Thursday, August 9, 2012

Is Central Planing inefficient?

The question is posed by recent research:
For 40 years the Soviet Union was indeed a growth miracle, but it was a spectacularly unsustainable one based on extractive political and economic institutions. The powerful Soviet state could generate large productivity increases by moving people from rural areas and putting them into factories.

 ... the reason why his thesis is ultimately unconvincing is that ... backward economies can grow rapidly and may do so using a variety of arrangements. This is made feasible because they are benefiting from catch-up and technological convergence. The fact that Soviet Russia took advantage of catch-up opportunities and transferred resources from its massively inefficient agriculture to industry implies neither that central planning was efficient in the short run nor that it could be a steppingstone for more growth-enhancing institutional structure in the long run.

 Inevitably, the collectivist system collapsed due to the universal problem of management:  
Do central planners have enough information to make good decisions, and the incentive to do so?

Anyone who has read chapters 1 and 2 knows the answer.



  1. Central planners clearly don't have enough information to make the decision. Moreover they do not even have the right incentives in place to make the correct decisions as their decisions have no direct affect on them and they are not bearing the risks of making a wrong decision. This is what happens in countries where there no decentralization of power and the states and local representatives have no say in the decision-making.

  2. Central planners probably did not have the information that they needed to make good decision, but they absolutely did not have the incentive to make the right decisions. I think that ultimately only free market mechanisms can rely on the rational-actor paradigm to make goal aligned incentives easy to implement and extremely effective over a long period of time. A period of time long enough to allow the benefits from the temporary situations listed above to fade away. Unfortunately, the nature of economic planning is that it does not intrinsically incentivize us to stop an oncoming disaster by utilizing a market approach, but the nature of a market approach requires more time than most are willing to give.

  3. Despite the advantages of wishing to provide employment, goods and services to all, Centralized Economies are definitely inefficient since they cause the misallocation and waste of vast resources in the production of goods and development of white elephant projects.
    The centralization of planning ensures that a few individuals who commonly lack objectivity determine the needs of a much larger populace, in a sense forcing their will on others. A major deficiency of central planning is the flow of information; decision makers make decisions without inputs from local governments or representatives of the people. Information flows in one direction from the center without any feedback since central planning is primarily practiced in countries without grassroots representation.