Inefficient resource distribution surplus and shortage
Critics of planned economies argue that planners cannot detect consumer preferences, shortages, and surpluses with sufficient accuracy and therefore cannot efficiently co-ordinate production (in a market economy, a
free price system is intended to serve this purpose). For example, even though the
Soviet Union had its own passenger car manufacturing industry going back to 1940's, it was impossible for a Soviet citizen to simply walk into a store and buy a car - the entire output of all car manufacturing plants was allocated for years in advance. From the modern viewpoint, such a shortage indicates a mismatch between supply and demand - suggesting that planners have misjudged the demand for the product, the equilibrium price, or both. An imbalance, which would've been corrected naturally in a matter of years in a free-market economy, persisted for decades, while central planners turned a blind eye on it.
As the Soviet Union was collapsing, the system gradually became so unbalanced and shortages became so common that one could wait hours in a queue to buy basic consumer products such as shoes or bread.
[16].
This difficulty was first noted by economist
Ludwig von Mises, who called it the "
economic calculation problem". Economist
János Kornai developed this into a
shortage economy theory (advocates could claim that shortages were not primarily caused by lack of supply).
There is also the problem of surpluses. Surpluses indicate a waste of labor and materials that could have been applied to more pressing needs of society. Critics of central planning say that a market economy prevents long-term surpluses because the operation of supply and demand causes the price to sink when supply begins exceeding demand, indicating to producers to stop production or face losses. This frees resources to be applied to satisfy short-term shortages of other commodities, as determined by their rising prices as demand begins exceeding supply. It is argued that this "
invisible hand" prevents long-term shortages and surpluses and allows maximum efficiency in satisfying the wants of consumers. Critics argue that since in a planned economy prices are not allowed to float freely, there is no accurate mechanism to determine what is being produced in unnecessarily large amounts and what is being produced in insufficient amounts. They argue that efficiency is best achieved through a market economy where individual producers each make their own production decisions based on their own profit motive.