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Managerial Economics and Organizational Architecture

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Discuss the differences between markets and central planning. Does this issue have anything to do with the demise of the Soviet Union? Explain.

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Hi there,

Here is some information for you on central planning:

Those who designed the Soviet economic system began with a belief that "the problem with capitalism is that it produces for profit instead of for people's needs," and they set out to build a system that produced directly for people's needs and not at all for profit. "There was a period early in Soviet life when it was argued that the Soviet worker and manager would work because of their enthusiasm for the revolution and their ideological fervor. That phase passed rather quickly."1 Because use of markets violated Marxist ideology, there was only one system of coordination possible. A system of central planning evolved; a system in which all decisions about what people needed were decided from the top.

To see how this system worked, consider how the operator of a shoe factory in the United States would make decisions. His major concern would be whether he could sell at a profit the shoes he made. In the Soviet Union, however, profit was of no concern to the manager of the state-owned shoe factory. Neither did he worry about selling the shoes. His only concern was to produce what he was told to produce, and if he could do that, both he and the workers of the plant received sizable bonuses. The problem the Soviet Union had was that it is very difficult to specify in physical terms what a manager should do. (If you do not believe this, try to write down a set of instructions specifying what sort of shoes should be produced. Remember, instructions to produce "good shoes" or "attractive shoes" involve instructions that are not measurable.) The Soviet Union produced huge numbers of shoes that no one would buy because they were of such low quality.

Or consider a nail factory. If it were told to produce as many nails as possible, it would produce only small nails. If told to produce as large a weight as possible, it would produce only very large nails. The Soviet Union wasted billions of rubles searching for energy because it rewarded drilling crews on the basis of the number of feet drilled. Because it is easier to drill many shallow wells than a few deep wells, drillers drilled lots of shallow wells, regardless of what was advisable geologically.

Unwanted incentives can be given whenever there are attempts to measure performance. In a series on the Soviet Union, the Chicago Sun Times reported a case in ...