Page 296 - The Principle of Economics

302 PART FIVE FIRM BEHAVIOR AND THE ORGANIZATION OF INDUSTRY
IN THE NEWS
Entry and Exit in Transition Economies
IN THE 1990S, MANY COUNTRIES THAT HAD previously relied on communist theo- ries of central planning tried to make the transition to free-market capitalism. According to this article, Poland suc- ceeded because it encouraged free en- try and exit, and Russia failed because it didn’t.
Russia Is Not Poland, and That’s Too Bad
BY MICHAEL M. WEINSTEIN
Put aside for a moment the frightening crash of the ruble and the collapse of
Russia’s stock and bond markets last week. They are symptoms of something larger—a deformed economy in which the Government sets business taxes that few firms ever pay, enterprises promise wages that employees never see, loans go unpaid, people barter with pots, pans and socks, and shady dealing runs rampant.
It didn’t have to be this way. The Russians need only look to Poland to be- hold the better road untraveled. Poland too began the decade saddled with pal- try living standards bequeathed by a sclerotic, centrally controlled economy run by discredited Communists. It reached out to the West for help creat- ing monetary, budget, trade and legal regimes, and unlike Russia it followed through with sustained political will. It now ranks among Europe’s fastest- growing economies.
Key to Poland’s steady suc- cess have been two policy decisions, and discussing them helps to illuminate by contrast what is going wrong with Russia.
First, Poland adopted what might be called the Balcerowicz rule, named after Leszek Balcerowicz, the Finance Minis- ter who masterminded Poland’s market reforms. Mr. Balcerowicz invited thou- sands of would-be entrepreneurs to sell, within loose limits, anything they wanted anywhere they wanted at whatever price they wanted. Economists called this liberalization. The Poles called it competition.
The Balcerowicz rule helped break the chokehold of Communist-dominated, state-owned enterprises and Govern- ment bureaucracies over economic ac- tivity. Also, encouraging small start-ups denies organized crime opportunities for large prey.
When Poland broke away from communism, Western economists had wrung their hands trying to figure out what to do with its sprawling state- owned factories, which operated more like social welfare agencies than produc- tion units. The solution, it turned out, was benign neglect. Rather than convert factories, the Poles allowed them to
We can rewrite this definition by multiplying and dividing the right-hand side by Q:
Profit 􏰄 (TR/Q 􏰁 TC/Q) 􏰀 Q.
But note that TR/Q is average revenue, which is the price P, and TC/Q is average
total cost ATC. Therefore,
Profit 􏰄 (P 􏰁 ATC) 􏰀 Q.
This way of expressing the firm’s profit allows us to measure profit in our graphs. Panel (a) of Figure 14-5 shows a firm earning positive profit. As we have al- ready discussed, the firm maximizes profit by producing the quantity at which price equals marginal cost. Now look at the shaded rectangle. The height of the rectangle is P 􏰁 ATC, the difference between price and average total cost. The