History of economic thought 6 Janos Kornai

1. History of economic thought 6Janos Kornai Bernard Chavance ABIK, June 2010

2. Main books of Kornai • Overcentralization in Economic Administration (1959) • Mathematical planning of structural decisions (1967) • Anti-Equilibrium (1971) • Rush versus Harmonic Growth (1972) • Economics of Shortage (1980) • The Road to a Free Economy. Shifting from the Socialist System: the Example of Hungary (1990) • The Socialist System. The Political Economy of Communism (1992) • By force of thought (2007)

3. Janos Kornai (b. 1927)

4. An unconventional career • A position acquired with difficulty between East and West • Consequences of the 1956 revolution in Hungary • Shifting to neoclassical leaning in the 1960s, followed by disappointment • Criticism of general equilibrium in Anti-Equilibrium • A first masterwork: Economics of shortage • 1986-2002: invited professor (part-time) to Harvard University, while part-time in Institute of Economics in Budapest • Permanent fellow at Collegium Budapest, since 2002 (now Emeritus permanent fellow)

5. Overcentralization • Thesis, 1956, published in Hungarian in 1957, in English in 1959 • An analysis of the socialist system as it really works, not as it ought to work ideally, based on investigations in the light industry • The interdependance of various problematic aspects of the economy: poor incentives, weak technological development, shortage phenomenon • The cause identified : overcentralization in economic administration

6. 1960s: the mathematical inclination • A period of influence of the mathematical school in socialist countries (eg Soviet Union: Kantorovich, Nemchinov, Novojilov…) • Two-level planning (with Liptak), 1965 • Mathematical planning of structural decisions (with Liptak and Wellisz), 1975

7. Anti-Equilibrium • The flaws of the equilibrium approach • Oskar Lange’s walrasian view of « market socialism » criticized • The opposition of ‘resource-constrained’ systems (socialism) and ‘demand-constrained systems’ (capitalism), Kalecki • Kornai : opposition between ‘pressure economy’ (socialism) and ‘suction’ economy • The question of shortage comes to the fore • Rush versus harmonic growth (1972)

8. Economics of shortage (1980) • A book that had an international influence, including indirectly in the socialist economies • A symmetry between underemployment in capitalism and shortage in socialism, as ‘normal’ phenomena • The introduction of an institutional analysis • The contrast between ‘hard budget constraint’ dominant in capitalism and ‘soft budget constraint’ in socialism • The main cause of soft budget constraint : state paternalism • Implicit conclusion: economic reforms of socialism may reduce, but not suppress shortage (a similar conclusion to Keynes’ about capitalism and unemployment)

9. Economic coordination • Market and bureaucratic coordination • … as distinct from the couple Market / Plan used in many economic reforms in the 1960s • Vertical and horizontal links in the economy • The question of dependence of entreprises from the control hierarchy

10. The question of economic reforms in socialist economies • The Hungarian experience of the New Economic Mechanism (1968): suppressing direct orders of planning • Direct bureaucratic coordination replaced by indirect bureaucratic coordination • Market coordination activated, but remains dominated by (indirect) bureaucratic coordination • Vertical links continue to predominate in the fate of the socialist entreprise and its director

11. A critique of « naive reformers » (1986) • Naive reformers: Wlodzimierz Brus, Ota Sik, and … Janos Kornai himself • A wrong confidence in the possibility to harmoniously correct respective flaws of the market and the plan by combining them • Radical Hungarian reformers of the 1980s (Bauer, Tardos, Antal) : are their correct economic proposals of activated role for profit, of orientation to efficiency, compatible with state ownership and the political system?

12. Affinity between Ownership Forms and Coordination Mechanisms (1990) • Reviving an argument of von Mises (1920) under a new form • Two principal ownership forms : private and state ownership • Two principal coordination mechanisms : market and bureaucratic corrdination • History teaches that there are strong linkages between private ownership and market coordination, and between state ownership and bureaucratic coordination • Other linkages are weak, eg state ownership and market coordination (‘market socialism’)

13. Transition strategy • The Road to Freedom (1990) : after decades of maximum state, we should accelerate the move to a minimal state • After observing the ‘transformational recession’ : such attitude was ‘too doctrinaire’ (1993) • For a sustainable growth : striving simultaneously for stabilization and growth • Privatization is necessary, but should not be accelerated; importance of grassroot privatization (creation of new private entreprises more important than privatization of existing state entreprises) (1990)

14. The socialist system (1992) • A variety of explicit (rather heterodox) influences • Marx : Kornai studies the emergence, the evolution and the disappearance of an economic system, through its internal contradictions • Schumpeter : the role of creative destruction and of innovation of entrepreneurs • Keynes : the shortage economy (socialism) is a kind of inverted form of the Keynesian unemployment economy (capitalism) • Hayek : his view of the ‘natural selection’ of institutions is applied to the socialist system

15. The system paradigm (1999) • Necessary to understand system change • A paradigm found in Marx, Mises and Hayek, Polanyi, Schumpeter, Eucken • Main components: • Interest in the system as a whole • An approach of social science in general • An attention to institutions • A historical approach • Social circumstances influence individual preferences • The question of great changes (eg transition from one system to the other) • Acknowledgment that all systems have defects of their own • A stress on the comparative method • This paradigm should be taught, in addition to teaching the mainstream approach, and the dominant paradigm should admit that its own accuracy has limits

16. What does the ‘change of system’ mean? (2000) • Historical shifts : from capitalism to socialism, from capitalism to socialism • Two families of national systems • What are the criteria of assessing the transformation of a great system into another • Inverting the traditional mode of comparison, of theorizing socialism in comparison to previous theories of capitalism • Using the model built to analyse the socialist system, to characterize the capitalist system : the main line of causality, 5 blocks

18. A recent evaluation of system change • Janos Kornai (2006), « The Great Transformation of Central Eastern Europe : Success and Disappointment », Economics of Transition, Vol 14 (2), pp. 207-244.

19. Six characteristics in Central and Eastern Europe

20. An ambivalent assessment • From a historical perspective, transformation is an exceptional success story. • However, from the perspective of everyday life, the result is different. Deep economic troubles are experienced by a considerable portion of the population. • The perception of losses is intensified by various cognitive problems. • Based on the experience of today’s generation, evaluating the change as an unequivocal success would be unwarranted. • Both approaches are justified: it would be wrong to blend the two and to weigh them by the same scale.