1088 Budapest, Rákóczi út 5.; Tel: (36 1) 381 23 47; E-mail: Ez az e-mail-cím a szpemrobotok elleni védelem alatt áll. Megtekintéséhez engedélyeznie kell a JavaScript használatát.
Schriftenreihe des Europa Institutes Budapest, Band 3:75–90.


The Evolution of Financial Discipline under the Post-Socialist System


I. Introduction

Financial discipline, as I see it, means the enforcement of four simple rules:

1. Buyers: Pay for the goods you buy.

2. Debtors: Abide by your loan contract; pay back your debt.

3. Taxpayers: Pay your taxes.

4. Enterprises: Cover your costs out of your revenues.

Self-evident though these rules may seem in a market economy, they were far from obvious in a socialist command economy. That was based on a quite different kind of discipline, which consisted chiefly of enforcing planning commands, above all the fulfilment of output targets and compliance to input quotas. How post-socialist society should learn to observe the new kind of discipline is the subject of this study.

The analysis rests on Hungary’s experiences; other countries are only referred to in a few places. But in my view, the problems raised in the discussion are general ones that inevitably arise in other post-socialist countries as well. So I attempt at the end of the study to draw some general conclusions.


II. A New Contract between the State and the Enterprise

An analysis of the problem requires a conceptual framework. Let us look upon the relationship between the state and the enterprise as if there were a long-term contract between them. (This study does not deal with the other areas in which financial discipline is manifest, for instance discipline within the bureaucracy or within the firm.) The relationship, in fact, might be interpreted as a specific kind of insurance contract.

Under the old contract that ran under pre-reform socialism, the insurance company (i.e. the state) covered the losses in full. If an enterprise found itself in financial trouble, the state bailed it out unconditionally. A variety of techniques were used for the purpose: extending financial subsidies, granting tax concessions or postponing tax commitments, rescheduling of loan repayments, or providing new soft loans. The state also guaranteed the survival of chronic lossmaking enterprises. All these techniques involved constantly breaking Rules 2, 3 and 4 of financial discipline (loan discipline, fiscal discipline and market cost-coverage discipline). This is the group of phenomena that I termed softness of the budget constraint in my earlier works. Also apparent was a side-effect well-known in insurance theory: the so-called moral hazard. If policy-holders know that the insurer will pay for all damage, it is not worth their making efforts to avoid damage, which in this context means that enterprises are insufficiently motivated to avoid losses by raising efficiency.

A mature market economy is marked by a different kind of insurance contract between the state and the enterprise. This policy only partly covers the damage, with the insured party paying the dominant share. There can be no question of losses being covered automatically and unconditionally. Only in certain privileged sectors (like banking) will the state assume a sizeable part of the losses that may occur. Irrespective of whether the state’s role as an “insurer” extends only to these privileged sectors or to others as well, the cover will apply only under exceptional, rigorously determined conditions. So the survival of an enterprise is not guaranteed; sooner or later, a chronic loss maker will have to make an exit from the economic scene. Rules 2, 3 and 4 are rigorously enforced. To use the terminology introduced earlier, the budget constraint is hard.

There are several signs that Hungary has moved towards the long-term insurance contract characteristic of a market economy. This seems to be confirmed by Table 1, which shows a substantial reduction in subsidies – from 12 % to under 3 % of GDP. Moreover, Tables 2 and 3 betray a jump in the number of bankruptcy and liquidation proceedings, which means the number of state rescue operations has fallen. Let me recall that an average of 26 enterprises a year ceased activities between 1976 and 19821, and even with this tiny number of exits, there were not financial reasons, but other factors behind them in many cases. To make another comparison, more liquidation proceedings were commenced in a single month of 1992 than in a whole year in the period 1986–1988.

In actual fact, of course, there is no written contract between the state and the enterprise. But the promising branch of theoretical economics known as “contract theory” has identified countless cases in which an unwritten contract applies; custom and habitual behaviour induce the parties to observe the terms of the contract2. Each party, counting on the other continuing to behave in the habitual way, itself abides by the unwritten terms of the contract. So this social relationship rests on firm long-term expectations3.

Under the old contract, characteristic to the pre-reform, classical socialism the enterprise could be sure about what help it would receive from the state in overcoming a financial crisis. That is true, but what happens if there is an insufficient basis for long-term expectations because the behaviour of one party (in this case the government) has suddenly changed? Neither economics nor social psychology provides adequate reliable information about a dramatic change in preferences, habits and expectations. This alone makes it very difficult to find an answer to the questions explored in this study.

