Janos Kornai's The Road to a Free Economy

...Here, as in Economics of Shortage, Kornai argues that soft budget constraints are a consequence not simply of state ownership but, rather, a social relationship between planners and enterprise managers...

...His writings have been characterized by a mixture, rare among economists, of rigor, skepticism, and sympathy...

...Kowalick quotes Alexsander Paszynski, the president of the Warsaw Economic Association: The state and party apparat are interested in founding as many companies as possible...

...Although his suspicions of the state are understandable, the collapse of command economies does not invalidate Keynes's analysis of the need for an active government role in the economy...

...I draw here on Kornai's earlier works, Economics of Shortage and Growth, Shortage and Efficiency: A Macrodynamic Model of the Socialist Economy...

...This is no longer a debating point, but simply a fact that must be accepted...

...Hungarians are poor...

...Always, I am clear about that...

...The system that has developed in the Hungarian state-owned sector may be called indirect bureaucratic control, juxtaposing it to the old command system of direct bureaucratic control...

...In its social democratic version, it implies instead a commitment to experimentation, trial and error, institutional revision, and ideological openness...

...The firm knows that, faced with losses, it will be helped out somehow...

...The first companies have already been founded at the initiative of the apparat, and even of people representing medium-level Party authorities, and some of those new companies are chaired by people from the top echelons of power in Poland...

...It is probably inevitable that history moves not in a straight line, but like a pendulum...

...Not being a part of the bureaucracy, this legislative body will in fact be superior to it...

...Shortage, sellers' markets, and resource constraints are for Kornai the distinguishing characteristics of the command economy...

...This must be understood in the context of his analysis of command economies and the history of economic reform in Hungary...

...For Kornai chronic unemployment is a distinguishing characteristic of capitalism, just as chronic shortage is characteristic of command economies...

...markets—especially the labor market—do not necessarily clear...

...Where the line should be drawn between the public and private sector need not be determined in advance...

...But the Hungarian reform did not work as intended...

...That Kornai would expect markets to result in "genuine order and calm" is puzzling, even for these days, when markets are expected to perform miracles...

...Thus, considered from the side of production, capitalism and command economies as economic systems are respectively demand-constrained and resource-constrained...

...The labor market under capitalism "is demand-constrained because production is demandconstrained...

...Consumers are caught in the same vicious circle...

...Within this framework, enterprises would produce for the (regulated) market...

...q 130 • DISSENT...

...Faced with shortages, households will purchase, whenever possible, in anticipation of future shortage (that is, they will hoard...

...But this spontaneous "bureaucratic coordination" developed in a political context that is now changing...

...Perhaps later generations will be able to envisage a more moderate midway...

...But this is not reason to abandon the fight...

...Accordingly, this legislature should be able to set an economy-wide hard budget constraint on the state sector...

...I believe they are ready to take the risks of a radical operation...

...they stand in stark contrast to the characteristics of capitalism, which are slack, buyers' markets, and demand constraint...

...Profit was to become the prime motivating factor of the enterprise...

...Kornai again reverts to a medical analogy: Those who have undergone a serious disease or have seen the sufferings of a loved one know well the state of mind that makes the patient turn to the doctor and declare: "I can stand this no longer...

...Hungary's 1968 reform, the New Economic Mechanism, promised to abolish the central determination of input and output targets...

...For example, they were to have a degree of independence in determining their product prices and investment plans...

...He is addressing himself to more immediate concerns...

...Kornai claims his book is not about the long-run goals of Hungarian society, but his underlying premise is that a capitalist market economy is the only basis of a free economy...

...The firm, as buyer, tries to acquire as much input as possible in order that shortage does not hinder production...

...But now an independent counterforce might emerge in the form of a multiparty Parliament...

...During the initial "naive" phase of the reform process, we all cherished the hope that the mere discontinuation of plan commands would be enough to create market coordination of state-owned firms...

...While the firms are subordinate they are not entirely powerless...

...in fact, this is what prompts it to scientific research and to the application of the achievements of science...

...The only role for state ownership is in places where it can solve certain tasks more efficiently than private ownership...

...Afree economy, according to Kornai, "is, of course, a market economy...

...The result, according to Kornai, is that Hungary is a bargaining society, and the main direction is vertical, namely bargaining between the levels of the hierarchy, or between bureaucracy and firm, not horizontal, between seller and buyer...

...According to Peter Bihari, the intent of the 1968 reform was to regulate, not the particular enterprises themselves, but (through the system of regulation) the economy as a whole...

...But this pessimism does not hold it back from action...

...For example, Kornai states that a successful transition to the free market will require strict wage discipline for workers at a time when prices will be rising...

...This is staggeringly expressed by the physician hero of Camus's The Plague, Rieux, in his conversation with his friend, Tarrou, who helps him in fighting the plague...

...as the repository of the nation's will it will be empowered to set limits to expenditures...

...Nor have enterprises been as autonomous as the original plan intended...

