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Contradictions and dilemmas: Studies on the Socialist Society
J~nos Kornai, Contradictiol,s and DUemmas: Studies on the Socialist Society (published by Corvina, distributed by Harper and Row, Noorderweg 68, 1221 AB Hilversum, The Nertherlands), 1986, 165 Pages, Dfl. 29,80. In the introductory chapter of this book, J~nos Kornai states that the seven studies which make up this volume are written not merely for economists but are addressed to all who are interested in economic problems and concerned about social matters. Without doubt the reading of the first six studies should be of interest to all those economists who love their subject: who are interested in the functioning of economic systems, the design of economic institutions, the behavior of individuals, organisations and institutions, and the foundations of economic reasoning and economic research. With respect to this motivation the seventh chapter, entitled "The Health of Nations: Reflections on the Analogy between Medical Sciences and Economics", seems of rather dubious value. Ever since Francois Quesnay (1694-1774), personal physician to Louis XV and Madame de Pompadour, published his tableau ~conomique, which describes the circular flow of "national income" and its annual reproduction, economists are inclined to stress the analogy of their science to the science of medicine. This can be profitably done, however, Kornai's emphatic claim for a comprehensive theoretical analysis devoted to investigating, systematically and in full depth, the interrelations among economic diseases (he explicitly lists "seven evils") and the systematic collection of adverse side-effects of economic therapies largely neglects that, on the one hand, human beings are mortal while social and economic systems are not and therefore other standards of "success" and therapy apply. The healing of society necessarily refers to other standards than the healing of an individual human being. On the other hand, the physics of the human body changed very little during the last few thousand years, and thus medical knowledge seems easier to accumulate while social and economic systems are submitted to processes of evolution and revolution - to some extent, reacting on the development of theoretical thoughts. (In fact, the performance of medical science is often very weak in face of new diseases and the rigorous medical catalogue of disease and recipies which Kornai praises in this chapter may well be challenged by alter-
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Books/Biicher
native medical systems like, for instance, the classical Chinese one.) Kornai's suggestion of a comprehensive catalogue of economic disease and therapies, expressing to a high degree recipe knowledge (see, e.g, Shaffer (1981) on the limits of recipe knowledge compared to traditional scientific knowledge), somehow contradicts his claim for general insights in the functioning of social and economic systems which he brings forward several times in the preceding chapters. The naivety of the medical-economic analogy invalidates, to a certain extent, his rather interesting statements on positive and normative theories, on contradiction and dilemmas and on the status of the Phillips curve which he waives in the elaboration of the analogy. However, one can easily abstract from this chapter and still enjoy the fruits of Kornai's analysis of the socialist economy of the Hungarian type and the general laws on shortage which he therefrom derives. The common thread of Kornai's analysis is the prevalence of economic shortage due to soft budget restraints. In a real-world socialist economy, due to state ownership and paternalism, firms do not go bankrupt and managers do not get punished by severe income reductions if the balance sheet shows red numbers. On the other hand, managers get only minor rewards if there are profits. The lion share of these profits will be taxed away anyhow. There is a system of taxation and direct and indirect state subsidies, grants in kind and financial allowances, which renders the profit concept inappropriate to measure the success of a firm, more so if the bonus of a manager does not depend on the "original" profitability of the firm, but on the actual profitability after receipt of the subsidies as noted by Kornai. Since the volume of activity and the smoothly functioning of production are generally taken as a substitute for the profit measure, managers tend to absorb all resources for their firm available to them within the realm of their business activities. The latter are often defined in a very broad sense, irrespective of the costs involved and thus rather independent of t h e corresponding prices; the production sector becomes insatiable. More so, if this expansion drive is supported by the minister's disposition to increase the sector in his charge by means of investment (see p. 69 and p. 107 of the book). As a consequence, there is a permanent shortage of resources within the production sector and, inasmuch as this resources are also used, directly or complementarily, in consumption, also within the consumer sector.
