Aleh Tsvynski and Sergei Guriev wrote a brief article on Russia's state of the economy and political stability. Here's a slice of the article:
"The other major barrier to growth is corruption. In another World Bank-EBRD survey, 40% of firms in Russia reported making frequent unofficial payments, and roughly the same percentage indicated that corruption is a serious problem in doing business. Unlike in other emerging markets, corruption has not declined with economic growth; it remains as high as in countries with one-quarter the per capita income of Russia."
Showing posts with label The Role of Government. Show all posts
Showing posts with label The Role of Government. Show all posts
Sunday, May 11, 2008
Sunday, January 06, 2008
ONE STEP CLOSER TO SOCIALISM IN SLOVAKIA
by Martin Rojko
Slovak government soc-storm brigade doesn't come to halt anything in the name of way for brighter tomorrows and achieveing of promises from the dreamland. It wants to connect by highway capital city Bratislava with second largest city Košice (on the other side of the country) till the year 2010. Recently passed law by the parliament should give a hand this aim, which as they say will enable to accelerate highway construction in areas, where an owners don´t want to sell their property at price the government says. Yes, they want to march on even at the expense of total blatant derogation by a private property. But finishing highway construction in this deadline is as real as building of broad-gauge railway to east part of Slovakia (to join railway to Moskva).
Legislative act or rather mafia´s ultimatum on non-resisting allows planners building roads on private land plots without agreement with the owners. If these people won´t consist with own property sale for government´s offered price, the state will simply steale it (they call it eminent domain). And to compensate still rightful owner will suffice as far as a road will pass just under his own window. Joke? Scarcely!
If the state should indicate a public interest (what a specific notation) of a kind up to this day, tomorrow it won´t have to. When government simply decides that your house with land plot stands in the way of highway, which pay every taxpayer in the country including those who don´t ride a car, you just drop it. With any immediate and adequate compensation. Better variant is that you learn of it from an official bulletin hanging in front of a local authority building, worse one is you wake up one day on a surprising noise of digger in your living-room.
Bolshevistic bashaws built roads for forty years in such a way. They weren´t interested whose a house, cottage or piece of farmland is. And not a bid any fair compensation. The same communists want now to steal people´s property and they don´t bother about some meaningless private property. A fundamental thing is they are building and giving out. And when the court will confirm the passed law as unconstitutional in a few years? It doesn´t matter, they tried. Government and parliament officials maybe already won´t seat on their chairs by that time and a huge financial compensation to the owners and PPP concessionaires will pay all taxpayers.
Appeal on virtue and conscience of parliament´s or government´s members is like to expect from a thief that he satisfies at a visit of your house with it´s visual inspection. A state constitution is not a contract. It doesn´t oblige anyone for any particular action. It is only a piece of unvalued paper document. The government and parliament simply confirm it by their action.
Author is a journalist of Slovak well-respected business weekly TREND and he runs a blog called „Private Property“ (vlastnictvo.blogspot.com)
Thursday, January 03, 2008
SLOVENIA: GERMANY OF THE BALKANS
By January 1, 2008, Slovenia took over the chairmanship of the EU presidency. In its latest article Slowenien: Deutsche vom Balkan, Der Spiegel described Slovenia as Germany of the Balkan region. Although the EU presidency would normally mean a final stage in leaving the Balkan region, such argument is very far away from the truth. My colleague Rado Pezdir once wrote a brilliant article on how unambitious Slovenian government really is in its intentions to discuss presumably relevant topics on behalf of EU presidency. Rado wrote:
"...the EU as it is today, is definitely not sustainable. Slovenia integrated into the union of nations instituted upon market capitalism. Regarding the negative experience we had with previous regimes of dictatorship, rational voters would agree that the only positive feature of current Slovenian government is that the latter attempts to pursue the agenda over democracy and market capitalism. Everything else is a zero-sum game as it was in Habsburg Monarchy, Kingdom of Yugoslavia and Tito's communist Yugoslavia. That's why, bluffing with all sorts of speech, banquets, inaugurations and fantasies about the relevancy of Slovenian Republic in foreign policy, will nevertheless be a clear signal, that Slovenian government has absolutely no idea what is it doing in the European Union. Nonetheless, given the current state of political and economic climate, Slovenia could easily be integrated into the African Union, leaving behind local monopolies and nation-wide cartels."
