during this period he can become so famous (with the aid of mass media) and/or collect so much important information that it enables him to start a successful business career. 

5. Conclusion: A plea for human capital

Taking into account all of this (not mentioning the problem of Socialist movements and policies which arise as a reaction to mass unemployment and other phenomena connected with the bazaar economy of post-Communist countries) it seems that the application of purely legalistic methods and instruments cannot attain its aim, i. e. attain a state of affairs characterised by the statement ”to be honest pays off.” It ought not to be said therewith that the enforcement of law is useless; on the contrary, a strict and consequential enforcement of law is a necessary condition for the re-establishment of capitalism in post-Communist countries. Nevertheless, it is only a necessary, but not sufficient condition for it. Being a form of external coercion to the observance of catallactic rules, it must be supplemented by a serious endeavour at forming some inner incentives in people’s minds, which would lead and motivate them to observe the rules. This endeavour can be put into practice only via a very radical raising of quality standards in education, especially in moral and religious upbringing of young generations. It is clear that this task requires massive investments in human capital. 

Of course, nor a substantial improvement of education as such is a sufficient condition for the re-establishing of the observance of catallactic rules; howsoever intensively are people trained in morals, they must experience again and again that any breaching of the rules is visited with a penalty. This implies that investments in human capital do not reduce transaction costs immediately and cannot be made at the expense of that part of state budget expenditures which is necessary for improvements in the enforcement of law; on the contrary, the investments in human capital in the above sense can be expected to bring a success only on the condition that they would be accompanied by an increase of the costs which are connected with improvements in the functioning of the law-enforcing institutions.

Of course, in consequence of the fact that there must be waited for a long time in order to make use of the return on investments in human capital, the post-Communist politicians, being prevalently oriented to the pursuit of short-term interests, almost completely ignore the issue of human capital. Paradoxically, the (long-term) programmes of improvements in education are developed rather by Socialists (who misuse the fact that teachers have relatively low wages and, therefore, hope to find a massive support from them) in the frame of their social policies, whereas some governments consisting of parties which claim to be market-oriented, usually start their budget restrictions by reducing items and subsidies for education and science. (The Socialists’ support for education is, of course, only a kind of rhetoric which has no real impacts on practice; but, the fact that many allegedly ”free marketers” have not even such a rhetoric, is truly shameful.) 

Taking into account that the above mentioned ”free marketers” who -claiming to be classical liberals – should have actually read and absorbed Milton Friedman’s and Gary Becker’s theories on human capital, do not make any attempt to apply these theories to practice and instead of it, they, in all probability, continue in Marx’ s disrespect for both mental work and morality in a fashionable ”technocratic” guise, we may say that their neglect of the necessity of investments in human capital is one of the worst consequences of Communist immorality which heavily damage any serious effort to re-establish a free market system.

Notes and References

1) Catallactic rules (the term refers to Hayek’s famous ”catallaxy”) consist of the rules guaranteeing private property, the rule of promise/contract keeping, and the finder-keeper rule (rule of homesteading). The fact that individuals, in their market interactions, observe the catallactic rules is a necessary condition for the functioning of the free market system. 

2) Douglas C. North, Institutions, Institutional Change and Economic Performance, Cambridge University Press, New York 1990; quoted in: Jan Winiecki, Formal and Informal Rules in Post-Communist Transition, chapter 2.2. (to be published in: Domenico da Empoli, ed., Economia delle scelte pubbliche, Roma).

3) The moral problems coming from the discrepancy between personal and impersonal (formal) interactions are expressed in Arthur Miller’s play All my sons where a producer manufactures defective military aeroplanes and sells them to the state; only when he finds out that his own son could become a pilot of one of those defective aeroplanes, he experiences a moral catharsis. Of course, Miller’s play is not a correct artistic representation of capitalism because it evokes an impression that capitalist ethics is ultimately based upon personal relations.

4) Cf. Ludwig von Mises, Socialism, in: Mark W. Hendrickson, ed., The Morality of Capitalism, p. 46.

5) Later, when the production of small arms in the Czech part of Czechoslovakia revived (because of a compromise between economic reasons and the ”velvet” ideology) whereas the production of tanks in Slovakia remained restricted, Slovaks regarded this policy as a form of discrimination and started to think about separation.

