Hard Budget Constraints
HARD BUDGET CONSTRAINTS
In market economies, firms face hard budget constraints. This means that they must cover their costs of production using revenues generated either from the sales of their product or from other financial sources. In the short term, firms facing hard budget constraints may borrow to cover their operating costs. In the long term, however, if firms cannot cover their costs from their revenues, they fail, which means they must declare that the company is bankrupt or they must sell their assets to another firm. Hard budget constraints coincide with a situation where government authorities do not bail out or subsidize poorly performing or loss-making firms.
Soviet industrial enterprises did not face hard budget constraints. Unlike their counterparts in market economies, Soviet firms' primary objective was to produce output, not to make a profit. In many respects, planners controlled the financial performance of firms, because planners set the prices of labor, energy, and other material inputs used by the firm and also set the prices on products sold by the firm. Centrally determined prices in the Soviet economy did not facilitate an accurate calculation of costs, because they were not based on considerations of scarcity or efficient resource utilization. Nor did prices reflect demand conditions. Consequently, Soviet firms were not able to accurately calculate their financial condition in terms that would be appropriate in a market economy. More importantly, however, Soviet planners rewarded the fulfillment of output targets with large monetary bonuses and continually pressured Soviet industrial enterprises to produce more. With quantity targets given highest priority, managers of Soviet firms were not concerned with costs, nor were they faced with bankruptcy if they engaged in ongoing loss-making activities. Without the constraint to minimize or reduce costs, and given the emphasis on fulfilling or expanding output targets, Soviet firms were encouraged to continually demand additional resources in order to increase their production. In contrast to hard budget constraints faced by profit-maximizing firms in market economies, Soviet industrial enterprises faced soft budget constraints.
See also: new economic policy; value subtraction; virtual economy
Kornai, Janos. (1986). Contradictions and Dilemmas: Studies on the Socialist Economy and Society, tr. Ilona Lukacs, et al. Cambridge, MA: MIT Press.
Kornai, Janos. (1992). The Socialist System: The Political Economy of Communism. Princeton, NJ: Princeton University Press.
Susan J. Linz
"Hard Budget Constraints." Encyclopedia of Russian History. . Encyclopedia.com. (February 21, 2019). https://www.encyclopedia.com/history/encyclopedias-almanacs-transcripts-and-maps/hard-budget-constraints
"Hard Budget Constraints." Encyclopedia of Russian History. . Retrieved February 21, 2019 from Encyclopedia.com: https://www.encyclopedia.com/history/encyclopedias-almanacs-transcripts-and-maps/hard-budget-constraints
Encyclopedia.com gives you the ability to cite reference entries and articles according to common styles from the Modern Language Association (MLA), The Chicago Manual of Style, and the American Psychological Association (APA).
Within the “Cite this article” tool, pick a style to see how all available information looks when formatted according to that style. Then, copy and paste the text into your bibliography or works cited list.
Because each style has its own formatting nuances that evolve over time and not all information is available for every reference entry or article, Encyclopedia.com cannot guarantee each citation it generates. Therefore, it’s best to use Encyclopedia.com citations as a starting point before checking the style against your school or publication’s requirements and the most-recent information available at these sites:
Modern Language Association
The Chicago Manual of Style
American Psychological Association
- Most online reference entries and articles do not have page numbers. Therefore, that information is unavailable for most Encyclopedia.com content. However, the date of retrieval is often important. Refer to each style’s convention regarding the best way to format page numbers and retrieval dates.
- In addition to the MLA, Chicago, and APA styles, your school, university, publication, or institution may have its own requirements for citations. Therefore, be sure to refer to those guidelines when editing your bibliography or works cited list.