Janos Kornai understood capitalism by studying its opposite

IN HIS CABIN on board of SS Bashan, a luxury riverboat sailing to Wuhan, Janos Kornai was sleepless with excitement. The Hungarian 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 Partners”, Mr. Kornai stole the show. During a week-long cruise with an audience of Chinese technocrats, he dissected the familiar “worries and woes” of socialism (overburdened businesses, rushed growth, and consumer shortages). And he offered a hopeful vision of a restricted and guided capitalism. His book “Economics of Shortage” quickly became a bestseller in China, although he never received any royalties.

Forty years earlier, Mr. Kornai lay on the roof of a Jesuit monastery in Budapest, hiding from a fascist raid below, even as Soviet forces dropped bombs from above. The horizon line had “hellish beauty,” he writes. As a Jewish Hungarian who had lost his father and brother to the Holocaust, he welcomed the Soviets as liberators. He didn’t even mind that they stole his watch. His gratitude was one of the reasons he became an enthusiastic Communist, so devoted to his work in a party newspaper that he missed the birth of his first child. His communism, in turn, explains why he became an economist. He looked at “Das Kapital” by Karl Marx. The illumination radiated from it “like the sun,” he wrote later. “I no longer had any doubts about which profession to choose. “

The charm of Marxism was broken when it encountered a victim of the tortures it entailed. He also came to hate the improvised rush of journalism. Instead, he turned to research at the Hungarian Institute of Economics. But his habits as a reporter have served him well in his thesis. By interviewing managers, complaining with them about bureaucratic idiocy, waste and ‘disrespecting customer needs’, he developed a rare systematic account of how a planned economy actually worked, as opposed to to the way it was supposed to work. The book also served as a clue to changing political winds. It was celebrated as the Hungarian revolution approached in 1956, denounced after that revolution was crushed by Soviet tanks, and then approved for translation into English, all by the same person, the director of the institute.

Some socialist reformers believed that widespread public ownership was compatible with market forces and price signals. But Mr. Kornai acknowledged that getting fair prices, even if possible, would not be enough. Under capitalism, a business cannot challenge prices for long without going bankrupt. Under socialism, things were different. SOEs knew they could always appeal to higher authorities to bail them out. In 1979, Mr. Kornai called it a “soft budget constraint”: the sharp line drawn by economists on their chalkboards has been smeared. If businesses don’t fear losses, they don’t need to consider prices. This lack of financial constraints has also enabled companies to satisfy their “investment hunger,” an excessive appetite for resources, which has crowded out consumers and resulted in chronic shortages.

The argument made a name for itself: it was a “sympathetic” extension of a concept familiar to mainstream economists. Mr Kornai had once had bigger ambitions, hoping to break the crystal through which most economists saw the world. He had studied neoclassical theorists such as Kenneth Arrow with much the same care he had lavished on Marx. But he could not reconcile their ethereal theory of “general equilibrium” with his observations of the living and breathing economy. The mismatch reminded an economist of a line from poet Edith Sodergran: “You’ve looked for a wife and found a soul, you’re disappointed.

While cruising in China, Mr. Kornai convinced his audience of the need to tighten the budget constraints of companies in the country. One of his traveling companions is now the Chinese banking regulator. But the imposition of financial discipline remains a work in progress. The increase in defaults, even of public companies, in recent years is evidence of some tougher financial lines. But that only comes after years of gluttonous investment.

China has not suffered from chronic shortages, however. On the contrary, it is an “over-surplus” economy, marked by massive overcapacity, as Xu Chenggang, one of Mr. Kornai’s students, pointed out. One of the reasons is that state-owned enterprises do not have the economy on their own. They coexist with very competitive private companies. Surpluses may also reflect the dual nature of the investment. It is both an immediate source of demand and a potential source of supply. In the short term, it demands resources from the economy, which can crowd out consumers. But when investment pays off, it increases the economy’s ability to provide goods and services, resulting in abundance, not scarcity.

Ephemeral team

Like the economies he deciphered, Mr. Kornai lived in two worlds. He was half in the mainstream of the economy, half outside. By 1983 he was half in America, half out. Transitions have not always been easy. It took him a long time to perfect his English. During his driving test in Boston, he stated that a “no hitchhiking” sign was a “no hijacking” sign. In a lecture, he repeatedly mispronounced the warehouse as a brothel. Returning home to Hungary each year, he had to remember to let go of his optimistic persona in the United States and complain a little more.

But even though he straddled different worlds, there was no doubt where his allegiances ultimately lay. “Despite its damaging and morally unpleasant characteristics … I would rather live under the capitalist system than in the happiest barracks of the socialist camp,” he wrote in his memoir. And although he was intellectually opposed to patriotic exaltation, he felt an instinctive pride in the accomplishments of his countrymen. It was their music and their literature that touched him. Their meliorism without illusion which animated it. He counted in Hungarian. And when he wasn’t sleeping with excitement, he dreamed of it too.

This article appeared in the Finance & economics section of the print edition under the title “The inbetweener”

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