Professor of Economics
Texas A&M University, College Station, and
Imadec University, Vienna
Senior Fellow
International Centre for Economic Research
Torino, Italy

ABSTRACT: Institutional restructuring in West Germany and Eastern Europe is a consequence of the failure of two major socialist experiments, National Socialism and Marxism-Leninism. The paper addresses a number of issues
such as: Why was the transition of West Germany in the 1950s more successful than the institutional restructuring of Eastern Europe in the 1990s? Why are the results of institutional changes within the former Soviet
Bloc different from one country to another? Why do we observe no tendency in former Marxist-Leninist states for more efficient institutions to replace less efficient ones?

The paper identifies the rule of law, the carriers of institutional restructuring and informal rules in the community as three critical factors upon which the results of institutional restructuring depend. The paper then demonstrates the interaction between those three factors is a powerful and perhaps necessary method for analysis of institutional changes and their causes, directions and consequences. To that end, analysis internalizes the effects of the interaction between the rule of law, the carriers of institutional restructuring and informal rules on incentive structures and the costs of transactions, and the effects of incentive structures and the costs of transactions on economic behavior.

Finally, the paper addresses three issues: Why has the use of economic policies based on neoclassical economics contributed to the rising strength of pro-socialist parties? What happens to the transition from socialism to
capitalism when the carriers of institutional restructuring have comparative advantage in running a state-centered economy? And finally, the paper suggests a primer for changes in informal rules. I would like to thank professors Enrico Colombatto and Victor Vanberg for useful comments. Jelena Vesovich of the Department of Economics at Texas
A&M University helped with statistical calculations. I am grateful to the Lynde and Harry Bradley Foundation for financial support of my research on the effects of customs and morals on social stability and economic performance.

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