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Janos Kornai and China part 1 Kornai's Political Economy of Socialism

posted 18 May 2012, 09:05 by heiko khoo   [ updated 18 Feb 2013, 12:15 by Admin uk ]

Janos Kornai’s Political Economy of Socialism  by Heiko Khoo   

Special thanks are due to Alex Callinicos for reviewing various stages of the preparation of these two documents and for providing critical feedback and ideas throughout. In addition I was fortunate to receive detailed feedback and encouragement from Janos Kornai and Xu Chenggang on Chapter 2.       

Introduction   

Janos Kornai has been described as “the most influential scholar of the political economy of state socialism in the world today” and his book ‘The Socialist System’ (1992) as “ the last textbook one needs on the communist economy”.[1] Nove called it “a masterly presentation of the nature of the functioning of the Soviet-type system, and an equally masterly explanation of the failure of attempts to reform it.” (1993:1057). Lebowitz (2000) describes the book as a political economy of the ‘Vanguard Mode of Production’, which unravels systemic laws of motion in a similar way to Marx’s Capital.       

 

When the book was first published in 1992, the fall of the Berlin Wall and the collapse of the socialist bloc meant that its insight into the causes of the systemic failure were largely sidelined or ignored, as ‘pundits of far less talent had already rushed into print with superficial explanations of the events of 1989’ (Chirot, 1993:855). Indeed Shambaugh (2008:12) observes that among Western analysts, only Zbigniew Brzezinski predicted the collapse of the USSR and the socialist system in advance.           

 

After 1989, China followed a different path to countries where the system collapsed. However, Kornai believes that “China is not an ‘exception’ that refutes (his) theory” of systemic transformation. “It can be fitted, without difficulty, into the analytical scheme outlined”…”Furthermore, a still bolder statement can be risked: the analytical scheme provides a useful tool for analyzing the Chinese transformation in depth.” (Kornai, 2008:150). It is this task that is undertaken in the next two chapters.

 

The first chapter is a selective summary and exposition of the main ideas contained in Kornai’s book ‘The Socialist System’. All views in the remainder of this chapter are those of Kornai. I seek to accurately and uncritically present the key attributes of his ‘Socialist System’, in order to facilitate a review of their relevance to China. This comparative review is undertaken in the second chapter.

 

The System’s Paradigm

 

Janos Kornai’s study, The Socialist System, The Political Economy of Communism (1992), provides valuable methods to understand socialism[2] by abstracting systemic characteristics and using them as tools of analysis. This is a study of the central theses and main features of Kornai’s analysis. It is designed to help identify commonalities and differences between Kornai’s theory of socialism and ‘socialism with Chinese characteristics’, the self-definition used by the Chinese Communist Party to characterise its social system.

 

Kornai approaches the subject using the ‘systems paradigm’. This methodology represents an intellectual tradition begun by Karl Marx, who viewed capitalism’s political, economic, social and ideological spheres, ‘altogether and analysed interactions between them… looking at the sum of it’s institutions –not one part or the other, but at the system as a whole.’ (Kornai, 2008:186). Other thinkers who ‘ share the common conviction that a comparison of capitalism and socialism is worth analysis as research’ are included in Kornai’s systems paradigm tradition (Kornai, 2008:187).

 

The system’s paradigm seeks to study:

  • The system as a whole and the relations to its parts
  • Societal interactions through combining social scientific disciplines
  • Institutions within which transformative societal processes occur and the identification of their system specific or non-systemic genesis
  • Human organisation in the light of historical processes
  • Systemic impacts on individual preferences
  • Great transformations and big changes, uncovering underlying processes of decay and creation that lead to systemic transformations
  • The intrinsic dysfunctional features of a system
  • Systemic attributes by comparative analysis (Kornai, 2008:190-93)

 

Kornai’s Theory of Causality

 

Kornai’s socialist system refers exclusively to those countries governed by Communist Parties. The system’s ‘genetic code’ automatically generates ‘classical socialism’ when the Communist Party holds state power, shaping the features and fundamental characteristics of the system through three main lines of causation. 

 

The first line of causation stems from the rule of a Communist Party guided by the ideology of ‘Marxism-Leninism’, the second, from the dominance of public ownership within the economy, the third, from the preponderance of bureaucratic coordination. The political system and ideology bring about the dominance of public ownership by design and the combination of these first two lines of causation inevitably produces ‘the dominance of the mechanism of bureaucratic control’ (Kornai, 1992:363). Once the system of Communist Party rule is established, it finds real roots in society and does so with only limited resistance. The system is internally coherent and self-sustaining (Kornai, 1992:369).


Figure 1. The Main Lines of Causation (Kornai, 1992:361).

From three primary lines of causation (blocks 1, 2 & 3 above), subordinate features flow naturally and organically. The content of subordinate blocks (4+5) can vary significantly, only a few examples are provided here. I do not deal extensively with the subordinate features within block 4 and 5 here, except as they relate to reform socialism.

 

In all countries where the Communist Party seized power through indigenous revolution, these societies were characterised by backwardness and poverty; the pre-revolutionary order was brutal, and democracy and capitalism were immature. These factors played an important role in shaping and defining the characteristics of the post-revolutionary regime. They sought to overcome backwardness by forced growth and radical redistributive policies using dictatorial political structures; features that Kornai describes as common to all socialist societies (Kornai, 1992:373).

 

He identifies two main phases, which follow the initial revolutionary transitional system; the phase of the classical system proper (CSP) and the classical system in reform (CSR).

 

A Summary of Kornai’s Main Lines of Causation under Socialism

 

The following pages provide a detailed summary of the three main lines of causation.

 

1. The Communist Party Rule and Ideology

 

The ruling Communist Party presides over a one party state.[3] It is a voluntary body, whose branches are headed by a party secretary. Branches function under territorially divided hierarchies, the pinnacle of which are the Central Committee, its Politburo and the General Secretary. Functioning under a system of ‘democratic centralism’, leading bodies are elected and can pass resolutions, which are binding on lower organisations and individuals. Debates may be held inside the party until voted on, and then must be acted upon by all members without dissent. The party apparatus is composed of elected officials and unelected appointees, whose powers emanate from bureaucratic authority. The upper levels of the party select and groom future members of the party apparatus. Membership promotion, demotion or expulsion, are decisions made by the party apparatus (Kornai, 1992:33-36).

The state and the party are organically intertwined in so much as all candidates in elections to government are selected or vetted by the party. Government organisations are shadowed by parallel party organisations that monitor operations and ensure party instructions are implemented. Political and administrative functions are unified in the ‘party-state’ (Kornai, 1992:36-39).

 

Mass organisations of the youth, trade unions, women, minorities, artists, etc. exist by virtue of their subordination to the party leadership and their adherence to party decisions. The totality of the organisational power of the party and functionaries in the state, mass organisations and economy, constitutes a collective apparatus or bureaucracy (Kornai, 1992:39-40).

