Kornai, Keynes, the Coronavirus, and Kant

Some thoughts on the implications of "soft budget constraints", featuring Eastern bloc economics, China's development model, and Perpetual Peace

It turns out that downturns are essentially optional, at least in the rich countries. Governments can prevent even the most severe disruptions to business activity from hitting household and corporate balance sheets simply by printing money. All we needed was a global pandemic to demonstrate the latent power of the modern state to eliminate the classical business cycle.

The big question is: will we use this new knowledge to prevent future downturns? Or will we return to the pre-pandemic world where widespread business failures, job losses, and foreclosures are regularly recurring phenomena, like El Niño?

It’s too early to tell where policymakers will land, but anyone thinking seriously about this question and the broader implications should consider the ideas of János Kornai, who died on October 18 at the age of 93. His thinking played a major role in China’s embrace of markets and competition in the 1980s—and also helps explain many of the limitations of China’s economic model since then.¹ Kornai’s perspective is especially relevant for thinking through the potential risks and rewards of the policy mix that might be called “full Keynesianism”.

What follows is my attempt to explain Kornai’s ideas and how they could apply to these big questions.