FINAL STUDY GUIDE

FINAL STUDY GUIDE - Easterly You cannot plan a market...

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You cannot plan a market Introducing free markets from the top down is not so simple. It overlooks the long sequence of choices, institutions, and innovations that have allowed free markets to develop in rich Western countries. The bottoms up approach don’t function well in low income societies of Africa, Latin America, Asia and the former Communist bloc. Markets everywhere emerge in an unplanned and spontaneous way by adapting to local traditions and circumstances. The free market depends on the bottom- up emergence of complex institutions and social norms that are difficult for outsiders to understand and much less change. Paradoxically the West tried to plan how to achieve a market. Even after evidence suggested that free markets imposed by outsiders do not work. No recipe exists to create a market Russia Russia became a free market or at least that is what the West told them they were becoming. The Russians then removed controls on prices and soon after privatized state enterprises Russia received 13 structural adjustment loans in the 1990s which only resulted in large inflation and the inevitable collapse, which represents the transformation to a market economy that has joined the list of failed utopian schemes. As far as companies that were actually producing value were concerned included privatization of former state enterprises without first creating the rules that make profit seeking behavior beneficial to society. The Flight of Icarus Shock therapy was the application to Russia of what the World Bank and IMF called structural adjustments Structural adjustment loans were given to finance imports, and were conditional on countries adopting free markets. The idea was that developing countries needed the big reforms in order for individual projects to be productive, hence the solution of World Bank intervention. The World Bank and IMF wanted to impose structural change to already messed up political and economic to attempt to remake the system in one fell swoop To make a long story short the shock therapy often ran afoul of poor institutions that failed to prevent public corruption and private looting. The overambitious reforms of shock therapy and structural adjustment were the flight of Icarus for the World Bank and the IMF. Aiming for the sun, but descended into a sea of failure. I’m Hungry, let’s invent Free Markets Freedom of choice and of personal knowledge makes the great gains that come from specialization. Wealth of Nations celebrates the advantages of specialization The other great accomplishment of the market is that they reconcile the choices people make for themselves with the choices other people are making. The market determines prices and quantities to reconcile the needs and abilities of
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This note was uploaded on 03/28/2012 for the course PS 339 taught by Professor Nance during the Fall '11 term at N.C. State.

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FINAL STUDY GUIDE - Easterly You cannot plan a market...

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