 

The bureaucracy is bound together by four main factors:

  1. Marxist-Leninist ideology and a sense of serving the people and mankind.
  2. The collective power to rule over society and the power to rule over subordinates.
  3. Prestige and Privilege: The former is derived primarily from rank in the bureaucratic hierarchy, the latter from access to goods and services in limited supply or of superior quality.
  4. Coercion: Decisions of the party and state must be implemented and defended, and are backed by sanctions, discipline and punishment in the event of either, failure in practice or perceived ideological deviation (Kornai, 1992:40-43).

 

Sectional, regional, industrial, organisational, ethnic, generational and other interest groups, inevitably emerge to constitute informal pressure groups - particularly when controversial issues are discussed and debated and when extreme repression is relaxed (Kornai, 1992:44-5).

 

The state is totalitarian in three senses; firstly, it extends to every aspect of life and there is no clearly defined private sphere; secondly, it reaches the whole society, and, through creating and monitoring comprehensive individual files, influences every citizen; and finally, decision-making and the legal system are subordinate to the particular and contemporary interests of the bureaucracy (Kornai, 1992-48).

 

Ideology under the Classical System Proper (CSP)

 

Open competition with alternative ideologies is forbidden, although religion is sometimes tolerated. Directly oppositional ideologies can only survive in underground publications or during short periods of openness.

The classical ideology itself is based on a combination of intellectual foundations: from Marx and the tradition of the European labour movement; from revolutionary movements in countries that became socialist; from the experiences of Communist parties shortly after seizing power, or from consolidated systems of power. National variation and the selective use of these ideological layers, form the basis from which the operative ideology is created.

 

Socialism is held to be inherently superior to capitalism because planning is believed to be capable of harnessing innovation for the collective good by eliminating anarchic market relations, associated fluctuations in supply and demand, and overproduction crises. It should reduce the competitive duplication of effort, place human labour at the centre of society, and eradicate parasitical class exploitation and attendant luxury consumption. It is also supposed to unleash workers’ ingenuity and enthusiasm, reduce supervisory costs and lay the basis for such a high level of productivity under communism, that wage labour and the monetary system itself disappears (Kornai, 1992:49-51).

 

Kornai argues that a breakdown in belief in the inherent superiority of socialism is a characteristic of departure from the classical system. Classical socialism promotes a sense of moral superiority and focuses on overcoming individualist and selfish ‘remnants’, and on creating a self-sacrificing and collectivist psychology that promotes social justice and egalitarianism. Ideologically convinced believers in socialism see its existence as the pathway to human emancipation, so they view specific failings, crises, or limitations in performance in this context. (Kornai, 1992:52-3).

 

A gulf exists between economic development in advanced capitalism and socialism, the superiority of the latter system is supposed to provide the basis to catch up and overtake capitalism. This requires the general mobilisation of enthusiasm and resources to stimulate rapid growth and assure future victory.

 

Welfare systems radically reduce inequality, unemployment is minimised and the state assumes a wide range of obligations in relation to basic needs and services. This ensures security in health, education, housing, employment, pensions, holidays and access to cultural facilities. Thus a tension emerges between the burdens of social provisions and the need for rapid economic advancement (Kornai, 1992: 53-4).

 

Party rule is legitimised through claims that it is a vanguard party, incarnating the historical interests of the most advanced class, the proletariat, whose dictatorship is normally backed by an alliance with the peasantry. Opposing forces are represented as class enemies or misguided allies, who require education to overcome ‘petty-bourgeois’ prejudices. The vanguard party’s ideology claims farsighted understanding of historical processes and societal needs. Ideological paternalism is combined with the ubiquitous provision of all basic needs. This paternalism may promote a cult of the individual and serve to justify centralism and bureaucracy (Kornai, 1992:55-7).

 

The moral imperative is characterised by discipline, loyalty, duty and submission to needs and objectives defined by the party and state. This can be traced to Communist practices in the pre-revolutionary underground struggle, which variously entailed, armed struggle, insurrection and civil and guerrilla war; conflicts in which discipline and obedience are necessary and highly valued qualities. During the era of post-revolutionary transition, establishing social order and reinvigorating economic activity also requires discipline and sacrifice. Those who serve the cause are regarded as heroes and revolutionaries, and those who don’t, are observed and graded in relation to their utility or hostility toward the system. The hostility of anti-communist forces, externally and internally, fosters and reinforces a siege mentality (Kornai, 1992:57-9).

 

The maintenance of power is an ideological objective in-itself and how firmly this power is held is a decisive criteria of success. Power and ideology are inextricably interconnected; ideologically motivated people shape the organs of the party and state. The need to legitimise and justify the actual system results in adjustments and modifications to the ideology. The classical system ‘develops and consolidates only where this official ideology of socialism just described enjoys a commanding influence’ (Kornai, 1992:61).

 

2. The Dominance of Public Ownership

 

The CSP is characterised by a massive preponderance of public ownership as a percentage of national income. The property rights of state-owned firms and other publicly and semi-publicly owned entities are inalienable. Bureaucratic administrators hold no property rights, and their incomes are not determined by the profits of these state companies. ‘State property belongs to all and to none’. Nevertheless, the bureaucracy exercises ‘some of the rights of ownership and all of those of control (Kornai, 1992:75). There is no profit motive determining the actions of socialist firms in the classical system. Private sector activity is almost totally eliminated. It is regarded as a hostile force and it is largely confined to informal and illegal ‘black market’ activities.

During the CSP state-owned firms occupy the ‘commanding heights’ allowing non-state sectors to be dominated. The residual income is difficult to identify and is broader than the quantity of taxes and profits. The bureaucracy determines all operating conditions, and all income and expenditure is part of the central state budget. However, individual bureaucrats are limited in their disposal rights by various rules and regulations (Kornai, 1992:71-3).

 

3. The Preponderance of Bureaucratic Coordination

 

The bureaucracy exercises control rights over state-owned production through a pyramid of power dominated by vertical hierarchal control. Overlapping bureaucratic organisations regulate and control individuals and organisations. They include, the political police, the youth organisation, the trade unions, the women’s organisation, the work unit, etc. All organisations are subordinate to the party structures and hierarchy, which have their own supervisory and disciplinary apparatus. State administration and governance is supervised legally and administratively and by mass organisations, and the population is also administered where they live. The ubiquitous nature of supervisory systems in the CSP, in theory, allows for failures to be spotted and rectified by multiple organisations. Commands downwards to subordinates can be issued, and subaltern groups or individuals can express disagreement, provided they do not challenge the fundamental tenets and principles of the system of power. The system provides no means to opt out or ‘exit’, as leaving any institution, moving home, changing job, leaving the union, or party, entails bureaucratic complications, possible sanctions, or worse (Kornai, 1992:97-100).

 

Planning and Bureaucratic Control.

