János Kornai (born Kornhauser)

Who he was and his times

János Kornai was born in Budapest in 1928 into a Jewish family. During the Nazi occupation of Hungary his father was sent to forced labour and perished in Auschwitz. After the war the young Kornai, impressed by Marx’s Capital, joined the Communist Party and in 1947–1955 worked at the party newspaper Szabad Nép, rising to head its economic department. He acquired his economic education largely on his own; later he graduated from the Budapest University of Economics.

After Stalin’s death, during the Hungarian “thaw”, Kornai and a group of journalists came out with criticism of the leadership. In 1955 he was dismissed from the newspaper and moved to the Institute of Economics of the Hungarian Academy of Sciences. His candidate’s dissertation “Overcentralization in Economic Administration”, defended in 1956 and based on material from light industry, became the first book by an Eastern European author published in the West (Oxford, 1959) with open criticism of central planning. After the suppression of the 1956 uprising Kornai lost the opportunity to travel abroad for several years but continued to work at the academic institute.

International recognition came in the 1970s. Kornai was president of the Econometric Society (1978), the European Economic Association (1987) and the International Economic Association (2002–2005), a full member of the Hungarian Academy of Sciences (1982) and a foreign member of the Russian Academy of Sciences (1994). From 1986 to 2002 he taught at Harvard University, and in 1992 he became one of the founders of Collegium Budapest, an institute for advanced study. Kornai died in Budapest in 2021.

The road to Economics of Shortage ran through a dispute with the prevailing theory. In Anti-Equilibrium (1971) Kornai criticised general equilibrium theory — the foundation of Lange’s model and of most Western economics — for describing the economy as a system tending towards equality of supply and demand at given prices while saying almost nothing about organisations, information and behaviour. This criticism was addressed both to Western theorists and to socialist reformers who hoped to fix the planned economy with the right prices. Kornai proposed studying real mechanisms of coordination rather than ideal models, and his subsequent books are built in exactly this way.

Key ideas

Kornai’s main book, Economics of Shortage, was published in 1980 simultaneously in Hungarian and English; it grew out of lectures delivered in 1976–1977 at Stockholm University. Kornai formulated the book’s central thesis as follows: the system characteristic of the socialist economy before decentralising reforms inevitably generates shortage. Shortage here is not an isolated lack of goods but a permanent state of the whole economy: queues, waiting lists, forced substitution of an available good for the one needed, and the hoarding of stocks “just in case” both in enterprises and in households.

Kornai showed that this state reproduces itself. Enterprises that do not fear bankruptcy demand ever more resources and investment — he called this “investment hunger”. Suppliers do not compete for buyers, because the buyer will take whatever is offered anyway; a “sellers’ market” emerges. A shortage of one material halts the production of another, and shortage is passed along the chain. Therefore, according to Kornai, raising prices or improving planning methods does not by itself eliminate shortage: it is built into the behaviour of the participants.

The key to this behaviour is soft budget constraints. A budget constraint is hard when an organisation can spend only what it has earned or borrowed on ordinary terms and closes down if it makes chronic losses. It is soft when the organisation reasonably expects that its losses will be covered by someone else — usually the state — through subsidies, tax breaks, soft loans, debt write-offs or increases in regulated prices. Kornai introduced this concept in the late 1970s and analysed it in detail in a 1986 article in the journal Kyklos. Softness, according to his analysis, makes enterprises insensitive to prices, lowers efficiency and generates unlimited demand for resources.

In The Socialist System (1992) Kornai combined economic analysis with political analysis. He distinguished “classical socialism” of the Stalinist and Maoist type — repressive but internally consistent — from “reform socialism”, associated with the names of Tito, Kádár, Deng Xiaoping and Gorbachev. Reform socialism relaxes repression but sharpens the contradictions of the system: the undivided power of a single party, the predominance of state ownership and bureaucratic coordination are incompatible with a genuine market, and attempts to combine them lead to the disintegration of the system. He called this approach the system paradigm — the analysis of society as a coherent whole rather than a set of separate policies.

