THE TEACHING ECONOMIST - William A. McEachern                 

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Issue 5, Fall 1992

William A. McEachern, Editor

The Demise Of Central Planning

The demise of central planning around the world has been stunning and revolutionary. The initial formation of centrally planned economies and the recent emergence of market forces are two of the greatest economic experiments in history. Developments in these transitional economies offer a rich source of material for a wide range of economics courses: principles, intermediate micro and macro, public finance, industrial organization, international trade and finance, law and economics, development, environmental economics, money and banking, economic history, economic thought, government regulation of business, labor, and, of course, comparative systems. The issues raised also spill into the business disciplines of finance, accounting, marketing, and management.

These transitional economies vary both in their approach to central planning and in their subsequent approach to decentralization, or market reform. For example, some former republics of the Soviet Union are still controlled by Communist parties. Thus, the transitional economies have many faces--from the emerging stock market in Mongolia, where half the population is nomadic, to the family farms and tiny household factories in China, where markets are spontaneously taking root with little or no support from the Communist central government.

Prior to recent market reforms, most centrally planned economies had several features in common. Production was carried out by state-owned enterprises, which had little experience with the need to satisfy consumers. Prices were fixed below their market-clearing level, so there was an excess demand for goods. Private property rights to resources other than labor did not exist or were poorly defined. Domestic currencies were not convertible into foreign exchange, contributing to an isolation from global markets. These common characteristics resulted in a poor allocation of resources, obsolete capital equipment, deteriorating infrastructure, low worker productivity, and profound environmental problems.

In centrally planned economies, bureaucratic coordination replaced market coordination, so nonprice rationing emerged to cope with excess demand. In the former Soviet Union, the most visible forms of rationing were the long lines that formed spontaneously outside shops that had or were rumored to have had something of value for sale. Another way of dealing with the distortions that arose from fixed prices was bribery. Consumers bribed clerks to get desired products. Subordinates bribed superiors to get relief from the central plan's output requirements or to get vital resources. And first-time job seekers bribed officials to obtain jobs and university positions. Thus, prior to the market reforms, widespread corruption and lack of faith in formal institutions were woven into the social fabric of nearly all Soviet-type economies.

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