Books/Biicher
619
The general feature of this thread of reasoning is known from Kornai's two volumes "Economics of Shortage" (1980). With respect to labour, the shortage implies full-employment. A further consequence of this shortage is the strong market position of the suppliers of resources. This often leads, as Kornai points out in the interview published in his chapter on "Economics and Psychology", to submissive behaviour of the buyers in face of the mighty sellers and to frustrations due to forced adjustments. The buyer often feels deprived of certain alternatives (and, in fact, he is); he knows such alternatives exist and that he could obtain them, however, others had more "luck" to get them and thus they are not available to him. "He cannot even think in terms of the 'best'. From the outset he looks for the 'second-best"'_ "Shortage keeps on making the choice instead of you". We can read several thousand of pages on labour economics and we will hardly find similar perspective on Keynesian unemployment which is one of the capitalist system's pendants to the shortage described above. And, of course, with respect to labour Kornai can proudly point out that "the Hungarian economic system freed the worker from the nightmare of unemployment, which not only causes grave financial losses to the society and to the individual, but also debases dignity, forcing workers to humble themselves before the employers" (p. 131). As already stated above, this is a consequence of the mamagers' insatiable hunger for recources which implies the economic inefficiency and shortage which frustrates the buyers. Now, when it comes to cure the shortage defect by making the budget constraint less soft, making managers responsible for the economic performance via profit measures and allowing for bankruptcy and unemployment, contradictions to socialist ethics become obvious. The latter, e.g., includes a principle of security which implies the full-employment guarantee which is satisfied under soft budget constraints. In a separate chapter, Kornai explicitly describes this contradiction and clearly states that this contradiction is inherent to the system a n d there is no final solution to it. There are few well-established economists who are dedicated to the capitalist market economy and have the courage to point out the contradiction within the system they favour. In Kornai's analysis, the policy maker as well as the advising economist have to face the dilemma which derives from the basic contradiction when it comes to increasing economic efficiency or to evaluate the performance of the economy. This fundamental and
620
Books/Biieher
not fully reducible dilemma-contradiction relation gave the book the adequate title. The dilemma-contradiction relation serves as frame and the budget constraint concept as main tool to Kornai's discussion of the results of the economic reform of 1968 which was intended to increase economic efficiency by the introduction of competitive elements in the Hungarian economy. Kornai does not give a comprehensive presentation of empirical facts, but restricts himselfs to illustrative details which support his theoretical arguments. One of these details is the outstanding high degree of concentration in the Hungarian industry (pp. 93-96 of the book). A n outstanding feature of Kornai's writings is the reflection of the methodological principles which the author chooses (see Kornai, 1971, 1972, 1980). This feature also characterizes the contributions to this book, though to different degrees. Even if one does not (fully) accept Kornai's methodological position(s), it is interesting to see how the tools of analysis are selected and how the subject of the study influences the selection of tools. A n obvious shortcoming of the book is some redundancy in the presentation of the material. This, of course, is due to the fact that the book results from seven contributions which were originally written as self-contained contributions. The more remarkable it is how strongly the common threat of the author's insights joins these contributions together to form a substantial book. Even if the reader is only interested in market economies of the capitalist type, he cannot avoid to gain additional insights in the functioning of his economic world by reading this book and studying socialist economies. Marco Polo said to Kublai Khan: "Sire, now I have told you about all the cities I know." "There is still one o f which you never speak." Marco Polo bowed his head. "Venice," the Khan said. Marco smUed. "What else do you think I have been talking about? _ Every time I describe a city I am saying something about Venice ... To disthzguish the other cities' qualities, I must speak o f the first city that remains implicit. For me it is Venice."
Books/Bilcher
621
Kornai, Janos (1980), Economics o f Shortage Vol. A and B, Amsterdam et. al.: North-Holland. (1972), Rush versus Harmonic Growth: Meditation and on the Theory on the Politics o f Economic Growth, Amsterdam and London: North-Holland. (1971), Anti-Equilibrium: On Economic System Theory and the Task o f Research, Amsterdam and London: North-Holland. Shaffer, Leigh S. (1981), "The Growth and Limits of Recipe Knowledge", Journal o f Mind and Behavior, 2, 71-83. M a n f r e d J. Holler
Institute of E c o n o m i c s and Statistics, U n i v e r s i t y of Aarhus, DK-8000 A a r h u s C, Denmark.
618
Books/Biicher
native medical systems like, for instance, the classical Chinese one.) Kornai's suggestion of a comprehensive catalogue of economic disease and therapies, expressing to a high degree recipe knowledge (see, e.g, Shaffer (1981) on the limits of recipe knowledge compared to traditional scientific knowledge), somehow contradicts his claim for general insights in the functioning of social and economic systems which he brings forward several times in the preceding chapters. The naivety of the medical-economic analogy invalidates, to a certain extent, his rather interesting statements on positive and normative theories, on contradiction and dilemmas and on the status of the Phillips curve which he waives in the elaboration of the analogy. However, one can easily abstract from this chapter and still enjoy the fruits of Kornai's analysis of the socialist economy of the Hungarian type and the general laws on shortage which he therefrom derives. The common thread of Kornai's analysis is the prevalence of economic shortage due to soft budget restraints. In a real-world socialist economy, due to state ownership and paternalism, firms do not go bankrupt and managers do not get punished by severe income reductions if the balance sheet shows red numbers. On the other hand, managers get only minor rewards if there are profits. The lion share of these profits will be taxed away anyhow. There is a system of taxation and direct and indirect state subsidies, grants in kind and financial allowances, which renders the profit concept inappropriate to measure the success of a firm, more so if the bonus of a manager does not depend on the "original" profitability of the firm, but on the actual profitability after receipt of the subsidies as noted by Kornai. Since the volume of activity and the smoothly functioning of production are generally taken as a substitute for the profit measure, managers tend to absorb all resources for their firm available to them within the realm of their business activities. The latter are often defined in a very broad sense, irrespective of the costs involved and thus rather independent of t h e corresponding prices; the production sector becomes insatiable. More so, if this expansion drive is supported by the minister's disposition to increase the sector in his charge by means of investment (see p. 69 and p. 107 of the book). As a consequence, there is a permanent shortage of resources within the production sector and, inasmuch as this resources are also used, directly or complementarily, in consumption, also within the consumer sector.
