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AbstractThese notes on the article by Koppl et al. (2014) contain some agreements and some criticism. Written upon the invitation of the editor-in-chief of this journal, they express personal views of an economist who has been searching in a similar direction – that is, for a better economic theory, more relevant to problems of modern, innovative, and thus possibly called 'creative' economies than the existing theories – but in a somewhat different, less abstract, and to standard economic terminology closer style. The strongest agreements are with both parts of the article's objective: to move away from mechanistic economic models and toward a more evolutionary and institutional approach to economic theory and policy. The pursuit of the first part is most seriously criticized for two illegitimate extensions of initially sound arguments, and the pursuit of the second part, for climbing up to a too abstract metatheoretic level, from which it loses the view of the concrete results that modern economics has already obtained.

As governments lack the rationality-promoting selective pressures of market competition, the standard (unbounded) rationality assumption is less legitimate in Public Choice than in analysis of markets. This paper argues that many Public Choice problems require recognizing that human rationality has bounds, that these differ across individuals, and that rationality must therefore be treated as a special scarce resource, tied to individuals and used for deciding on its own uses. This complicates resource-allocation in society, which has to rely on institutionally shaped selection processes. But this also appears to be the only way to produce the long-missing analytical support to the first head of J.S. Mill's criticism of government, of which Public Choice has so far supported only the second.

Recognizing that human rationality has bounds that are unequal across individuals entails treating it as a special scarce resource, tied to individuals and used for deciding on its own uses. This causes a meta-mathematical difficulty to the axiomatic theories of human capital and resource allocation, and raises a new problem for comparative institutional analysis, allowing it to explain some so far little understood differences between markets and government. The policy implications strengthen the case against national planning, selective industrial policies, and government ownership of enterprises, but weaken the case against paternalism.

The search for growth-promoting policies is found to demand knowledge of how growth depends upon actions of entrepreneurs and how these actions depend upon the prevailing institutions. While institutions have extensively been examined for their influences upon the freedoms and the incentives of entrepreneurs, and thereby upon the level of employment of resources, this paper examines their influences upon the selection of entrepreneurs, and thereby upon the efficiency of that employment. This selection is crucial in the realistic but in theory seldom considered cases in which all agents, including entrepreneurs, may differ in economic abilities. A simple model shows that in the long run, selection by market competition, especially when extended to financial markets, vastly outperforms selection controlled or protected politically. Such selection may outperform market selection only during a limited period, extendable only at the price of growing bad debts and financial crises.

Attention is called to a little explored scarce resource, termed 'economic competence', which combines features of human capital and bounded rationality, and causes a singularity in resource-allocation in society. The performance of each economy is shown to strongly depend on how this resource is allocated, which in turn strongly depends upon the economy's institutions ('rules of the game'). Two stylized institutional variants of market selection and one of government selection are compared for their short-term and long-term effects upon the output and growth of a perfect team economy. The results are exemplified by throwing new light on the social value of financial markets and the limitations of industrial policies.

It is noted that modern economics cannot decide which economic system is the best way of organizing production. In particular, support is given to Nelson (1981) who claims that modern economics does not provide any substantial argument in favor of private enterprise being the best. However, rather than concluding that government control or socialist planning could do at least as well, this essay explores the alternative hypothesis that the organizationally static framework of most of modern economics is too narrow to see the entire truth. Connected to Schumpeter's and Hayek's approaches, an organizationally dynamic analytical framework is outlined and shown to reveal important advantages of private enterprise, in particular of contestable private enterprise with equitable risk assignment. This argument is qualified by showing that even such a system may suffer from organization failures which can be alleviated by selection-neutral industrial policy, including government entrepreneurship on underdeveloped markets.

State-owned enterprises after socialism : why, and how to privatize them rapidly.
The problem of privatization appears to be the most controversial problem of post-socialist transition. There is still much disagreement on how and how fast to privatize the great number of state-owned enterprises, and there are even arguments claiming that these entreprises should not be privatized at all. This disagreement is seen to be caused by the lack of a clear and generally recognized analytical argument why firms should be owned privately, which leaves this problem to arbitrary ideological preferences. The paper provides such an argument and shows what it implies for the speed and the method of post-socialist privatization. The argument is based on the author's earlier study of scarce economic competence and the efficiency of its allocation in society. The well-known problem of allocation of scarce managerial talents is shown to raise the twin problem of allocation of scarce competence for ownership. It is for an efficient solution of this problem, shown to be crucial for social efficiency, that private and tradeable ownership of firms proves indispensable. The implications for the speed and the method of post-socialist privatizations are that all the state-owned enterprises should be privatized as rapidly as possible, and that a suitable privatization method is the one by investment vouchers with free entry for investment funds and unrestrained secondary trading with shares. Compared to the usual incentive arguments, the competence argument brings stronger support to private and tradeable ownership of firms, but is more favorable to income redistribution and social security, provided that this concerns persons and not firms.

"As governments lack the rationality-promoting selective pressures of market competition, the standard (unbounded) rationality assumption is less legitimate in Public Choice than in analysis of markets. This paper argues that many Public Choice problems require recognizing that human rationality has bounds, that these differ across individuals, and that rationality must therefore be treated as a special scarce resource, tied to individuals and used for deciding on its own uses. This complicates resource-allocation in society, which has to rely on institutionally shaped selection processes. But this also appears to be the only way to produce the long-missing analytical support to the first head of J.S. Mill's criticism of government, of which Public Choice has so far supported only the second." (author's abstract)

"Recognizing that human rationality has bounds that are unequal across individuals entails treating it as a special scarce resource, tied to individuals and used for deciding on its own uses. This causes a meta-mathematical difficulty to the axiomatic theories of human capital and resource allocation, and raises a new problem for comparative institutional analysis, allowing it to explain some so far little understood differences between markets and government. The policy implications strengthen the case against national planning, selective industrial policies, and government ownership of enterprises, but weaken the case against paternalism." (author's abstract)