What arguments do economists offer to explain the collapse of central planning?

To understand why central planning collapsed it is necessary to first understand what central planning is. Central planning is a method of market control whereby the demand and supply of goods and services is regulated solely by the government. Any centrally planned government experiences 100% government intervention to decide the availability of goods and services.

There are two other types of market / economy presently. There is that of the free market such as experienced by the USA wherein demand and supply are the sole influence on the availability of goods and services. There is the mixed market economy, wherein there is, although limited, government intervention in the demand and supply of goods and services. Some industries are given artificially high prices and incentives. Some industries are government funded such as the NHS to provide it relatively “free” to the population. There is however payment for it in the form of taxes, though the service received is not relative to your particular contribution. Finally as explained above, there is the planned market economy.    

There are several reasons that this system is unsustainable and therefore collapsed as it did. The main reason for which is the massive inefficiency that occur as a result of its implementation. This leads to wastage and therefore contradicts the basic economic problem of scarcity facing every economy. Scarcity as a definition is a population choosing between its needs and its wants, and in doing so making the most efficient usage of the scarce resources available. Inefficiency has two main forms Productive inefficiency and allocative inefficiency.

Productive inefficiency is when firms in the economy do not produce at their lowest possible cost. The result of which is costs to the government, who are deciding and providing the necessary quantities of raw materials and labour needed to cover economic rent, are higher. This leads to higher prices for the consumer and less disposable income on other goods and services, in return reducing the tax income revenue generated for the government. Productive inefficiency also holds a detrimental effect on quality of goods. Poorer quality goods are manufactured during productive inefficiency as there is no opportunity cost of producing and inferior good to that of a high quality good. Poorer quality goods, and especially capital creating poor quality goods, in turn yield less output in the economy. This means less is produced, there is less income for the population and less is spent in the domestic economy. This creates greater poverty in the population.

Join now!

The reason productive inefficiency was so rampant in centrally planned economies was the highly inefficient process of “material balance”. Producers would purposely become wasteful in the usage of the factors of production when left with remaining material to prevent it from being unsupplied the following cycle and later reduced quota’s of resources. This was the reason the former USSR had the reputation of having goods that were “too heavy”.

They could not exploit economies of scale, as all goods and resources were given to them at a fixed rate.

There is no incentive for technological innovation. The free and ...

This is a preview of the whole essay