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12-05-2020

Janos Kornai: a non-mainstream pathway from economic planning to disequilibrium economics

Author: Wladimir Andreff

Published in: Public Choice | Issue 1-2/2021

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Abstract

This paper first positions Janos Kornai in the controversies about the feasibility of socialist planning (Lange, Hayek). Kornai has leant in favor of Hayek’s thesis contending that, without an actual market price system for conveying information to those who can beneficially use it, a socialist economy is impracticable. The paradox is that Kornai worked at the Computer Centre of the Hungarian Academy of Sciences in relation with the Planning Institute of the National Planning Office and conceived an algorithm for decentralized two-level planning, i.e., the best improvement ever brought into Lange’s model of market socialism. This is due to Kornai being also involved in actual dysfunctions of central planning in Hungary (shortages) that he eventually theorized with disequilibrium modelling in his Economics of shortage. However, the latter departs from standard disequilibrium economics (Barro–Grossman) which has been joined by most former planometricians (such as Malinvaud for instance). Eventually Kornai adopted a more institutional approach for his recommendations as regards post-communist transformation into a market economy with a Hayekian flavor, in particular his support to an organic development of a privately-owned sector within a gradualist process instead of mainstream-supported overnight privatisation. His recent analysis of capitalism as a surplus economy shows the continuity of his non-mainstream view of disequilibrium over five decades. All this makes Kornai an original front-running researcher and breaking-through analyst, though somewhat paradoxical, and a quasi-heterodox economist, one foot in and one foot out of the mainstream.

previous article Kornai’s Overcentralization and naïve empiricism

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Gregory (2020) summarizes this English translation of Kornai’s Ph.D. dissertation in this special issue.

Hungarian enterprises were not fulfilling their plan because of weak incentives and dysfunctional bureaucratic relationships with central planners. Plan uncertainty was sustained with repeated plan revisions; inconsistent planning quantitative indicators were drifting into input shortages.

Kiev mathematicians had calculated in 1965 that it would take 10 million years of the world population’s work to build up the annual precise and detailed supply plan for the Republic of Ukraine only (Antonov 1965, p. 23).

Another interpretation of market socialism, often criticized by Kornai, considers it as “a combination of socialism and capitalism”—see Vahabi (2020) in this issue; such a combination cannot be found, even with an in-depth reading of Lange (1936, p. 135) who writes that “the capitalist economy cannot function under a socialist government” (p. 135), a statement that Kornai would not deny.

Malinvaud (1968) modeled such a hyper-centralized economy with central planning of consumer goods’ distribution, in addition to production planning when labor is one input.

Even after serving at Poland’s CPB, Lange (1967) taught how to program the plan’s optimal decisions without a word about enterprises’ informational ‘cheating’ by transmitting fake data about their plan’s fulfillment in view of being rewarded (bonuses) and supplied with scarce inputs.

“When we find Leon Trotzky arguing that ‘economic accounting is unthinkable without market relations’; when Professor Oskar Lange promises Professor von Mises a statue in the marble halls of the future Central Planning Board; and when Professor Abba Lerner rediscovers Adam Smith and emphasizes that the essential utility of the price system consists in including the individual, while seeking his own interest, to do what is in the general interest” (Hayek 1945, p. 16).

Any attempt at controlling prices deprives competition of its power of efficiently coordinating individual efforts; controlled prices cannot guide individual decisions correctly (Hayek 1944).

They absolutely opposed other reformers such as Liberman willing to introduce market-type mechanisms.

Owing mainly to the small capacities of computers available in 1965.

“I may venture that the discussion given below has direct relevance for the exchange of information that occurs in France between the Commissariat Général du Plan and the large public enterprises when the former prepares the national plan and the latter determine their long-term programs. I also hope that the same discussion will find application in the future when a more systematic exchange of information will be organized between the Commissariat and the commissions de modernisation which represent the various industries” (Malinvaud 1967, p. 171).

“No serious businessman, no serious government official believes that markets convey all the information required for good decisions with long- or medium-term implications” (Malinvaud 1992, p. 22).

Their first paper (Kornai and Liptak 1962) submitted to Econometrica was supported warmly within the editorial board by Malinvaud.

While Kornai (2014) still trusts medium and long-term planning to alleviate the detrimental effects of the surplus economy (capitalism) “but updated forms of indicative planning on the lines of those once used in France”.

The axiom of non-manipulability of demand adopted by Benassy rules out stock-hoarding demand, while the latter has been a critical phenomenon in the Soviet experience of a shortage economy. Later, Weitzman (1991) elaborated a model of shortage equilibrium taking on board prices that are not necessarily market-clearing and consumer behavior with search and waiting costs that trigger an inventory policy. In his criticism of the standard disequilibrium approach (see below), Kornai never referred to the limits introduced by the aforementioned axiom. Note that if shortage boils down to a consumer buying only small units at a time and then being compelled to wait in line anew for each small purchase, then Weitzman’s (1991, p. 401) model adopts in turn a preferred limiting assumption: “after waiting in line for a sufficiently long time, or happening upon the good, the customer can effectively buy as much as he wants”. Thus, he argues as if shortage had vanished in the meantime in a shortage economy.

This assumption of fixed prices was criticized when it was formulated because no justification for it was provided. In the preface to the French edition of his book Malinvaud (1977/1980, p. 13) replied that the alternative assumption of enough flexible prices to guarantee permanent equalization of supplies and demands was even less justified, meaning the existence of auctioneers in all existing markets.

That is Clower’s notional demand (or supply).

In that respect, Kornai departs from Hayek’s (1945) faith in the price system as a unique and very simple system for “coordinat[ing] the separate actions of different people” among which relevant knowledge (information) is idiosyncratic and dispersed, and as “a mechanism for communicating information” when prices are not rigid; Hayek contends that the price system operates as an economy of knowledge reduced to “how little individual participants need to know in order to be able to take the right action”, so “that the dispute about the indispensability of the price system for any rational calculation in a complex society is now no longer conducted”.

At least until the publication of a World Bank (2002) report that gave up on the overnight privatization strategy recommended since 1989. One may assume that Kornai (2003) and a minority of non-mainstream ‘transition’ economists, including the present article’s author, had little influence on the World Bank’s policy U-turn.

Blanchard–Fischer (1989, p. 373) contend that the disequilibrium approach to studying the implications of sticky prices and wages has run out of stream because it “had reached a dead end: the assumption of given prices, which had appeared initially to be a useful shortcut, turned out to be a misleading one. Further, in the absence of microfoundations that accounted for the price stickiness, it was difficult to make progress on several ambiguities that emerged from the framework”. The last sentence might be inappropriate as regards infra-microeconomic roots of Kornai’s SBC analysis.

In the team sports league’s business mid- and long-term supply of capital (stadiums) is fixed ex ante and prices are partly regulated (thus sticky) while teams operate under a soft budget constraint (Andreff 2014b).

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Title: Janos Kornai: a non-mainstream pathway from economic planning to disequilibrium economics
Author: Wladimir Andreff
Publication date: 12-05-2020
Publisher: Springer US
Published in: Public Choice / Issue 1-2/2021
Print ISSN: 0048-5829
Electronic ISSN: 1573-7101
DOI: https://doi.org/10.1007/s11127-020-00813-6

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