What became of the ideas in practice

Hungary was Kornai’s main laboratory. From 1 January 1968 the “New Economic Mechanism” was in effect there: enterprises were freed from compulsory plan targets, gained more autonomy in production and investment, and were oriented towards profit; some prices were linked to world prices, and small private enterprise expanded. In its first years the reform had a noticeable effect, but in 1972–1978 it was partly rolled back under pressure from the conservative part of the leadership and from the policies of the Soviet bloc countries, and the architect of the reform, Rezső Nyers, was removed from top posts in 1974.

In the article “The Hungarian Reform Process: Visions, Hopes, and Reality” (1986) Kornai took stock. In his assessment, the reform abolished directive plans but did not change the main thing: enterprises still depended more on ministries and banks than on buyers, and loss-making firms were rescued by subsidies and individual concessions. Managers looked “upwards”, to the agency on which their survival depended, rather than “sideways”, to the market. In other words, administrative control weakened, but soft budget constraints remained, and price signals did not work at full strength.

The Soviet economy knew the same phenomena. Chronic shortages, tolkachi (expediters), above-norm stocks and the “extraction” of allocations, which our site writes about, are well described in Kornai’s language. The 1965 reform associated with the names of Kosygin and Liberman likewise tried to make profit the indicator of enterprise performance without changing either subordination to ministries or the practice of covering losses, and in this sense repeated the Hungarian trajectory. In Russian, Economics of Shortage (as Defitsit) was published in 1990 by the Nauka publishing house, when the planning system was already falling apart, and The Socialist System in 2000.

The Russian edition of Economics of Shortage was translated from the second Hungarian edition by a large team of translators under the academic editorship of D. Markov and M. Usievich. For Soviet and Russian economists the book turned out to be a description of a very familiar everyday reality, set out in rigorous language and without ideological caveats. As the researcher A. A. Koryakovtsev notes, Kornai explicitly objected to the habit of calling the imagined properties of an ideal picture of socialism “objective laws” and proposed instead to study how the system actually works. It is this method, rather than individual conclusions, that many consider the book’s main lesson for the history of Soviet planning.

What worked and what did not

The explanatory power of the theory of shortage proved very high. It brought together into a single picture phenomena that had previously been explained separately — queues, hoarding, labour shortage, investment cycles — and linked them not to planners’ mistakes but to the structure of incentives. The concept of soft budget constraints quickly moved beyond the socialist economy: it is applied to state-owned companies, banks that are “too big to fail”, regional budgets, and hospitals and universities in market economies.

The theoretical development of the concept proceeded in collaboration with Western economists. Mathias Dewatripont and Eric Maskin, a future Nobel laureate, in a 1995 article in The Review of Economic Studies built a model explaining why softness arises even with a rational creditor: when a project has already been started and investments have been made, continuing to finance it is often more advantageous than writing off what has been invested, and the contractor, knowing this, takes on less reliable projects in advance. Their conclusion is particularly important for practice: decentralisation of financing, in which a project has several independent creditors and none of them has the funds or the interest to rescue it alone, makes it possible to promise credibly to refuse refinancing and thereby hardens the constraints. The review article by Kornai, Maskin and Roland, “Understanding the Soft Budget Constraint” (2003), provides a classification of the causes and consequences of this phenomenon for socialist, transition and market economies.

Some forecasts and conclusions proved controversial. Critics pointed out that Kornai underestimated the capacity of reformed systems to adapt: China, while retaining one-party rule and a large state sector, achieved many years of rapid growth, although Kornai himself stressed the political risks of the Chinese model in his later articles. Moreover, after 1990 it turned out that the mere introduction of private ownership does not automatically make budget constraints hard: in transition economies the rescue of large enterprises and banks continued.

The result most important for present-day practice is the transfer of the concept to market economies. In the 2003 review Kornai, Maskin and Roland stated explicitly that soft budget constraints are widespread not only in socialist and transition economies but also in market economies, and compared them with other problems of commitment over time: situations in which a participant promises firmness in advance but later finds it more advantageous to give way. This means that the problem does not disappear together with Gosplan. It arises wherever someone pays for a result but cannot afford not to obtain it.

