32 SOCIAL SCIENTIST
would the reforms have in the process of overcoming, if at all, this 'inefficiency'? Are there reforms of a different genre more appropriate to the occasion than those which are currently under way?
There is a basic difficulty about discussing these questions, namely that the socialist countries differ considerably among themselves with regard to the precise nature, extent and pace of these economic reforms, as indeed they did with regard to the precise state of their pre-reform economic situation. A meaningful discussion of the economic reforms at a general level, therefore, can be carried out only in a highly stylised manner, by examining two stylised prototypes, one of the old system and the other of the new system that is implicit in the conception of the current reforms. The fact that these stylised prototypes do not exactly correspond either to the actual past situation of any particular socialist country, or to the future state of affairs that would necessarily prevail in any of these countries, or even to the vision that the reforrhers themselves may have of the future, is irrelevant for our purpose. They are an analytical device for assessing the implications of the reforms.
For the first of these stylised prototypes, of a socialist economy under the old system, I shall rely on the model constructed by Janos Kornai, the eminent Hungarian economist. I use Komai's work because he is among the first economists from Eastern Europe to provide a theoretical analysis of a socialist economy, as distinct from the normative discussion as well as from the plethora of anecdotes that have hitherto characterised the literature on socialism.1 The basic distinction which underlies Kornai's work, and which he takes over from the work of Michael Kalecki, is between a demand-constrained system, and a supply-constrained system. Classical capitalism is demand-constrained while classical socialism is supply-constrained. The basic reason for this difference in his view lies in the fact that firms under socialism have 'soft* budget constraints. While the demand of the household sector is limited by the income which it receives, i.e. its budget constraint is 'hard*, the demand of the firms for fixed capital formation and for inventory accumulation is almost insatiable. There are no financial or profitability considerations to restrain effectively the firms' exaggerated demand.'2 As a result, socialist economies are characterised by a chronic shortage, which, by setting up a perennial expansion drive, sustains the investment hunger of firms as well as a widespread hoarding tendency, and this perpetuates itself. 'A vicious circle is thus created: shortage - quantity drive - increased demand for inputs - increasingly intensive shortage -...' There are however certain counteracting forces which drive the system back to the normal level of shortage. 'Unusually intensive shortage dampens down the purchasing intentions of firms' because superior authorities, the banking system