Planned Economy Vs Market Economy Essay

2280 words - 9 pages

Chapter 5 - Guiding Development: Markets versus Controls, page 1 of 6
• capitalist market economies vs. socialist planned economies: • the extreme distinction between market and planned economies is often used • the textbook discusses the "march to markets" to refer to both the transition from socialism in centrally planned countries and the increasing liberalization in LDCs • the difference in efficiency between a market and planned system depends largely on how each deals with 1) information and 2) incentives
• incentives: • it is argued that the profit motive is the most reliable way to increase output, cut costs, innovate, and meet unmet wants • in socialist economies, public-mindedness was an insufficient incentive, so promotions and raises were offered to managers who met the goals of government planning; although these might have helped managers achieve quantitative goals, they did not encourage them to cut costs, innovate, and meet unmet needs
• advantages and disadvantages of market economies and planned economies:
Market EconomyPlanned Economy Advantages Disadvantages Advantages Disadvantages
1. better provision of incentives
1. the market satisfies demand but might not meet needs
1. successful at rapid industrialization and structural change
1. enterprises tended to be oriented toward increasing quantity of output but not quality
2. better uses local information and conveys global information more cheaply (in prices)
2. public goods not automatically supplied
2. tended to have less income and wealth inequality and higher levels of literacy and basic health care
2. economies as a whole were not technologically dynamic
3. market power - monopolies, cartels, etc.
3. despite high saving rate, growth was slowed by low productivity of capital (high s, also high v)
4. possible negative macroeconomic outcomes
4. output mix lopsided - producer goods vs. consumer goods and agriculture
5. structural changes might be difficult
5. political repression
• advantages of a market economy: 1) incentives:
• the profit-motive has been the best way to motivate; although people can be motivated to work for moral commitments, etc., this has not worked on a large scale for a national economy; changing people's psychology through propaganda did not work over a sustained time period • mimicking market incentives for managers helped meet physical quantity goals, but did not help reduce cost, create better products, etc.;

Chapter 5 - Guiding Development: Markets versus Controls, page 2 of 6
this is similar to the problem with paying workers on a piece-rate basis (workers neglect quality, maintenance of equipment, etc.)
2) information: • in a market economy, local decision makers use their information without having to convey it up a decision hierarchy; the global information they need is transmitted to them through the price system; prices are an automatic byproduct of exchanges in markets •...

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