Books/Biicher
619
The general feature of this thread of reasoning is known from Kornai's two volumes "Economics of Shortage" (1980). With respect to labour, the shortage implies full-employment. A further consequence of this shortage is the strong market position of the suppliers of resources. This often leads, as Kornai points out in the interview published in his chapter on "Economics and Psychology", to submissive behaviour of the buyers in face of the mighty sellers and to frustrations due to forced adjustments. The buyer often feels deprived of certain alternatives (and, in fact, he is); he knows such alternatives exist and that he could obtain them, however, others had more "luck" to get them and thus they are not available to him. "He cannot even think in terms of the 'best'. From the outset he looks for the 'second-best"'_ "Shortage keeps on making the choice instead of you". We can read several thousand of pages on labour economics and we will hardly find similar perspective on Keynesian unemployment which is one of the capitalist system's pendants to the shortage described above. And, of course, with respect to labour Kornai can proudly point out that "the Hungarian economic system freed the worker from the nightmare of unemployment, which not only causes grave financial losses to the society and to the individual, but also debases dignity, forcing workers to humble themselves before the employers" (p. 131). As already stated above, this is a consequence of the mamagers' insatiable hunger for recources which implies the economic inefficiency and shortage which frustrates the buyers. Now, when it comes to cure the shortage defect by making the budget constraint less soft, making managers responsible for the economic performance via profit measures and allowing for bankruptcy and unemployment, contradictions to socialist ethics become obvious. The latter, e.g., includes a principle of security which implies the full-employment guarantee which is satisfied under soft budget constraints. In a separate chapter, Kornai explicitly describes this contradiction and clearly states that this contradiction is inherent to the system a n d there is no final solution to it. There are few well-established economists who are dedicated to the capitalist market economy and have the courage to point out the contradiction within the system they favour. In Kornai's analysis, the policy maker as well as the advising economist have to face the dilemma which derives from the basic contradiction when it comes to increasing economic efficiency or to evaluate the performance of the economy. This fundamental and
620
Books/Biieher
not fully reducible dilemma-contradiction relation gave the book the adequate title. The dilemma-contradiction relation serves as frame and the budget constraint concept as main tool to Kornai's discussion of the results of the economic reform of 1968 which was intended to increase economic efficiency by the introduction of competitive elements in the Hungarian economy. Kornai does not give a comprehensive presentation of empirical facts, but restricts himselfs to illustrative details which support his theoretical arguments. One of these details is the outstanding high degree of concentration in the Hungarian industry (pp. 93-96 of the book). A n outstanding feature of Kornai's writings is the reflection of the methodological principles which the author chooses (see Kornai, 1971, 1972, 1980). This feature also characterizes the contributions to this book, though to different degrees. Even if one does not (fully) accept Kornai's methodological position(s), it is interesting to see how the tools of analysis are selected and how the subject of the study influences the selection of tools. A n obvious shortcoming of the book is some redundancy in the presentation of the material. This, of course, is due to the fact that the book results from seven contributions which were originally written as self-contained contributions. The more remarkable it is how strongly the common threat of the author's insights joins these contributions together to form a substantial book. Even if the reader is only interested in market economies of the capitalist type, he cannot avoid to gain additional insights in the functioning of his economic world by reading this book and studying socialist economies. Marco Polo said to Kublai Khan: "Sire, now I have told you about all the cities I know." "There is still one o f which you never speak." Marco Polo bowed his head. "Venice," the Khan said. Marco smUed. "What else do you think I have been talking about? _ Every time I describe a city I am saying something about Venice ... To disthzguish the other cities' qualities, I must speak o f the first city that remains implicit. For me it is Venice."
Books/Bilcher
621
Kornai, Janos (1980), Economics o f Shortage Vol. A and B, Amsterdam et. al.: North-Holland. (1972), Rush versus Harmonic Growth: Meditation and on the Theory on the Politics o f Economic Growth, Amsterdam and London: North-Holland. (1971), Anti-Equilibrium: On Economic System Theory and the Task o f Research, Amsterdam and London: North-Holland. Shaffer, Leigh S. (1981), "The Growth and Limits of Recipe Knowledge", Journal o f Mind and Behavior, 2, 71-83. M a n f r e d J. Holler
Institute of E c o n o m i c s and Statistics, U n i v e r s i t y of Aarhus, DK-8000 A a r h u s C, Denmark.