Economists prefer to advance many reasons for the push from centralized planning to market mechanisms. First, centralized planning often worked well in the early stages of developing industry, but with the enormous growth and complexity of economies and technologies, centralized planning falls short in taking into considerations all of the variables that may affect the economic system (Alchian and Demsetz, 776). In such a complex economic system, therefore, centralized planning becomes inherently flawed because it cannot acquire all of the required information for the decision-making. The centralized planning cannot deal with the self-interest of people, so people do not feel motivated. However, public services are never better performed than when their reward comes only in consequence of their being performed, and is proportioned to the diligence employed in performing them. Therefore, capitalist market is considered to be superior not only to planning in the socialist countries but to all kinds of state intervention in the capitalist countries.
In contrast to the centralized system, a market place is considered free of government interference, where individuals voluntarily exchange goods and services among each other as a means of promoting their mutual welfare. As long as both buyers and sellers inherit similar means of information, they can look for their best interests. This kind of self serving interests work far better than a centralized planning. In practice, markets for many goods provide extremely rapid response to changing circumstances and changing demands. In other words, as contrast to the centralized planning, the market serves as a best known method of resource allocation to best satisfy the preferences of the people. However, in a centralized economy, the planners are required to do a lot of computing to find the best allocation of the resources.
One way to deal with the problem of centralized planning is that traditional planners make good choices of methods on a local basis, but a market-guided planning system makes choices based on global assessments of importance, overcoming the limitations of the traditional local choice methods. Improving the choices of traditional planners are considered as a problem of bringing more knowledge to make decisions on the individual choices of methods for achieving each task, and this has proved difficult as increasing complexity of the activity requires taking a larger and larger perspective in these choices (Kornai, 78-83).
In contrast, the advantage of the is that it provides a means for constructing comprehensive perspectives quickly using only application of the knowledge local to each method, with iterative adjustment of prices.
Thus in the market-guided approach, no one needs know everything; the real knowledge is in the local methods, and the global market mechanisms serve only to combine the results of this knowledge in summary form. In sum, we believe that the centralized planning methods do not scale well to construction and maintenance of plans for . Most of this only as a problem of achieving a set of goals without necessarily achieving the best, since it does not motivate others to do the same thing differently. Therefore, it appears that while the intentions behind the centralized planning were fair, but the executions of the sets of ends were inherently difficult due to the growing complexity of the economies as well as the technologies. Moreover, as capitalistic system was motivated to work efficiently and earn a profit because of the use of the efficient methods, there was no incentives in the centralized economy to make a capital investment for earning such profits.
Alchian, A. And Demsetz, H., Production, Information Costs, and Economic Organization. , 1972, 62, pp. 777-795
Kornai, J. The Socialist System: The Political Economy of Communism. Princeton: Princeton University Press, 1992.