Economic Lessons from the Transition. The Basic Theory Re-examined
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Book Review Economic Lessons from the Transition. The Basic Theory Re-examined. By Daniel R Kazmer and Michele Konrad (M.E. Sharpe: Armonk, NY, 2004), 248 pp. Comparative Economic Studies (2004) 46, 570–571. doi:10.1057/palgrave.ces.8100074
This book is a critical review of basic undergraduate economics in the light of the transition experience. It argues that introductory economics, as taught in the US universities, excludes many phenomena important for understanding the transition process. It also argues that economic policy in the transition economies was adversely influenced by these theoretical lacunae. The book is aimed at two audiences: students of economics and of transition who want to think through alternative views of the basic theory and non-economists interested in the transition experience. The book opens with a chapter which draws attention to some aspects of the basic microeconomics of equilibrium in one market, which are normally neglected in introductory textbooks – for example, that perfect price discrimination produces a higher output than perfect competition. This is followed by a chapter on firms, which discusses the behaviour of firms under actually existing transition. Chapter 3, on the factors of production, recommends opening the economy to foreign financial institutions and allowing capital flight. Chapter 4 is on the role of government. It discusses public choice theory, public finance, the Coase theorem, and a fundamental reform of the organization and finance of healthcare. Chapter 5 is a simplified introduction to input–output, which stresses that economic adaptation takes time. Chapter 6, on macroeconomics, draws attention to the relevance of the Keynesian model for the transition process, but suggests that this has to be supplemented by concern for the supply side and an attention to time lags. Chapter 7 is a critical overview of monetary policy in actually existing transition. Chapter 8, on exchange rates, argues for flexible exchange rates and stresses the role of expectations and financial transactions in determining exchange rates. Chapter 9 is about the role of the international financial system. It argues that the financial policies of the transition countries were flawed. They were based on erroneous theory and led to extreme volatility. Chapter 10 is on open economy macroeconomics. Chapter 11, on stock market bubbles, discusses the rationality of momentum investing. Chapter 12 concerns Japan, the reasons for that country’s stagnation and how to overcome it. The conclusion of the book is that ‘there are blind spots in
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accepted basic economic theory. This book is intended to identify some of these, and to spur challenge, debate and research.’ (p. 238) This book will be useful for undergraduates (and their teachers) who find standard introductory economics one-sided and who are interested in a more policy-relevant and critical introductory economics, which focuses on transition – rather than on quantitative exercises or problems
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