...If history moves like a pendulum, must intellectuals also swing along with it...

...He has little hope of reforming state-owned firms: As long as the state sector remains the dominant sector in 128 • DISSENT Books the national economy, the firms, owing to their spontaneous and internal concerns, do not have and will never have hard budget constraints...

...For Kornai this also means private ownership...

...Here the case is exactly as socialists have always claimed . . . : liberty and equality are the two chief virtues of social institutions and they stand best when they stand together...

...A number of rights concerning decisions over production and marketing were transferred from the ministries to enterprises...

...This could lead to what the Polish economist Tadeusz Kowalik calls "Nomenklaturaled privatization...

...But in contrast to some who believe Hungary's economy can be privatized immediately, Kornai believes it will take decades...

...But your victories will always be temporary and that is that...

...What is necessary is that everyone . . . be able to say yes or no...

...This can be facilitated by breaking up the enormous Hungarian enterprises that artificially unite a number of smaller units...

...To satisfy such demands, the firm as buyer "joins the queue of those demanding more input...

...This very process, however, creates material shortages of those inputs, which in turn intensifies the process of hoarding and stimulates the same process among the producers of the particular inputs...

...The same contrast appears in the labor market...

...The "radical operation" that Kornai calls for is a move toward a market economy...

...For Kornai the key feature of a command economy is "soft budget constraint...

...Although he acknowledges that democracy could change one of the basic mechanisms of the shortage economy, Kornai's aim in his new book is to develop a program to stimulate the private sector...

...For democratic socialists, Michael Walzer put the issue succinctly: The precise forms of political participation and of economic citizenship, the precise extent of welfare provision—these are matters still subject to democratic debate...

...At the end of his book, however, Kornai seems to recognize that soft budget constraints are not inherent in state property: The situation was different earlier, when all the regulative powers were held by the top state bureaucracy, which was one soul, one body with state-owned firms...

...The main reason is that the revenues withdrawn from the enterprises are so large that they are incapable of surviving on their own...

...If they reach unbearable levels, how long before democracy itself is threatened...

...The protagonists of the normative theory based on a belief in the almightiness of planning, however, reach the no less optimistic conclusion that the foresight of planners is capable of optimally coordinating the activities of every member of society...

...Haven't they been told for forty years: sacrifice today so you can enjoy a better future...

...The issue is: to what extent, in what form, subject to what controls and with what consequences...

...We must take a stand in the name of our science more cautiously, more considerately, more circumspectly, when giving advice in matters relating to the healing of the sick economy...

...Through the centralization of investment funds the state maintains considerable economic power...

...Following a number of decades in which a maximal state prevailed, it is now time to take great steps in the direction of a minimal state...

...Indeed, the firm's most important goal is the procurement of state funds...

...Not only is such an economy unworkable— it tends to destroy civil society—but the difficulty of implementing it is demonstrated by the fact that, for workers, the arguments in support of it minor arguments made in support of the communist centrally planned system...

...The basic idea of market socialism simply fizzled out...

...This kind of bureaucratic coordination is as much the spontaneous effect and natural mode of state property's existence as market coordination is of private property...

...On the other hand, men are not free, not politically free at least, if his yes, because of his birth or place or fortune, counts seventeen times more heavily than my no...

...They can often exploit the regulatory system because they can distort information essential for state decisions...

...Kornai concludes with a plea for an economics of steady work: "We must fight with the forces we have for healing the diseases of society...

...According to one normative theory, the individual makes decisions that are optimal for his own self-interest...

...Rieux's eyes darkened...

...Without liberty, there could be no rightful distribution [of goods] at all...

...Why can't Kornai envisage a more moderate midway now...

...In reacting against the failed utopia of communist central planning, many East European intellectuals (apparently including Kornai) have embraced a different sort of utopia—the laissez-faire version of capitalism...

...The process of privatization and marketization will be very difficult...

...Its permanent survival is guaranteed even in the case of a lasting financial deficit...

...With political democracy, is it not possible to imagine an economy that is true to the principles of consumer sovereignty, the autonomy of producers, and democratic planning...

...One can recognize the virtues of markets without embracing lassez-faire...

...It is time to abandon hope that the budget constraint can be hardened...

...In such an economy sellers need not make great efforts to sell their products nor worry about their quality: "the chronic-shortage economy ensures that every (or almost every) product is salable sooner or later...

...Shortages "maintain a social relationship in which the buyer is at the mercy of the seller—and feels himself to be so...

...An example is Kornai's remarkable 1982 lecture "The Health of Nations," from which I quote at length because it is an interesting contrast to his new book: The normative theories of economics are deeply interwoven with a naive optimism...

...Don't intellectuals have a responsibility to moderate the swings of the pendulum—to take a stand, as Kornai once said, "more cautiously, more considerately, more circumspectly,, when giving advice in matters relating to the healing of the sick economy...

...Is it not possible to use markets to pursue democratically planned goals...