6) The unhappy ”switching the light off and on” programme was originally uttered by one of the leading economic reformers at the very beginning of the transition process as a kind of sad joke which should have expressed the reformer’s hopelessness resulting from the attitudes of lawyers who then saw no possibility to find any legal way of the privatisation of state-owned property. In spite of the fact that the reformer himself did not take his slogan seriously, the journalists started to disseminate it among the public. One of the worst things connected with the dissemination of misinterpreted paroles among the public was the fact that many citizens started to believe (being supported in this by the Socialist propaganda) that ”switching off and on” programme (with its weakening the maintenance of rule of law) was an appropriate application of the laissez-faire principle. Nothing can be more mistaken and nothing can discredit the ideas of classical liberalism more massively: the laissez-faire principle concerns fundamentally the free interplay of economic self-interests in the legal framework guaranteeing property rights and keeping contracts, whereas an application of this principle to semi-legal and illegal practices of extra-economic expropriation is totally incorrect. 

7) This theory states that capital investments needed for the start of capitalist production were collected in a non-capitalist way, i. e., with the aid of political coercion and direct military violence. Accordingly, all people were originally owners of means of production, but later a part of society violently expropriated the others who became proletarians (non-owners of means of production) through this act.

8) It is known that the Russian became the heir of Byzantine culture with its principle of amalgamation of church and state power; this principle (preserved mutatismutandis even under Communism when ideology played a role similar to religious doctrines) gave no opportunity for developing the system of checks and balances which is typical for Western civilisation.

9) ”There have been too many cases of disappearing value because assets were stolen. The success of fast privatisation risks being lost if the government is unprepared to protect private property.” Jezek’s statement is quoted in: Thomas W. Hazlett, Velvet Devolution, Reason, March 1998, p. 44. 

10) ”What Klaus’s government missed, at least in part, was the importance of property rules that went beyond the initial distribution of equity shares to private owners. (…) Extending the economic reforms further and deeper, including the establishment of legal protections for capitalists and entrepreneurs, are the devilish details that have been left for a new government to deal with.” Thomas W. Hazlett, Velvet Devolution, Reason, March 1998, p. 43-44.

11) As an example for this it can be mentioned Alexander Rezes, a Slovak entrepreneur who received East Slovak Iron Works from the Prime Minister Meciar as a reward for political services. Under his management, the enterprise fell into a disastrous indebtedness. 

12) Jan Winiecki, Formal and Informal Rules in Post-Communist Transition, chapter 3.3. 

13) This was precisely done by Adam Smith; moreover, when saying that ”religion (…) gave a sanction to the rules of morality long before the age of artificial reasoning and philosophy,” he was aware of the fact that his utilitarian treatment of the catallactic rules had to be necessarily preceded by their being sanctioned in religion.

14) In order to be precise, it should be added this concerns non-Calvinist economic agents.

15) W. A. Niskanen, The Soft Infrastructure of a Market Economy, The Cato Journal, Vol. 11, No. 2; quoted in: Jan Winiecki, Formal and Informal Rules in Post-Communist Transition, chapter 3.3. 

16) Since the positive consequences of people’s following the catallactic rules are not immediately visible, it must be true, that the breaching of the catallactic rules has some hidden, in addition to visible, negative consequences; these invisible consequences consist in the above described economic activities’ shift from the most distant future to the less distant one. It seems to be especially instructive to mention the case of Lenin’s New Economic Policy in 1920s under which economic agents knew that the revival of the (very restricted) market system would be soon or later abolished; accordingly, they pursued only short-term economic interests and in addition, they performed precisely the same forms breaching the catallactic rules, which we experience now in the post-Communist countries (fraudulent conveyances, etc.) In spite of all of this, the working of the ”invisible hand” of market showed to be unbelievably fruitful: it saved Communist Russia, destroyed by the civil war, from a total collapse and famine.

17) Turning back to the example of Lenin’s New Economic Policy we may see that various forms of pilferage and corruption flourished in spite of the fact that in accordance with the Soviet penal law they were (or should have been) punished very strictly (with the typical Communist cruelty which found its expression in economic criminals being executed or sent to gulags).