Question

give two different reasons why Hayek expected an economic collapse in every socialist country.

Each reason (A and B) must use economic fundamentals to demonstrate the problems expected by Hayek. (note: It is not sufficient simply to state that in the late 20th century many socialist countries collapsed, proving Hayek’s long term forecast. You must give two of Hayek’s reasons.)

Answer 1

Reason A :-

The socialist calculation debate:-

According to Hayek , the free market relies on the price mechanism where people decide how resources should be distributed on the basis of their willingness to pay money for specific goods and services. The price conveys information about the abundance of resources as well as their Desired demand which allows individual decisions and corrections that prevent shortages and surpluses in the free mechanism market. Socialism lacks method to rationally allocate resources as the prices are predetermined and there is no scope for conscious decisions that can be taken up by the firm in order to increase their profit margins by new innovations and new product line in the market there by creating redundancy in the market . The Matrix for taste and preferences of consumers is also unknown to the the market.

Reason B :-

Undemocratic nature of centralised planning:-

Centralised planning is inherently undemocratic in his view because the will of a small minority is imposed upon a large chunk of people and does not correspond with their desires. The freedom of choice for a large portion of people is progressively abandoned because centralised planning leads to totalitarianism .Socialism means aassuring equality to all ,however the the rights of minority are given more priority in comparison to others . Thus planning becomes coercive and is an inferior method of regulation while the competition of a free market is superior than the the centralised planning as free market is the only method by which our activities can be adjusted to each other without arbitrary intervention of authorities.

The two major economic problems attached with centralised planning is that centralised planning is not always accurate and can lead to severe economic downturn for the economy if it is not implemented correctly. Another problem which is created by centralised planning is that industrial houses choose not to invest in this type economy as they have no incentive to earn higher profits as the price is a pre determined by the government itself. This leads to outflow of capital, Technology and innovation outside the country.