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What are disadvantages of centrally planned economies?

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Quick Answer

The disadvantages of centrally planned economies include the inefficient distribution of resources and the suppression of economic freedom. Centrally planned economies are generally associated with dictatorial political states.

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In a centrally planned economy, planners cannot accurately predict consumer preferences, surpluses and shortages, so they cannot efficiently allocate resources. This results in an abundance of goods that cannot be sold in some areas and a shortage of goods that are in high demand in others. In a free market economy, the allocation of scarce resources is dictated by the price system, so resources go where supply and demand dictate. One example of a centrally planned economy is the former Soviet Union, which operated as a centrally planned economy from the Bolshevik Revolution of 1917 until the 1991 fall of the Communist Party.

Central economic planning also stifles economic freedom, as citizens have no incentive to innovate or to take entrepreneurial risks. The desire to earn profit is a foundation of the free market system. Central planners suppress the profit motive by taking decisions from businessmen and transferring them to the government. Economist Adam Smith believed that society functioned best when the economy was guided by an "invisible hand" that rewarded personal economic freedom and risk taking. Central planning handcuffs the "invisible hand."

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