The conceptual framework just described provides an appropriate structure in which to discuss the problem. Let us look first at government, and then at enterprise conduct.


Table 3 – Number of Liquidation Proceedings


Number of Filings

Number of Official
Announcements by the Court

1986 to 1988













2 617


January to March




1 281


























Total in 1992

10 184

2 227

Total in 1993

7 242

2 593

Sources: Figures for the period 1986–1991 from MRA [1992, pp. 18–23]. Figures for 1992 from Pénzügyminisztérium (Ministry of Finance) [1992b, pp. 5 and 9] and SZALAI [1993, p. 79]. 1993: Pénzügyminisztérium (Ministry of Finance) [1994, Table II/3.3]
Notes: The period covered by the first figure started on September 1, 1986 and ended on December 31, 1988. The figures in the first column record the initiation (filing) of liquidation proceedings. The figures in the second column refer to public announcements regarding the start of liquidation proceedings. As in the case of the bankruptcy proceedings, it is the responsibility of the court to publish the announcement in the official gazette.


III. The Conduct of the Government

1. Conflicting Objectives

The prime requirement before a government can change the long-term contract in force is the political will to do so. This is a function of the political goals. When a government sets its political objectives concerning financial discipline, it has to weigh the benefits and costs to be expected from it. Let us look first of all at the benefits of enforcing financial discipline.

– A smoothly operating credit system is essential to a modern market economy, but it cannot appear without an assurance that credit contracts will be observed.

– Very grave problems arise during the post-socialist transition with balancing the budget. One requirement for overcoming them is to improve the collection of taxes.

– Relative prices have been distorted by the system of differentiated, non-uniform taxes and subsidies. Discontinuing these helps more reliable price signals to develop.

– Tougher financial discipline will send the chronic lossmaking producers out of production. This becomes particularly opportune once the system of relative prices is giving a sufficiently true reflection of the costs and relative scarcities. Apart from that, the discipline encourages the surviving old enterprises and the emerging new ones to reduce costs and adjust better to demand.

To sum up, tightening financial discipline provides a strong incentive to increase efficiency. Hungarian experience also shows that some of the benefits appear immediately, but others only after a delay.

The most spectacular result was the rapid adjustment made by Hungarian production to the collapse of Comecon. The threat hanging over Hungarian enterprises was expressed by two World Bank staff members, DERVIS and CONDON, in their study [1993] as “export or perish”. A picture of the export performance is provided by Table 4. The share of exports directed to the EC doubled in a very short time.

Less conspicuous, but extremely important is the effect that imposition of tougher financial discipline has on the reorganization of production, the process known as restructuring and reorganization. Judicial bankruptcy proceedings do not necessarily signify the beginning of the end, since they initially provide legally regulated forms for deferring the settlement of debts. During this period, the enterprise’s affairs must be set right, if that is possible. The process is often accompanied by a full or partial change in the top management and the appointment of new, better managers. Nor, of course, do the liquidation proceedings bring about an irresponsible destruction of the material and intellectual capital. They promote the sale of as much of them as possible, if only in order to satisfy the creditors to a greater extent. During liquidation, a previously vast enterprise is often split up into smaller units, and its various assets are sold. Both bankruptcy proceedings and liquidation can create improved conditions for privatizing the original enterprises or the successor firms.

Finally, there is the least conspicuous, longest delayed, but most important effect of tough imposition of financial discipline, which appears in the shaping of people’s thinking. This I will return to later.

Let us turn now to the other side of the balance, the costs. The tightening of financial discipline, including the wave of bankruptcy and liquidation proceedings, contributes to the fall in production. This is not the sole reason why recession appears in all post-socialist economies without exception, but it is undoubtedly one of the factors behind the contraction of the economy.

The closure of whole factories clearly causes a loss of jobs. Moreover the surviving enterprises also try to reduce their costs, and lay-offs are among the results. Table 5 presents the changes which have taken place on the labour market. The number of vacancies still exceeded the number of jobseekers before May 1990. The scales since then have tipped to the side of unemployment, which continues to grow month after month. This produces a particularly grave trauma in a country where the labour force has become accustomed over decades to full employment, in fact to a labour shortage. The appearance and growth of unemployment are a great affliction that is only alleviated in part by unemployment benefit. In any case, there is not only the financial loss caused by unemployment to be considered, but the psychological effect produced by the loss of job security.

