Failure of centrally-planned economies

Failure of centrally-planned economies

The Soviet did it but couldn’t sustain it. China did it but realizing its folly tweaked their economic strategy. Some Eastern European countries tried doing it but failed miserably and therefore changed their political set up. It shows that communist or centrally-planned or command economy thrived in some countries for short while but could not compete in the long run. The abandonment of Communism by many countries during 1980s and 1990s signaled that free market price system is better than total central planning as a method of organizing an economic system.

There are various flaws in a centrally-planned economy. Some of them have been discussed here.

Lack of coordination – In centrally-planned economies, planners try to coordinate the economic decisions about production, consumption, investment and savings of all producers and consumers throughout the country. But a handful of intellectuals taking economic decisions inside a closed room hardly ensures any degree of efficiency. This led to gluts in production and shortage of some goods.

Poor quality of goods – In a communist economy, planners monitor the number of units produced in a factory and reward labourers who over-produce and punish those who fall short. The planners are only concerned about meeting their quota of production. But no one cared about the quality of goods. Since purchases and sales are planned centrally, once the goods leave the factory, it became someone else’s responsibility to look after it. In 1980s, the quality of goods of Leftist countries was degraded to such extent that they could not compete with advanced products of market economies.

Few incentive to work – In centrally-planned economies, wages and salaries are similar for the same job in all factories and companies, while wages and salaries are relative in market economies. Since there is a possibility of losing job in the market economy, workers work diligently. Such incentive is not there in command economies. Due to high job security, workers do not work hard and efficiently. Moreover, employment is rare in such economies.

Destroying environment – Since the planners want an output-driven economy, they forget how much environment is being degraded in the process. Environmental degradation is the result of pressure to fulfill production plans and lack of political market place. For example in Central Asia, high cotton output led to poor irrigation and maintenance of land, thus resulting in dumping of nuclear waste throughout the land.

Nowadays instead of purely command or market economic systems, economists believe in self organizing forces of the market and how government can intervene to improve some aspects of their working.

 

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