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of institutional economics, communist bureaucrats derived economic rents from their positions in the planning system; they would use their power to defend those rents, and if market opportunities opened up new sources of income, they would use their power to extract rent from these activities as well, stunting the development of a market economy and derailing market reform (Winiecki, 1990). It was therefore highly unlikely under communist rule that market reform would progress to the point where it could turn these economies around—the interests of the powerful militated strongly against it (Brus, 1989; see also the work reviewed in Goldstein, 1996).

The second model highlights the features of the state as a distinctive form of economic administration, and analyzes the behavior of state agencies and firms under conditions of central planning and partial reform. The premises of the system create inherent behavioral tendencies that are as predictable as they are different from the workings of market economies. By far the most influential and coherent of such analyses is that of Kornai (1980, 1991). Kornai counterposed the economic mechanisms of central planning with those of a market economy. Production proceeded according to the preferences of planners, not aggregate demand. Production in firms was therefore resource constrained, not demand constrained: firms would produce to meet production targets until they ran out of materials (which they did habitually); they did not have to worry about finding customers for their products (or improving products to maintain their sales). Firms responded to their resource constraints by stockpiling materials (the "Kornai ratio" of inventory over output was a revealing measure of this) and engaging in barter trade, and sought higher investments to produce their own parts and supplies, rather than relying on specialized suppliers. The result of such practices is wasteful investment and lack of product innovation, and an economy that excels in early stages of growth when the mobilization of capital matters, but lags in subsequent stages, when organizational and technological innovation increase productivity and drive growth (Kornai, 1980, 1991; see also Winiecki, 1987, 1988).

To Kornai and other early reformers, the only remedy for these defects of central planning was to introduce market mechanisms: evaluate managers and allocate investment according to profit criteria, not plan fulfillment; make them find their own customers and compete for sales; and allow prices for products to fluctuate so they would better reflect relative scarcities. After more than a decade of experimentation in Kadar's Hungary, however, Kornai had concluded that such partial reform was doomed to failure; a market economy could not be grafted successfully onto socialist stock (Kornai, 1990a). Kornai's explanation for this is the most memorable and persuasive: market mechanisms were defeated by the redistributive practices of public ownership. The state and the firm were locked into a position of dual dependence: the state depended on the firm to produce goods for other enterprises, maintain employment, fund social services, and contribute tax revenues. At the same



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