Shortage economy

Shortage economy is the term coined by the Hungarian economist, Janos Kornai. This is a term he uses to analyse the old centrally-planned economies of the ex-Communist countries of Eastern Europe. Janos Korani in his article Economics of Shortage (1980), perhaps his most influential work, demonstrates that chronic shortages are not the consequences of planners’ errors or the wrong prices, but rather systemic, that is, the inevitable consequences of the 'classical' communism economic system.

Definition and characteristics

A shortage economy has the following characteristics:

• shortages that are:
  • general, that is, in all spheres of the economy (consumer goods and services, means of production and producer goods)
  • frequent
  • intensive
  • chronic
  • horizontal and vertical
  • replaced by occasional slacks (surpluses)
• buyers’ and sellers’ market change
• forced substitutions
• forced savings
• soft budget constraint
• paternalistic behaviour
• repressed inflation

Buyers actions

Buyers have various possibilities facing them in a shortage economy:

• event 0: buyer goes to a shop, the item sought is there, and the purchase is made immediately. This is a rare event.

• event 1: the item is there but buyer has to queue for it, as there is only a limited number of items. The consumers spend a lot of time standing in the queue, often many hours a day for basic products like food. For certain goods there is a waiting list that may be many years in length. Example: the wait for an apartment in the Soviet Union was typically 10 to 15 years.

• event 2: the item is not available so buyer accepts a forced substitution, ie. he is buying something else that is more or less a close substitute. This substitution is compulsory, as opposed to the normal, voluntary substitution as when price or tastes changes.

• event 3: the item is not available so buyer searches for the item elsewhere or the item is not available now but is known that it will be in the future and buyer decides to postpone the purchase. This is a form of forced saving, as consumer is saving his money since he is not able to spend it in a way he desire.

• event 4: the item is not available so the buyer abandon purchase completly.

References

• Kornai, Josef, Socialist economy, Princeton University Press, 1992, ISBN 0691003939
• Kornai, Josef, Economics of Shortage, Amsterdam: North Holland Press, Volume A, p.27; Volume B, p.196 .
• Gomulka, Stanislaw : Kornai’s Soft Budget Constraint and the Shortage Phenomenon: A Criticism and Restatement, in: Economics of Planning, Vol. 19. 1985. No. 1.
• Planning Shortage and Transformation. Essays in Honor of Janos Kornai, Cambridge, Mass.: MIT Press, 2000

External links

• Part 1 and Part 2 of COMPARING AND ASSESSING ECONOMIC SYSTEMS, Shortage and Inflation: The Phenomenon, PPT (PowerPoint file presentation) at West Virginina University