Source: Rado Pezdir, Croats and Banquets - The Radius of Janez Jansa's Government, Finance, July 9, 2007 (link - subscription required).
In 1991, Slovenia emerged as the wealthiest former communist state with the highest GDP per capita in Eastern Europe. That was a sign that Slovenia's socialist politico-economic system allowed some (!) private initiative. For example, manufacturing companies were allowed to operate with private means of production, but only if there were five or less employees. However, the entrepreneurship under production means of private property and ownership was strictly prohibited. The manufacturing sector was hardly seen. Later, the hope of the most successful economy in Eastern Europe suddenly disappeared.
Slovenian politicians quickly embraced the idea that the country must progress gradually by a beguiling path of non-reform. The consequences were terrible. The mainstream economists embraced the idea that foreign direct investment must be highly limited and prohibited in some sectors. Therefore, the privatization was delayed. By 2005, Slovenian government ownership share in major Slovenian companies was 35 percent of the GDP; the highest share in Eastern Europe.
Government ownership can be seen everywhere, managed by para-government funds - in Krka (pharmaceutical company), Triglav (insurance company), NKBM (banking company), Nova Ljubljanska Banka (banking company), Gorenje (household appliance producer), Petrol (oil company) etc. Slovenia has an unreasonably high tax wedge, among the highest in the EU. Taxes levied on labor supply and productive behavior negatively affect economic performance. High tax burden in the share of the GDP does not stimulate productivity growth and the growth of GDP.
There's a dozen of empirical arguments in favor of private ownership. Capital management under private ownership is better at approximizing the information and seeking cost-efficient solutions needed for a successful investment and return on equity as well as for other parameters of the firm. At the same time, looking at the productivity data, Slovenia hasn't yet reached a convergence of the productivity in line with EU15, EU25 and EU27.
The political map of Slovenia is perhaps the most terrible saga that has been continuing in historical cycles. Currently, there is no political party that would launch reform agenda to boost an ambitious political program in favor of higher and stable growth in the long run. Slovenia's economic policy is based on Keynesian ideas such as heavy public investment, inefficient public administration and government intervention into the free market. Each year, the World Bank composes a ranking of countries in accordance with the ease of doing business. This year, Slovenia was ranked as 55th most friendly environment for doing business.
This year's rank has arrived from 53th place last year. For example, in Iceland (link), the enforcement of commercial contracts is easy and payment disputes almost do not exist. In average, it takes 393 days to reach a full enforcement of commercial contract until the actual payment. In Slovenia, it possibly takes (link) 1350 days until the commercial contract claims and obligations are fully enforced after dozens of lawsuits and payment disputes. A research by Slovenia's Office for Macroeconomic Analysis and Development has shown that the major obstacle to starting a business is weakly protected rights of entrepreneurs regarding payment disputes.
Slovenia's Balkan ethics lies firmly into its unique political culture. Recently, Johnny Munkhammar wrote a book entitled Guide to Reform (here and here), where he showed how policymakers can achieve great results and win re-election by implementing long-range economic reforms. Slovenian political parties, whether they are left or right, always opposed full privatization, pro-growth tax policy, labor market deregulation, the rule of law and reductions in public expenditure.
Instead, interest groups control all types of decision under public policy. Trade unions, for example, roared against tax reform, denied labor market deregulation and stood firmly against education reform. Urban planners have controlled nearly every possible instrument that could enable the liberalization of housing sector. The ongoing consequence is that the prices of urban flats, housing and land are stratospheric. Slovenia's agricultural lobby can easily be compared to the "state-within-the-state".
Besides holding a complete control over land resources, they boost artificially high land prices, given a flat downward sloping curve of land supply. Protectionism has arrived at the cost of enormously high consumer housing prices. In addition to the pedigree of central planning, Slovenian Apartment Fund, under government control, runs a policy of full price control. Nevertheless, price controls fail sooner or later.
