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.