It is difficult not to be intrigued by a scholar who declares that he was greatly influenced by Karl Marx but also by Friedrich von Hayek, who acknowledges habitual behavior while also dealing with standard optimization models, and who claims he has “one foot in and one foot out of the mainstream” (p. 99). One should not be surprised, however, when Mehrdad Vahabi refers to his mentor, Janos Kornai, as a scholar whose “analytical framework can be better understood as an incomplete theoretical framework that needs to be ‘completed’ and revised to overcome its inconsistencies” (p. 3).

The story of this incomplete analytical framework begins with Kornai’s account for the dysfunctionality of a socialist economy. What characterizes a socialist economy, Kornai points out, is the existence of a Soft Budget Constraint (SBC): Firms can rely on the state to make up for their failure to be profitable. This leads to an economy characterized by “chronic and pervasive shortages and major sources of real and nominal inefficiencies” (p. 87).

Kornai initially situates the SBC within Oskar Lange’s model, where he focuses on the role of extreme centralization. Viewed from this strictly economic perspective, he considers that a reform of the socialist economy is possible within the framework of market socialism. This possibility is, however, brought into question when, in subsequent work, Kornai points out that the "Walrasian model, along with most of its later variants including the Lange-type model, is a marvelous piece of intellectual machinery placed in a socio-political vacuum. It is a construction that lacks a positive theory of politico-socioeconomic order as a foundation” (p. 311).

The upshot of Kornai’s argument is that economic relationships within the material structure of the economy—those depicted by a Wassily Leontief input-output model—depend on coordination mechanisms, such as prices or centralized control. In turn, these coordination mechanisms are determined by institutions such as private property or state property and party dominance. This “institutionalist” theory of the economy allows Kornai to pursue a comparative analysis of capitalist and socialist economies, which ought to point out the advantages that private property has for market coordination.

The issue is how to conduct such a comparative analysis. One possibility is to focus on the microeconomic effect of the SBC as opposed to the Hard Budget Constraint (HBC) of a capitalist economy. This is methodologically problematic in that it compares a stylized fact of a socialist economy—the SBC—with an idealized view of optimal behavior in a capitalist economy. A possible way out is to provide an account of SBC that explains it in terms of optimizing behavior rather than as a mere empirical fact. Paradoxically, however, this leads to a theory of the SBC that applies to a capitalist economy just as to a socialist one.

The alternative is to follow a macroeconomic approach that investigates how the SBC leads to a redistribution of income between different groups of firms as well as between firms and households. Here, too, however, we are faced with a phenomenon that is typical of capitalist economies. The bailout of banks after the Great Financial Crisis is a capitalist version of the SBC.

So what difference is there between a socialist economy and a capitalist one? We are left with Kornai’s unsubstantiated claim that private property provides for a better coordination of the economy, even though “in a capitalist system, overproduction or underemployment is the normal state of the demand-constrained economy” (p. 211), and capitalism is a source of “injustice and inordinate income inequality” (p. 329).

This is not the end of the story, however. The theoretical vitality of Kornai’s research program includes a broad range of issues. Following an introductory chapter on Kornai’s legacy and a group of articles devoted to a general assessment of his work, Vahabi’s book discusses these issues in three distinct parts. The first part, “Kornai on Marx and Austrian Economics,” includes an exchange between Amartya Sen and Kornai on the importance of Marx in relation to systemic coherence and contradictions, and a discussion of Kornai’s gradual shift towards Austrian economics. The second part, “Kornai on Walrasian and Marshallian Equilibrium Theory,” focuses on the different notions of equilibrium—and disequilibrium—that Kornai deals with in his work but also on his attempt to deal with the concept of normality in relation to dynamics and time. The final part, “Kornai on Soft and Hard Budget Constraints,” deals with Kornai’s original emphasis on the empirical relevance of the SBC and his attempt to incorporate it in a broader theoretical framework that may clarify the command versus bargaining features of state paternalism. These issues are, in one way or other, related to the main theme outlined above, but they end up having a life of their own. It is, therefore, no wonder that Vahabi provides us not with a book that systematizes Kornai’s thought but with a group of articles that delve into specific open issues of Kornai’s intellectual legacy in an attempt to reconstruct his work. Vahabi’s view is that, although Kornai’s “work comprises several unfinished research projects and is characterised by various methodological twists and turns…. [g]iven the richness and variety of his research, different economic schools could approach this reconstruction from their unique perspectives” (p. 329).

Despite Vahabi’s reference to “twists and turns,” Kornai’s methodological background is definitely straightforward. It emerges clearly from his view of coordination as an exogenous action on allocation:

Vahabi correctly asks, “Why should the direction of causality be assumed to be hierarchical? Why does Kornai exclude [Gunnar] Myrdal’s assumption regarding cumulative or circular causation, between economics and institutions?” (p. 330). In so doing, however, he does not seem to acknowledge that Kornai’s failure to deal with these questions depends on his closed systems perspective (Kapp Reference Kapp and Dopfer1976; Chick Reference Chick, Rochon and Rossi2017), where there is only one type of allocation mechanism, and institutions act on it much like endowments, technology, preferences, or shocks act on a general equilibrium model. Were Kornai to take account of “cumulative or circular causation, between economics and institutions,” the material structure of the economy would be irreducible to a unique allocation mechanism, and comparative analysis would have to consider the diverse complexities of different economic systems.

These problematic aspects of Kornai’s classification emerge, albeit in a different manner, even when we deal with factual capitalist economies. Drawing on James Galbraith (Reference Galbraith2009), Vahabi points out that “the American model of capitalism, with its enduring New Deal institutions, is replete with examples of the SBC” (p. 312). They include health care, higher education, housing, and social security, along with the military, agriculture, and other sectors. Thus, although, according to Vahabi, “the SBC under neo-liberal American capitalism is closely related to the rise of a predator state” (p. 313), it need not be considered a priori as a negative feature of the economy. It may well reflect the distributive consequences of the welfare state, the developmental state (Woo-Cumings Reference Woo-Cumings1999), and the entrepreneurial state (Mazzucato 2013). Kornai himself claims that state intervention is necessary for “preserving the macroequilibrium of the economy, ensuring a fair distribution of income, accounting for the effect of externalities, supplying an adequate quantity of public goods, and limiting the power of monopolies” (p. 142). Indeed, the very existence of a legal system involves a centralized coordination that interacts with prices and allocation (Schmid, Medema, and Samuels Reference Schmid, Medema and Samuels1997).

Vahabi’s book on Kornai suggests that centralized and decentralized coordination coexist. The outcome may be a Keynesian-welfarist compromise such as in the post–WW II “golden age” or the predator state that both Galbraith and Vahabi refer to. Rather than providing an indicator of the contrast between centralized and decentralized coordination, the SBC is a feature of their inevitable coexistence, which may help to understand whether and how the interaction between these two forms of coordination is conducive to a society’s ultimate goals. Such a coexistence is a key issue that suggests that the state-market duality is fallacious and that mixed economies are dominant features of the world we live in. In this perspective, while Vahabi’s urge for a reconstruction of Kornai’s work may appear to be an uphill battle, some of his intuitions may still provide insights for a theory of modern economies where multiple means of coordination coexist and interact with each other.