 

Planning in the CSP is comprehensive; it encompasses production targets for the main economic sectors; the use of their products; a rationing mechanism for distribution, and quota systems for inputs. Balance between the sources and uses of production are agreed between relevant parties, and equilibrium is sought. Planning encompasses labour quotas, wage levels, investment, high priority projects, technical development, foreign trade, trade relations, and the balance of import-export ratios. It also includes finance of the state budget, banking and pricing.

Plans are subdivided between planning bodies, ministries and enterprises. They are imposed on the lower level organisations, but some scope for amendment is negotiated in advance of the final plan. Fulfilment reports are required after implementation (Kornai, 1992:111-14).

 

The bureaucracy decides on the formation, liquidation, break-up or merger of firms. It determines appointments, promotions, the dismissal of leaders and the parameters of managerial decision-making within the plan. Products and materials are allocated in such a way that ‘the bureaucracy takes the place of the market mechanism’ (Kornai, 1992:116). Upper levels of the hierarchy exercise direct bureaucratic control by constantly intervening in the operation of subordinate bureaucratic entities. Despite its rigidity, the absence of market impulses, and limits on innovation associated with this, ‘the tasks those running the system consider of primary importance are particularly likely to be accomplished.(Kornai, 1992:117).

 

Bureaucratic motivation is distinct from proprietary motivation, as no residual income benefits are derived from innovative decision-making. Supervision and sanctions from above tend towards a conservative passivity shaped by bureaucratic dependence. Individual bureaucratic motivations may be driven by ideological conviction, professional satisfaction, power and prestige, material benefits, the desire for a quiet life, and the fear of sanctions from above (Kornai, 1992:119).

 

A form of vertical bargaining emerges between bureaucratic entities. The lower levels seek a simple means of fulfilling their tasks, so they request excess labour and supplies. The higher level seeks to extract more production, so prescribes tighter plans than are realistic , aware of the impending bargaining process. This process pertains between each superior-subordinate relation of bureaucratic power where exchange occurs (Kornai, 1992:122-4).

 

Bureaucrats are not concerned with present and future profits, corporate value, market position, or commercial concerns. The top leaders pursue a drive for rapid growth. Attempts by lower level bureaucrats to match these demands are tempered by conflicting concerns with quality, and by bargaining interests which seek to minimize change. Planning in the CSP is inextricably interconnected with politics: managerial, technical, bureaucratic and political roles are combined and complementary faces of the bureaucracy when it negotiates on resource allocation, tasks, etc (Kornai, 1992:124-7).

 

The interests of those who provide planning information compromise its quality, as does the quantity of information required, and the rigidity of the implementation system. Adjustments to the plan inevitably have unexpected consequences. Thus a hierarchy of priority plans is devised, which result in the relegation of plans of subordinate importance (Kornai, 1992:127-30).

 

A presentation of Kornai’s overview of reform socialism

 

Kornai argues that the classical socialist system is a coherent unity, its breakdown and end is driven by impulses that come from four groups of internal contradictions and dysfunctions.

 

  1. Economic slowdown exposes technical lag, shortage and waste. Rapid extensive and forced growth neglects spheres such as health, housing, transport and telecommunications, and competitive military burdens limit the consumption power of the masses.  
  2. Public disaffection with the quality and choice of consumer goods, the poor natural and built environment and low living standards find expression. Restrictive and arbitrary bureaucratic power and propaganda, clashes with desire for greater freedom of expression and action, particularly amongst the intelligentsia.
  3. The elite unity breaks down as self-doubt replaces self-confidence; the sincerest believers observe the superior performance of capitalist countries. As a means of self-protection, they seek legal protection against repression; this dissolves internal bonding agencies.
  4. Collective international experience of reforms and revolts in other socialist states, impact all such states. This was evident in 1989 where, regardless of repression or control over propaganda, even isolated states experienced common upheavals (Kornai, 1992:383-6).

 

The radicalism of changes may vary by degree, from ending the old methods of rule entirely, to superficial adjustments. The relationship between the radicalism and depth of change, reveal connections and associations that facilitate an understanding of the system’s dynamics. For example, a radical change in property relations may generate associated political forces (Kornai, 1992:386-7).

 

Reform and Revolution (Kornai, 1992:387-92)

 

Kornai provides his own contextualised definition of ‘revolution’ and ‘reform’, in which, any change which fails to radically amend the three core lines of systemic causation: party rule, public ownership and bureaucratic coordination; cannot be considered as reform. Changes restricted to subordinate spheres are defined as ‘superficial phenomena in economic activity’, (Kornai, 1992:388), and are not classified as reform.

 

Reform must impact one of the three main lines of causation and affect the functioning of this sphere fundamentally and permanently, and yet not so fundamentally as to change the system away from the socialist ‘species’.

 

Kornai’s definition of ‘revolution’ requires an end to the undivided rule of the Communist Party as a precondition for a qualitative change of system. He rejects the view that revolution is defined by its rapidity, its origin ‘from below’, or its violent nature. The term revolution is defined as a qualitative leap from one family of systems to another, not by whether it is considered to be an advance or a retreat. ‘A consistently radical change in the deepest fundamental attributes of some society - that and only that is what in this book qualifies as a revolution.’ (Kornai, 1992:390).

 

Long-term ailments of the socialist system find expression in diverse forms. Triggers for change vary from the death of a leader, (Maozedong, Stalin) to change from above, (Tito) or initiatives from within the elite. Rumbling discontent or open revolt may characterise the forms of pressure from below.

 

The aim of Kornai’s analysis is to provide ‘abstraction distilled from the multiplicity of historical realizations’ (Kornai, 1992:394) that permits generalisation from observable tendencies of change. Thus his examination focuses on the ‘tendencies of the movement and the change, along with the countertendencies working against them.’ (Kornai, 1992:395).

 

The Perfection of Control (Kornai, 1992:396-408)

 

Advocates of ‘perfection’ are believers who seek to refine the system. They try to eliminate problems within the bureaucracy by amending the instruments of power and control. Firms are merged for economy of scale, although comparative capitalist enterprises are generally smaller. Under socialism, systems are designed for ease of control and monitoring, thus monopolies without overlapping boundaries are efficient from the standpoint of bureaucratic simplicity.

 

Mathematical and computer models promote rational planning and control, but are sabotaged, as planning functions through ‘vertical bargaining and horizontal reconciliation’ (Kornai, 1992:404). The concealment of information is in the interest of officials, thus, the checks and controls of computerized models are perceived negatively. The complexity of the calculations involved in the complete interrelations of a national economy, are too intricate and uncertain to be calculable (Kornai, 1992:405).

One trend seeks to change the importance of plan indicators by redefining parameters. This may include decentralisation; reducing the quantity of indicators subject to plan; greater emphasis on value; overcoming bureaucratic inertia by eliminating indicators based on past performance (which may contain false results); or changing calculations based on total output value, to emphasize net production or profits (Kornai, 1992:405-6).

