Socialism, Capitalism, and Transition-Coordination of Economic Relations and Output Performance

In this paper, we relate the differential development of market and planning systems to the creation and destruction of contacts. In our general equilibrium model, a greater stock of relational capital (business contacts) increases the sold output of a representative firm. Besides this direct effect of contacts, the replacement of some contacts is needed for innovation. Replacement involves negative external effects on the relational capital of other firms in the economy. Here systems differ: whereas the market system allows everybody to to do so. Given a limited span of control, and strong political lobbying against contact destruction, a planner was less able to replace old cal progress in the planned economy. The technological gap created characterize steady states of the two systems and simulate the output development for socialism and the transition process to capitalism. We discuss how a dual track approach, insider privitization, and a civil society may impact on transition paths.