An economist as an iconoclast
Janos Kornai (1928-2021), the Hungarian economist, provided the first systematic and structural understanding of the flaws in the centralised command economy as well as the fallacy of the assumed equilibrium
of the capitalist economy.
WITH the passing away of Janos Kornai on October 21 at the age of 94, the world has lost yet another link to the intellectual world that struggled to shape the 20th century amid its great upheavals. While the city of Vienna produced grand theorists of world economy before the two World Wars, which included Alfred Hayek, the icon of neoliberal thought, it was Budapest, the capital of neighbouring Hungary, that produced one of the most insightful economists, Janos Kornai. This Hungarian provided the first systematic and structural understanding of the flaws in the centralised command economy as well as the fallacy of the assumed equilibrium of the capitalist economy.
‘ECONOMICS OF SHORTAGE’
Piercing the ideological ways of looking at the socialist economy by Western economists, Kornai, through his celebrated research that included his doctoral work Overcentralisation in Economic Administration (1959), and later Economics of Shortage (1980), provided clues to the problem of shortage in the socialist (and centrally planned) economies which, as we know today, became their nemesis. He was the first to point out that this perennial shortage was not because of the problem of target or laxity on the part of the managers to carry out instructions properly; it was structural and embedded into a centralised command economy like that of the socialist economy.
It was after the Hungarian revolution of 1956 that Kornai became determined to delve deeper into the profession of economics. He began his self-instruction in the application of mathematics in economic modelling. It brought him to the study of linear programming. He was selftaught and arrived at a state of modelling where he needed a mathematician to suggest the next step. Here, he was introduced to Thomas Liptak, a brilliant mathematician at the Hungarian Academy of Science who would soon land in prison in those early days of post-1956 communist restoration.
The paper, written from Budapest at a time when Kornai himself had just lost his job, was published in
Econometrica, the reputed journal of mathematical economics, and immediately attracted worldwide attention towards the authors and the Hungarian economy.1
KORNAI-LIPTAK DECOMPOSITION MODEL
The paper tried to present a twosector model to ascertain in precision what has become famous as the Kornai-liptak decomposition model, that is, simplifying the large problem of resources and profits by decentralised firms. It tried to help understand the price-sharing mechanism, not through what Kornai later said, ‘property relations or institutional design’ but from the rate of profit sharing and incentives. Thus, incentives and the relation between principal and agent, on the one hand, and incentive and its direction to production, on the other, can be understood differently from the kind of economic modelling done by the Marxist economist Oscar Lange, who identified the central planning board (CPB) with providing space for adjustment of both output and incentive. Kornai’s was the first open difference with an effort to bring precision into forecasting, which might or might not have accorded the supreme place to the planning commission.
Incidentally, Lange had a deep interest in Indian planning and was quite influential in India’s planning decision. Kornai, too, was keen on Indian’s planned development, and in fact visited India in 1975 and interacted with one of India’s foremost economists on planning, Prof. Sukhamoy Chakravarty, and some political leaders, including those from the communist parties. His disagreements with many of those he met were that they were not ready to give the running democracy in India its due just because it was falling short of their expectations. He also disagreed on the basic postulate, valid even today, that the answer to the problems in the economy as well as society lay in efficient production and not merely expansive distribution.
Kornai believed in this even three decades later when changes were witnessed in east and central Europe after the 2007-08 financial crisis.
With his work on economic modelling advancing to a higher level, what attracted his attention was the general equilibrium theory, the lynchpin of the justification of the market and market mechanism. Working behind iron curtains with limited contact with Western academia in the 1950s and 1960s,
Kornai taught himself serious mathematics and economics to question this lynchpin of the economic understanding in capitalist economy.
His Anti Equilibrium (1971) showed how the capitalist system has a supply surplus, contrasting with what he described as excess demand (shortage) in the socialist ones. This was a major critique of the mainstream Western economy and hollowed out the glory of the general equilibrium theory that worked on a different assumption. This also brought him in direct touch with the world of
Western economics at a time when neoliberals, spreading out from
Chicago, were trying to take over the economic establishment and the
United States universities. Kornai, therefore, presented a critique of their assumption. In fact, the book also brought out issues that would become quite central to economic research in the 21st century, that is, the information base of economic analysis. His idea of ‘informational asymmetry’ helped many future researchers in the field.
The post-1980s saw Kornai gradually moving to the centre stage of the world of economics and economic thinking. In 1992 he became the Allie S. Freed Professor of Economics Emeritus at Harvard, and contributed at a larger level through his students there. This was also the time that he published his magnum opus, The Socialist System (1992). As president of the International Economic Association and the Econometric Society and European Economic Association, and with state and university honours from a number of countries, including the highest state honours of Hungary, Kornai travelled far and wide and higher in the realm of economics and scholarship.
