Julian Gewirtz’s new book, Unlikely Partners: Chinese Reformers, Western Economists, and the Making of Global China, has gotten rave reviews from plenty of people smarter and more important than me, but I am happy to add my voice to the chorus. It is an excellent general history of economic policymaking in the first fifteen or so years of the reform era (1978-1993), focusing particularly on the intellectual exchanges between a group of Chinese intellectuals and various foreign economists. The “western” in the title should be interpreted very broadly, as the stars of the story are in fact mostly lesser-known scholars from what used to be called the Eastern Bloc.

At the center of this tale is the great Hungarian economist János Kornai, who incisively analyzed the nature and problems of socialist economies. With detailed research and interviews, Gewirtz nicely uncovers the chain of encounters that led to Kornai’s ideas getting wide exposure in China:

Kornai’s major idea presented at the [1981] Athens conference was his analysis of the “soft budget constraint.” This crucial concept showed that, under a planned economy, the firm “is not limited by fear or loss of failure”–in more practical terms, loss-making in the firm’s finances does not bring negative consequences to the firm. … Kornai’s presentation drew a sharp rebuke from V.R. Khachaturov, president of the Soviet Economic Assoication and a vehement supporter of the socialist planned economy. … But an unlikely voice, not heard previously in the conference discussions, spoke up in Kornai’s favor: Wu Jinglian. “In his paper, Professor Kornai had analyzed the functioning of a specific model of a socialist economy. Chinese experience made it easy to understand his analysis,” Wu said. Chinese economists had observed these issues, especially the “paternalistic relationship” of the government and enterprises, “serious waste” in enterprise management, and “the disappearance of the function of prices as carriers of information about supply and demand.” Wu praised Kornai for providing a rigorous conceptual apparatus. …

While at Yale University’s Department of Economics in 1983-1984, the 53-year-old Wu had read Kornai’s Economics of Shortage. Returning to China in 1984, Wu stashed a copy of Kornai’s book in his luggage and, at home, excitedly circulated sections of the book among friends and colleagues. In the minds of this small, elite group of Chinese economists, Janos Kornai seemed like an unexpected friend. …

[in 1985] Kornai had come to China as part of a distinguished group of economists from Europe and North America who would gather with many of China’s leading economists and economic policy makers. … The ostensible topic of his presentation was “could Western policy instruments (especially monetary and fiscal policies) be effective in socialist countries?” Kornai’s career, built on applying sophisticated economic analysis to the economic problems of socialist countries, clearly suggested an affirmative answer to this question–although this idea was relatively new to China. Since arriving in Beijing, Kornai had been listening carefully to discussions of China’s problems, including economic “overheating” and fears of inflation, as well as to the Chinese economists’ sense that they did not have in mind a goal model for the reform. Listening to such discussions, he wrote in his memoirs, “I felt…that I was at home in China, despite the distance and the historical and cultural differences. All the phenomena that came up and the cares and woes were familiar.” …

Kornai’s ideas, transmitted through diverse channels, flooded into Chinese debates, including the 1986 publication of the Chinese translation of Economics of Shortage. Dozens of articles in periodicals introduced an even wider readership to what Dushu, then a prominent liberal magazine, called the “enlightening” views of Kornai, whom they dubbed “the economic theorist that reform cried out for.” “Kornai fever” would go onto fuel sales of over 100,000 copies of the Hungarian economist’s book. Kornai was mentioned hundreds of times in academic and research journals in the period 1986-1989, including in regional and provincial journals in areas as varied as Guangxi, Hubei, Anhui, and Heilongjiang. …

These authors placed particular emphasis on two related aspects of the book: why the shortage economy was innate to socialism and how enterprise behavior under socialism created shortage phenomena—focusing, as a result, on Kornai’s arguments about the “soft budget constraint” and “paternalism.” These ideas, which the reviewers defined as priorities to address in future reforms in China, would remain the most salient aspects of Kornai’s thought for Chinese economists.

This jibes with my own experience; I discovered Kornai’s work from Chinese references to the term “soft budget constraint” in writings on state-owned enterprise reform. But while the soft budget constraint is brilliantly useful conceptual tool, being able to identify the problem of soft budget constraints has not enabled China to solve it. In fact the simplest diagnosis of the problems of the post-2008 Chinese economy is probably that budget constraints, which had been getting harder, became a lot softer.

Kornai’s most important contribution may actually have been to articulate the idea a market economy could still be regulated or managed by the government through indirect means–the fiscal and monetary policies used in Western economies–rather than the direct planning characteristic of socialism.

There is much testimony that Kornai’s presentation on this theme at the 1985 Bashan conference helped many Chinese reformers clarify the direction in which they wanted to head. They knew that they didn’t want a planned economy any more, but they were also very uncomfortable with the idea of an economy completely driven by random market forces. Kornai’s presentation helped square the circle, and Gewirtz shows how the deceptively simple concept of a “market economy with macroeconomic management” eventually became an official goal and (more or less) a reality. Kornai himself recognized how unlikely this whole chain of events was:

It’s very strange that in my own little country [I was ignored] most of the time, and in this giant country I was able to speak at a certain historical moment when one billion people wanted to hear exactly what I wanted to say. That was a very rare moment, and good luck.