...And of course there is also a danger of increasing WINTER • 1991 • 129 Books inequality and unemployment...

...This may be contrasted with the capitalist firm, which is held back not by its resources, which are usually underutilized, but by a demand constraint...

...They see chances for themselves to sit on various company councils and even to hold company stocks...

...The firm has no obvious interest in achieving profit (since there is the threat of having profit withdrawn) and no adequate interest in meeting price rises by its suppliers (since it knows the state will rescue it from such difficulties in any case...

...And in anticipation of shortages in inputs, the firm will attempt to stockpile and hoard its own requirements...

...WINTER • 1991 • 127 Books For a firm in a command economy it is the quantity of resources at its disposal that limits its level of output...

...Socialism doesn't imply a necessary commitment to any set of political or economic arrangements...

...It is unlikely they will be able to buy shares in state-owned companies...

...Until recently Kornai rejected the orthodox economics of both East and West, which claimed that either central planning or the free market was the answer for whatever problems plagued the economy...

...accordingly, only its resources constrain it...

...The advocates of this normative theory, trusting the perfection of the market, add that if we allow the market, and only the market, to harmonize the atomized individual decision-makers, the functioning of the national economy as a whole will be equally optimal...

...Under conditions of shortage firms will face queuing and clamoring buyers (as well as pressure from higher authorities...

...And for all the temporary trauma and troubles it would cause, the operation at least holds out the promise of genuine order and calm...

...Instead . . . direct bureaucratic regulation of the state sector was replaced by indirect bureaucratic regulation...

...Private entrepreneurs should be given a chance to buy the wealth of the state sector in suitably separated parts...

...The apparat is only whetting its appetite for profits that companies can provide them with, and so not only is it not trying to hamper the growth of companies but it is even making life easier for companies by opening a protective umbrella over them...

...The result is the reproduction of shortage...

...Kornai could reply that these are all problems for the future...

...For a modern economy, even a capitalist economy, to function humanely, the state must take responsibility for employment levels, incomes policy, socialinvestment decisions, regulation of multinational corporations, and planning the public sector (social security, health, education, environment, public transit, and so on...

...I would risk the operation, but do something with me...

...If it manages to do this, then it will stop one of the basic mechanisms in the reproduction of shortage...

...Under command economies, by contrast, the tendency is toward full employment...

...I feel that the Hungarian population is approaching a point where it cannot tolerate further suffering...

...Markets and private property will no doubt spread in Eastern Europe...

...I hope that a legislature acting independently of the bureaucracy, or more precisely as its superior, will be able to impose restrictions on state-owned firms' propensity to spend...

...Market economies are not self-equilibrating...

...A recipe, as the Economist said, for unmaking an omelette...

...He believes there is no third way...

...Kornai is certainly aware of all these problems...

...But right now, in the beginning of the transformation process, people are really fed up with the excesses of state intervention, with the totalitarian power of the bureaucracy...

...The other side of the same phenomenon is that the firm as seller faces an almost insatiable demand...

...This almighty bureaucracy displayed a high propensity to spend at every level of the hierarchy...

...Medicine is, in a sense, "pessimistic" because it boldly faces the fact that the overwhelming majority of people will sometimes fall ill in the course of their lives, perhaps even several times, and usually die, in the end, from some disease...

...Perhaps the role of government will be reconsidered at a later stage...

...Yet for all his erudition he writes simplistically about the market...

...The firms try to adapt themselves not to the market (or to people's needs) but to the regulators and expectations of regulatory changes...

...Enterprises were also given authority to make some decisions of a long-term, strategic nature...

...What accounts for Kornai's newfound faith in the market...

...Although the number of independent decisions made by firms has grown, the state continues to play a decisive role in determining the firms' activities through the withdrawal and return of earnings...

...The goal of the reform was greater independence for firms...

...Perhaps...

...But is it any wonder if workers are skeptical...

...Yes," agreed Tarrou, "I can understand you...

...The dominant form of coordination has remained bureaucratic control but . . . there are significant changes in the set of control instruments...

...Ultimately, he says, when the operation is complete, workers will benefit from the change...

...However this hope did not come true...

...Spurred by a failing economy and the political opening in Hungary, Kornai's new book is a blueprint for economic reform in Eastern Europe...

...As the individual enterprises were to be regulated only indirectly, the realization of the enterprises' own interests would have to be dependent upon market forces, and not upon the fulfillment (or non-fulfillment) of the plan...

...Foreigners should be allowed to purchase the state's wealth but only to the extent compatible with the nation's interest...

...They must constantly "beg" for state funds...

...For over thirty years the Hungarian economist Janos Kornai has been a sophisticated analyst of the communist command economies...

...The major portion of capital is still allocated by the state...

...Shortages thus spread from product to product, becoming "a mutually reinforcing, self-sustaining process...

...Producers have little interest in raising their own prices, since low prices may be precisely the basis for obtaining supplementary state funds...

...Come what may, put me out of my misery...