Wednesday, March 5, 2014

Kornai: Shortage versus Surplus Economies

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).


Vito Tanzi said...

Very interesting. But is China a "socialist economy"?

D. Mario Nuti said...

Good question, Vito. It is certainly not a Soviet-type socialist economy. But neither is it a full-fledged capitalist economy. The Chinese government keeps control of the exchange rate, and through its undervaluation it controls the level of domestic activity. There is still a sizable state sector that is heavily subsidised. And there is financial repression but no shortages of commodities and services.

Vito Tanzi said...

By the way, I worked on China and even wrote a small impressionistic book mostly on it: Peoples, Places and Policies: China, Japan and Southeast Asia (New York, 2008: Jorge Pinto books Inc.)..

D. Mario Nuti said...

Thanks for the reference. I believe I have it but I had forgotten it, I will look it up.

travaglino said...

Thanks Mario. A very interesting topic. Janos Kornai is a sort of iconic figure for those of us with a strong (unfortunately long gone) interest in inflation in Soviet-type economies. His works on the shortage economy is probably one of the most quoted contributions in the area of comparative economic studies. With the not so minor caveat that I have not yet finished reading the book, I would fully concur with two of your observations. Ignoring military and space expenditure and the non-profit sector is not trivial. In addition to the internet and regardless whether one would like it or not, the military industrial complex has made important contribution to technological progress in many areas, ranging from GPS to weather forecasting to biotechnology to aeronautical engineering, etc.
Ditto for the glorification of the surplus economy. I would even go beyond your consideration that 'Austerity has raised the surplus features of capitalism far beyond what may be regarded as necessary to enhance entrepreneurship and technical dynamism.'
To a very large extent the most recent crises illustrate very clearly the basic principle that while profits are strictly private, crisis related costs are fully socialised. And this in a context where – if you allow a provocative statement – almost all mechanisms for income redistribution have been discontinued leaving as the main form of social support ...’ le mense dei poveri ‘.
For readers interested in the relationship between redistribution, inequality and economic growth I would recommend a recent IMF staff discussion note at:

D. Mario Nuti said...

Thanks Renzo for your endorsement. The recent upwards revisions of fiscal multipliers by the IMF (see my recent post on the subject) are the strongest indictment of austerity policies. Arguably the surplus generated by austerity is not part of a capitalist genetic propensity but the result of neo-liberal anti-keynesian dogma.

Oleh Havrylyshyn said...

Thanks for the book review - nicely done.

I like your last point about mis-timing praises of capitalism .
We may not in the end agree about all interpretations of the Great Recession, but you are right: it behooves defenders of capitalism to address this. The obscene bonuses of those who caused the financial crisis cannot simply be explained by saying that contracts cannot be broken, and that caps would not work in practice.

Of course contracts can be broken - that's why the legal system has something called torts. Of course, caps would induce loophole-seeking - but the issue here is not mere technical correction, but the signal this sends.

D. Mario Nuti said...

Thanks Oleh. One of the limitations of Kornai's book is the neglect of financial innovation mostly aimed at bending the rules of the capitalist game.

Musico said...

So what is new?

La Tarantella de li denari (G.G. Croce, 1550-1609, musica di S. De Murcia, 1673-1739)

1. Tutto il mondo si lamenta,
Che non corron piu’ quattrini,
Gridan grandi e piccolini,
Ed ogni arte si tormenta,
Tutto il mondo si lamenta.

Son calate le faccende,
Non si compra, ne’ si vende,
Vanno a mal tutti i mestieri,
Le botteghe e i lavorieri,
Scarsi son tutti i partiti,
Ed assai sono falliti,
La lor speme in tutto spenta,
Tutto il mondo si lamenta.

2. I maestri e i lavoranti
Stanno indarno tutti quanti,
E bisogna, per scampare,
Vender mobili e impegnare
Far dei stocchi e far de i fitti
Per pagar robe ed affitti,
E appena anco si sostenta,
Tutto il mondo si lamenta.

Dove dunque siete andati,
Oh, denari almi e pregiati,
In qual loco, in qual paese,
Sete giti a far contese,
Deh tornate a noi hormai,
E cavateci dai guai.
Perche’ a voi ogn’un s’avventa,
Tutto il mondo si lamenta.