Moreover the enterprise under the socialist system, particularly in its pre-reform stage, was not simply an employer. It provided numerous welfare services: apartments or hostel accommodation, canteen meals, holidays, medical treatment, kindergartens and child-minding centres. As the enterprise turns into a profit-motivated employer, it steadily brushes aside these tasks. So social security provided at firm level is eroded at the same time as job security is lost.

Confrontation of the benefits and costs leads to a difficult choice between conflicting objectives. Much attention is devoted in the economics of macro-stabilization to the trade-off between inflation and unemployment. The curbing of inflation, which requires a rigorously observed regime of restrictive monetary policy, is regularly accompanied by an increase in unemployment, and conversely, measures to reduce unemployment increase the danger of inflation speeding up. This trade-off applies also to the post-socialist economy, and places a heavy burden upon it. Hungary’s annual rate of inflation has fallen somewhat, but in 1992 it was still 23%, while the unemployment rate has already risen above 12%. But underlying this there is another trade-off that is still more serious because it has a deeper effect: that of efficiency versus security. Improvement of efficiency, in the short, medium and long term, goes hand in hand with abandonment of full employment and job security, and erosion of the social security originating from the welfare services provided by the enterprise.

International comparison shows that in terms of facing this serious dilemma, Hungary has gone furthest in imposing financial discipline and hardening the budget constraint, and consequently in promoting an improvement in efficiency. Poland, the Czech Republic and Slovenia have taken steps in the same direction, but so far they have hesitated, for example about introducing a modern bankruptcy law and applying it consistently. To give the ultimate counter-example, Russia’s central bank in the second half of 1992 was extending almost incalculable sums in credits to sustain state-owned enterprises on the brink of bankruptcy, or at least to make sure they could keep on their workers and pay their wages.


2. Credibility and Commitment

Let us return to a move general level of discussion. Let us assume there comes a point when the government decides that from now on it will rigorously impose financial discipline and harden the enterprise’s budget constraint. The question is, will it have the perseverance to continue this policy consistently? And even if it promises to do so, will the enterprises believe this promise? One condition for applying the new contract mentioned at the beginning of the study is that the government should have credibility, in general terms, and in the specific context of our discussion, credibility for its “no bail-out” commitment. The theory of conflicts and contracts draws attention emphatically to credibility, above all to the central importance of the credibility of threats. Here the picture Hungary presents is far from clear, a curious ambivalence can be found instead.

Let me recall at this point the story of Ulysses and the Sirens4. The bewitching voices of the Sirens would entice sailors towards them into shipwreck and destruction. When Ulysses’ “ship approached the Sirens” island, he blocked his men’s ears with wax and told them to tie him to the mast, so that he could not yield to the temptation. The more he begged them to release him, the tighter they were to tie his bonds.

Turning from the metaphor of temptation and commitment to Hungary’s real situation, let us first examine the temptations. There are a great many influences on the government tempting it to loosen the financial discipline and soften the budget constraint. The political forces behind the government can use financial bail-outs to win clients by playing the part of a patron. They can make concessions to political pressure and the requests of industrial or regional lobbies. They will clearly have in mind the next parliamentary and local-government elections, so that bail-outs can serve to gain them a cheap popularity.

This constitutes a very real political temptation whose effects can actually be observed. Since the period of tougher financial discipline began, exceptional procedures have been followed in several cases, in many of which the bargaining led to agreement. The remnants of the soft budget constraint are plainly visible. There is a danger that the frequency of the exceptions will undermine the credibility of the government’s pledges concerning the tough financial discipline.

The function of Ulysses’ bonds is performed mainly by constraints and pre-commitments that bind the government’s hands. An absolute, doctrinaire application of the “no bail-out” principle cannot be expected, because of the macroeconomic requirements and the efforts to defuse political tensions, but the government must ensure that the financial bail-outs are infrequent, i.e., they occur only on very rare occasions. The criteria and procedures for bailing out enterprises must be laid down by law, not left to ad hoc administrative bargaining processes. Only temporary financial assistance is permissible, and whatever form the assistance may take (postponement of tax arrears, debt rescheduling, budgetary subsidy etc.), it must follow a clear timetable that extends the assistance over a strictly determined and not too distant deadline. Instead of confidential agreements reached behind closed doors, there should be full publicity for each bail-out, so that it takes place under the public scrutiny of a parliamentary committee and the press.