Slovenia's political system is marred by dusts of old-style protectionism and anti-competitive mentality. State Council is holding an enormous power of public decision-making. It can simply block the decisions which have been democratically approved by the parliament. State Council is a symptom of Mussolini's idea of the corporate state where the interests of stakeholders are firmly protected in the economic system.
In addition to obscure institutions such as State Council, there is also an ESS, which could be called Economic Schutz Staffel. It is a cooperative body called Economic Social Council where employers, government and trade union impose wage-control policies. This particular council indeed has terrible consequence for the growth of living standards which are, by the wisdom of economic theory, determined by productivity. In the long run, productivity is everything.
At last, Slovenia's blurred image is further degenerated by the inefficient and cumbersome judicial system. Property rights are very weakly protected. According to Heritage Foundation's 2007 Index of Economic Freedom, Slovenian courts are inefficient and procedurally slow with a bulwark of reports about legal corruption. The latter is widespread. It enables everything what is legally prohibited under the rule of law.
In Balkan region, Slovenia is the most developed country according to official parameters. Its eastern neighbors call it "Slavic Switzerland" or "Balkan's Germany" as Der Spiegel wrote in the abovementioned article. The reality is quite different from official reports of a happy sub-Alpine nation enjoying an ever-lasting prosperity.
This myth has been erased when Slovenia entered the European Monetary Union when country's inflation skyrocketed because of structural inflexibility. But nevertheless, depression, anti-competitive mentality, status quo, degenerated legal system, slow economic progress, violence against intellectual and productive individuals, psychological torture, public unsafety and spurring corruption are the best signs of country's international rank. However, structural misery cannot escape the pen of history.
Rok SPRUK is an economist.
Copyright 2008 by Rok SPRUK
"...the EU as it is today, is definitely not sustainable. Slovenia integrated into the union of nations instituted upon market capitalism. Regarding the negative experience we had with previous regimes of dictatorship, rational voters would agree that the only positive feature of current Slovenian government is that the latter attempts to pursue the agenda over democracy and market capitalism. Everything else is a zero-sum game as it was in Habsburg Monarchy, Kingdom of Yugoslavia and Tito's communist Yugoslavia. That's why, bluffing with all sorts of speech, banquets, inaugurations and fantasies about the relevancy of Slovenian Republic in foreign policy, will nevertheless be a clear signal, that Slovenian government has absolutely no idea what is it doing in the European Union. Nonetheless, given the current state of political and economic climate, Slovenia could easily be integrated into the African Union, leaving behind local monopolies and nation-wide cartels."
Source: Rado Pezdir, Croats and Banquets - The Radius of Janez Jansa's Government, Finance, July 9, 2007 (link - subscription required).
In 1991, Slovenia emerged as the wealthiest former communist state with the highest GDP per capita in Eastern Europe. That was a sign that Slovenia's socialist politico-economic system allowed some (!) private initiative. For example, manufacturing companies were allowed to operate with private means of production, but only if there were five or less employees. However, the entrepreneurship under production means of private property and ownership was strictly prohibited. The manufacturing sector was hardly seen. Later, the hope of the most successful economy in Eastern Europe suddenly disappeared.
Slovenian politicians quickly embraced the idea that the country must progress gradually by a beguiling path of non-reform. The consequences were terrible. The mainstream economists embraced the idea that foreign direct investment must be highly limited and prohibited in some sectors. Therefore, the privatization was delayed. By 2005, Slovenian government ownership share in major Slovenian companies was 35 percent of the GDP; the highest share in Eastern Europe.
Government ownership can be seen everywhere, managed by para-government funds - in Krka (pharmaceutical company), Triglav (insurance company), NKBM (banking company), Nova Ljubljanska Banka (banking company), Gorenje (household appliance producer), Petrol (oil company) etc. Slovenia has an unreasonably high tax wedge, among the highest in the EU. Taxes levied on labor supply and productive behavior negatively affect economic performance. High tax burden in the share of the GDP does not stimulate productivity growth and the growth of GDP.
There's a dozen of empirical arguments in favor of private ownership. Capital management under private ownership is better at approximizing the information and seeking cost-efficient solutions needed for a successful investment and return on equity as well as for other parameters of the firm. At the same time, looking at the productivity data, Slovenia hasn't yet reached a convergence of the productivity in line with EU15, EU25 and EU27.
