Tuesday, August 12, 2008

Is There a Middle Way Economic System: Janos Kornai Speaks

Among the things I did while out of town for the last two weeks was to interview the 80-year old, Janos Kornai, for a forthcoming book. For those who do not know who he is, he is probably the best known economist in Eastern Europe, and in my opinion deserves the Nobel Prize in economics, if for nothing else, for his development of the concept of the "soft budget constraint," originally to analyze the problems of market socialist economies, but which is clearly relevant to many economies, as the current problems of financial institutions and their relationships with governments in many countries during the past year indicate. Kornai has had a fascinating personal life as well as career, having barely survived the Nazi occupation of Hungary, then at least partly in reaction to that becoming a supporter of Stalinist socialism, which he turned against after Stalin's death as he learned of human rights abuses, then his involvement in the 1956 revolution and later turning to mathematical economics and linear programming, to become a critic of neoclassical economics in his book, Anti-Equilibrium from 1971, and then on to forecast the fall of socialism in Hungary with his later work and his broader analysis of the nature and history of the socialist economies. For those not wishing to wait for our interview to be published, his fascinating memoirs are available from MIT Press.

In any case, I wish to note an unresolved issue in our discussion. In the late 1980s Kornai argued that ultimately "there is no third way" between command socialism and market capitalism, that the soft budget constraint and related political issues would force every country either to go to a hard line command socialist position like North Korea's or move towards some form of market capitalism as did most of Eastern Europe eventually. During our discussion he brought up in a favorable way the late West German economist, Walter Eucken, who has been little translated into English. He was the inventor of the concept of the "social market economy," (sozialmarktwirtschaften), which has been the official ideology, more or less, of the Bundes Republik of Germany since the late 1940s, and which I think the social democracies of the Nordic countries are more or less examples of as well. Now it can be argued, and Kornai does, that these countries are all just special cases, if involving some "hybrid" elements, of market capitalism. And it is certainly true that they all have mostly private ownership of the means of production with little central planning. However, Sweden in particular has long advertised itself as representing a Middle Way, with its advanced welfare state and high environmental and other public goods concerns. I, for one, think that Kornai should be a bit more willing to grant such status to such economies.

11 comments:

rosserjb@jmu.edu said...

Great. I carefully proofread the text, only to have a major boo boo in the title of this post!

jsalvati said...

Can't you just change it? I think spelling errors are ok to edit.

I think there is a middle way, and it sure seems like it's becoming more popular, but it seems different than the Middle Way that the world used to talk about.

Brenda Rosser said...

Barkley, it appears that the 'market capitalism' of the US and other western nations has now evolved into something distinctly 'non-market' and 'non-private'.

As mentioned in previous posts a very large percentage of international 'trade' is now intra-corporate. Non-trade (artificial transactions) between subsidiaries of the same multinational across national boundaries. Often designed to show artificial losses on balance sheets. They deal direct with governments in order to access increasingly cheap labour and raw materials.

The 'private' status is also under question when vast public holdings, especially of land, are transferred to a handful of specially-selected corporations. And when the declared 'public' domains of 'democracy' and 'government' are overtaken by private commercial players; well, is there any such thing as a private democracy?

Observe also the incredible mass media domination by 8 corporations in the US (and only about 2 in Australia). The funding of public elections etc.

'Market capitalism' is a strange term. Capitalism likes markets but definitely doesn't want to be one.

rosserjb@jmu.edu said...

Brenda,

Well, the terms "market capitalism" and "command socialism" come from textbook comparative systems literature. Obviously different people mean different things by these terms, but in narrow terms, "market" means decisions by made within markets, even those are monopolistic, while "command" means orders by a government. There are now very few command economies, with North Korea the leading example, although even it is moving away from that.

The old classical definitions of capitalism and socialism come from Marx, who tied them to ownership of the means of production. Capitalism was private ownership while socialism was state ownership, although there was always a certain fuzziness and controversy over such entities as cooperatives.

In any case, if one sticks with these old definitions, Kornai is right. The current social market social democracies are simply special cases within "the Big Box" of market capitalism, if more benevolent such forms, the best face of market capitalism, if you will.

Brenda Rosser said...

I can't go along with that terminology, Barkley. To be true to meaning 'market' cannot encompass monopolies. Consumers need choice and trade needs to mean more than transactions taking place within the same business. When corporations have that much power over what is produced/how it's produced, when, where and why its produced. Well they are, in effect acting as sovereign states. They are 'command economies' in themselves.

It appears that our respective western governments are supporting these relatively new forms of 'command economies' by using national armies and tax-payer funded weaponries to defend them across the globe.

This week I discovered the extraordinary case of the United Fruit Company in South America. A very misleading name since it was, in effect, the corporate and US military takeover of South America.

How United Fruit robbed and killed the people of Central America
By Stephen Millies, in Workers World, 3 October 1996
http://www.hartford-hwp.com/archives/47/043.html

And more at:
Chronology
http://www.unitedfruit.org/chron.htm

rosserjb@jmu.edu said...

Brenda,

United Fruit had its heyday in the early and mid-20th century. It has been some time since a US government has overthrown a banana republic on behalf of United Fruit.

Markets can be monopolistic. Economists regularly distinguish "competitive markets" from monopolistic or oligopolistic ones. You would prefer to use the term "markets" only for the more or less competitive ones.

Peter H said...

What about labor-managed firms? Where do those fall in?

rosserjb@jmu.edu said...

If the only firm in an industry is labor-managed, then it is monopolistic. However, the more successful labor-managed firms tend to be somewhat smaller and thus are more likely to be in somewhat more competitive markets.

rosserjb@jmu.edu said...

If the only firm in an industry is labor-managed, then it is monopolistic. However, the more successful labor-managed firms tend to be somewhat smaller and thus are more likely to be in somewhat more competitive markets.

rosserjb@jmu.edu said...

jsalvati,

BTW, I did try to edit it, but somehow I do not have the hang of it. Nothing happens. So, I need to proofread better before sending stuff up.

Brenda Rosser said...

Barkley said: "Markets can be monopolistic. Economists regularly distinguish "competitive markets" from monopolistic or oligopolistic ones. You would prefer to use the term "markets" only for the more or less competitive ones."

In response to my comment: "
To be true to meaning 'market' cannot encompass monopolies."

Okay, I retract that statement. I was trying to say that what we appear to be experiencing with the giant multinational, networked with other giant multinationals, in their production and distribution systems is something quite unprecedented. Traditional economic models don't describe this.

It is not a mere monopoly because the network of giants working together encompasses a whole range of industries at the one time. Media, steel, energy, construction, entertainment, medical, education etc. Government, in fact, appears to be merely another 'industry' for these firms.

Such a network would be better described as a kind of global command economy.