“A major reason the economy of the former Soviet Union collapsed was due to a lack of incentives that are provided by the profit system.” Evaluate

Question

Please provide the best answer for the statement.

Answer 1

A very good case can be made in favor of this statement. The centrally planned system had to rely heavily on the efficient use of resources through better management and increased productivity, but it was those aspects of Soviet central planning that had the greatest flaws.
The profit system would have provided incentives for innovation, productive efficiency, and allocative efficiency that were lacking under the planned system. For example, under a profit system, resources would move toward their most efficient use where they are most in demand. In the planned economy, resources go where the planners direct, which may not be best in terms of society’s goals. This meant that consumers had less incentive to work since they couldn’t get what they wanted for their efforts. It meant that managers had little incentive to minimize costs, because rewards were based on fulfilling the plan rather than on being efficient. They also had little incentive to innovate or take risks because the reward structure was such that there were penalties for failure, but no economic profits waiting for those who successfully innovated or took risks.
It is the combination of a lack of work incentives and incentives to innovate which point to the conclusion that a profit-based system would have enhanced Soviet economic growth.