The political map of Slovenia is perhaps the most terrible saga that has been continuing in historical cycles. Currently, there is no political party that would launch reform agenda to boost an ambitious political program in favor of higher and stable growth in the long run. Slovenia's economic policy is based on Keynesian ideas such as heavy public investment, inefficient public administration and government intervention into the free market. Each year, the World Bank composes a ranking of countries in accordance with the ease of doing business. This year, Slovenia was ranked as 55th most friendly environment for doing business.
This year's rank has arrived from 53th place last year. For example, in Iceland (link), the enforcement of commercial contracts is easy and payment disputes almost do not exist. In average, it takes 393 days to reach a full enforcement of commercial contract until the actual payment. In Slovenia, it possibly takes (link) 1350 days until the commercial contract claims and obligations are fully enforced after dozens of lawsuits and payment disputes. A research by Slovenia's Office for Macroeconomic Analysis and Development has shown that the major obstacle to starting a business is weakly protected rights of entrepreneurs regarding payment disputes.
Slovenia's Balkan ethics lies firmly into its unique political culture. Recently, Johnny Munkhammar wrote a book entitled Guide to Reform (here and here), where he showed how policymakers can achieve great results and win re-election by implementing long-range economic reforms. Slovenian political parties, whether they are left or right, always opposed full privatization, pro-growth tax policy, labor market deregulation, the rule of law and reductions in public expenditure.
Instead, interest groups control all types of decision under public policy. Trade unions, for example, roared against tax reform, denied labor market deregulation and stood firmly against education reform. Urban planners have controlled nearly every possible instrument that could enable the liberalization of housing sector. The ongoing consequence is that the prices of urban flats, housing and land are stratospheric. Slovenia's agricultural lobby can easily be compared to the "state-within-the-state".
Besides holding a complete control over land resources, they boost artificially high land prices, given a flat downward sloping curve of land supply. Protectionism has arrived at the cost of enormously high consumer housing prices. In addition to the pedigree of central planning, Slovenian Apartment Fund, under government control, runs a policy of full price control. Nevertheless, price controls fail sooner or later.
Slovenia's political system is marred by dusts of old-style protectionism and anti-competitive mentality. State Council is holding an enormous power of public decision-making. It can simply block the decisions which have been democratically approved by the parliament. State Council is a symptom of Mussolini's idea of the corporate state where the interests of stakeholders are firmly protected in the economic system.
In addition to obscure institutions such as State Council, there is also an ESS, which could be called Economic Schutz Staffel. It is a cooperative body called Economic Social Council where employers, government and trade union impose wage-control policies. This particular council indeed has terrible consequence for the growth of living standards which are, by the wisdom of economic theory, determined by productivity. In the long run, productivity is everything.
At last, Slovenia's blurred image is further degenerated by the inefficient and cumbersome judicial system. Property rights are very weakly protected. According to Heritage Foundation's 2007 Index of Economic Freedom, Slovenian courts are inefficient and procedurally slow with a bulwark of reports about legal corruption. The latter is widespread. It enables everything what is legally prohibited under the rule of law.
In Balkan region, Slovenia is the most developed country according to official parameters. Its eastern neighbors call it "Slavic Switzerland" or "Balkan's Germany" as Der Spiegel wrote in the abovementioned article. The reality is quite different from official reports of a happy sub-Alpine nation enjoying an ever-lasting prosperity.
This myth has been erased when Slovenia entered the European Monetary Union when country's inflation skyrocketed because of structural inflexibility. But nevertheless, depression, anti-competitive mentality, status quo, degenerated legal system, slow economic progress, violence against intellectual and productive individuals, psychological torture, public unsafety and spurring corruption are the best signs of country's international rank. However, structural misery cannot escape the pen of history.
Rok SPRUK is an economist.
Copyright 2008 by Rok SPRUK
Saturday, December 01, 2007
PRIVATIZATION OF STATE ENTERPRISES: THE CASE OF SLOVENIA
Dr. Joze P. Damijan, the professor of economics at Vienna University of Economics and Business Administration, recently wrote an article about the need to accelerate the privatization of state enterprises in Slovenia. The article can be read here and here.