Regrettably, politicians usually behave in a different way from the Ulysses of Homer. There is no question of them telling their sailors to bind them hand and foot. On the contrary, they do all they can to keep a free hand, feeling they need room to manoeuvre and improvise. “Unpredictability is power”, as HIRSCHMAN put it5. Obscurity suits politicians much better than clarity.

The outcome depends greatly on whether the public, particularly the economists’ profession, can extract binding pledges from the government and make sure it keeps them. Whatever happens, the test of the credibility of the government’s promises about financial discipline will be the practice it pursues in the years to come.


3. The Mechanism for Imposing Discipline

Let us now assume the existence of the political will to apply financial discipline continually and consistently. That still leaves open the question of whether the means are available to perform the task.

Discipline under the socialist economic system was imposed by the bureaucracy itself, often by arbitrary and brutal means. Post-socialist society must become a constitutional state, and that applies in connection with financial discipline as well.

Let us begin with legislation. Hungary has made significant progress: modern accounting banking and bankruptcy laws that meet the requirements of a market economy are already in place. The legislative process is itself an instructive one of experimentation. A particular law may be full of mistakes, and sooner or later need amending, which makes it harder for the effect of it to be incorporated into the awareness of the actors in the economy6.

But although the necessary legislative steps have been taken, there is a problem with enforcing the law. The work load of the courts dealing with business cases has grown by leaps and bounds. The number of competent professionals is too small. There is a shortage not only of judges, but of receivers, chartered accountants, lawyers, economic analysts and business administrators with the qualifications and experience to conduct bankruptcies, liquidations, auctions, mergers, demergers and reorganizations7.

Let us take another example, in which an enterprise has broken Rule 1 of financial discipline: it has not paid for what it has bought. The seller requests the court to issue a warrant of payment. This is a warning which is followed, if the payment has still not taken place, by an official auction. Table 6 shows that the number of such cases has multiplied by six in four years. It can be three to four months before the court issues the warrant of payment and the official bailiff begins auctioning the debtor’s seizeable assets.

It is hardly surprising that some entrepreneurs feel they must take the law into their own hands. There have been reports in the press on the existence of one or two obscure firms that specialize in debt collection by curious means: a few strong young men with a resemblance to boxers are sent to a debtor’s home to remind him, at least in menacing words, of his obligation to pay8. There have also been cases where the message was underlined by beating up the debtor or warning him that his property would be damaged or his dependants attacked. So there we have the mafia method of imposing financial discipline...

This is alarming and intolerable. But unfortunately such methods must be expected to appear as well, because it will be some time before the legal infrastructure for enforcing financial discipline develops.

Although legal enforcement of financial discipline is essential, it is by no means sufficient in itself. It must be augmented by a change in the moral attitude of the public towards financial transactions9. This leads to the second part of the study, which concerns the conduct of enterprises.


IV. The Conduct of Enterprises

1. An Example: Forced Credit between Enterprises

The new contract between the state and the enterprises, determined in the spirit of a market economy, requires a change not only in government conduct, but also in the behaviour of enterprises. To see how this second change has failed to occur sufficiently in Hungarian business, let us look at the phenomenon of forced credit between enterprises. Enterprise B delivered goods for production to Enterprise A. The buyer received them, but it not then paid the bill. One could put it like this: Enterprise A forces Enterprise B to extend credit without prior agreement, and then does not pay its debt. By doing so, Enterprise A commits a grave breach of Rules 1 and 2 of financial discipline. In a similar way, Enterprise C is not paid for its goods by B, one of whose troubles is that it has not been paid by A. The neglect of payments and debt settlements spills over onto other enterprises, to form long, interlocking chains of forced credits10. It was continuously growing until April 1992, as shown in Table 7.


