Janos Kornai’s warning to the post-pandemic world

The author is the publisher of The Overshoot research service and the co-author of Trade Wars are Class Wars

If the pandemic has taught us anything, it is that an economic downturn is inherently optional.Governments in rich countries can protect household and business balance sheets from the worst damage since World War II Just print money.

How should we use this new knowledge? Anyone who seriously considers the potential risks and rewards of a policy portfolio that may be called “complete Keynesianism” should consider the ideas of the economist Jano Cornet, who died last month.

Kornai grew up in Hungary and spent most of his time on Soviet satellites, which allowed him to experience firsthand a society where “full employment” became the norm and the business cycle was banned. The result is not a paradise for workers or anyone else, but what Kornai calls a “shortage economy” that wastes producers and deprived consumers.

For Kornai, the essential feature of the “capitalist” economy is that enterprises face “hard budget constraints.” If they do not make enough money from their business, they need to raise funds from banks or capital markets. If they cannot raise funds, they will go bankrupt.

This constraint forces producers to conform to the wishes of consumers. Unless companies can provide the goods and services that people want at affordable prices, they will not survive. At the same time, companies must also focus on efficiency and cost control so that they can pay their own expenses. Kornai believes that these urgent needs to promote competition will lead to innovation, productivity improvements and sustainable improvements in living standards.

In contrast, Hungary and other “socialist” economies are characterized by what Kornai calls “soft budget constraints.” Companies never have to worry about balance of payments, let alone generating profits. On the contrary, they knew that they received unlimited financial support from the government. They can always “afford” to hire workers, invest in physical capital and accumulate raw materials. It does not matter whether any of these activities are truly valuable.

This eliminates the incentive to innovate to meet customer needs and reduce costs. Consumers are forced to adapt to the whims of producers. Since managers receive individual rewards based on the reported size of the business—rather than other indicators such as value creation—they are very motivated to increase their scale as much as possible by hoarding workers, land, and materials. In Kornai’s words, the needs of companies are “unsatisfiable,” even if the production of useful goods and services is limited by weak incentives built into the system.

The result is a chronic shortage. There is no inflation in the traditional sense of rising consumer prices, because these prices are explicitly or implicitly set by the state. But ordinary people feel the squeeze in various ways.

They have to spend a lot of time waiting for what they want, whether it’s a decent apartment, new appliances, or even just groceries. Even so, many consumer goods and services are simply not available. Workers’ ability to change jobs or demand higher wages is severely restricted. The state vigorously suppresses other forms of labor activism, such as confrontational unions and strikes.

The wealthy democracies in the 2020s are different from the Eastern bloc that inspired Kornai’s work in the 1970s. In fact, Kornai may approve extraordinary measures taken in the past 18 months to protect family and business income, including wage subsidies, forgivable loans, foreclosure moratoriums, and eviction injunctions.But you can imagine how we inadvertently caught “Soft Budget Constraint Syndrome”As Kornai said, after the coronavirus.

For Kornai, the danger is that one-off emergency measures become routine. What would the world be like if consumers and companies began to believe that the government would respond with similar forces every time the economy fell?

To be sure, if we reduce our self-insurance and rely more on a strong and reliable public safety net during the downturn, we may all live better. But it is also easy to see that with the adjustment of expectations and behaviors, exploring the possibilities revealed by the pandemic may produce a series of new social problems. Destroying incentives for workers and companies to increase productivity will eventually make everyone’s situation worse.

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