[OPE-L:2165] Re: Re: Re: Markets and Information

From: Steve Keen (s.keen@uws.edu.au)
Date: Sat Jan 15 2000 - 16:00:36 EST

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People interested in this topic should consult Janos Kornai's works on
"demand constrained versus resource constrained economies".

Kornai, J., 1985, Contradictions and Dilemmas, Corvina Kiado,
1980, Economics of Shortage, North Holland Amsterdam
1990 Vision and reality, market and state, Routledge, New York

A brief synopsis of his argument from my database:

An analysis primarily of the failings of socialism which uses the
concepts of demand constrained and resource constrained economies.
Kornai argues that capitalism is characterised by excess capacity
while socialism is characterised by excess demand, that these
modes of operation respectively reflect the use of hard and soft
budget constraints for firms, and that the resource constrained
economy necessarily performs below expectations and grows less
rapidly than the demand constrained economy.

Kornai's case is an important--and non-ideological--adjunct to the partly
ideology-driven critiques of Hayek, and not one which assumes the eternal
primacy of competition.

On the historical record that capitalism has in fact to date out-innovated
socialism, there is also the issue of the historical impact of Fel'dman's
growth model on Soviet planning, with its focus on heavy industry. If
you'll pardon me citing from a paper of mine on the subject (which also
discusses Kornai), an excerpt discussing this is below.

Finally, a read of a bit of fiction might be in order: Ursula le Guin's
"The Dispossessed". For those who don't know it, it's the tale of an
anarchist moon orbiting a capitalist planet, and the theoretical
development of the physics of "simultaneity". The point for this discussion
is that this ideal anarchist society develops its own conventions which
stifle innovation, leading to one group forming the "syndicate of
spontaneity" to disturb these conventions. Well worth a read for anyone
hypothesising about how future societies might overcome the deficiencies of
historical ones.


These inferences from the constrained Fel'dman model lend support to the
second criticism of the short-term nature of Fel'dman's analysis--the low
priority attributed to technological change and increased labor
productivity. It is a "stylised fact" of comparative economics that
capitalist economies have increased per capita output more rapidly than
socialist ones. Equally, it is evident that the diversity and
sophistication of both capital and end consumer goods have increased more
rapidly under capitalism than under socialism. These comparative "failures
of socialism" could be explained, at one extreme, by historical factors. It
could be asserted that the West's anti-Soviet policies forced socialist
countries to focus excessively on armaments, resulting in less consumable
output and lower priority to consumer-oriented technological development
(while military output and innovation were remarkable). The Terror and its
long-term managerial and worker-motivation consequences are also doubtless

However, Kornai (1980) has argued that there are systemic reasons why per
capita growth—propelled in the main by technological innovation, but also
reflecting efficiency of employment of resources—has been higher under
capitalist regimes than under socialist. Kornai distinguishes two broad
types of economies: demand-constrained, and resource-constrained. In a
demand-constrained economy, the key constraint experienced by firms is
insufficient demand for their products. This encourages two key competitive
behaviours: the building of excess capacity (in order to be able to exploit
short-term market opportunities); and the development of new products (to
encourage demand for its products versus its competitors). Kornai has
argued that such behaviour should result in "spurts" of growth; Yoshikawa
(1993) has argued that such policies should result in a higher rate of
growth of effective demand and a consequent increase in the maximum
feasible rate of growth.

In a capacity constrained economy, the key constraint experienced by firms
is insufficiency of resources to complete the ordained Plan output--which,
as argued above, could well have been in part a consequence of Fel'dman
growth policies. Firms respond by attempting to conserve resources, which
in addition to hoarding behaviour, encourages non-innovation: the easiest
way to produce the allocated number of motor-cycles is to produce more of
last year's model, as any purchaser of a "Cossack" (otherwise known as a
1942 BMW) would know.