Table 7 – Forced Credit


Number of Involuntary
Creditor Enterprises

Total Involuntary Credit
(HUF bn.)








































Apr. 1992



Dec. 1992



Dec. 1993



Source: VÁRHEGYI and SÁNDOR [1992, p. 25] and communication by VÁRHEGYI.. The figures are based on the data of the Hungarian National Bank.
Note: 1991 figures refer to data for November 30, 1991. All other figures refer to the volume of involuntary credit on December 31 of the year stated. The figures for the volume of involuntary credit only cover credits larger than HUF 25 m. The total volume, including smaller-scale involuntary credit, would presumably be much larger. For the sake of comparison, consider the volume of total outstanding bank credit to all enterprises, in billion Hungarian forints: 144.3 in 1990, and 121.4 in 1991. The ratio of involuntary trade credit to bank credit was 63 % in 1990 and 132% in 1991.


In the second half of 1992 the amount of forced credits decreased substantially. It seems to indicate that the wave of bankruptcies have already had a favourable effect on the strengthening of financial discipline. In addition, various attempts are made to resolve the problem with the cooperation of the banking sector. It would be possible, for instance, to settle some of the reciprocal debts, even in several different chains, through a clearing system. Some of the interfirm trade credit could be converted into bank credit. Though the amount of forced credits decreased considerably, the reoccurrence of an increase of forced credits is not excluded as long as fundamental and lasting changes do not occur in the observance of financial discipline. To ensure that forced credit is at most sporadic, instead of ubiquitous, enterprises must accept the following two prohibitions:

Buyer: Never leave goods unpaid for without the seller’s prior agreement. If a debt should remain, you may well be in legal trouble: the seller may take you to count and have your assets seized. Apart from the legal complications, there will be a blot on the business reputation and goodwill of your creditworthiness rating will fall.”

Seller: Refrain from delivering your goods until you are convinced that the buyer will pay for them and is really creditworthy.”

The second warning is particularly worth emphasizing. The extenders of forced credit are often presented as “innocent victims” who demand justice. They think they have a right to expect the state to rush to their aid, as if they were the victims of a natural disaster. I think this argument is faulty. It must be accepted that the market is not “just”. Entrepreneurs, as their name suggests, take a risk. If the deal goes well, they can make a lot of money, but if it comes out badly, they make a loss. If the buyer happens not to pay, they must try to collect their debt by legal means. If they do not succeed, that is their problem... If they have not lost heart, they will be more cautious next time about who they deliver their goods to.

In this respect as well, we must get used to the change. In a socialist economy, what counted was how much a firm managed to produce. Once the production had taken place, it could be reported to the statistical office, and the quantity of products was chalked up as a contribution to the fulfilment of the plan. What actually happened to the goods was quite immaterial from the enterprise’s point of view. In a market economy, however, the sole thing that counts is what the firm manages to sell, how much money it can get for its products.

Having considered this instructive example, it is time to analyse the conduct of enterprises on a more general plane. Here it is worth examining separately the two segments of the economy: the new private enterprises, and the old state-owned enterprises.


2. The New Private Sector:”Imprinting”

To shed light on the behaviour of the new private firms that arise during the reform-socialist period and the post-socialist transition, I would like to borrow a concept from evolutionary biology: the expression “imprinting”11. (The dictionary definition is to impress or stamp, and the figurative meaning to impress indelibly on the memory.) Observations of animals provide firm evidence that habits acquired in the initial, particularly sensitive stage of life have an extremely strong influence. They become impressed deeply and almost irreversibly in the memory, and prompt the animal concerned to repeat the experience12.

It is most important for the new private firms to learn from the outset that they must observe the rules of financial discipline strictly. Resistance appears to this requirement. Private entrepreneurs may argue that if state bail-outs are still being instituted for state-owned enterprises, why is the same not done for them? I think it would be a big mistake to yield to this pressure. Disregarding some rare, truly justified exceptions (mentioned already), private enterprises must not be rescued financially with the help of the state. Let them struggle to survive. There is no cause for alarm if even 10–15 % of new businesses, especially small and medium-sized firms, cease trading each year. The healthy, natural process of evolution and selection requires a large number of entries and exits.


3. The Old State Sector: Education by Trauma

The same argument makes people sceptical about what can be expected of state-owned enterprises if they remain in state hands. The knowledge that loose financial discipline was tolerated and the budget constraint was soft has been deeply “imprinted” in the minds of those running state-owned enterprises and many of those employed by them. Is it possible to alter this imprint at all?

It may be possible to change it, at least to some extent, if (and only if) the other contracting party, the state as “insurance company”, is strict and steadfast about abiding by the new market economic contract.

