Tuesday, April 28, 2009

My Problem with Kornai

Actually, he seems like a very nice guy, a scholar in love with economics and with a mild social democratic inclination. As mentioned in a previous post, I have just (belatedly) read his memoirs, By Force of Thought. He went through a fascinating transformation in the years leading up to and following the revolution of 1956 (Hungary), and I’m sympathetic to many of his insights into economic theory and methodology. By any standard, he is a giant within the discipline.

Nevertheless, I also found that his self-examination revealed for me the source of his dogmatism during the crucial transition period of the early 1990s. Readers may recall that Kornai was one of the loudest voices for the view that there could be no middle way, that ex-communist countries had to embrace private enterprise capitalism without holding back, so that one day they might be in a position to soften the edges and introduce the elements of a more mixed economy. As one of those labeled naive by Kornai, I tried to imagine a different path.

Now I understand where he was coming from. The man had fallen out of love with Marx, his teenage crush, but he kept faith all his life with the platonic impulse in Marx—the inclination to see the world as simply the special case of essences like capitalism, socialism, or other overarching orders. Just as Marx wanted us to exit from the universe of capitalism into the alternate realm of socialism, Kornai wants us to go in the other direction. For him there could be no in-between; it is a matter of replacing one mode of production with another.

In my view, this compartmentalist perspective is one of Marx’ most pernicious creations. Before his time, only utopians imagined such ruptures; after Marx it became respectable social science. Here is not the place to dispute it, but I strongly question the premise on which this approach is based; I do not see any fundamental discontinuities between social systems. Lumpiness, yes, but that is the case within as well as between. For me, a public library is a communist institution in a capitalist world. Organize more goods into the form of libraries and you shift the balance between communism and capitalism. I see nothing to be gained from positing that a library in capitalism is a different beast from a library in some other mode of production. I’m not arguing against system-level forces, just against the view that there are just a few predetermined configurations of economic and political life, hardened against the step-by-step alteration of detailed institutions and policies. But Kornai explicitly takes the opposite stance and credits Marx for it.

It’s a shame. He threw out much of the good stuff in Marx, his many insights into production and financial systems earned from long hours at the British Museum, and kept the most questionable. But he seems like someone you would like to discuss this with over a good meal and a bottle of wine.


rosserjb@jmu.edu said...

I had the opportunity to interview Kornai last summer for a book that will come out sometime next year from Elgar entitled, European Economics at the Crossroads, with David Colander and Richard Holt. It was quite a fascinating encounter. I posed some hard questions to him about some of these matters.

So, he seems to have mellowed some from his position of 20 years ago. He effectively admits that he should have been more of a gradualist than he was then, and has much good to say about the "hybrid" system one finds in China. He agrees that there is no pure form of any system, and that we live in a world of mixed economies (and he definitely has more than just a mild streak of social democracy to him).

I think his position of 20 years ago needs to be seen in context. He had in effect been an advocate of a sort of middle way for some time, the market socialism of Hungary, but he had seen it not work because of the soft budget constraint (which he sees no operating in the current financial crisis all over the West). Of course, that model was not the same as what one finds in Sweden.

I also had the feeling that he was nto a fan of workers' management as one found it in Yugoslavia. This was what was often put forward as a variant of market socialism, a third way, and he saw it as at least subject to the soft budget constraint, and of course that unfortunate nation pretty much fell apart at the end of the 1980s with massive inflation and unemployment, looking much worse than Hungary, even though the former Yugoslav republic of Slovenia, which has remnants of the former system, came through the transition in better shape than any of the other transition economies, and was the first of them to join the euro (Slovakia has now also as of Jan. 1).

Brenda Rosser said...

I don't know how there can be a 'middle way' in a world dominated by a handful of global conglomerates.

In 1999 the Top 200 global corporations were the equivalent of 27.5 percent of world economic activity, they employed only 0.78 percent of the world's workforce. 5% of their workforce are employed by Walmart.

Top 200: The Rise of Corporate Global Power
by Sarah Anderson and John Cavanagh, Institute for Policy Studies. December 4th, 2000

It's not as if this top 200 are inherently separate entities from each other. They're not. There's cross-ownership and management; with a revolving door of key staff directly from and to national governments. (Most of the profit of the large US corporations is made outside of the US).

I'm not a fan of socialism (in the form of big government) or capitalism (in the form of BIG government and BIG corporations OR small government and BIG corporations).

What we have today looks, smell and feels like the death of both socialism and capitalism.

"We are the prisoners of old political labels. The new system needed for our collective survival does not exist....Both a global vision and radical decentralisation and diffusion of political power now appear to be requirements of a stable and just human order. The intellectual and political task of reconciling the two is staggering. But our institutions are our own creation."

