Shortage economy
Encyclopedia
Shortage economy is a term coined by the Hungarian
economist
, János Kornai
. He used this term to criticize the old centrally-planned economies
of the communist state
s of the Eastern Bloc
. In his article Economics of Shortage (1980), János Kornai argued that the chronic shortages seen throughout Eastern Europe in the late 1970s (and which continued during the 1980s) were not the consequences of planners’ errors or the wrong prices, 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
). This may be caused by a government enforced low price which encourages consumers to demand a higher amount than is supplied. Kornai, however, concentrated on the role of reduced supply, and argued that this was the underlying cause of Eastern European shortages during the 1980s.
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).
. 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 1980's Soviet Union
for the right to purchase an apartment which could take as long as ten or fifteen years. In a market economy this problem would have been solved as well by price adjustments, so that the people gave away the luxury of having a house.
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 for the good, or purchase a substitute good
. 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
, simply in the hope that selling the unneeded
item later will enable her to purchase the actual good she 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.
on the part of the planners who blame the shortages on the fact that consumers demand "wrong things", and in macroeconomic terms, repressed inflation
resulting from pent up demand.
Hungary
Hungary , officially the Republic of Hungary , is a landlocked country in Central Europe. It is situated in the Carpathian Basin and is bordered by Slovakia to the north, Ukraine and Romania to the east, Serbia and Croatia to the south, Slovenia to the southwest and Austria to the west. The...
economist
Economist
An economist is a professional in the social science discipline of economics. The individual may also study, develop, and apply theories and concepts from economics and write about economic policy...
, János Kornai
János Kornai
János Kornai , is an economist noted for his analysis and criticism of the command economies of Eastern European communist states.- Biography :...
. He used this term to criticize the old centrally-planned economies
Planned economy
A planned economy is an economic system in which decisions regarding production and investment are embodied in a plan formulated by a central authority, usually by a government agency...
of the communist state
Communist state
A communist state is a state with a form of government characterized by single-party rule or dominant-party rule of a communist party and a professed allegiance to a Leninist or Marxist-Leninist communist ideology as the guiding principle of the state...
s of the Eastern Bloc
Eastern bloc
The term Eastern Bloc or Communist Bloc refers to the former communist states of Eastern and Central Europe, generally the Soviet Union and the countries of the Warsaw Pact...
. In his article Economics of Shortage (1980), János Kornai argued that the chronic shortages seen throughout Eastern Europe in the late 1970s (and which continued during the 1980s) were not the consequences of planners’ errors or the wrong prices, 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
Supply and demand
Supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers will equal the quantity supplied by producers , resulting in an...
). This may be caused by a government enforced low price which encourages consumers to demand a higher amount than is supplied. Kornai, however, 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
Buyers' actions
Kornai distinguishes between several different possible actions and individual outcomes that can occur in a shortage economy. It could happen, though by definition, it only does so rarely in a shortage economy, that the consumer gets lucky and the item sought by her is available in the shop. More likely 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 adjustments). 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 foodFood
Food is any substance consumed to provide nutritional support for the body. It is usually of plant or animal origin, and contains essential nutrients, such as carbohydrates, fats, proteins, vitamins, or minerals...
. 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 1980's Soviet Union
Soviet Union
The Soviet Union , officially the Union of Soviet Socialist Republics , was a constitutionally socialist state that existed in Eurasia between 1922 and 1991....
for the right to purchase an apartment which could take as long as ten or fifteen years. In a market economy this problem would have been solved as well by price adjustments, so that the people gave away the luxury of having a house.
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 for the good, or purchase a substitute good
Substitute good
In economics, one way we classify goods is by examining the relationship of the demand schedules when the price of one good changes. This relationship between demand schedules leads economists to classify goods as either substitutes or complements. Substitute goods are goods which, as a result...
. 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
Income effect
In economics, the consumer's preferences, money income and prices play an important role in solving the consumer's optimization problem...
, simply in the hope that selling the unneeded
Speculation
In finance, speculation is a financial action that does not promise safety of the initial investment along with the return on the principal sum...
item later will enable her to purchase the actual good she 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 behaviourPaternalism
Paternalism refers to attitudes or states of affairs that exemplify a traditional relationship between father and child. Two conditions of paternalism are usually identified: interference with liberty and a beneficent intention towards those whose liberty is interfered with...
on the part of the planners who blame the shortages on the fact that consumers demand "wrong things", and in macroeconomic terms, repressed inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
resulting from pent up demand.
See also
- Consumer goods in the Soviet UnionConsumer goods in the Soviet UnionThe industry of the Soviet Union was usually divided into two major categories. Group A was "heavy industry," which included all goods that serve as an input required for the production of some other, final good...
- Planned economyPlanned economyA planned economy is an economic system in which decisions regarding production and investment are embodied in a plan formulated by a central authority, usually by a government agency...
- Eastern Bloc economiesEastern Bloc economiesAfter the Soviet Union's occupation of much of the Eastern Bloc during World War II, Soviet leader Joseph Stalin implemented socioeconomic transformations of each of the Eastern Bloc economies that comported with the Soviet Communist economic model...
- The Use of Knowledge in SocietyThe 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 as a rebuttal to fellow economist Oskar R...
External links
- János Kornai Home Page at Harvard University
- János Kornai Home Page at Collegium Budapest
- Part 1 and Part 2 of COMPARING AND ASSESSING ECONOMIC SYSTEMS, Shortage and Inflation: The Phenomenon, PPT (PowerPoint file presentation) at West Virginia University
- János Kornai 'The Soft Budget Constraint'
- David Lipton and Jeffrey Sachs 'The Consequences of Central Planning in Eastern Europe'
- On overview and critique of Kornai's account can be found in