232
SOCIALISM
LEADS TO
EMPTY SHOPS
SHORTAGES IN PLANNED ECONOMIES
A
fter an initial dramatic
rush of growth after World
War II the centrally
planned economies of Eastern
Europe faced increasingly obvious
problems. They could mobilize
resources on a large scale for well-
defined tasks, such as producing
military armaments, but seemed
to have difficulty meeting more
complex demands. Shortages
abounded, as—despite planning—
goods and services were not
delivered on time, in the required
quantity, or at an appropriate
quality. The gap between the East
and the West yawned wider.Soft budget constraints
In response, a number of regimes
attempted to introduce reforms to
the planning system. Hungary
went further than most, introducing
elements of market competition
from the 1960s onward. In theory,
this was supposed to introduce the
benefits of the market, provoking
innovation and expanding choice,
while retaining the ability of the
plan to deliver broad social goods
like full employment. In practice,
after some initial successes the
system continued to produce
shortages and inefficiency.IN CONTEXT
FOCUS
Economic systemsKEY THINKER
János Kornai (1928– )BEFORE
1870 Economists William
Jevons, Alfred Marshall,
and Léon Walras focus on
optimizing efficiency within
budget constraints.AFTER
1954 Gérard Debreu and
Kenneth Arrow identify the
conditions under which
demand equals supply in
all the markets of a
competitive economy.1991 The Soviet Union
collapses and central
planning ends.1999 Economists Philippe
Aghion, Patrick Bolton, and
Steven Fries publish The
Optimal Design of Bank-
Bailouts, arguing that banks
face a soft budget constraint.Socialism
leads to
empty shops.In planned economies, if
firms do not cover their costs,
the state steps in to protect
them from bankruptcy.This means that costs
(materials and labor) do not
have to be closely matched to
output or demand.In competitive markets
firms’ revenues must be
higher than their costs, or
they will go bankrupt.