'Global Reach - the power of the multinational corporations' by Richard J Barnett and Ronald E Muller. 1974

john c. halasz said...

Barkley Rosser:

The former Yugoslav self-management system was not entirely unsuccessful in its day having spurred significant economic growth and kept civil peace. It collapsed only due to the imposition, for the first time in Europe, of "shock therapy" policies by the IMF in 1988-89. And the rest, as they as, is history. Slovenia was always the wealthiest of the Yugoslav "republics" and was the first to break away, meeting milder Serbian resistance, since it had little mixed population and Croatia soon followed suit. Slovakia, I'm sure you know, is north of Hungary, and has nothing to do with the Yugoslav case. There, it was Bohemia that was the industrially developed region, with Slovakia a relative backwater, so when the Communists took over, they put the arms factories in Slovakia to jump start its industrial development. Nowadays, Slovakia is a center of German auto manufacturing, producing, in fact, more autos per capita than any other nation, since the match between legacy infrastructure and work-force made for a ready conversion.

rosserjb@jmu.edu said...


Well, there are middley ways and there are middle ways. Kornai's daughter lives in Sweden, which has long advertised itself as the middle way, although that was back before the Soviet Union collapsed. Nowadays it is more likely to be labeled as the leftist way (with Jon Stewart satirizing this label by sending a reporter to interview people (mostly women) in the street whom he was supposedly helping to save from their "socialist nightmare"). But, Sweden has some multinationals based in it and others operating in it, with General Motors killing Saab, one of the two Swedish car producers. Sweden has long been effectively market capitalist, with little state ownership, but of course a very large welfare state (and high taxes) and a lot of advanced environmental policies, plus very liberal social policies, while, of course, maintaining political democracy and human rights.


So, Yugoslavia is a different example, and the one that I think Kornai had more in mind. So, I agree that it worked somewhat, although regional inequality increased substantially, with ratio of real per capita income in Slovenia to Kosovo increasing from about 3 to 1 in the late 1940s to about 9 to 1 by the time the nation broke up. In that regard, blaming the collapse on the IMF is rather missing the point. The reason the IMF got in there in the first place was because they were having hyperinflation, high unemployment, and a massive foreign debt crisis, all of which Kornai would say arose from it being a supreme example of the ultimate outcome of a soft budget constraint, semi-functioning workers' management combined with a vague state ownership, backed up by provinicial level state banks that pumped money into money-losing enterprises.

An interesting detail about Slovakia is that for at least a decade after 1989, it had the most equal distribution of income in the world, at least according to official stats, a Gini coefficient of about .20. That has since gone up somewhat, but it is still one of the most equal.

Brenda Rosser said...

"The reason the IMF got in there in the first place was because they were having hyperinflation, high unemployment, and a massive foreign debt crisis... banks that pumped money into money-losing enterprises....So, what's the IMF going to do about the same situation in the US? (Albeit the hyperinflation was hidden in the financial and environmental sectors rather than in retail prices).

Brenda Rosser said...

Well, if the IMF and World Bank moved in to privatise the USA it may look just like it does today - dominated by a handful of global conglomerates (like most other nations). Yugoslavia was different. Now it's not.

"....workers at the five largest factories in the country remain faithful to self-management and refuse to let their enterprises be privatized and subordinated to foreign multinationals. Gosa is coveted by German interests, while Peugeot seeks Zastava.....But it is not only the friends of Mr. Djindjic who are growing rich. When he closes the four largest Serb banks, eliminating 10,000 jobs, who takes them over? The French Societe General and the German bank Raiffeisen. In the beer industry, it is the Belgian firm Interbrew that has taken over.

Which country claims the largest piece of the pie? Germany, hands down. ...It is a German firm that covets the water installations in Montenegro. German companies have purchased the majority of the Serb media. The West German Allgemeine Zeitung has taken control of the well-known daily Politika, while Grunner & Jahr has seized the tabloid daily Blic....currently all the press are pro-Western. This is pluralism?.... It is the United States and the European Union that have taken the economic and social life of Yugoslavia directly in their hands. They exercise their absolute control through the “G-17 Plus,” an economic circle financed by the West and made up of former directors of the International Monetary Fund and the World Bank....
Two years later
Where is Yugoslavia?
By Michel Collon
(november 2002)

Brenda Rosser said...

Sweden does (superficially) look like it has an inkling of a way out of this crisis. But how can the taxpayer obtain a profit from from 'assets' that are worthless or have a negative value?