In Slovenia, 65 percent of the GDP is composed of private sector while public sector is extensive, accounting for about 35 percent of the GDP. There is a numerous empirical evidence in favor of privatization. In fact, the allocation of scarce resources is the key argument for privatization. Managers in state enterprises have different interests than private investors. That's why, private enterprises are more risk-taking in particular investment opportunities. Thus, as an empirical matter, private investors usuallly sustain higher rates of return on equity than managers in state companies.
In Slovenia, the government has been controlling the economy by extensive ownership participation in all major enterprises, ranging from insurance companies (Triglav), pharmaceutical industry (Krka), manufacturing sector (Gorenje) to retail industry (Mercator), banking sector (Nova Ljubljanska Banka, NKBM) and even telecommunication sector (Telekom Slovenije, Mobitel).
There is also a proof that sizeable state entrepreneurship reduces growth and distorts capital allocation nevertheless. In China, there is an average estimate that a decrease in state-owned enterprise share of industrial production increases real GDP growth by 1,14 percent (Phillips, Kunrong 2003).
In Slovenia, political and popular attitude toward the privatization is somehow negative. Yet, the privatzation is urgent. Some privatization is already taking place. Unfortunately, it is taking place very slowly and non-transparently. The withdrawl of government ownership of enterprises is essential to sound economic performance and economic liberty nevertheless.
In Slovenia, 65 percent of the GDP is composed of private sector while public sector is extensive, accounting for about 35 percent of the GDP. There is a numerous empirical evidence in favor of privatization. In fact, the allocation of scarce resources is the key argument for privatization. Managers in state enterprises have different interests than private investors. That's why, private enterprises are more risk-taking in particular investment opportunities. Thus, as an empirical matter, private investors usuallly sustain higher rates of return on equity than managers in state companies.
In Slovenia, the government has been controlling the economy by extensive ownership participation in all major enterprises, ranging from insurance companies (Triglav), pharmaceutical industry (Krka), manufacturing sector (Gorenje) to retail industry (Mercator), banking sector (Nova Ljubljanska Banka, NKBM) and even telecommunication sector (Telekom Slovenije, Mobitel).
There is also a proof that sizeable state entrepreneurship reduces growth and distorts capital allocation nevertheless. In China, there is an average estimate that a decrease in state-owned enterprise share of industrial production increases real GDP growth by 1,14 percent (Phillips, Kunrong 2003).
In Slovenia, political and popular attitude toward the privatization is somehow negative. Yet, the privatzation is urgent. Some privatization is already taking place. Unfortunately, it is taking place very slowly and non-transparently. The withdrawl of government ownership of enterprises is essential to sound economic performance and economic liberty nevertheless.
Tuesday, October 23, 2007
POLAND: REFORM OR DIE
In Poland, the liberal Civic Platform won the very recent elections by a narrow margin ahead of socially conservative Law and Justice (here, here, here, here and here).
The current economic and structural picture in Poland is mixed. Despite the great impact of the stabilization and market liberalization on economic performance in the past 17 years, Poland, as well as other Central European countries, maintained a high level of public spending in the share of the GDP. Poland scores low on Corruption Perception Index with a rampant track on the overall corruption. The index is measured on the scale between 0 (highest) and 10 (lowest). Poland slumped from 4,6 in 1998 to 3,4 in 2005.
The reason for such persistent corruption is the fact that Poland's government spending has not fallen below 40 precent of the GDP yet. In turn, higher level of spending and more extensive government and public administration negatively affect the overall capacity of the economy to operate and sustain robust growth subject to convergence process.
As a positive thing, under previous government, the burden of government size and spending was reduced, which was an additional influence on Poland's 6-7 percent economic growth rate, which is still low on Eastern European average. One of numerous disadvantages of the government chaired by Law and Justice was a an assertive foreign policy and a brisk growth of populism, curtailing individual liberties through the coercive dogmas of Catholic values, in addition to the enforcement of protectionism and criticism of free-market views based on the doctrine primarily adopted by socialist movements.