State-owned enterprises have become dependent on the paternalist helping hand of the state and the constant availability of a bail-out, just as many weaker-willed individuals become addicted to the relief of smoking, alcohol or drugs. This is worth pondering upon as an analogy. How do those who actually manage to stop smoking, drinking or taking a narcotic go about giving up their addictive habit? The most important step is to recognize it is harmful and dangerous. In most cases the recognition comes through the influence of explanatory writings of lectures, while in many the final push comes from a shattering experience, for instance when the toxic habit causes a tragedy in the immediate environment of the hesitant subject, or serious illness in the addict himself or herself13.

Tables 2 and 3 showed that chronic lossmaking and grave insolvency have become mortal dangers to the survival of enterprises in Hungary. If this pressure becomes permanent, managers will come to believe sooner or later that observing financial discipline is a matter of life and death.

This is what may happen, but it is not certain the situation will really develop in this way. Observation of addictive habits, in fact, shows how easily any temptation can cause an old habit to recur. Every recurrence of the state’s old conduct – toleration of infringements of financial discipline, softening of the budget constraint – may be taken by the managers of state-owned enterprises to mean that they need not take the matter so seriously after all. Then they too will revert to the old conduct.

So there is a chance of new expectations, accompanied by new habitual behaviour, developing in state-owned enterprises, but it cannot be fully relied on. This can serve as an extra argument, alongside the other well-known ones, for privatizing state property, as the new kind of conduct can really be expected only from enterprises based on private ownership and accustomed to financial discipline right from the start.


V. General Conclusions

A number of general conclusions emerge from an analysis of the situation in Hungary.

A long preparatory phase was needed before the government and judiciary really set about imposing financial discipline with a firm hand. A range of prior conditions were required for this to happen. There was a need for the private sector to attain a critical mass, so that it could become, both as a supplier and an employer, capable of at least partly replacing the state-owned enterprises, if they disappeared in large numbers. There was also a need for the market institutions and legal infrastructure to attain a critical mass. There was also a need for an apparatus to handle unemployment, above all organizations to distribute unemployment benefit and act as a labour exchange.

Later, when financial discipline is being applied more forcefully, another quite long period must pass before the actors in the economy start believing that the state’s conduct in this respect has changed for good and all. The expectations of managers are shaped above all by their own experience, not just by the pledges the government makes. Once they can see in retrospect, over a period of years, that a new, tough and consistent regime of financial discipline has really come into being, the new enterprise conduct will consolidate as well.

The two lessons, drawn so far, point to a common conclusion: consolidation of financial discipline is a lengthy process of evolution that extends over several years.

This is a painful process that cannot take place smoothly or without grave social costs. This is chiefly because it has painful side-effects like falling production and lay-offs, but also because the upheaval and trauma are themselves part of the education process.

The imposition of stronger financial discipline inevitably becomes a political issue. It can only be done if there is broad enough public support behind it. It assumes the presence of a consensus on a certain scale, at least in an implicit and passive sense. The requirement for its development, in other words, is that no significant force in the political arena attacks the policy of reinforcing discipline from the rear.

The final lesson is that forceful steps taken towards financial discipline entail a risk. Tension is caused by the negative side-effects, the falling production, the unemployment, and the weakening of social security. A marked rise in this tension can exercise a destabilizing effect and undermine the still fragile democratic institutions. More than one alarming warning has already been heard in Eastern Europe about the danger of “Weimarization”, where populist demagogy, extremist nationalism and racial hatred find a response in the discontent caused by the economic ill.

I would like at this point, at the end of the article, to make my own position clear on this issue. While the conflict remains one between various economic and welfare goals, I for my part would lay very great emphasis on raising efficiency and imposing financial discipline to that end. But if a sober, objective political analysis revealed that democracy was threatened by the drastic economic measures being taken, I would accept a more cautious advance towards reinforcing financial discipline in order to avert that danger. If it comes to a conflict between efficiency and the cause of democracy, I am sure that defence of the institutions of democracy is the supreme task.





See KORNAI and MATITS [1987, p. 100]


BECKER [1992, p. 338] in his study of habitual behaviour and traditions states the following: “... habits, addictions, traditions, and other preferences that are directly contingent on past choices partly control, and hence commit future behaviour in predictable ways. Indeed, habits and the like may be very good substitutes for long-term contracts and other explicit commitment mechanisms”.


