Which of the following will reduce the effectiveness of centralized economic planning?

economic planning, the process by which key economic decisions are made or influenced by central governments. It contrasts with the laissez-faire approach that, in its purest form, eschews any attempt to guide the economy, relying instead on market forces to determine the speed, direction, and nature of economic evolution.

By the late 1960s the majority of the world’s countries conducted their economic affairs within the framework of a national economic plan. But in the 1980s the theory and practice of economic planning went through a crisis. In the developed market economies the rate of economic growth slowed from the very high levels reached in the 1960s and ’70s, and unemployment rose significantly. At the same time, public confidence in the ability of governments to influence for the better the performance of the economy diminished. As a result, the popularity of national economic plans waned and the scope left to the free play of market forces widened. In developing countries, forms of economic planning practiced earlier yielded disappointing results characterized by the growth of heavy state bureaucracies and inefficient public enterprises. In these countries also, although the role of the state remained preponderant, market forces were increasingly relied upon to improve economic performance. In the Soviet Union and its satellites, the backward state of the economy and widespread examples of waste and inefficiency led to attempts to introduce more market solutions into the process of economic planning. These attempts proved largely unsuccessful, however, and the inherent rigidity of the Soviet economic model proved an important factor in the collapse of communism in eastern Europe and the Soviet Union itself, beginning in 1989.

The nature of economic planning

Historically, the idea of central economic planning was associated with the criticism of capitalism as a system of anarchy and greed. Marxist critics did not give much thought to how the economy would be run after capitalism had been abolished; most of them professed to see no difficulty in organizing the society that would follow. When in 1917 the new Soviet government found itself the owner of all the means of production, it had no blueprint as to what to do next. The evolution of central economic planning in the Soviet Union was largely a pragmatic affair; methods were tried and discarded, and new ones were introduced. The decision in 1927 to undertake rapid and large-scale industrialization required the centralizing of control, since only the government could undertake the task of marshaling the productive resources of the country to achieve its ambitious aims.

In western Europe, economic planning is adapted to a diversified economic structure, a dynamic class of business managers, and a long tradition of political and economic liberty. Consequently, although planning implies an extension of the economic responsibilities and activities of the state, the mainspring of economic growth remains the private sector. Only rarely does the state intervene directly in the affairs of individual firms. Economic planning remains indirect and takes the form of collaboration between the public and the private sectors. Producers and consumers are free to adapt their activities to changes in market conditions and relative prices. In the 1980s there was a general trend for governments to sell state-owned enterprises to the public and to reduce the extent of public regulation of particular sectors, such as air transport.

Communist methods of planning after the mid-1950s entered a state of flux, and the highly centralized administrative type of planning inherited after World War II from the Soviet Union by all the newly established communist states underwent considerable modifications. In Yugoslavia planners followed policies very different from those of the Soviet model, and differences also emerged in the practice of other eastern European countries. In the Soviet Union itself, a debate concerning the most appropriate means for implementing plans went on for some years, but, despite numerous efforts on the part of the government to reorganize the machinery of planning, the fundamental drawbacks of central economic planning were never overcome. The Soviet Union’s attempts in the late 1980s to reform its planning machinery had the unintended effect of bringing down the whole structure of central economic planning, and with it the Soviet government itself. By the early 1990s the postcommunist governments of eastern Europe and of the states of the former Soviet Union had begun making a painful transition to the diversified economic structure typical of the economies of western Europe.

In the meantime, the knowledge of the Soviet-bloc countries’ long-standing difficulties had given rise in many developing countries to a repugnance to Soviet planning methods, while the methods used in the developed noncommunist countries were felt to be not directly applicable, either. There was consequently no settled planning doctrine in the developing countries, and the approach of governments remained empirical. In practice, this meant that the state played a major role in setting up new industries and in modernizing agriculture, particularly in countries of recent independence. The state budget was a major source of savings, supplemented frequently by the local currency counterpart of foreign aid. But the absence of a highly qualified civil service placed limits upon the extent and efficacy of state action. Thus, in urban areas, privately owned businesses continued to supply most local consumer goods. In agriculture, peasant proprietorship or large private estates—particularly for export products—remained the general rule.

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