 

Such adjustments dodge the issues, as new indicators produce new indicator successes at the expense of newly neglected factors. To elevate the profit motive to the chief indicator, superficially appears to constitute a radical emulation of capitalist methods, but without ‘real decentralisation’, free entry and free competition, these measures are antithetical to capitalism (Kornai, 1992:406).

 

Recentralisation re-emerges to restrict non-compliance and to tighten up on dodges and tricks. This requires more regulation, control, administrative layers and disciplinary measures. Thus ’perfection’ may strengthen conservative tendencies, but, where political loosening accompanies these changes, ‘perfection’ helps ‘break down the self-congratulatory official ideology’. A constituency, encompassing sections of the leading circles, comes to believe in more profound and radical change (Kornai, 1992:407).

 

Political Liberalisation (Kornai, 1992:407-32)

 

Kornai identifies typical origins, forms and countervailing tendencies that appear with political liberalization. Radicalism in this sphere determines the fate of all others.

 

The monopoly of Communist party power continues in three key areas.

  1. Appointments. Party appointments are ubiquitous in the state, economic management, the judiciary, and mass organisations. The public elect candidates nominated or approved by the party and bureaucratic apparatus.  Limited competitive elections may be permitted, some are sham, others, are real conflicts between individuals, ideas and programs. Individual political representatives may conflict with official views and policies and this represents the seeds of a multiparty system (Kornai, 1992:410-11).
  2. Government by decree.  There is no separation of legislative, executive and judicial power, and thus appeals against organs of the state are excluded. The Communists have a solid majority, so decisions are based on decrees rather than parliamentary procedure. In the reform era, demand for the ‘rule of law’ is raised, in order to subject all to judicial control, but law is adjusted to serve the bureaucracy and the party (Kornai, 1992:411).
  3. Armed force. The organs of force and repression remain under control of the party; it decides appointments, promotion, demotion, budgets and material resources. The disposal of these forces remains in the hands of the party leadership and is not subject to any endorsement procedure within the legislature. The classical and reform socialist eras do not differ in this respect (Kornai, 1992:411).

 

The Easing of Repression

 

An official condemnation of past errors shakes ideological conviction and is followed by a reduction in repression. This enables loyalists to express limited critical thoughts causing a moral crisis, which gives birth to ‘reform communist’ ideology inside the party, state and intelligentsia.

 

The reduction in repression alleviates tension within the apparatus and opens avenues for loyalists to express critical views and opinions, within the power structure. Targets of more constrained repression may include, opponents of the present ideological line within the party, external ideological opponents and those who attempt to form organisational opposition to the party. The extent and regularity in the use of repression declines, and there is a more nuanced and formalised application (Kornai, 1992:412-4).

 

Constant and Variable Elements in Official Ideology

 

Ideological revision is inevitable, but party ideologists seek to minimise adjustments to safeguard fundamentals and to justify the present line.

 

Some tenets remain untouchable:

  1. The leading role of the party in the state, the ban on factions and adherence to democratic centralism inside the party.
  2. The doctrines of Marx and Lenin are untouchable: errors are blamed on their misinterpretation.
  3. The superiority of public ownership and its predominance as the foundation of socialism.

 

It was previously taboo not to declare allegiance to these untouchable principles, now self-censorship prevents the explicit questioning of them. Underground literature and groups engage in dissent against the core axioms. If this dissidence on the fundamental taboos becomes a widespread, vocal and mass phenomenon, it may signal a change from reform to revolution.

 

Ideological flexibility leads to creative pragmatism, but compared to classical ideology it weakens the bonds. Certainty of mission and the sense of superiority over capitalism are undermined.  Material incentives replace ideology as key motivators, with an emphasis on consumption as opposed to industrialisation; although at times of economic hardship, appeals to moderation may reappear. A retrenchment of the state from comprehensive welfare provision, subsidies, and other social guarantees, is accompanied by an emphasis on personal responsibility. This ‘mental edifice’ lacks coherence. Permissiveness gradually and irreversibly conquers official ideology, taboos can’t be re-established, and any successes serve to reinforce this process. A weakening of ideological cohesion is reflected in the media and education. The press, radio and television become a terrain where the pressures of social opinion find critical expression (Kornai, 1992:414-8).

 

 

Seeds of Pluralism

 

Political reform unleashes centrifugal forces expressed in the following:

  1. Sectoral lobbies influence decisions such as investments, wages, bailouts and subsidies, reducing central power.
  2. Regional, national and ethnic minority pressure groups, assert greater independence, this enhances the power of regional party and administrative organs. A broadening of decision-making is encouraged, provided it does not give rise to ‘nationalist’ tendencies. Culturally derived communities tend to clash with hostile centralist forces, often resulting in physical conflict. In the reform era, harmonious federal states are not created and the assertion of national independence is prevented. 
  3. The repression of religious organisations decreases, a growth of religion corresponds to a systemic moral and ideological crisis. Spiritually independent organisations provide examples of alternative power.
  4. The union bureaucracy weakens in its role as a transmitter of commands from above and from the party. There is a tendency for the union bureaucracy to identify with their members and assert their interests more forcefully. Strikes and various forms of worker unrest are legalised or tolerated. Some of these conflicts occur under official auspices, others through independent organisations. Similar processes occur within other interest groups, e.g. scientists, artists, writers, students unions, peasants etc. The dual nature of these organisations as transmitters ‘downwards’ and representatives ‘upwards’ begins to shift emphasis towards the latter role. Autonomy increases and is expressed in increased influence and self-government. Independent organisations appear, some sanctioned, others semi-legal, emerging from below to represent special constituencies, e.g. tenants, pensioners, the disabled.
  5. The Communist party always contained dissidents; the reform era fosters factional organisation, and ‘reform communists’ form the germ of a multiparty democracy.
  6. In a grey zone of legality a range of ‘alternative’ movements emerge, initially as contributors to official events they stretch the parameters of legality. Repression becomes more problematic due to external and internal opinion. If critics are repressed such people may become models of heroic dissent (Kornai, 1992:418-23).

 

The changes produce ‘neither a pluralistic nor a monolithic system’ (Kornai, 1992:423), alternative political spheres, undermine the hold over people’s minds, weakening ideological faith and the dissuasive power of fear.

 

Opening to the Capitalist World

 

The reform era corresponds to a relaxation of international tensions and facilitates disarmament. The theory of class antagonism in international relations recedes. The Chinese phrase of ‘opening’ captures the essence of the change. Contacts with the Western world increase in personal, trade and official relations and exchanges. Western cultural goods and values proliferate, acting as a cultural distraction and as a source of affinity with Western values.

 

Conservative backlashes occur occasionally and align themselves with other conservative tendencies freed up by the intellectual thaw. The feeling of fresh air blowing through a stale environment opens a mass comparative analysis of systems, undermining the untenable edifices constructed around mythical claims of inherent systemic superiority (Kornai, 1992:423-5).

