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Does a Planned Economy Perform Well? | Here’s Why It Does
Over the last century, one of the lessons we have learned is that planned economies do not work very well. The Cold War taught us this vital lesson, and since the abolition of the Soviet Union in 1991, the majority of the world has agreed that a capitalist system, while flawed, usually yields better economic results.
But should the government ever interfere with the running of a country?
A free market economist would say, no. A free market economist frowns upon any form of government intervention, arguing that it just causes distortions in the markets which they are prevented from recovering from. Free market economists point to the failures of the USSR and North Korea, using these countries as prime evidence of their belief system.
What Does Free Market Theory Suggest?
It suggests governments can and do play a crucial role in economic growth.
One of the big drawbacks of the perfect competition model, is that it assumes that people are rational and have perfect knowledge. This is certainly not the case in the real world. Using models to determine our actions can therefore be at our own peril.
The state often has better knowledge than individuals that make up a country. They also often have more intelligence than individual firms. This knowledge can be used to support the economy.
This is precisely what happened in South Korea. While South Korea is not a planned economy, they assisted in steering the electronics giant, LG, down the path they are today. LG originally wanted to focus on the textiles market. Luckily, the government disagreed with this move and they pushed LG towards focusing on electronics.
As Westerners, we usually look upon the Middle East and Far East Asia as completely unrelated parts of the world. So here’s another example.
The US government also carefully supported the early development of certain industries. These industries include internet, biotechnology and the aircraft industries.
Why did government planning not work in the case of Soviet Russia?
There is a fine line between government intervention and government control. The key is not to control too much, otherwise markets will have no freedom at all, and there will be a lack of innovative spirit.
The government should really act more like a company’s CEO. The CEO of a company sets strategic goals and ensures that their business is heading in the right direction. The CEO is invested in the business, so gains welfare when the business does well. The CEO looks far into the future of the company, trying to predict what challenges are going to come up in the next 5, 10, 15 or 20 years.
To achieve this, the state should focus on setting loose goals such as achieving economic targets: economic targets like inflation, unemployment and economic growth. They can even manipulate interest rates to a degree to help achieve economic prosperity. In this case, the country is more likely to become successful.
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