Econometrica: Jul, 1979, Volume 47, Issue 4
Resource-Constrained versus Demand-Constrained Systems
In a socialist economy the shortage in consumer goods, housing shortage, disturbances in material supply, shortage in investment goods, and labor shortage are to be traced back to common main causes. Certain properties of the economic mechanism permanently reproduce shortage. First we study the microanalytics of the producer firm. Efforts at increasing production may hit three different upper constraints: the constraints of physical resources, demand constraints, and the firm's budget constraint. The system can best be characterized according to which of these constraints is in effect. From this aspect resource-constrained and demand-constrained systems are discerned. In the former it is bottlenecks of production and not buyers' demand that delimit production; in the latter the case is the reverse. A socialist economy in its "classical" form belongs to the former type. This is connected with the question of whether the firm's budget constraint is "hard" or "soft". If it is hard, spending of the firm will be effectively delimited by its financial abilities. If it is soft, then because losses are almost automatically compensated by the state the firm's demand becomes almost insatiable. The macroanalytical part of the paper demonstrates the mechanism of a chronic shortage economy with the aid of a hydraulic analogy. In it the sector of firms "pumps out" the slack of the system. This phenomenon is due primarily to the effect of "investment hunger" shown to be the result of an irresistible expansion drive. Finally, the paper briefly touches on the interdepencies of shortage, inflation, and employment.