Question

The term ‘communist bloc’ was used in the West until the late 1980s to describe the operation of 25 economies under the Soviet sphere of influence. A characteristic of all these economies was an extensive central planning system, often termed a ‘command economy’. The command economy dominated every aspect of life, telling factories where to buy their inputs, how much to pay their workers, how much to produce and where to sell their output. Individuals were trained in specialist schools and universities and directed to work at specific factories, which provided their wages, houses, health care – even holidays in enterprise-owned hotels. The national bank was told how much to lend to which factories and how much cash to print to pay wages.
As a theoretical concept, central planning was very elegant. Using ‘input-output’ analysis (a planning framework which calculated the inputs required for each factory in order for it to deliver its planned outputs to the next stage in the production process), the planning ministry could calculate precisely how much labour, capital and raw materials each enterprise required to achieve its production targets. The various production targets for raw materials and intermediate and final products all fitted together to ensure a perfectly balanced expansion of the economy. Input and output prices were carefully set to ensure that all firms could pay their wage bills and repay loans from the national bank, while at the same time pricing consumer goods to encourage consumption of socially desirable goods (e.g. books, ballet, theatre, public transport, etc.) and discourage consumption of politically unfavoured goods (e.g. international telephone calls, cars, luxury goods).
Questions
i). Why do you think the command economy failed to deliver many of the benefits claimed for it in this study? .
ii). Can you find any clues in the case above to explain why the transition from a command economy to a market economy has proved to be so painful for many of these states? .
iii). What would you consider to be the potential advantages and disadvantages for these states seeking to move from a command to a market economy? .

Answer 1

( I ) The command economy failed to deliver many of the benefits claimed because of the inapplicability of socialist and communist economic policies in the economy. In today's world of innovation and high technology, it is very important that innovation is pursued vigorously by the firms in the economy which in turn helps country stay competitive and increases economic growth. The economic policies and model proposed by communist bloc has no incentive for innovation as there are fixed or equal wages for all. There is no incentive for a firm to be more profitable by using more innovative technology. Overall, the command economy just couldn't stand against the free market economies around the world which led to its downfall.

( II ) Many of these states had already lagged behind in industrialization. Production of even consumer goods didn't take place domestically. The socialist economic model had pinned false hopes on the citizens of increase in prosperity due to industrialization. In order to completely change the economic model purusued in these economies, there is need of privatization, globalization, investments by MNCs in domestic market. However, these economies have not fully opened up leading to stagnation in economic growth.

( III ) Potential advantages:-

( I ) Free market will lead to higher competition and lower prices for goods.

( II ) Market economy will enable gorwth of all sectors of economy, such as consumer goods, manufacturing and services.

( III ) More integration with world economies with increase in trade.

Potential disadvantages:-

( I ) May result in higher imports.

( II ) Increased competition may force local industries to shut down.

( III ) More volatility in the economy with integration with world economy.