Debate and criticism

Economists of the disequilibrium school, above all Richard Portes, argued with Kornai about how general and chronic shortage in planned economies was. In a 1980 article by Portes and David Winter in The Review of Economic Studies, disequilibrium models developed for market economies were applied to the consumer goods markets of several socialist countries; the authors concluded that in a number of countries and periods these markets were close to equilibrium and shortages were partial. Kornai replied that such models are not applicable to planned economies: aggregate data do not capture forced substitution, queues and hoarding, and enterprises with soft budget constraints do not respond to prices the way market firms do. Hence the practical divergence: according to Portes, a change in relative prices could restore equilibrium; according to Kornai, it could not. Estimates of the scale of shortage in different countries still diverge.

Kornai was also criticised for pessimism about reforms. Advocates of market socialism believed that his conclusions concerned specific one-party states rather than the idea of combining social ownership with the market. Kornai, on the contrary, argued ever more consistently that market socialism based on state ownership is unviable: the state as owner cannot credibly promise that it will not rescue its own enterprise. In The Road to a Free Economy (1990) he advocated the rapid creation of a private sector and strict financial discipline.

In his last years Kornai concentrated on comparing systems. He contrasted the “shortage economy” of socialism with the “surplus economy” of capitalism, where excess supply and competition for buyers are chronic and stimulate innovation. At the same time he criticised Hungary’s departure from democratic institutions in the 2010s and the political development of China. Some researchers consider these late works less rigorous than Economics of Shortage, but they are important because Kornai insisted to the end that an economic mechanism cannot be assessed separately from the political system.

Legacy today

Kornai is one of the few economists of the socialist camp whose concepts have entered the common vocabulary of world economics. Soft budget constraints are discussed when it comes to the rescue of banks in 2008, the debts of state corporations and the financing of regions. For the history of planning, his main contribution is that he moved the debate from the level of models to the level of the real behaviour of organisations and showed that the problem lies not in a lack of calculation but in expectations: if everyone knows that failure will not be punished, no prices or indicators will work.

Recognition of his work extends far beyond Hungarian scholarship. His books have been translated into more than twenty languages, and the Polish economist Grzegorz Kołodko, in a 2021 article in Voprosy Ekonomiki, called Kornai the most outstanding economist of the socialist and post-socialist world of the past half-century. At the same time, Kornai himself remained to the end a researcher prepared to revise his own views: in 2019, in an article in the British newspaper the Financial Times, he wrote that Western economists, himself included, who had advised on Chinese reforms since the mid-1980s share responsibility for the fact that China’s economic successes overshadowed restrictions on human rights. It is in this sense that his legacy teaches us to test our own forecasts.

For Open Planning, Kornai is the most direct and concrete opponent. Our model asserts that payment is possible only for a confirmed result and that the contractor risks collateral. Kornai would reply that such rules are easy to write but are broken at the moment when failure threatens a socially significant facility: a school, a water utility, a residential quarter. A state that has publicly set a goal has an interest in rescuing it, and the contractor knows this. If the model does not answer this question in advance, it will repeat the fate of the Hungarian reform.

Hence a requirement that we are obliged to meet. The rule for the case of failure must be written down before the project begins: what happens to the collateral, who completes the work, at what price and from what funds. Every exception — an extension of the deadline, additional financing, a relaxation of an indicator — must be a separate public decision with a justification, not a quiet arrangement. The agency that commissioned the project must not decide by itself whether to rescue its contractor. Whether these rules work can be verified only in pilots, and if a pilot shows that budget constraints have softened, this negative result must be published.

Links between ideas

Whom the author argued with, whose ideas they developed, whom they answered and whose fate they shared. All links are on the shared graph. Graph of ideas

• Nikolai Voznesensky

  Debate and criticism →

  Kornai later described the covering of losses with subsidies in the Gosplan system as soft budget constraints.

