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The soft budget constraint

An introductory study to volume IV of the Life’s Work series

Author: János Kornai

The author’s ideas on the soft budget constraint (SBC) were first expressed in 1976. Much progress has been made in understanding the problem over the ensuing four decades. The study takes issue with those who confine the concept to the process of bailing out loss-making socialist firms. It shows how the syndrome can appear in various organizations and forms in many spheres of the economy and points to the various means available for financial rescue. Single bailouts do not as such generate the SBC syndrome. It develops where the SBC becomes built into expectations. Special heed is paid to features generated by the syndrome in rescuer and rescuee organizations. The study reports on the spread of the syndrome in various periods of the socialist and the capitalist system, in various sectors. The author expresses his views on normative questions and on therapies against the harmful effects. He deals first with actual practice, then places the theory of the SBC in the sphere of ideas and models, showing how it relates to other theoretical trends, including institutional and behavioural economics and theories of moral hazard and inconsistency in time. He shows how far the intellectual apparatus of the SBC has spread in theoretical literature and where it has reached in the process of “canonization” by the economics profession. Finally, he reviews the main research tasks ahead.

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What Economics of Shortage and The Socialist System have to say to the (Hungarian) readers today

An introductory study to the first two volumes of the life’s work series

Author: János Kornai
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In 2001 the Hungarian economy departed from the path of balanced growth. During the past six years the state budget deficit has grown to an unsustainable level, and also the deficit in the current accounts has become too high. Real wages have increased considerably faster than labour productivity. These difficulties and other macroeconomic troubles led the Hungarian Government to the introduction of an adjustment program in July 2006. The first part of the article analyses the current macroeconomic situation and the expected economic and social effects of the adjustment program. The commitment and determination of the government is shown by the fact that they are ready to accept the political “price” of the program, i.e. that the unavoidable measures will probably reduce the popularity of the election winning political powers.  The second part of the article discusses the relationships concerning measures requiring immediate execution and reforms aimed at long-lasting effects and in-depth institutional changes. These are indispensable to the sustainability of the effects of the adjustment. In connection with this, the paper reflects on the relationship between the budget deficit and the size of the state, on the proportions of state- and self-support, as well as on the speed and the gradual implementation of the reforms.

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For two decades Hungary, like the other Eastern European countries, followed a general policy of establishing and strengthening the institutions of democracy, rule of law, and a market economy based on private property. However, since the elections of 2010, when Viktor Orbán’s Fidesz party came to power, Hungary has made a dramatic U-turn. This article investigates the different spheres of society: political institutions, the rule of law, and the influence of state and market on one another, as well as the world of ideology (education, science and art), and describes the U-turn’s implications for these fields and the effect it has on the life of people. It argues against the frequent misunderstandings in the interpretation and evaluation of the Hungarian situation, pointing out some typical intellectual fallacies. It draws attention to the dangers of strengthening nationalism, and to the ambivalence evident in Hungarian foreign policy, and looks into the relationship between Hungary and the Western world, particularly the European Union. Finally, it outlines the possible scenarios resulting from future developments in the Hungarian situation.

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Research to date has focused mainly on the soft budget constraint syndrome in the corporate sector and in the credit system. This article concentrates on the hospital sector. It describes the motivations and the contradictory nature of the behaviour of the patient, the physician, the hospital director, the politician and the hospital owner. The motivations explain the reasons behind the strong inclination to overspend and the tendency of softening budgetary limits. The burden of overspending and debt is pushed upward at each level of the decision-making and financing processes. This article covers the relationship between the various ownership types (state, non-profit and for-profit non-state ownership types) and the soft budget constraint syndrome. Finally, it looks at the phenomenon from normative aspects: the favourable and unfavourable consequences of the hardening of the budgetary limit and how normative dilemmas are reflected in the minds of the participants of the events.

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The system paradigm revisited

Clarification and additions in the light of experiences in the post-socialist region

Author: János Kornai

The term paradigm was introduced to the philosophy of science by Thomas Kuhn — he used this term to denote the specific approach applied by a school of reasearch to examine its subject matter. Researchers using the same paradigm seek answers to similar questions, and employ similar methods and concepts. In an article published in 2000, the author of this essay introduced the term system paradigm, which focuses on the systems functioning in a society. This study develops the theoretical considerations outlined in that earlier article on the basis of experience on post-socialist transition. The first part compares the socialist and capitalist systems, describing their main characteristics, and concludes that the capitalist system has become established in former socialist countries, except for North Korea and Cuba. The second part analyzes varieties of capitalism within a typology which classifies prevailing forms of politics and government. Three markedly different types are identified: democracy, autocracy, and dictatorship. Huntington wrote about the “third wave” of democratization. This study concludes the third wave has dried up: for the 47 post-socialist countries, only a tenth of the population live in democracy, while autocracy or dictatorship prevails in all other countries in this group. The third part of this essay applies the conceptual and analytical apparatus to Hungary, where capitalism exists, and autocracy is the prevailing politico-governmental form — here we can find important characteristics common to other capitalist countries or other autocracies. This finding is compatible with the observation that there are some, less fundamental, characteristics unique to Hungary, or “Hungarica”, which differ from the characteristics of all other countries.

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Editor's Note: This essay paper of Professor Kornai with an unusually provoking title consists of two parts. Part I is the slightly edited, non-abridged version of his writing published as an oped in The Financial Times (FT) on 11 July 2019, the world's leading global business publication (Kornai 2019a). Subsequently, the full text of this paper was published in the Hungarian weekly magazine Élet és Irodalom (Life and Literature; Kornai 2019b), which in turn generated a number of commenting articles published in the same weekly. Still in the month of July, the original essay was translated into Chinese by a Hong Kong newspaper and into Vietnamese. An influential multilingual Chinese newspaper gave an extensive summary of the FT essay (Street 2019). The latter one, according to our best knowledge, was disseminated only on the internet. Part II is the translated and slightly edited version of Kornai's second article, published in September this year on the same topic (Kornai 2019c). In this second essay he responded to his critiques both in Hungary and world-wide. This piece was published in its original form in Hungarian by the previous mentioned Hungarian weekly. We, the Editors of Acta Oeconomica, are proud to publish the complete English translation of this second essay first time. We thank for the opportunity given to us by Professor Kornai to publish the Frankenstein-papers in an integrated form, together with all the necessary bibliographic references.

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