Assignment
Fulfilling the plan 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 and sanatoria. 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). The overall national plan was thus internally consistent. If each of the enterprises achieved its production targets, there could not be, by definition, shortages or bottlenecks in the economy.
There would be full employment, with everyone working in an enterprise for which heshe had been specifically trained at school and university. The total wage bill for the economy, which was paid in cash, would be sufficient to buy all the consumer goods produced. There would be zero inflation and all the country's citizens would have access to housing, education and health care. Of course, in practice things rarely worked out as planned and since the late 1980s the ‘command economy' system has been progressively replaced with a more market-based system for allocating resources.
However, decades of economic planning meant that these 25 so-called ‘Transition Economies' began the reform process without having functioning markets for labour, goods or capital, since all three had been allocated by the central planner, in accordance with an internally coherent economic plan. Because all the means of production had been in state hands, there was, moreover, no legislative framework for the enforcement of property rights, the valuation and disposal of assets or the liquidation of unprofitable enterprises. Nor in a system of directed labour was there any official unemployment and, hence, no need for a social security system.
Questions
1 Why do you think the command economy failed to deliver many of the benefits claimed for it in this case study?
2 Can you find any clues in the case study to explain why the transition from a command economy to a market economy has proved to be so painful for many of these states?
3 What would you consider to be the potential advantages and disadvantages for these states seeking to move from a command to a market economy?