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"Shortage economy" ( pl, gospodarka niedoboru, hu, hiánygazdaság) is a term coined by Hungarian economist
János Kornai János Kornai (21 January 1928 – 18 October 2021) was a Hungarian economist noted for his analysis and criticism of the command economies of Eastern European communist states. He also covered macroeconomic aspects in countries undergoing pos ...
, who used this term to criticize the old centrally-planned economies of the
communist state A communist state, also known as a Marxist–Leninist state, is a one-party state that is administered and governed by a communist party guided by Marxism–Leninism. Marxism–Leninism was the state ideology of the Soviet Union, the Comi ...
s of the
Eastern Bloc The Eastern Bloc, also known as the Communist Bloc and the Soviet Bloc, was the group of socialist states of Central and Eastern Europe, East Asia, Southeast Asia, Africa, and Latin America under the influence of the Soviet Union that existed du ...
. In his monograph ''Economics of Shortage'' (1980), Kornai argued that the chronic shortages seen throughout
Central and Eastern Europe Central and Eastern Europe is a term encompassing the countries in the Baltics, Central Europe, Eastern Europe and Southeast Europe (mostly the Balkans), usually meaning former communist states from the Eastern Bloc and Warsaw Pact in Europe. ...
in the late 1970s (and which continued during the 1980s) were not the consequences of planners' errors, but rather systemic flaws. A shortage of a certain item does not necessarily mean that the item is not being produced; rather, it means that the amount of the good demanded exceeds the amount supplied at a given price (see
supply and demand In microeconomics, supply and demand is an economic model of price determination in a market. It postulates that, holding all else equal, in a competitive market, the unit price for a particular good, or other traded item such as labor ...
). This may be caused by a government-enforced low price which encourages consumers to demand a higher amount than is supplied. However, Kornai concentrated on the role of reduced supply and argued that this was the underlying cause of Eastern European shortages during the 1980s.


Definition and characteristics

According to Kornai, shortage economies share several common characteristics. They all experience frequent, intensive and chronic shortages. These are general in nature; that is, they occur in all spheres of the economy (consumer goods and services, means of production and producer goods). The shortages are both horizontal and vertical which means that they affect both the supply of intermediate goods as well as related complementary goods. Furthermore, the shortages are occasionally replaced by situations of surplus "slack" when too much of a particular good is supplied (often due to the mis-timing of production orders which arrive too late).


Buyers' actions

Kornai distinguishes between several different possible actions and individual outcomes that can occur in a shortage economy. It could happen that the item sought by the consumer is available in the shop, but there may be a limited amount of a sought-after good available, which means that consumers have to queue for it (theoretically, in a market economy such a situation would generally, but not always, be eliminated by price increases that would discourage buyers). Queueing involves a considerable cost in terms of time spent in the queue for consumers. In the economies which Kornai studied, this could have involved several hours a day spent in queues just to obtain basic products like
food Food is any substance consumed by an organism for nutritional support. Food is usually of plant, animal, or fungal origin, and contains essential nutrients, such as carbohydrates, fats, proteins, vitamins, or minerals. The substance is ...
. Other consumer goods had explicit waiting lists for which potential buyers had to sign up months or even years in advance. An example is the wait in the 1980s
Soviet Union The Soviet Union,. officially the Union of Soviet Socialist Republics. (USSR),. was a List of former transcontinental countries#Since 1700, transcontinental country that spanned much of Eurasia from 1922 to 1991. A flagship communist state, ...
for the right to purchase an apartment which could take as long as ten or fifteen years. Another possible situation is that the item is simply not available. In that case, the buyer can either abandon the intent of purchase completely, spend additional time (an implicit economic cost) in further
search Searching or search may refer to: Computing technology * Search algorithm, including keyword search ** :Search algorithms * Search and optimization for problem solving in artificial intelligence * Search engine technology, software for findi ...
for the good, or purchase a
substitute good In microeconomics, two goods are substitutes if the products could be used for the same purpose by the consumers. That is, a consumer perceives both goods as similar or comparable, so that having more of one good causes the consumer to desire less ...
. According to Kornai, the purchase of a substitute is compulsory. Finally, it is possible that the consumer ends up purchasing a completely unrelated good due to the
income effect The theory of consumer choice is the branch of microeconomics that relates preferences to consumption expenditures and to consumer demand curves. It analyzes how consumers maximize the desirability of their consumption as measured by their pre ...
simply in the hope that selling the unneeded item later will enable him to purchase the actual good he is seeking at a future time. This has the effect of increasing demand for other goods simply because they are there and can lead to the spread of shortages throughout the economy.


Outcomes

The common results of these shortages for consumers are forced substitutions between goods which are imperfect substitutes and forced savings as consumers are unable to fully utilize their current purchasing power. The institutional outcomes involve the so-called soft budget constraint in which production units under a planned economy form expectations of always being bailed out by central authorities, paternalistic behaviour on the part of the planners who blame the shortages on the fact that consumers demand "wrong things" and in
macroeconomic Macroeconomics (from the Greek prefix ''makro-'' meaning "large" + ''economics'') is a branch of economics dealing with performance, structure, behavior, and decision-making of an economy as a whole. For example, using interest rates, taxes, and ...
terms repressed
inflation In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reducti ...
resulting from pent up demand.


See also

*
State capitalism State capitalism is an economic system in which the state undertakes business and commercial (i.e. for-profit) economic activity and where the means of production are nationalized as state-owned enterprises (including the processes of capital a ...
*
Consumer goods in the Soviet Union Consumer goods in the Soviet Union were usually produced by a two-category industry. Group A was "heavy industry", which included all goods that serve as an input required for the production of some other, final good. Group B was "consumer goods ...
* Eastern Bloc economies *'' Kolejka'' *
Planned economy A planned economy is a type of economic system where investment, production and the allocation of capital goods takes place according to economy-wide economic plans and production plans. A planned economy may use centralized, decentralized, pa ...
* Second economy of the Soviet Union *''
The Use of Knowledge in Society "The Use of Knowledge in Society" is a scholarly article written by economist Friedrich Hayek, first published in the September 1945 issue of ''The American Economic Review''. Written (along with ''The Meaning of Competition'') as a rebuttal to ...
''


References

* Kornai, János, ''Socialist economy'', Princeton University Press, 1992, * Kornai, János, ''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, Massachusetts: MIT Press, 2000 *


External links


János Kornai
at Harvard University
János Kornai
at Collegium Budapest
Part 1
an
Part 2
of ''Comparing and assessing economic systems, Shortage and Inflation: The Phenomenon'', PPT (PowerPoint file presentation) at West Virginia University



* On overview and critique of Kornai's account can be found in {{instecon Marxism–Leninism Economic systems Economic history of Poland Scarcity