Economic Transition As a Crisis of Vision: Classical versus Neoclassical Theories of General Equilibrium

In this paper we compare the classical general equilibrium framework of Smith and Marx with the neoclassical one of Arrow and Debreu, and find that these competing paradigms of equilibrium clash on a number of critical issues--efficiency, power, the role of markets, time, the nature of exchanges, and the importance of institutions. We argue that it is primarily a neoclassical, Arrow-Debreu vision of the economy that underlies current shock therapy policy recommendations, and that such policy advice has often had devastating effects on the transitional economies. As an alternative, we re-examine transition and economic reform through the theories of the classical economists to suggest policy recommendations.