"Sweden did not just bail out its financial institutions by having the government take over the bad debts. It extracted pounds of flesh from bank shareholders before writing checks. Banks had to write down losses and issue warrants to the government. That strategy kept banks on the hook and turned the government into an owner. When distressed assets were sold, the profits flowed to taxpayers, and the government was able to recoup more money later by selling its shares in the companies as well. "If I go into a bank," said Bo Lundgren, who was Sweden's finance minister at the time, "I'd rather get equity so that there is some upside for the taxpayer." Stopping a Financial Crisis, the Swedish Way
By CARTER DOUGHERTY September 23, 2008

I'm not sure what the situation is now in that country.

rosserjb@jmu.edu said...


The US is pretty far from hyperinflation at the moment. Heck, the latest is that we may be back to worrying about deflation.

The part of Yugoslavia that has done well is Slovenia, already noted. Even though they have joined both the EU and the eurozone, they have resisted takeovers by foreign corporations of their now worker-owned and somewhat worker-managed firms, the remnant of their former system. Having the workers own the firms seems to work better than having some vague ownership by "the people" as was the case before.

YouNotSneaky! said...

This is a bit funny/ironic to me since, because of a different background, I've always seen Kornai as "a Marxist with some mild pro market inclinations" (you can call that Social Democracy if you want) rather than, as Peter tends to portray him as a "pro market person with Social Democratic inclinations". I guess it depends on which side of the barricade you're peeking over. Either way, yes, he has always seemed like a good, well meaning guy who really wanted to make things better. And he is an important and influential economists.

I also agree with John Halasz's first sentence above (of course, not the rest). Before its break up Yugoslavia (not just Slovenia) was quite better off than the more strictly planned economies of the Soviet block. Even workers in Poland (which was also a relatively well off place in that sphere) aspired to be able to take a vacation in Yugoslavia someday, because, there "they have capitalism". Part of this looking up to Yugoslavia thing back in the 70's and 80's might have been due to simple glee on account of that "Tito pissed off Stalin, heh heh", though. But that bit of extra prosperity in Yugoslavia was real and it probably had a good bit to do with the market/workers' control mixture introduced under Kornai's (indirect) influence.

As far as Kornai's position from 20 years ago, well, for the most part I think he was right. There's really no way you can blame the economic performance of post Yugoslavian nation states on anything but the political and ethnic conflicts that erupted after it's break up. This sort of reminds me of the time I got in an argument with someone, possibly on this site, maybe another, about shock therapy, and the person brought up the falling incomes in Tajikstan in the 90's as evidence that "shock therapy didn't work". Of course, through out good bit of the 90's Tajikstan was engaged in a brutal and destructive civil war which trumped, well, pretty much any other policy development.

Anyway, while there may have possibly been post SU economies where a more gradualist approach would've worked better (and I'm not sure that's true - as the kids say these days, correlation is not causation) I think it's pretty clear Hungary wasn't one of them. If anything, they went too slow.

Barkley Rosser said...


I know that you are from somewhere in East-Central Europe, but forget exactly which country it was, although I do not think it was Hungary. According to his memoir, Kornai had stopped believing in Marxism, although to this day he defends portions of Marx's intellectual heritage and respects his breadth and historical depth, even if he thinks he was wrong on certain crucial matters. It should be kept in mind that until nearly the end, economists living in that zone could not openly dispute Marx without getting into serious trouble.

Regarding Hungary and Yugoslavia and the general picture, I think you know these things, but in fact while Slovenia was better off, and Croatia (where probably those vacationers of the past went to that good old Dalmatian coast) was pretty well off, other parts of Yugoslavia were not so well off, with many of the other CEE countries better off than those parts economically, even if Yugo was somewhat freer (although hardly ideal in that respect, as the ins and outs from jail of Milovan Djilas should remind everybody). In terms of overall per capita real GDP such countries as East Germany, Czechoslovakia, and Hungary were ahead of Yugoslavia, if not ahead of its Slovene part.

Hungary was the closest to Yugoslavia in being a "market socialist" country, and like Yugo did not have a strong central command plan. I do not know if you visited there, but like Yugo and unlike the USSR or some of those other countries, one did not find lines there. Many also went to Hungary to get things unavailable elsewhere. Hungary held back from workers' management, but in other ways was quite similar in policy to Yugo (although lacking all that regional variation). It was easy to forget it given Kadar's boot likcing of the Soviets on foreign policy, viewed as a sort of deal: he could do a lot domestically if he kissed ass on foreign policy.

Actually, as far as the transition went, Hungary did better than all but a handful of other CEE countries, with maybe Poland, Czech and Slovak Republics, and Slovenia being its rivals.