János Kornai, the Austrians, and the political and economic analysis of socialism

For recent examples of work that applies Kornai’s theoretical work to understanding the process of economic reform and transition, see Perényi, Esposto and Bamforth (2020) and Zhou (2020).

Our elaboration of Kornai, namely that incentives are embedded within mechanisms that filter and transmit dispersed and tacit and knowledge, also parallels the insights of Sowell (1980, p. 150) in Knowledge and Decisions: “Effective feedback does not mean the mere articulation of information, but the implicit transmission of others’ knowledge in the explicit form of effective incentives to the recipients. A corporation’s profit and loss statement or a baby’s whimpers are such transmissions. Both galvanize people into action in response to other people’s feelings, even though one is articulated and the other not. It is the effectiveness of the incentive transmission, not the explicit articulation that is crucial.”

See Buchanan (2015, p. 260), in which the following is stated: “The diverse approaches of the intersecting ‘schools’ must be the bases for conciliation, not conflict. We must marry the property-rights, law-and-economics, public-choice, Austrian subjectivist approaches.” Indeed, Kornai himself has recognized the parallel insights to which he has drawn about the incoherence of market socialism by Mises ([1920] 1975), Lavoie (1985), and Nutter (1968), as well as the “property-rights school” of Alchian and Demsetz (see Kornai 1992, p. 500).

By the end of 1955, Kornai recounts in his intellectual autobiography that he had completely moved away from Marxist theory and ideology, but “went on believing for quite a while that socialism could be reformed” (Kornai 2006, p. 81). See, for example, his work with Tamás Lipták, applying mathematical analysis to theoretically examine central planning (Kornai and Lipták 1962, 1965).

Another way in which to reframe this point is to draw the distinction between high-powered and low-powered incentives (see Williamson 1985). Frant (1996, p. 367) describes the distinction as follows: “High-powered incentives are those provided by market transactions, in which efficiency gains from a particular transaction flow directly to the parties transacting. In hierarchies (organizations), on the other hand, incentives are low powered. The particular individuals involved in a transaction may get a raise, a promotion, and so on, but they generally are not able to personally lay claim to the gains from trade.”.

Moreover, the lack of residual claimancy also implies that the organization of production within state-owned firms will not be incentivized correctly, not owing to the absence of incentives per se, but to a failure to know what kinds of incentives should be implemented to minimize the transaction costs associated with metering and monitoring workers in the first place. When production within a firm is organized by a residual claimant, “opportunities for profitable team production by inputs already within the firm may be ascertained more economically and accurately than for resources outside the firm. Superior combinations of inputs can be more economically identified and formed from resources already used in the organization than by obtaining new resources (and knowledge of them) from the outside. Promotion and revision of employee assignments (contracts) will be preferred by a firm to the hiring of new inputs. To the extent that this occurs there is reason to expect the firm to be able to operate as a conglomerate rather than persist in producing a single product. Efficient production with heterogeneous resources is a result not of having better resources but in knowing more accurately the relative productive performances of those resources” (Alchian and Demsetz 1972, p. 793; emphasis in original). Thus, in a non-profit setting, the planners will not be able to identify which contractual arrangements, such as piece-rate or fixed-wage contracts, will minimize the transaction costs associated with metering and monitoring workers (see Piano and Rouanet 2020). It is only through the profit and loss mechanism that firms can sort from the array of technically feasible contractual arrangements those that are economically viable. Thus, the calculation problem under socialism extends not only to the allocation of the means of production in the economy as a whole, but also within socialist firms as well (see Rothbard 1962, pp. 544–560; Boettke and Coyne 2004).