• Oskar Lange

  Debate and criticism →

  Kornai showed that under soft budget constraints the rule “price equals marginal cost” means nothing.

• Ludwig von Mises

  Develops ideas ←

  Mises’s reply to Lange’s model shifted the debate to incentives and responsibility, later developed by Hayek and Kornai.

• Friedrich Hayek

  Debate and criticism →

  Kornai sees the failure of market socialism not in computing prices, as Hayek did, but in the impossibility of promising not to bail out.

• Evsei Liberman

  Debate and criticism →

  In Kornai’s view the 1965 reform repeated the Hungarian path: profit became an indicator, while subordination to ministries and loss coverage remained.

Timeline

1. 1928

   Born in Budapest

2. 1955

   Dismissed from the newspaper Szabad Nép; moves to the Institute of Economics of the Hungarian Academy of Sciences

3. 1959

   Overcentralization in Economic Administration published in Oxford

4. 1968

   The “New Economic Mechanism” launched in Hungary

5. 1979

   The article “Resource-Constrained versus Demand-Constrained Systems” in Econometrica

6. 1980

   Economics of Shortage

7. 1986

   The article “The Soft Budget Constraint” in Kyklos; begins work at Harvard

8. 1992

   The Socialist System: The Political Economy of Communism; founding of Collegium Budapest

9. 2003

   Article with Maskin and Roland, “Understanding the Soft Budget Constraint”

10. 2021

    Dies in Budapest

Key works

• 1959Overcentralization in Economic Administration
• 1971Anti-Equilibrium
• 1980Economics of Shortage (Russian translation: Defitsit, 1990)
• 1986The Soft Budget Constraint
• 1986The Hungarian Reform Process: Visions, Hopes, and Reality
• 1990The Road to a Free Economy
• 1992The Socialist System: The Political Economy of Communism (Russian translation 2000)
• 2003Understanding the Soft Budget Constraint (with E. Maskin and G. Roland)

Sources

1. Большая российская энциклопедия. Корнаи Янош. 2017
2. Большая российская энциклопедия. Социалистическая система. Москва, 2000. б. г.
3. János Kornai; Kyklos. The Soft Budget Constraint. 1986
4. János Kornai, Eric Maskin, Gérard Roland; Journal of Economic Literature. Understanding the Soft Budget Constraint. 2003
5. Я. Корнаи, Э. Маскин, Ж. Ролан; Вопросы экономики. Осмысливая феномен мягких бюджетных ограничений. 2004
6. János Kornai; Econometrica. Resource-Constrained versus Demand-Constrained Systems. 1979
7. János Kornai; Journal of Economic Literature. The Hungarian Reform Process: Visions, Hopes, and Reality. 1986
8. Википедия. János Kornai. 2025
9. Центрально-Европейский университет. Janos Kornai 1928–2021, Economist. 2021
10. Princeton University Press. The Socialist System: The Political Economy of Communism. 1992
11. János Kornai; Oxford University Press. Overcentralization in Economic Administration. 1959
12. Я. Корнаи; URSS.ru. Дефицит. Пер. с венг.. 1990
13. А. А. Коряковцев; Антиномии. «Экономика дефицита» Я. Корнаи в контексте «политэкономии реального социализма». 2023
14. Г. В. Колодко; Вопросы экономики. Янош Корнаи и его знаменательные работы. 2021
15. Mathias Dewatripont, Eric Maskin; The Review of Economic Studies. Credit and Efficiency in Centralized and Decentralized Economies. 1995
16. Richard Portes, David Winter; The Review of Economic Studies. Disequilibrium Estimates for Consumption Goods Markets in Centrally Planned Economies. 1980
17. János Kornai; The Financial Times (копия на сайте HACUSA). Economists share blame for China’s ‘monstrous’ turn. 2019
18. Википедия. New Economic Mechanism. 2025

Prepared from open sources. Dates, titles and quotations were checked against the source list at the bottom of the page; where sources disagree, the text says so.