These constraint-determined behaviours are bound to impact on the extent to
which firms will invest in technological innovation. It is feasible to
regard a firm's investment decision as having two extremes: at one, all
investment can be devoted to expanding capacity; at another, all investment
can be devoted to developing new production techniques (thus lowering costs
and encouraging additional demand) and/or developing new products (thus
directly increasing demand). A firm which is resource-constrained is more
likely to lean towards the former extreme; a demand-constrained firm will
tend towards the latter. If these forces operate in practice, then (cycles,
depressions and other "short-term" considerations aside), the economy
characterised by demand-constraint should grow more rapidly than its
resource-constrained rival.

Fel'dman's work contributed to the neglect of technological innovation in
generating growth, even before the industrial structure which evolved from
his policies generated the innovation-shy behaviour detailed by Kornai.
While he did acknowledge the role of innovation once full-employment was
attained (Fel'dman 1928, pp. 182-83), he clearly felt that promoting
innovation was a problem whose solution could be delayed until "the labor
force is utilised to the limit, [then] the prediction of technical
improvement will be a pressing problem and the forecasting of technical
reconstruction will be central to all planning." (Ibid, p. 320) His policy
advice encouraged increasing the intensity of exploitation of existing
capital (which he believed could be increased over 200 per cent at a time
when Soviet figures at the time--1927/28--implied much higher levels of
efficiency than those prevalent in the West--ibid, p. 331), and increasing
capacity. Technical progress was the Cinderella of his industrial vision.

Fel'dman-inspired growth policies may then have been a classic historical
mistake. By undialectically disregarding the impact of success on the
prospects for further capacity-driven growth, it encouraged long-term
adherence to policies which were suited only to a short spurt of growth
until labor was fully employed. The focus on capacity with, as Kriesler
observes, the false but perennial promise that truly remarkable growth in
consumer goods output is "just around the corner", may also have distracted
socialist attention from the pressing need in long term growth, to
encourage innovation in processes and products. Had attention been properly
focused on the role of innovation, then it is conceivable that a Soviet
means to encourage technological growth could have evolved, with possibly
far reaching consequences for the development of what, in practice, became
a failed social experiment.

At 11:32 PM 1/14/00 -0500, you wrote:
>On Fri, 14 Jan 2000, Duncan K. Foley wrote:
>> [Hayek] views the market as a device that does two things:
>> 1. It induces people to reveal at least some of this
>> information, which he thinks they otherwise would be
>> reluctant or unwilling to do. The market willy-nilly forces
>> people to take positions (or risks) that reveal some of
>> their information.
>Suppose I come up with an invention that permits the production
>of some item using less than the going amount of social labour
>time. If I'm operating in a market system I have an incentive
>to utilize that invention, undersell the competition and make a
>super-profit. My investment in the new technique reveals to
>others _that_ I have a new method, but it does not reveal what
>that method is, how it works. I may patent the new method and
>keep it a secret for as long as possible. Contrast this with
>the communist procedure that we see with Open Source software
>these days. A new invention is made; the inventor has the
>incentive of kudos and the esteem of his peers to reveal what
>he's done, and the further incentive that by opening up the
>invention he's likely to get help with advancing it faster than
>The implied contrast with the view you ascribe to Hayek seems to
>be that people in a non-market system would just sit on their
>information, not revealing it for fear that they would get no
>reward and would just have their plan quota raised. That seems
>a bleak -- and, happily, unrealistic -- picture of human
>behavior, given a modicum of cooperative culture and interest in
>one's work.
>> 2. The market roughly integrates these disparate pieces of
>> information and thus makes social production possible.
>True, but here Paul's technical points kick in. There's reason
>to believe that a planned system using the right methods could
>do better than the market's "rough", slow, ex post integration.
>I believe (but then I would!) that the burden is now on those
>who maintain Hayek's position, to show just what it is that only
>the market is able to achieve.
>Allin Cottrell.
Dr. Steve Keen
Senior Lecturer
Economics & Finance
University of Western Sydney Macarthur
Building 11 Room 30,
Goldsmith Avenue, Campbelltown
PO Box 555 Campbelltown NSW 2560
s.keen@uws.edu.au 61 2 4620-3016 Fax 61 2 4626-6683
Home 02 9558-8018 Mobile 0409 716 088
Home Page: http://bus.macarthur.uws.edu.au/steve-keen/
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