transitional economies

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The attempt to replace central planning with markets is one greatest economic experiment in history. In the study of geology, this would be comparable to a huge earthquake. In this section, we take a look at these so-called transitional economies.
Types of economic systems
What to produce, how to produce it, and for whom to produce it. Laws regarding resource ownership and the role of government in resource allocation determine the "rules of the game" the incentives and constraints that guide the behavior of individual decision makers. Economic systems can be classified based on the ownership of resources, the way resources are allocated to produce goods and services, and the incentives used to motivate people.
Resources in capitalist systems are owned mostly by individuals and are allocated through market coordination. In socialist economics, resources other than labor are owned by the state. For example, a country such as Cuba or North Korea carefully limits the private ownership of resources such as land and capital. Each country employs a slightly different system of resource ownership, resource allocation, and individual incentives to answer the three economic questions.
Enterprises and soft budget constraints
In the socialist system, enterprises that earn a "profit" see that profit appropriated by the stat. Firms that end up with a loss find that loss covered by a state subsidy. Thus socialist enterprises face what has been called a soft budget constraint. Capitalist economies equate quantity supplied with quantity demanded through the invisible hand of market coordination; centrally planned economies use the visible hand of bureaucratic coordination assisted by taxes and subsidies.
A common problem in the soviet system was that the amount produced often fell short of planned production. When the quantity supplied fell below the planned amount, central planners reduced the amount supplied to each sector, cutting critical sectors such as heavy industry and the military the least and cutting lower- priority sectors such as consumer products the most. Evidence of shortages of consumer goods included long waiting lines at retail stores; empty store shelves; the "tips", or bribes, shop operators ...