D. Mario Nuti said...

Thanks, Musico. Delightful, and very depressing at the same time. You are right, nothing new, except for the larger scale.

Bobo said...

"Except for the larger scale"- AND the explosion of financial intermediation (financialisation of the economy).

Jacob Richter said...

I wouldn't call that economist's attempt at characterization accurate.

The "shortage economy" coincided with the move away from directive planning and towards indicative planning. It also coincided with that paradox of increased transparency in price controls, as in price controls became more blatant.

A computerized planned economy via an upscaled ERP could deploy piecework compensation all across the board as an economic motivator, just like more primitive "Stakhanovism" did the job for manual material balances.

A progressive transitional economy could do away with structural and cyclical unemployment, yet have key features the older indicatively planned material balances economies didn't have: frictional unemployment, putting economic pressure on workers in outdated workplaces to move elsewhere, and firing slackers.

Jacob Richter said...

Also, some overhauling policies:

Although the author thinks basic income is "thinking bigger" than a job guarantee, it seems he acknowledges the need not to put his eggs in one basket by saying "combined with a job guarantee and other social programs." He might be aware of problems with basic income policies regarding downward pressures on wages and the urge to replace social benefits.

"Municipalities themselves can be big-time landowners," but if they don't have a land value tax system, rent-based economic distortions can still result. I would argue, like Michael Hudson, to call this something else and have it cover additional things one wouldn't associate with just land, like the airwaves and broadcast spectrum.

When I read left-leaning advocates of sovereign wealth funds, the first questions that come to my mind, with my knowledge of that area, are: How are these funded to effect the buyouts? How much legal force is put into the buyouts?

Finally, I'm not a supporter of regionalized public banking.

Alberto Chilosi said...

"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."
Yes this is true, but a fundamental difference with "real socialism" of the capitalist (and in particular the American) economy is the tendency of technical progress in the space and military sector to percolate and spread into the civilian sector, with very far reaching consequences. Of course the best example is Internet, but there are many, many others. To my best knowledge this did not happen at all under "real socialism".

D. Mario Nuti said...

I sent a draft of this post to Professor Janos Kornai. He replied with a very kind letter, expressing two reservations about my criticisms. He pointed out that he had changed his mind on the causes of chronic shortages in the socialist system, and that far from glorifying the capitalist system he recognizes that “Capitalism has great virtues and great deficiencies, causing suffering for many people”. I intend to look up his more recent work on shortages, which at the moment is not readily available to me, and I apologise for mis-representing his stance on capitalism.

His letter is of general interest, and I now have his permission to post it as a comment on this blog. Here it is, with my thanks.


Dear Mario,

Thank you for your kind letter. I am delighted that you read my new book, and wrote a nice article about the book for your blog.

As authors usually do, I gladly accept every praise. However I have some reservations concerning your reservations.

Some scholars never changed their mind. I do not belong to that type. I am ready to revise my views if experience or the discourse convince me that the original position was not quite right. Not only giants, like Marx have a Marx I, and then a Marx II or even III, or the same with Keynes. That is permissible for minor figures like me as well. Economics of Shortage was published in 1980. You find a shift in the causal explanation of chronic shortage in later works: The Socialist System, (1992) which is summing up my ideas on socialism, furthermore in a paper "Eliminating the shortage economy". Economics of Transition. 1995. 146-168.

You may still disagree with my works of 1992 and 1995. Also, you can go back to the book of 1980. However, I think the later works cannot be ignored in this discussion.

China is a very special case. As for the economy, it is for a long time closer to capitalism than to socialism. I would regard it a particular variation of capitalism, generating in most sectors a surplus economy.

I am not, and was never engaged in the "glorification" of capitalism. That is a complete misunderstanding of the main messages of Dynamism ... In the contrary, what I am saying emphatically is this. Capitalism has great virtues and great deficiencies, causing suffering for many people. And then I add: according to my value system, I still prefer capitalism if the choice is between "existing socialism" and "existing capitalism". I do not believe in a "third system" today, nor in the foreseeable future. Utopias -- that is not my business. Of course, when I take this position,

I am fully aware of all the problems of the global crisis. That was not the only one, recurrent crises belong to the normal operation of capitalism.

I hope I see you in Greenwych.

Warm regards