Notwithstanding all the fame abroad, he remained rooted to his Hungarian origins and his concern for the Hungarian economy and society. Born in 1928, he suffered both Nazi torture and the communist suppression. The first killed his father and brother and left him without any support after his accidental survival. The other, while giving him the inspiration to become a serious economist after seeing and analysing the socialist economic system, also made him work longer and with difficulties in much of his youth. It is only after the 1980s that one saw him moving with much freedom and across the world, including to the U.S.,
which was turning out to be the Mecca of economists. His extremely readable Force of Thought: Irregular Memoirs of an Intellectual Journey (2008) gives a moving account of the extraordinary times in which he lived and the life of a great mind.2
FALLACIES OF THE SOCIALIST SYSTEM
As a young researcher working on the contemporary history of central Europe, I met Kornai in 2007, just before the economic crisis hit central and eastern Europe, and could sense his discomfort at the way the transition in Hungary and its neighbouring countries was taking a turn. While he was critical of the centralised command planning of the socialist system, he did not completely wish it away. He showed me the building which used to house the Goss Plan (Planning Commission) and was being taken over by the European Union to turn into its office “to plan” its course. With a twitch of sarcasm, he indicated that what the post-socialist abandoned, the liberal economist took over after criticising it wholeheartedly. While he was the first to show the fallacies of the socialist economic system, he was equally concerned about the madness of wholesale privatisation. This made him look closely at the way societies were having to shoulder the collapse of institutions in the wake of such privatisation, which was bringing in its wake leaders and parties giving societies a completely wrong turn. He wanted the social trust to regain its hold.3 His voice became cautionary and sagacious, and it is no wonder that he began to take active interest in the privatisation of, for example, the health segment in Hungary.4
He, however, was alive to the
He thought that changes should come to nations from within, as exemplified by China, where its leadership’s resolve to change resulted in developing capitalism in a communist system.
political turn that central and eastern Europe were taking, which to him were betraying the hopes that the transition had offered. In fact, he observed closely the U-turn that Hungary was making and wrote about it. To him freedom, democracy and civilisation were too important to be sacrificed for economic development. He could see, unlike the neoliberal idea of trust that Fukuyama later came out with, that societies in this part of the world may lose many virtues of human life if the economy and society are guided in this way. In this sense, his long and committed life of reflection cautions us: we should not just be privatising for the sake of privatisation as there were repercussions, and that there were arenas of human life that needed to be treated differently.
RESPECT FOR NATIONAL WORTH
Deeply nationalistic in the sense of someone who loved the language, literature and the flavour of Hungary, he was forthright (during my conversation with him) that no matter how small the country was, its nationalism and national self-worth should be respected. He thought that changes should come to nations from within, as exemplified by China, where its leadership’s resolve to change resulted in developing capitalism in a communist system. He was involved in advising China. It is another matter that Kornai later seems to have expressed his unhappiness and regret over the developments in China. Notwithstanding his disavowal of the socialist system and its ‘ideology of bureaucratic rule, etatism, paternalism, and egalitarianism’, which had pervaded the socialist system and caused its structural collapse, he was also the medium that conveyed to us the forces of ideas of the 19th and 20th century Europe: “the ideas of solidarity, fairness, compassion for the weak, and rationality at a societal level”, which he believed had attracted, including himself, to socialism.5
Academics and scholars who are living in oppressive systems can take heart from the way Kornai worked and exposed the cleavages in the system. May be his initial self-censorship or being an economist saved him that ultimate penalty, which many political dissidents paid for with their life and career. It was the doggedness with which he carried on his work and the grand vision that he never lost touch with that made him what he became: a person whose ideas resonated the world over and despite the Noble Prize eluding him. The contributions that he made were far in excess, using his own concept rather than the ones Western economists were providing through excess supply of papers and thesis. He personified the career of many a great European intellectual of the last century. m Rakesh Batabyal teaches history and media theory at the Centre for Media Studies, School of Social Sciences, JNU. He is currently working on east and central Europe from 1989-2021.
References
1. Kornai, Janos and Thomas Liptak, 1965. ‘Two Level Planning’ in Econometrica, vol. 33, No. 1,pp. 141-169.
2. Kornai, Janos, 2006. Force of Thought: Irregular Memoirs of an Intellectual Journey, Cambridge, Mass.: MIT Press.
3. For his insight into the problem of transition, see Kornai, Janos, From Socialism to Captialism, Budapest: Central European University Press.
4. Kornai, Janos and Karen Eggleston, 2001. Welfare Choice and Solidarity in Transition: Reform in the Health Sector in Eastern Europe, Cambridge U.K.: Cambridge University Press.
5. Kornai, Janos, 1992. The Socialist System: Political Economy of Communism, Oxford: Clarendon Press, p. 580.