Comments on Steve Pejovich's 'Understanding the Transactions Costs of Transition: It's the Culture Stupid'

A key element in the New Institutional Economics is the distinction between formal institutions, which are largely established through legislation, and informal institutions, which largely emerge through cultural types of processes. Pejovich uses this distinction in an imaginative and fruitful manner to articulate his Interaction Thesis. According to this thesis, the speed of the transition from socialism to capitalism varies directly with the transaction costs of making that transition. The transition to capitalism has proceeded more fully and speedily in those nations where the prevailing informal culture clashes less sharply with the formal institutional requisites of a capitalist economy. In this paper, Wagner concentrates on gaps he perceives in Pejovich’s formulation, gaps that if not filled, narrow the reach of his formulation. Wagner starts by considerinig some implications of Pejovich’s formulation for the theory of political economy and finishes by considering some implications of Pejovich’s formulation for the art of political economy.