The Socialist Planned Economy: The Price System Eliminated

All earlier chapters have rested on the assumption that prices are formed by the interplay of supply and demand in the world market. The distortions we have scrutinized so far modify the functioning of the market but do not eliminate the price system as such. There is another way of allocating resources in an economy, however: with the aid of administrative processes where planning plays a decisive role. The planning system may function in different ways in practice. Here we will concentrate on looking into the effects of the ‘purest’ variety, the type of planned economy applied in the Soviet Union and a number of Eastern and Central European countries until the early 1990s. In this system there was, in principle, no place for the market at all, even if reality never quite lived up to that ideal. (In several Eastern European countries fragments of a private sector survived. Moreover, illegal, black markets were a reality in all planned economies). Now we know, however, that the system functioned badly and finally it crumbled completely, so that today only North Korea and Cuba remain as orthodox planned economies. From what we know it seems highly unlikely that the planned economy could ever return as an economic system. In this chapter we will show how this type of economy functions and why the experiment of economic planning was unsuccessful.