 

Change in the Scale of Publicity and Candor

 

‘Glasnost’, represented an end to secretiveness, and the start of more open decision-making processes and truthfulness in public life. Many problems of the classical system remain present and may constitute grounds for unrest. Opening the lid on pent up frustration increases the intensity of revolt. ‘Liberty is among the spiritual foods whose consumption whets the appetite for it.’ (Kornai, 1992:427) Sometimes, loosening control unleashed explosive change, in other cases; a failure to reform generated sudden unrest. The observation of events in other countries played an important role in the spread of revolt (Kornai, 1992:427).

 

The clash between liberalising tendencies and those seeking to conserve existing power characterises the reform era. The equilibrium of political forces can develop into a prolonged period of consolidation as in Yugoslavia, from the early 1950s until 1989, and in Hungary from 1968 to 1989. No stable equilibrium is established; tensions remain and can tip the balance. Such was the case in Poland at the time of the challenge posed by the Solidarity trade union in 1980-1, and in the Chinese democracy movement of 1989, both these cases were ended by repression.

 

This repressive and conservative reaction stems from the outlook and motivation of party members at all levels. They consider power to be an intrinsic value and thus, the loss of party power entails the destruction of their hopes and dreams. In addition, it may herald the loss of personal power, privileges and prestige, and engender reprisals against them. The Chinese reformer and former General Secretary, Zhao Ziyang, explained that the Western multiparty system cannot be introduced in China, as the party represents the people, and any reforms that are carried out, must be done within the system of Communist party rule. Multiparty systems permit the defeat of the Communist party and are rejected for precisely this reason (Kornai, 1992:427-9).

 

The Rise of the Private Sector

 

The formation of the private sector is the most profound change in the economic sphere under reform socialism. Private sector growth mushrooms naturally and spontaneously as soon as there is a decrease in hostility towards it. It is driven by material incentives, a desire for autonomy, the satisfaction of self-mastery and a thirst for independence. Part of the bureaucracy assists the private sector in order to alleviate shortages and to divert attention from political shortcomings (Kornai, 1992:432-5).

 

Private owners establish new enterprises parallel to state sectors, or acquire ownership of state or collective assets through privatisation. The first method tends to characterise the reform era, but privatisation can also take place outside the productive sphere, for example in housing stock (Kornai, 1992:444).

 

Private Sector and Official Ideology

 

The classical system defined the private sector as a vestige of capitalism. Leading reform Communists such as the CPSU general secretary Mikhail Gorbachev, declared universal public ownership as his objective as late as 1988, and CPC General Secretary Zhao Ziyang reiterated his faith in public ownership and its inviolability in 1989 (Kornai, 1992:445).

 

Small-scale producers can develop into large-scale capitalists and unearned income and exploitation is an anathema to Communist ideology. Thus high-income earners become the object of envy and hatred. Wide layers of society, imbued with the ruling ideology, share this outlook and approve of measures taken against ‘parasites’. The reform socialist ideology is an inconsistent combination, internally torn between the need for pragmatic solutions and the antipathy towards the agents and methods of these solutions (Kornai, 1992:446-7).

 

Affinity of Private Ownership and Market Coordination

 

There is an organic affinity between private ownership and market coordination. Private enterprises relate on a horizontal basis and do not hold administrative power over one another.  Individuals own and voluntarily engage in autonomously determined interconnections in conditions of decentralised coordination. Prices are the natural domain of the proprietor as costs and sales are the measures and means of material gain. Unhindered entry into the market, competitive rivalry and consequent failures, are normal market conditions.

‘All economic relations arising among private enterprises or between them and the general public are coordinated basically by the market mechanism. A natural advance of the market mechanism is inseparable from the expansion of the private sector.’ (Kornai, 1992:448).

 

Hard budget constraints pertain, as failure to generate sufficient income and profits, leads to survival crises for private enterprises. However, in reform socialism, bureaucratic coordination still dominates and impacts on the operation of private firms in a myriad of ways. This is a significantly different environment to interventionist state activity in capitalist countries (Kornai, 1992:448-9).

 

The Private Sector and the Bureaucracy

 

The nature of the bureaucracy’s relations with the private sector depends on which interests groups are involved. There is clash of ideology and power, because the bureaucracy governs the public sector from within, whereas it’s power relation to the private sector is from without. This undermines the power of the bureaucracy. Just as private sector activity is spontaneous and voluntary, so is bureaucratic resistance to it (Kornai, 1992:450-1)

 

The bureaucracy determines and defines the enforcement of the legal framework governing private operations, but the private sector seeks protection and guarantees for its property. The parameters of legal activity are amended, permitting previously forbidden activities, but simultaneously extending bureaucratic authority over them. Other previously illegal spheres may now be tolerated, and semi-legal activities proliferate. New forms of dependence on bureaucratic leniency develop.

 

Legal measures to enforce contracts are weak or non-existent. The state is protected against private sector interests by existing power, ideology and law. Tax rules are arbitrarily applied and the burdens imposed may eat into profitability. The tolerance of grey markets fosters a moral climate of lawlessness in tax relations.

 

Limited access to bank credit, materials and state orders, discriminates against the private sector, which has no voice in political life. This ambivalent environment and insecurity, promotes short-term money making as the norm for private sector activity. Conditions of shortage permit private firms to disregard quality, and the bribery needed to engage in their business activities, promotes a cheating culture. This in turn increases public hostility to private entrepreneurs. (Kornai, 1992:451-5)

 

Family based economic coordination increases in the reform era and creates a zone of privacy and independence from the state. Privatisation of housing promotes family ownership, engendering autonomy and positive identification with private property. The state begins to retreat from welfare responsibilities (Kornai, 1992:458).

 

‘Traditional’ family roles provide a retreat from the bureaucratic invasiveness of the past; this benefits state finances, whilst those dependent on subsidies, or unable to tap into the new sources of financial accumulation, become more impoverished. Women lose the independence provided by work and may be burdened with a wide range of welfare responsibilities previously shouldered by the state (Kornai, 1992:458-9).

 

Kornai predicted that after the demise of socialism the advance of the private sector would be all the more rapid where the private sector had already matured. Capitalism can be ‘abolished by state command’ in a relatively short time span, but the development of the private sector cannot be ‘performed by state command’ (Kornai, 1992:460).

 

Worker Manager Relations

 

The erosion of political tyranny and classical ideology produces a change in worker-manager relations. There is a slackening of control over the workforce and increased pressure in favour of workers’ interests. Unions adopt a more aggressive stance, workers become more mobile, and the administration is less able to control them. Managers are also less likely to be backed up by bureaucratic, party and union organisations, and workers discover that they are able to remove managers. So, a tendency for managers to become populist, as representatives of the workers, is generated by this combination of circumstances (Kornai, 1992:469-70).

    

Market Socialism

 

The principal concept behind market socialist ideas is for the market to fulfil the role of the basic coordination mechanism of the economy, or at least be equal in importance to bureaucratic planning, and for this to function in an economy dominated by public ownership. Various tendencies exist within this stream with differing ideas concerning how much power the market should have within the economy (Kornai, 1992:474).

