The eminent Hungarian economist Janos Kornai successfully characterized the Soviet-type, centrally planned socialist economy as The Shortage Economy (2 Vols, 1980). Whether money prices were stable, rising or falling, those economies were characterized by large-scale, endemic excess demand at prices below the market-clearing level, with associated re-trading (whenever feasible) at higher black market prices.
Kornai attributed shortages primarily to soft budget constraints, i.e. the ability of state enterprises to replenish their liquid resources through budget subsidies or credit (by banks or suppliers) whenever money prices were raised in order to reduce shortages. However, soft budgets can explain open inflation but are neither necessary nor sufficient to explain repressed inflation, which requires simply administered prices consistently lower than market-clearing: socialist planners could not eliminate inflation, so they simply pretended they had, and repressed it.
But Kornai is certainly right in emphasizing the negative implications of shortages: labour over-full employment was associated with consumers’ frustration at their inability to secure goods and services at official prices, and with production inefficiencies, and vanified any attempt to establish forms of market socialism.
In his latest book, Dynamism, Rivalry and the Surplus Economy (OUP 2013), Janos Kornai characterizes capitalism on the contrary as the economy of surplus, of excess supply and labour unemployment – not cyclical a’ la Keynes but endemic.
The novel aspect of this characterization is its positive assessment as an environment favourable to dynamism, entrepreneurship and technical progress, innovation and structural change, while central planning, together with the failure to allow experimentation, reward the successful inventor and innovator, and to make available resources outside a rigid central plan, was ultimately responsible for systemic stagnation. Both systems have merits and drawbacks that Kornai regards as inseparable and genetically implanted in the two systems. His personal preference goes to the surplus economy, although he recognizes the evil of unemployment associated with it.
Kornai supports these provocative propositions with a mass of data on technical inventions and their diffusion in the two systems. Nevertheless, some reservations are in order.
First, the contribution of the state to technical progress is under-estimated by the acknowledged exclusion of military and space expenditure and generally the non-profit sector, without which we would not have had most IT progress including Internet. Conversely, the negative implications of capitalist protection of intellectual property have been overlooked.
Second, is shortage a necessary feature of socialism, i.e. is China a shortage economy?
Finally, the glorification of the surplus economy seems to have been somewhat mis-timed, considering both the large-scale costs of the “transformation recession” (Kornai’s label) of transition economies in the 1990s, and the persistence and severity of the current global crisis that began in 2007 and is still rampaging. Austerity has raised the surplus features of capitalism far beyond what may be regarded as necessary to enhance entrepreneurship and technical dynamism.
(A session on Kornai' s latest book will be held at WINIR - World Interdisciplinary Network for Institutional Research - Conference on “Institutions that change the World”, Greenwich, London, 11-14 September 2014).