To analyse a long-term implicit contract, in other words a constantly renewing social relationship based on “the rules of the game”, the mathematical models most commonly used are those of repeated games. For a theoretical description, see, for instance, the book by FUDENBERG and TIROLE [1991, pp. 147–206]. The interpretation of the theoretical models from the social sciences’ point of view is presented in a more popular form in SCHELLING [1978, pp. 115–133], and BINMORE [1993, pp. 345–381].


ELSTER’s book Ulysses and the Sirens [1979] makes manifold use of this metaphor in its philosophical analysis of temptation and commitment.


See HIRSCHMAN [1977, p. 50].


Of the regulations on bankruptcies and liquidations, one particularly worth noting was the measure known ironically as the “harakiri clause”. The responsible manager of an enterprise was obliged to file for bankruptcy once it was clear that the firm would be unable to fulfil its payment commitments. If the manager failed to do so and this could be proved to cause loss, he or she could be sued personally for damages in the civil counts. This provided a very strong inducement to file for bankruptcy if the enterprise got into financial straits.

The “harakiri clause” exacerbated the wave of bankruptcies to such an extent that it was withdrawn recently at the same time as other, lesser amendments were made. Experience will show whether this amendment has substantially weakened the bankruptcy Act or not.


BECKER and STIGLER [1974] in a study on enforcing the laws show that the mechanism for the purpose is not an invariable. If the interests of society’s members are served by so doing (as they clearly are in this case), the scale, methods and organizational forms of the apparatus can be adjusted to the greater demands; the quality of its activity can be improved, for instance, with requisite incentives.


See, for instance, the news report in the daily paper Népszabadság on October 19, 1992.


Economic history shows that private contracts based on the honesty and mutual respect of the parties to them were widely made before the legislative regulation and legal enforcement of them. When the first commercial laws were then passed, they dealt unceremoniously with those who failed to pay their debts. England’s Lex Mercatoria (Merchant Law), passed in the 13th century, stipulated that if a debtor did not pay his debts, the creditor first had to seize his moveable property: “And if the debtor have no moveables whereupon his debt may be levied, then shall his body be taken where it may be found and kept in prison until be have made agreement, or his friends for him.” The quotation is from MITCHELL [1969]. For more on the history of commercial law, see TRAKMAN’s book [1983]. So from the Middle Ages onwards, there were strict laws to induce respect for private contracts and financial discipline among the actors in the commercial world. Only centuries later, when the need for discipline had been historically fixed in their minds, did the legal sanctions become “tamer”.


This means that the creditors wait in line in front of the debtor firm to have their debts settled. So the expression queuing has become widespread in Hungary for this phenomenon.


See HESS [1973] and SLUCKIN [1973].


Goslings follow the mother goose on their walks in single file. One of the discoverers of “imprinting”, KONRAD LORENZ, observed that if goslings hatched in an incubator became acquainted with him, a man, in the first hours of their lives, they would follow him in single file when he went for a walk, instead of their real mother, even though the goose was nearby. This habit of theirs remained, even if they were otherwise living in company with their mother.


A study by SWENSON and DALTON [1983] of the factors inducing the cessation of smoking contains the following figures: 67.9 % of the sample of former smokers cited the fact that they had been deterred by learning of the statistics on the mortal dangers of smoking; in 57.6 % of cases they mentioned damage to the respondent’s own respiratory system, and in 29.2 % of cases the smoking-related death of a family member or friend. Similar findings are reported by CURRY, WAGNER and GRONHAUS [1990].



Becker, Gary S. 1992. “Habits, Addictions, and Traditions.” Kyklos 45 (3):327–346.

Becker, Gary S., and Stigler, George J. 1974. “Law Enforcement, Malfeasance, and Compensation of Enforcers.” The Journal of Legal Studies 1974 3:1–18.

Binmore, Ken. 1992. Fun and Games. A Text on Game Theory. Lexington: D. C. Heath and Company.

Curry, Susan–Wagner, Edward H.–Grothaus, Louis H. 1990. “Intrinsic and Extrinsic Motivation for Smoking Cessation.” Journal of Consulting and Clinical Psychology 58 (3):310–316.

Dervis, Kemal, and Condon, Timothy. 1994. “Hungary: An Emerging ‘Gradualist’ Success Story?” In The Transition in Eastern Europe. Edited by O. J. Blanchard, K. A. Froot, and J. D. Sachs. Chicago, University of Chicago Press.

