INTRODUCTION

In the late 1980s, the actual accomplishments of capitalism finally made a convincing case against socialism. After several decades of experimentation with human beings, socialism in the former Soviet Union and Eastern European countries (hereafter, Eastern Europe) died an inglorious death. To an economist, the present value of the expected future benefits from socialism fell relative to their current production costs. And Marx was finally dead and, hopefully, buried.

Short of risking a social breakdown, new leaders in Eastern Europe could not and did not immediately put an end to all the institutions and legacies of socialism. Instead, they were confronted with two critical issues: (1) how to choose new institutions, and (2) at what rate the new rules of the game should replace the old ones. Evidence shows a significant disparity among Eastern European countries in dealing with those two issues. It has become quite clear that, in a heterogeneous region like Eastern Europe, the transition paths and the rate of institutional change have to differ. Whenever we get impatient with the rate of transformation to capitalism in Eastern Europe, we should remind ourselves that, notwithstanding our free-market institutions, political freedoms, and stock of human capital, the transition to capitalism has not been completed in the West either.

The end of totalitarian socialist rule in Eastern Europe has indeed opened a highway to liberty along which there are many incentives to take detours. The detours are set by the ideas and perceptions that Eastern Europeans have of the Western world.