The Economist November 20th 2021 Finance & economics 81Theinbetweener
I
n his cabinaboard the ssBashan, a luxury river boat sailing to
Wuhan, Janos Kornai was sleepless with excitement. The Hun
garian economist, who died last month, was one of seven foreign
experts invited in 1985 to share their views on China’s economic
reforms. As Julian Gewirtz recounts in his book “Unlikely Part
ners”, Mr Kornai stole the show. On a weeklong cruise with an au
dience of Chinese technocrats, he dissected socialism’s familiar
“cares and woes” (featherbedded firms, rushed growth and con
sumer shortages). And he offered a hopeful vision of a restrained,
guided capitalism. His book “Economics of Shortage” soon be
came a bestseller in China, although he never saw any royalties.
Forty years earlier, Mr Kornai lay on the roof of a Jesuit monas
tery in Budapest, hiding from a fascist raid down below, even as
Soviet forces dropped bombs from above. The skyline had a “hell
ish beauty”, he wrote. As a Jewish Hungarian who had lost his fa
ther and a brother to the Holocaust, he welcomed the Soviets as li
berators. He did not even mind when they stole his watch. His
gratitude was one reason why he became an enthusiastic commu
nist, so devoted to his work on a party newspaper that he missed
the birth of his first child. His communism, in turn, explains why
he became an economist. He pored overKarl Marx’s “Das Kapital”.
Enlightenment radiated from it “like sunshine”, he later wrote. “I
had no more doubts about what profession to choose.”
The spell of Marxism broke when he met a victim of the torture
it entailed. He also came to hate the improvised haste of journal
ism. He turned instead to research at Hungary’s Institute of Eco
nomics. But his reporter’s habits served him well in his disserta
tion. By interviewing managers, grumbling with them about bu
reaucratic idiocy, wastage and “disregard for customer needs”, he
crafted a rare systematic account of how a planned economy actu
ally worked, as opposed to how it was supposed to work. The book
also served as an index of shifting political winds. It was celebrat
ed in the leadup to the Hungarian revolution in 1956, denounced
after that revolution was crushed by Soviet tanks, then approved
for translation into English, all by the same person, the director of
the institute.
Some socialist reformers thought that widespread state owner
ship was compatible with market forces and price signals. But MrKornai recognised that getting prices right, even if it were possi
ble, would not be enough. Under capitalism, a firm cannot defy
prices for long without going bust. Under socialism, things were
different. Stateowned firms knew they could always appeal to
higher authorities to bail them out. In 1979 Mr Kornai called this a
“soft budget constraint”: the sharp line drawn by economists on
their blackboards was smudged. If firms do not fear losses, they
need not heed prices. This lack of financial restraint also allowed
firms to indulge their “investment hunger”, an excessive appetite
for resources, which squeezed out consumers and resulted in
chronic shortages.
The argument made his name: it was a “congenial” extension
of a concept familiar to mainstream economists. Mr Kornai had
once had larger ambitions, hoping to smash the crystal through
which most economists viewed the world. He had studied neo
classical theorists such as Kenneth Arrow with much the same
care he had lavished on Marx. But he could not square their ethere
al “general equilibrium” theory with his observations of the living,
breathing economy. The mismatch reminded one economist of a
line by the poet Edith Sodergran: “You searched for a woman and
found a soul—you are disappointed.”
On the China cruise, Mr Kornai convinced his audience of the
need to harden the budget constraints of the country’s firms. One
of his fellow passengers is now China’s banking regulator. But the
imposition of financial discipline remains a work in progress. The
rise in defaults, even of stateowned firms, in recent years is evi
dence of some harder financial lines. But it comes only after years
of gluttonous investment.
China has not, however, suffered chronic shortages. On the
contrary, it is a “supersurplus” economy, marked by massive ex
cess capacity, as Xu Chenggang, one of Mr Kornai’s students, has
pointed out. One reason is that stateowned enterprises do not
have the economy to themselves. They coexist with fiercely com
petitive private firms. The surpluses may also reflect the dual na
ture of investment. It is both an immediate source of demand and
an eventual source of supply. In the short run, it makes a claim on
the economy’s resources, which can crowd out consumers. But
when the investment bears fruit, it adds to the economy’s ability
to supply goods and services, resulting in abundance not scarcity.Team transitory
Like the economies he deciphered, Mr Kornai inhabited two
worlds. He was half in the mainstream of economics, half out.
From 1983, he was half in America, half out. The transitions were
not always easy. It took him time to perfect his English. In his Bos
ton driving test, he declared that a “no hitchhiking” sign was a “no
hijacking” sign. In a lecture, he repeatedly mispronounced ware
house as whorehouse. On returning home to Hungary each year,
he had to remember to drop his upbeat stateside persona and com
plain a bit more.
But although he straddled different worlds, he was in no doubt
where his allegiances ultimately lay. “Despite its detrimental and
morally nasty features...I would sooner live under the capitalist
system than in the happiest barrack in the socialist camp,” he
wrote in his memoir. And although he was intellectually opposed
to patriotic bombast, he felt an instinctive pride in the achieve
ments of his compatriots. It was their music and literature that
moved him. Their unillusioned meliorism that animated him. He
counted in Hungarian.Andwhen he wasn’t sleepless with excite
ment, he dreamt in it too.nFree exchange
Janos Kornai understood capitalism by studying its opposite