Kornai János: “Resource-Constrained Versus Demand-Constrained Systems“, Econometrica, Jul. 1979, Vol. 47, No. 4, pp. 801-819.
ECONOMETRIC A RESOURCE-CONSTRAINED VERSUS DEMAND-CONSTRAINED SYSTEMS1 By J. Kornai In a socialist economy the shortage in consumer goods, housing shortage, disturbances in material supply, shortage in investment goods, and labor shortage are to be traced back to common main causes. Certain properties of the economic mechanism permanently reproduce shortage. First we study the microanalytics of the producer firm. Efforts at increasing production may hit three different upper constraints: the constraints of physical resources, demand constraints, and the firm’s budget constraint. The system can best be characterized according to which of these constraints is in effect. From this aspect resource-constrained and demand-constrained systems are discerned. In the former it is bottlenecks of production and not buyers’ demand that delimit production; in the latter the case is the reverse. A socialist economy in its “classical” form belongs to the former type. This is connected with the question of whether the firm’s budget constraint is “hard” or “soft”. If it is hard, spending of the firm will be effectively delimited by its financial abilities. If it is soft, then because losses are almost automatically compensated by the state the firm’s demand becomes almost insatiable. The macroanalytical part of the paper demonstrates the mechanism of a chronic shortage economy with the aid of a hydraulic analogy. In it the sector of firms “pumps out” the slack of the system. This phenomenon is due primarily to the effect of “investment hunger” shown to be the result of an irresistible expansion drive. Finally, the paper briefly touches on the interdependencies of shortage, inflation, and employment. INTRODUCTION I wish to investigate a few fundamental problems of the socialist economic system. Some of my colleagues and I, with the aid of mathematical models studied the questions to be analyzed in what follows; our results are in the process of publication. The present study is not concerned, however, with the description of any particular model, but tries to give a broader outline of the general economic issues underlying the various models. I will try to face the difficulties of a socialist economy no less frankly than would a Western economist discussing the deeper causes of recession, inflation, and unemployment. I shall focus my attention on the problem of shortage. This is one of the central subjects in the economics of socialism. In understanding the problems of a socialist economy, the problem of shortage plays a role similar to the problem of unemployment in the description of capitalism. The consumer constantly encounters shortage phenomena. Let me refer to Hungarian experiences. Although in past years the supply of consumer goods has much improved, “deficit goods” still keep disturbing smooth supply. Tens of thousands are waiting to get a telephone station, or to buy a car. The gravest 1 Presidential address, presented at the North-American and at the European meeting of The Econometric Society, in Chicago, August 29, 1978 and Geneva, September 6, 1978. The author gratefully acknowledges the support of his research by the Institute of Economics, Hungarian Academy of Sciences, Budapest, and Institute for International Economic Studies, Stockholm University, Stockholm. Volume 47 July, 1979 Number 4 801