Economics is not exactly the sort of profession that generally leads to enduring fame and glamor. The passing of an economist into the long run, even of “famous” ones is usually only remarked upon by academics or the financial press. The death of Janos Kornai is no exception. I had not heard of Kornai’s passing until I read about it in an article in the Financial Times, by Matthew Klein. Kornai was known for his critique of Centrally Planned Economies of the type that existed in the former Soviet Union, Central Europe, and still exist in Cuba and North Korea. Klein’s article uses the death of Kornai to warn that the recent spate of what he terms “Full Keynesianism”, runs the risk of recreating the kinds of pervasive problems with respect to widespread shortages of consumer goods that plagued Centrally Planned Economies. Klein’s article, as I explain below, is actually superficial and in my view, conflates two of Kornai’s central critiques of Central Planning, and actually, fails to do justice to Kornai’s work. The Marxist economist Michael Roberts has a much better and more interesting discussion of Kornai, which raises a separate set of issues. But for the most part, I’ll focus my arguments here on what I think Klein got woefully wrong. I’ll first explain what Klein missed about Kornai, and then explain why the reference to Kornai actually has nothing whatsoever to do with whether or not “Full Keynesianism” is good economic policy in the context of actually existing Capitalism.
Before I jump into it however I want to make a brief point about nomenclature. Those who find such discussions tedious can just skip onto the next paragraph. For the sake of convenience, I’ll use the term Centrally Planned Economies, or CPEs. I always struggle with how to describe the social formations of the kind that existed in the former Soviet Union and its allies. I am sympathetic to characterizations of them as “State Capitalist” but in the absence of private ownership and the accrual of profits to corporate entities, the term Capitalist doesn’t make much sense. Nor am I inclined to call them “Socialist” -with or without the appellation of “degenerate” or “actually existing”-as their operation had little to nothing to do with the goals of the 19th century Socialist movement. The term “Asiatic mode of production”, as that term was understood, is descriptive of how these systems functioned, but the term itself has multiple obvious shortcomings. Consequently, I lean towards describing them as Tributary social formations, which raises additional problems of its own. But whatever term we apply to the former Soviet Union and similar societies, their general characteristics were one party totalitarian rule, state ownership of productive property, and efforts at planning the entire economy down to the microscopic level. I’m partial to the description of elites in these societies as a “New Class”, rather than as just a “bureaucracy”. Now that I’ve established my heretical credentials, let’s move on.
Like a number of other Soviet or Soviet bloc dissidents, Kornai started from a humanist critique of “actually existing socialism” and moved rightward over time. I disagree however that Kornai’s ultimate position was identical with Austrian economics, even if there are some superficial resemblances. Kornai’s critique of Centrally Planned Economies was in part political in that he critiqued the centralized control of the Communist Party. The other part was economic: he argued that CPE’s were characterized by soft budget constraints for firms and consumer shortages. With respect to the operation of Centrally Planned Economies, he was not entirely wrong. These were indeed two features of Centrally Planned Economies. But the issue is, was there a causal link between soft budget constraints and shortages? To his credit, I don’t think that Kornai attributed the shortages to soft budget constraints. To the contrary, he was quite aware that the shortages were owed to political and ideological factors.
The shortages of consumer goods in CPEs was by design: central planners emphasized heavy industry and military production over consumer goods. Since prices were lower for these goods than a hypothetical market clearing price, there were endemic shortages of consumer goods, and sometimes even of electricity, which was heavily subsidized and often sold well below world market prices. In addition, there were also pervasive shortages of critical inputs for firms. Centrally Planned Economies functioned because in actuality, goods and services, including inputs for firms, were allocated by a complex barter system in which the goods one got depended in large part on how connected one was. I don’t actually, in general terms, disagree with this analysis as far as it goes. The preference of planners for heavy industry and military production was in part ideological and in part geo-political. I don’t believe that in the latter decades after the 1950’s that most people responsible for setting the priorities of the plan opposed the introduction of consumer goods in principle.
There is an interesting question about whether or not Centrally Planned Economies could have overcome pervasive consumer shortages. Of course, there is another question about why one would want Central Planning, but that’s an issue for another day. But in principle, there was no inherent reason why a Centrally Planned Economy could not emphasize the production of butter over guns, or washing machines and sausages over tanks and concrete. A Centrally Planned Economy is unlikely to produce pet rocks or washing machines with 10 different cycles. On the other hand, it was perfectly capable of producing washing machines. I know, because I used one in Bulgaria for three years in the early 90’s. It was bulky and built like a tank and as I recall had two cycles, hot and cold, but it worked perfectly well to get my clothes clean. If Central Planners choose to produce washing machines and sausages they can do so. There’s a lot of other problems that Central Planning can’t solve. But the point is that shortages in CPEs were not a consequence of soft budget constraints per se. Though there are aspects of late Capitalist consumerism that are sometimes advantageous-such as extensive safety features on automobiles-there are others that seem entirely superfluous, such as programmable refrigerators and ovens that required replacement when one computerized part breaks down. I might prefer the 200 plus channels associated with cable TV to Comrade Detective , but I remain unconvinced that 200 plus channels makes me truly happy.
In his article however, Klein uses the arguments of Kornai (or rather I should say misappropriates them) to offer us a warning about the possibility of pervasive shortages that might follow as a consequence of a “full Keynesianism” that emphasizes persistent or permanent use of extensive aggregate demand management and promotion of full employment in the context of actually existing capitalism. In the first instance, the current round of shortages-which admittedly have caused some flashbacks to my days in the Post-Soviet twilight of early and mid 90’s Romania and Bulgaria- are a consequence of COVID related bottlenecks. I suppose one could argue that given our current supply side constraints, aggregate demand should be lower, which would in a way resolve the shortages in the sense that if no one can buy anything then there will be an abundant supply of goods. The problems currently however are not a consequence of excess aggregate demand. Secondly, if we look at the history of when Capitalist economies came close to using something kind of like “Full Keynesianism” and these economies came close to full employment, there is no evidence that there was any kind of lack of consumer goods. The only way that Keynesian type policies could cause shortages would be if aggregate demand were to consistently press on the underlying capacity of the economy and there was a widespread system of wage and price controls-which would probably lead to repressed inflation. Even then, if we take the experience of the US economy in WWII rationing of consumer goods such as butter, gas and sugar, while pervasive, did not lead to extensive lines in front of butcher shops. And this was a result of an economy geared towards producing for all out war at full employment. In sum, Klein’s argument is simply a non-sequitir.