The economics of shortage in the centrally planned economies

Abstract

The purpose of this chapter is to introduce, and critically review, an approach to the analysis and interpretation of the Eastern European economies largely based on the work of János Kornai and his colleagues at the Institute of Economics, Budapest. Kornai’s ideas have been maturing since his early research on the behaviour of the centrally planned, socialist economy, based on Hungarian experience in the mid-1950s (Kornai, 1959). The general aim of his research programme since the 1950s has been to develop a conceptual framework for understanding the functioning of the traditional socialist economy. The main finding, a conception which now forms the central maintained hypothesis of Kornai’s school of thought, is that the socialist economy is characterized by endemic and persistent shortage; moreover that this shortage is maintained over time by a variety of mechanisms all grounded in rational behaviour by enterprises, central planners and other agents given their information and expectations, the constraints they experience, and the organizational structures which tie the system together. Some of Kornai’s early work is discussed in section 3.2 of the present chapter, to provide the reader with background information on the development of Kornai’s thinking. Although Kornai’s approach is constantly being developed and refined, both theoretically and through empirical work (some of which is reported later in the book), most of the recent contributions are based on Kornai’s own book, Economics of Shortage (Kornai, 1980).