Civic platform's leader Donald Tusk pledged to accelerate the privatization of state-owned assets more rapidly and energetically as previous government did. He also pledged to adopt replace the current progressive income tax with 19 percent flat income tax. Polish economy is doing well at the moment driven by strong foreign direct investment and solid export performance. Mr. Tusk's also promised to reform Poland's wasteful public finance, inefficient and oversized bureaucracy and a lagging infrastructure.
A victory of Poland's now-leading party inspired by liberal political views might play a crucial role in building and implementing a reform agenda as a sign of relief with positive impacts on overall growth foundations such as reduced tax burden and an active fight against corruption through reducing the size of government and improve the inadequte public administration.
The current economic and structural picture in Poland is mixed. Despite the great impact of the stabilization and market liberalization on economic performance in the past 17 years, Poland, as well as other Central European countries, maintained a high level of public spending in the share of the GDP. Poland scores low on Corruption Perception Index with a rampant track on the overall corruption. The index is measured on the scale between 0 (highest) and 10 (lowest). Poland slumped from 4,6 in 1998 to 3,4 in 2005.
The reason for such persistent corruption is the fact that Poland's government spending has not fallen below 40 precent of the GDP yet. In turn, higher level of spending and more extensive government and public administration negatively affect the overall capacity of the economy to operate and sustain robust growth subject to convergence process.
As a positive thing, under previous government, the burden of government size and spending was reduced, which was an additional influence on Poland's 6-7 percent economic growth rate, which is still low on Eastern European average. One of numerous disadvantages of the government chaired by Law and Justice was a an assertive foreign policy and a brisk growth of populism, curtailing individual liberties through the coercive dogmas of Catholic values, in addition to the enforcement of protectionism and criticism of free-market views based on the doctrine primarily adopted by socialist movements.
Civic platform's leader Donald Tusk pledged to accelerate the privatization of state-owned assets more rapidly and energetically as previous government did. He also pledged to adopt replace the current progressive income tax with 19 percent flat income tax. Polish economy is doing well at the moment driven by strong foreign direct investment and solid export performance. Mr. Tusk's also promised to reform Poland's wasteful public finance, inefficient and oversized bureaucracy and a lagging infrastructure.
A victory of Poland's now-leading party inspired by liberal political views might play a crucial role in building and implementing a reform agenda as a sign of relief with positive impacts on overall growth foundations such as reduced tax burden and an active fight against corruption through reducing the size of government and improve the inadequte public administration.
Tuesday, October 16, 2007
FREE TRADE, NOT FOREIGN AID
There is an innumerable evidence showing the devastating impact of foreign aid on the economic development of countries in the third world. In fact, free trade boosts growth and accelerates the GDP convergence while protectionist measures such as duties on imports and high tariffs on exports slows growth and impairs growth potentials due to higher costs of trade and international exchange at which markets in 'poor countries' (link) estimate the comparative advantage, i.e. the specialization at producing according to the opportunity costs of producing goods.
Monday, October 15, 2007
NOBEL PRIZE IN ECONOMICS 2007
This year's Nobel prize in economics jointly goes to Leonid Hurwicz of the University of Minnesota, Eric S. Maskin of the Princeton's Institute for Advanced Study and Roger B. Myerson of the University of Chicago, for having laid the foundations of mechanism design theory, as released by the Royal Swedish Academy of Sciences (link).
Adam Smith's invisible hand refers to how market mechanism ensure an efficient allocation of resources under ample conditions. In pratice, those conditions are distanced from the ideal. Competition is not completely free as there exist oligopolistic, imperfect and monopolistic type of competition.
Among four basic definitive principles of perfect competition, there is an assumption that consumers initialize perfect information about the anticipation of the market. Consumption and production may generate externalities, a positive influence on by-standers. However, many transaction do not actually occur in the open market but in the depth of the microeconomic transactions between firms or in particular exchange agreements between individuals, interest groups (link).
In addition, transactions also occur as an institutional phenomena. The question is not if such transactions are equitable but whether such allocation mechanisms function optimally. The subsequent question is also what is actually the optimal mechanism in going for a certain goal whether it be a goal related to welfare or/and profit maximization. In fact, contemporary economic theory is based on extremal theory of utility and profit maximization.