 

This constitutes one of the main trends away from the classical system. Kornai argues, that the idea of market coordination is alien to Marxist traditional theory, which sees the market as an anarchical system of coordination. Marx proposed that market relations, reacting to supply and demand, would be replaced by conscious planning. Kornai believes that adopting market socialist ideas entails abandoning the axiomatic principles of Marxism (Kornai, 1992:475)

 

For reform socialists, combining a ‘plan-cum-market’, appeared to offer the prospect of correcting market failure in the social sphere, and minimising the need for intervention by central planners in everyday economic operations.  The system retains key features of the classical system and combines these, with independent firms, contractual relations, price signal tools, and other market based measures. Market socialist ideas emerged organically, several thinkers in different countries independently developed similar ideas to one another. These theories play a central role in the new ideological line developed under reform socialism, in which the market is allotted a respected role in economic activity (Kornai, 1992:477-9).

 

Various ‘socialist-market’ methods were used over time. They involve a degree of ‘deregulation’ i.e. they remove economic entities from direct bureaucratic command (Kornai, 1992:480).

 

There are differing criteria for assessing such deregulation.

a. The degree: to which it impacts on central command.

b. The scope: local, national, experimental, gradual, competitive, universal. 

c. The sequencing: sudden abolition of commands or gradual evolution.

 

The package of deregulatory measures differed substantially from country to country and experiment to experiment (Kornai, 1992:481).

      

Vertical Dependence

 

Some key features of the semi-deregulation of state owned firms are cited here. There is dual-dependence upon vertical ties to state authorities and on horizontal ties to the market of buyers and sellers. The system specific features of these vertical dependencies are catalogued as follows:

 

  1. Entry is determined by bureaucratic decision and permission.
  2. Exit is determined by bureaucratic decision, or halted by bureaucratically allocated soft-budget constraints.
  3. Mergers and splits are permitted, but final rejection or permission is a bureaucratic right.
  4. Appointment of leaders is decided or heavily influenced by bureaucratic powers. 
  5. Exports, imports and foreign exchange are less tightly controlled, but pressure is brought to bear to fulfil certain obligations or de-prioritise others. Technology or product development choices may be determined by superior organisations.
  6. Prices are generally still subject to some control.
  7. Wages are subject to pressures at the minimal and maximal scales, undermining free bargaining.
  8. Taxes and subsidies are subject to considerable scope for tailor made solutions and the bending of rules.
  9. Bureaucratic interests vertically control credit and loans; banks provide soft-budgets to save and sustain projects that are deemed important.
  10. Investments are partially deregulated to firm level decision-makers, who can spend retained profits. In large projects, the state intervenes more frequently.

 

Free enterprise does not apply in the state sector and rivalry between firms is restricted. The survival or demise of state owned firms and managerial promotion or demotion within them, is determined bureaucratically. However, formal regulatory frameworks fail to account for a myriad of intangible means by which the leadership bend firms to their will. There is a far greater scope for evasion and personal decision-making, more fluidity in power relations and more bargaining between superiors and subordinates. Direct bureaucratic control of the classical system gives way to indirect bureaucratic control in the socialist-market (Kornai, 1992:482-9).

 

Budget Constraints and the Responsiveness of Firms

 

Market-socialists hoped that reduced engagement in direct planning would free resources to concentrate on the short term macro economy and long-term economic strategy. However, micro-regulation continues and old planning routines become useless. Socialist-market planning is composed of ‘a series of improvisations’ (Kornai, 1992:489).

 

The profit motive is supposed to incentivise the behaviour of firms. Investments are partially financed by retained profits in the hope that prices and costs will begin to shape managerial action. Budgetary laxity means that the correlation between profits, prices and actions, remains limited. Soft budgets take the form of subsidies, tax benefits, credits and administrative pricing. The maintenance and expansion of unprofitable firms, by rescues and bankruptcy avoidance, is financed by the state.

 

Vertical bargaining produces customised solutions. Rules are subject to incessant adjustment, subsidies and deductions are complex and unique, and relate to the specific spheres of interest of bureaucratic powers. High profit companies are squeezed to subsidize other sectors in a form of egalitarian profit distribution. Profits are conjured-up by bureaucratic action rather than being produced by market relations and incentives.

 

The Communist Party and the bureaucracy are not profit driven owners of firms, so, ideological conflicts occur between the paternalistic promotion of solidarity and workers’ welfare, and demands to implement hard budget choices, particularly when this provokes workers’ unrest.

 

Under capitalism, property ownership generates innate profit seeking motivations and behaviour. The market is governed by this universal discipline. Kornai believes that public ownership negates this, and cannot lead to the application of financial discipline, because ownership relations do not divide the bureaucracy. The state is the owner and manager rolled into one. This can only be changed by private ownership, or if state enterprises are few in number and surrounded by capitalist enterprises (Kornai, 1992:493-5 see also note 35 p 495).

 

Entrepreneurial dynamism requires free entry into productive activity and access to credit for private individuals or companies. Market socialist coordination and control mechanisms involve micro-level decision-making on company activities by managers and their vertically superior bureaucratic organisations. ‘The more bureaucratic control remains dominant, the less the budget constraint can be hardened’ (Kornai, 1992:495).

 

The root of this problem is seen in the power structure, property relations and coordination mechanisms. In an economy in which budgets are ‘sufficiently weak to dampen substantially all demand and supply reactions, the market is incapable of fulfilling its role.’ (Kornai, 1992:496).

 

These factors produce firms which react with dulled market responses to price signals, producing less effective and slower reactions than their private free-market cousins. Price signals from companies that are kept alive artificially, in turn produce more artificial prices. 

The expectation of market-socialists was that firms would behave price-sensitively and financial control would replace physical input and output instructions. Investments would respond to interest rates and product substitution would be stimulated by prices. However the firms were overwhelmingly unresponsive to these control mechanisms. Despite the more active role for money, public sector economics in market-socialism remains only semi-monetized (Kornai, 1992:497).

 

The Affinity between Public Ownership and Bureaucratic Coordination

 

Reformers hoped that market mechanisms would occupy the vacuum created by the control or dissolution of the instruction system, but amended bureaucratic coordination filled the gap. Indirect vertical control predominates and is combined with subordinate horizontal relations. 

The resistance to implementing policy changes, by upper and lower level bureaucrats, is often blamed for the situation. But Kornai maintains that the bureaucracy is a ‘hierarchically structured social group’ rooted in every cell of society, so the natural survival instincts of this group pursue its continuance. They cling to their authority, identify with their respective organisational and social functions, and seek to complete them. They try to reinforce their rule and to prefect it. Firm managers want little interference from their superiors, but nevertheless seek out their superiors, and connections inside the bureaucracy, whenever difficulties are encountered. Their ‘capital’ is composed of these interrelations and these connections are their natural environment.

