Shortage economy

Shortage economy (Polish: gospodarka niedoboru, Hungarian: hiánygazdaság) is a term coined by the Hungarian economist, János Kornai. He used this term to criticize the old centrally-planned economies of the communist states of the Eastern Bloc. In his article Economics of Shortage (1980), János Kornai argued that the chronic shortages seen throughout Central and 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).

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 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 food. Other consumer goods had explicit for which potential buyers had to sign up months or even years in advance. An example is the wait in the 1980s Soviet Union for the right to purchase an apartment which could take as long as ten or fifteen years.

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