As in the upgrading of the circular-flow of the economic cycle, there is also the role of government regulation and the question, under which conditions, government regulation is supportive to achieving concrete goals and objectives. From the basic point of view, governments can sometimes improve the economic well-being and welfare nevertheless. For example, government anti-trust and anti-monopoly policies can benefit the overall economic well-being through the enforcement of competitive law as a way towards making welfare deliverable.
However, it is an absurd idea that government should own enterprises due to the fact that the scale of externalities is rare and hardly attainable on the locus of benefits and advantages of the private sector as markets are usually a good way of organizing the economic activity. The issues regarding the efficiency of allocation mechanisms are difficult to tackle mostly due to asymmetric information among market actors.
The fact, that information about individual preferences of particular choice and availible inputs (such as technology) may be dispersed and the fact that information about the individual interest is delivered asymmetrically and through random variables, is probably the core of the theory of allocation mechanism.
This year's Nobel winning economists succinctly initiated and further developed a theory of mechanism design. Enhanced by the laws of complexitiy, optimal allocation mechanism cannot be stated on the typical view from government's perspective, assuming that market failures occur frequently and, further, thus government distortion of market and exchange is non-peculiar.
Contrary to popular assertions, mechanism design theory distinguishes situations in which markets work well and in which they don't, judging the validity of allocation resource mechanism regarding the private information and individual incentives to fluctuations in the market accountably.
In practice, mechanism design theory is a great tool of assistance in experimenting various different mechanisms of trade and multiple exchange, schemes of sound regulation and deregulation. The theory is also applicable in the field of political science as it may upgrade voting procedures to perform efficiently with the supportive role of the economic theory in the process respectively.
Adam Smith's invisible hand refers to how market mechanism ensure an efficient allocation of resources under ample conditions. In pratice, those conditions are distanced from the ideal. Competition is not completely free as there exist oligopolistic, imperfect and monopolistic type of competition.
Among four basic definitive principles of perfect competition, there is an assumption that consumers initialize perfect information about the anticipation of the market. Consumption and production may generate externalities, a positive influence on by-standers. However, many transaction do not actually occur in the open market but in the depth of the microeconomic transactions between firms or in particular exchange agreements between individuals, interest groups (link).
In addition, transactions also occur as an institutional phenomena. The question is not if such transactions are equitable but whether such allocation mechanisms function optimally. The subsequent question is also what is actually the optimal mechanism in going for a certain goal whether it be a goal related to welfare or/and profit maximization. In fact, contemporary economic theory is based on extremal theory of utility and profit maximization.
As in the upgrading of the circular-flow of the economic cycle, there is also the role of government regulation and the question, under which conditions, government regulation is supportive to achieving concrete goals and objectives. From the basic point of view, governments can sometimes improve the economic well-being and welfare nevertheless. For example, government anti-trust and anti-monopoly policies can benefit the overall economic well-being through the enforcement of competitive law as a way towards making welfare deliverable.
However, it is an absurd idea that government should own enterprises due to the fact that the scale of externalities is rare and hardly attainable on the locus of benefits and advantages of the private sector as markets are usually a good way of organizing the economic activity. The issues regarding the efficiency of allocation mechanisms are difficult to tackle mostly due to asymmetric information among market actors.
The fact, that information about individual preferences of particular choice and availible inputs (such as technology) may be dispersed and the fact that information about the individual interest is delivered asymmetrically and through random variables, is probably the core of the theory of allocation mechanism.
This year's Nobel winning economists succinctly initiated and further developed a theory of mechanism design. Enhanced by the laws of complexitiy, optimal allocation mechanism cannot be stated on the typical view from government's perspective, assuming that market failures occur frequently and, further, thus government distortion of market and exchange is non-peculiar.
Contrary to popular assertions, mechanism design theory distinguishes situations in which markets work well and in which they don't, judging the validity of allocation resource mechanism regarding the private information and individual incentives to fluctuations in the market accountably.
In practice, mechanism design theory is a great tool of assistance in experimenting various different mechanisms of trade and multiple exchange, schemes of sound regulation and deregulation. The theory is also applicable in the field of political science as it may upgrade voting procedures to perform efficiently with the supportive role of the economic theory in the process respectively.
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