 

The attempt to match central control with independent firms is contradicted by vertical subordination. Bureaucratic self-reproduction is organically engrained in the system. ‘There is no need for a central command; on the contrary, bureaucratic coordination rises again even if some stern central resolution lays down that it must be curtailed.’ (Kornai, 1992:499).

 

Horizontal Relations of Firms in Public Ownership

 

There is a substantial growth of horizontal relations in the reform era, but these relations are not governed by prices, profits or rivalry. They are the result bureaucratic command. This market is a contrived affair, in which formulas and incentives are thought up and imposed, rather than naturally evolved. There is no affinity between the market and public ownership.

Contracts are broken with impunity, companies refuse to pay, or pay late, leading to debt queuing by firms and general liquidity crises, and state rescue as a last resort is taken for granted. Company to company credit and debt is permitted, but so is delay or the non-payment of debt.

Three forms of capital allocation for public firms emerge, central state budgetary funding, investment loans from state banks and investments from company savings. One method proposed, is to permit cross ownership is through joint - stock companies, which issue shares. Banks, insurance companies, pension funds and other state entities, hospitals, local governments and villages etc. are permitted to own and trade shares; these shares would be traded on state stock markets. Kornai believed that without private ownership, state entities owning these shares would continue to behave within soft-budget constraints (Kornai, 1992:500-4).

 

Proportions of the Two Kinds of Dependency

 

Vertical dependencies predominate over horizontal ones, despite the growth of the latter.  Coordination and control methods are altered but not fundamentally changed. There is a critical point at which bureaucratic intervention destroys market vitality, so the balance is between them not an arbitrary question.

 

The demeanour of managers assumes the appearance of their capitalist counterparts. They are not owners, but are granted rights of control over public firms, so their interests are not bound to the profit and net worth of the companies. Their positions are vertically dependent, “one eye on the market and the other on their superiors, the important thing, in fact, is for the eye cast upward to see clearly: their present bonus or penalty and their future promotion depends on their superiors. The proprietor, if any, is the sum total of the bureaucracy. But this is ‘intangible.’ What was established about the classical system remains true: public property belongs to all and to none.” (Kornai, 1992:505).

 

A new independent managerial class opposed to the bureaucracy and independent of the workforce fails to emerge. Managerial behaviour is governed by multiple roles: as intermediate managers dependent on their superiors, yet wielding local power; as recipients of residual income; as technocrats of production and development; and as representatives of employees’ interests (Kornai, 1992:505).

 

Relations between Publicly Owned Firms and the Private Sector

 

Contact between the two sectors is fraught with conflicts. Private entrepreneurs dislike the privileged access of state enterprises to power and credit. State managers envy the autonomy of the private sector, and that higher wages may ‘steal’ talented workers away from public firms. Workers in the private sector envy the security of public sector workers. Access to key materials may come only from public enterprises, so private companies often need to bribe officials to sell to them, and access to public sector contracts is restricted by the state. Fair competition does not exist, thus both sectors have legitimate grievances against the other (Kornai, 1992:505-7).

 

Interaction between the Mechanisms; Assessment of the Changes

 

In the reform era, managerial flexibility is increased, the quality and quantity of products improve, new product innovation and production is accelerated and buyers’ interests are considered more frequently. The rigidity of the economic atmosphere changes, and barrack like controls and fear, associated with the classical system, diminish.

 

The failings of bureaucratic and market mechanisms reinforce each other, producing a no-man’s land scenario where neither operates effectively. The old bureaucratic discipline is undermined and central power is no longer able to enforce policies, simultaneously, market discipline, governed by competitive rivalry is also absent.

Markets require a minimal trust level to develop ‘good will’ and avoid constant litigation. Instead of this, bribery, nepotism and ‘cheap commercialism’ predominate, and there is widespread petty theft of state property -as it is not endowed with ‘value in the public’s eyes.’ (Kornai, 1992:509).

 

In the 1980s, the Chinese a ‘dual-system’ economy encouraged the sale of subsidised goods at higher market rates. Managers often pocketed the difference. Those with bureaucratic connections spawned entire industries based on ‘back-door’ access to these state subsidized goods. The general public viewed the new rich with profound dislike, unconcerned whether the wealth was a product of entrepreneurial endeavour or theft. Hatred of corruption erupted in 1989, in a widespread social movement alienated by the results of the reform process (Kornai, 1992:509-10)

 

According to Kornai, the imaginable model of a rational, objective and neutral bureaucracy, behaving according to market impulses, was contradicted by the actual structure, surviving ideology and property relations, within which the attempts to create market socialism were made. He thinks that the main benefits of market-socialist experiments are that they shake belief in the command economy, promote spontaneous forms of economic activity, and improve the public perception of private enterprise and the market (Kornai, 1992:511).

 

 

 

 

Factor prices tend to remain under tight control

 

Under market socialism interest rates are set by state banks, where they are set at negative real rates, this indicates market coordination is not predominant. Interest rates should primarily be determinants of investment. Without this, forecasting and decision-making are undermined and this impacts on the entire pricing system. Private sector credit is charged at much higher rates and as there is no private banking system. Thus private access to capital is often secured through grey or black money (Kornai, 1992:519).

 

The employment of labour, capital, and associated investment decisions by state enterprises are protected by soft-budgets and thus have no intrinsic relationship to the relative scarcity of capital and labour. Therefore prices do not serve as indicative symbols. Private sector companies have to calculate their investment on capital and labour on the basis of scarcity and price indictors. The prices of land and rent prices are state determined and are arbitrarily fixed at below market value for state enterprises. Private investors, fearful of inflation and limited in their investment opportunities, often park their money in real estate. The discrepancy between state land prices and market rates is a field of lucrative enrichment and unequal terms of trade between the public and private sector (Kornai, 1992:520-1).

 

State Price Determination and Fiscal Redistribution

 

Administrative price determination deals with the differences between prices and costs in state owned firms. If state firms make profits they are taxed, but if they make losses they are bailed out. This process is not reduced under market-socialism.

 

In the reform era, prices should serve to produce equilibrium between supply and demand, however, no country attempted to make this a dominant principle. Rapid fluctuations in prices would conflict with bureaucratic yearnings for stability.

 

Compensatory principles are applied in justifying redistribution and subsidies, profits may be ascribed to luck and good fortune, (e.g. chance demand and previous investment in a specific machine) and likewise losses may be ascribed to bad luck and mistakes (e.g. bad weather, or an old machinery). This compensatory principle clashes with market and equilibrium principles. Prices and taxes are interconnected in this system of fiscal redistribution, and errors provide rational grounds for compensation. Arbitrary prices, arbitrary fiscal redistribution and soft-budget constraints, all feed off one another and combine to make rational pricing impossible (Kornai, 1992:521-25).