Elster, Jon. 1979. Ulysses and the Sirens. Studies in Rationality and Irrationality. Cambridge: Cambridge University Press.

Fudenberg, Drew–Tirole, Jean. 1991. Game Theory. Cambridge, Mass.: MIT Press.

Hess, Eckhard H. 1973. Imprinting. Early Experience and the DevelopmentalPsychobiology of Attachment. New York, D. Van Nostrand Company.

Hirschman, Albert O. 1977. The Passions and the Interests. Political Arguments for Capitalism before Its Triumph. Princeton, Princeton University Press.

Kornai, János, and Matits, gnes. 1987. A vállalatok nyereségének bürokratikus újraelosztása (The Bureaucratic Redistribution of Firms’ Profit). Budapest, Közgazdasági és Jogi Könyvkiadó.

Központi Statisztikai Hivatal (Central Statistical Office). 1993. Magyar statisztikai évkönyv 1992 (Hungaryan Statistical Yearbook, 1992). Budapest.

Mitchell, William D. 1969. Essay on the Early History of the Law Merchant. New York, Burt Franklin.

Móra, Mária. 1992. „Változások a csődkezelésben – nyolcvanas évektől napjainkig” (Changes in the Way of Handling Bankruptcies – From the 1980s to Our Days). Vezetéstudomány (4):18–23.

Muraközy, László. 1993. „Az átmenet költségvetése Magyarországon, 1986–1992” (The State Budget in the Transitional Period in Hungary, 1986–1992). Mimeo. Debrecen: Kossuth Lajos Tudományegyetem.

Pénzügyminisztérium (Ministry of Finance). 1992a. Tájékoztató az 1992. évi gazdasági folyamatokról. (Júliusi-augusztusi információk alapján) (Report on the Economic Development in 1992. On the Basis of Information Available in July and August). Budapest.

Pénzügyminisztérium (Ministry of Finance). 1992b. Elterjesztés a Kormány részére a csődeljárásról, a felszámolási eljárásról szóló törvény makrogazdasági hatásairól (Report to the Government on the Macroeconomic Effects of the Bankruptcy and Liquidation Act). Budapest, October.

Pénzügyminisztérium (Ministry of Finance). 1994. Tájékoztató az 1994. évi gazdasági folyamatokról (Report on the Economic Development in 1994). No. 11–12. Budapest.

Schelling, Thomas C. 1978. Micromotives and Macrobehavior. New York, W. W. Norton and Company.

Sluckin, W. 1973. Imprinting and Early Learning. Chicago: Aldine Publishing Company.

Szalai, Tamás. 1993. „Konstruktív bizalom” (Constructive Confidence). Heti Világgazdaság 15 (February 20):78–80.

Swenson, Ingrid, and Dalton, Jo Ann. 1983. “Reasons for Smoking Cessation Among a Random Sample of North Carolina Nurses.” Women and Health 8 (Winter).

Trakman, Leon E. 1983. The Law Merchant: The Evolution of Commercial Law. Littleton, Colorado, Fred B. Rothman and Company.

Várhegyi, Éva, and Sándor, László. 1992. A sorban állások kialakulásának okai és visszaszorításuk lehetséges módjai. (The Causes Behind Queuing and the Possible Means to Eliminate it.) Mimeo. Budapest, Pénzügykutató Rt.


Harvard University and Collegium Budapest, Institute for Advanced Study, Hungary. The study was prepared as part of a research project entitled „Hungary’s Transition into Market Economy” with support from Hungary’s National Scientific Research Foundation and the European Bank for Reconstruction and Development. I must express thanks for the help I have received from ANNAMÁRIA BALOGH, BÉLA BÁRTFAI, IMRE FERTÕ, ERZSÉBET GÉM, MARIANNA HOLLÓ, MÁRIA KOVÁCS, LÁSZLÓ MURAKÖZY, SÁNDOR PISKOLTI, JANE PROKOP and GYÖRGY RÓZSAHEGYI in gathering the material for the lecture. I am grateful to BRIAN McLEAN and JULIANNA PARTI for their excellent translation of the Hungarian text.


Das „József Eötvös Memorial Lecture” des Europa Institutes Budapest im Jahre 1995 hat János Kornai, Mitglied der Ungarischen Akademie der Wissenschaften, gehalten.