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TERRA ECONOMICUS

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  • Shock therapy as a generator of limits to rationality in the Russian transitional economy in the 1990s

Shock therapy as a generator of limits to rationality in the Russian transitional economy in the 1990s

TERRA ECONOMICUS, , Vol. 15 (no. 1),

The paper offers Post Keynesian/Institutionalist critique of the shock therapy policy in Russia by means of analyzing its influence on rationality of the Russian economic agents in the 1990s. The main idea is that the shock therapy policy’s implementation contributed to an institutional hiatus and led to both rising information overload and higher uncertainty. It created barriers to calculated valuations of expected costs and benefits in the process of decision-making. As a result, behaviour of agents became more arational. In the process of decision-making agents of the Post-Soviet Russian economy relied more on emotions, advertising, group pressure and “behaviour of others” rather than individual optimizing techniques. All these aspects were substitutes for real knowledge. The paper considers forms of arational behaviour of agents in the processes of consumption, investment and financial decision-making and its negative consequences. So such arational behaviour contributed to the great economic crash of the Russian transitional economy in the 1990s. Consumers generated adverse tendencies because of conspicuous consumption of the Western goods at the expense of demand for domestic goods. Investors refused to buy fixed capital goods due to higher uncertainty and provoked both investment collapse and technological degradation. Finally, agents that demanded on the financial markets were fooled by numerous financial fraudulent “players”. It steered away funds from financing real investment projects.


Keywords: shock therapy; uncertainty; rationality; transition; institutional hiatus

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Founder: Southern Federal University
ISSN: 2073-6606