Janos Kornai and the soft budget constraint

The most developed thesis of that book was that capitalist economies were in a state of constant excess supply (overproduction) whereas centrally planned economies were in a state of constant excess demand (shortage), and he drew out with minute detail all the implications of this analysis. I remember raising arguments from his book in my general equilibrium class in university, surely annoying the professor. Olivier Blanchard once told me he had a similar experience. Kornai’s book was extremely popular among young rebellious economists who wanted to change the world.

In 1980, his magnum opus, Economics of Shortage, came out. Whereas his earlier work on the economics of planning was mostly theoretical (all that literature was very remote from how planning was done in reality), this was the first book to propose a systematic and powerful analysis of how the socialist economy really worked in practice. Starting with the concept of the soft budget constraint (state-owned enterprises in socialist economies that were making losses would never shut down), he explained how this led to increasing demand by enterprises, making them barely responsive to price variations. These increased demands led to generalised shortages that deeply influenced the behaviour of enterprise managers, consumers and planners.

That is from a broader appreciation by Gérard Roland.  Here is one original Kornai piece on the topic.  Here is a later ungated piece.  Here is Eric Maskin on different theories of the soft budget constraint.


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