 

Employment and Wages

 

Full employment and a shortage of labour were characteristic of European reform socialism, and were underpinned by soft-budgets constraints. In China under classical socialism, there was surplus labour and concealed unemployment in agriculture, but a labour shortage in the cities. In the reform era, the employment planning of the classical system loosens and employees are permitted to leave employment more easily or voluntarily. When this is combined with a labour shortage, it empowers workers vis-à-vis managers.[4]

 

Pressure grows on the wage bill, which the central government seeks to control, in order to meet investment needs. As lower level bureaucratic enforcement is weakened, worker unrest spreads. In all manner of negotiations and discussions, workers become more militant and assertive. Bonds between managers and more senior officials are weaker, so managers become more dependent on their workforce. This may result in self-management tendencies, such as the election of managers by the workforce. This reinforces the tendency to dispel tension through concessions to the workers. Managerial autonomy in setting wage increases and evasion of central control becomes common. Workers in other employment settings, like education, healthcare, etc. also begin to assert themselves. Wages rises exceed productivity gains and produce inflationary pressure. Bureaucratic control is weakened and private sector discipline is absent, so wage discipline breaks down (Kornai, 1992:530-3).

 

Growth and Investment

 

The classical system seeks as fast a rate of growth as possible. The reform era bureaucracy is torn between the need for rapid growth and the need to improve living standards and reduce disproportions. As growth slows, the leadership becomes determined to stop the decline, simultaneously the surplus labour force is exhausted, (in Europe) and so investment is increased. There is a need for increased consumption to alleviate social discontent. Investment in neglected sectors that serve consumption is needed in such areas as housing, healthcare, catering, road transport and all manner of maintenance services.

 

These sectors require vast investments, but meeting immediate needs for consumer goods eats into this.  The classical system leant towards heavy industry, which now lobbies for its continued influence. These contradictory demands produce contradictory policies, speed-ups and slow-downs in investment and consumption. The tendency towards forced growth gains the upper hand as a conditioned reflex (Kornai, 1992:534-5).

 

There is a decentralisation of investment decision making, as firms are granted more autonomy. This may provide for profit retention as a source of investment or greater access to bank loans. Negative real interest rates and the fact that bank loans are treated as grants, means that the borrowing and investment decisions are not profit constrained (Kornai, 1992:536-7).

 

Credit and Monetary Policy

 

In the reform era, decentralised banks and banking coordination mechanisms appear to emulate capitalist structures. However, market coordination is not what determines the behaviour of banks, as property relations are public and motivations are bureaucratic, and are not driven the profit. Political pressures influence lending and the price of credit is set too low, and so there is a constant excess demand for credit. The “banking system in a reform economy is fundamentally a bureau for allocating credit and collecting and storing money, not a network of institutions running on commercial, market principles.” (Kornai, 1992:545).

 

Where there are negative real interest rates, it is entirely logical to borrow as much as possible. Credit is allocated not for the profits of the banks, but on the basis of all manner of bureaucratic lobbying and non-commercial deals. There are no incentives to restrain credit. Firms also impose forced credit on one another by the late payment of bills. This can generate wider liquidity problems, which may be resolved by further loans. 

The party appoints the leadership of the central bank and monetary policy is bureaucratically determined. The budget deficit is generally covered by the central bank instead of by issuing state bonds. The leniency of the central bank adds to inflationary pressures, exacerbated by a general lack of skill and expertise at all levels of banking administration. Monetary policy shifts, between relaxed and tight, but multiple bureaucratic and social pressures generate laxity (Kornai, 1992:545-8).

 

Living Standards

 

The effect of reform on living standards varies considerably. Private sector entrants are big winners. In China, this encompasses hundreds of millions of peasants, whose living standard rose significantly. This also led to a rapid improvement in food supplies to urban consumers. Private sector activity stimulates consumption in general. 

 

If there is a shift in priorities to current consumption, this can bring a rise in living standards through improved services, like health and housing. Imported goods, and improvement in the quality and availability of goods from public firms, may increase consumption. The improvements in Hungary, China and Yugoslavia are notable in this respect (Kornai, 1992:559-60).

 

Macrotensions break out in all socialist-market economies, although leaders try to conceal or postpone them. Under the classical system, driving down living standards could be carried out by repression, but more open and vocal environments limit the options to restrict consumption. Military budgets are generally ring-fenced by bureaucratic interests, so curbing investment or raising foreign loans remain the only options. As investment is the basis of future growth, backlogs generate discontent within the bureaucracy (Kornai, 1992:560-2).

 

Incoherence of Reform Tendencies

 

The classical system is a coherent whole, like a fully functional prison, whereas reform socialism is riddled with elements of repulsion and contradiction. The Communist monopoly clashes with newly unleashed competitive political pressures, these forces pose a mortal threat to party rule. Control over ideas weakens as dogmatic interpretations of official Marxism are abandoned. This leads to a questioning of the entire theory and honest investigation is encouraged. At first, problems are blamed on individual errors, then on incorrect political lines and later, on false models. Eventually, this leads to a questioning of the entire system. Contradictory messages between the eras, and inside the new era, provoke clashes in moral outlook, between sacrifice and purity, and hedonism and consumerism. Kornai believes that the reform era produces an unstable system whose contradictions inevitably bring it to an end (Kornai, 1992:570-3).

 

Bibliography

 

CHIROT, D. 1993. Review of The Socialist System: The Political Economy of Communism, Janos Kornai. Slavic Review, 52, 855-856.

KORNAI, J. 1992. Socialist System : Political Economy of Socialism, Oxf.U.P.

KORNAI, J. 2008. From socialism to capitalism : eight essays, Budapest ; New York, Central European University Press.

LEBOWITZ, M. 2000. Kornai and the vanguard mode of production. Cambridge Journal of Economics, 24, 377-392.

NOVE, A. 1993. Review of The Socialist System: The Political Economy of Communism by Janos Kornai. The Economic Journal, 103, 1057-1059.

SHAMBAUGH, D. L. 2008. China's Communist Party : atrophy and adaptation, Washington, D.C.; Berkeley, Woodrow Wilson Center Press ; University of California Press.

 

 



[1] Ivan Szelenyi, Contemporary Sociology, Vol. 22, No. 1 (1993) pp. 33-4

[2] Kornai is aware that the term socialism is contested as an appropriate definition for the states that he studies, but he considers their self-definition as socialist as adequate grounds to use the label, and the fact that various socialist schools will find common attributes of socialism are present in such societies.

KORNAI, J. 1992. Socialist System : Political Economy of Socialism, Oxf.U.P. pp 9-11 

The main point of Kornai’s analysis is to identify and abstract the fundamental trends and features of the specific system that ruled many countries in the 20th century in the name of socialism. Kornai identifies 26 countries as Socialist in 1987, encompassing 34.4% of the global population. Ibid. pp 6-7

[3] Where there are other parties they are completely subordinate to the Communist Party.

[4] China’s labour market is also constrained by the added factor of the Hukou, or household registration, I shall address these issues elsewhere.

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