Asklemmy

It’s because in a capitalist or other market driven system, economic planning is decentralized.

Let’s say trucks become really popular. There’s a lot of demand for trucks, so you can charge a higher price and make more profit. People want to buy 1000 trucks a day but only 500 are being built per day. Demand exceed supply. You’re making bank.

Other people see that profit and want a piece so they decide to build a truck factory of their own. Let’s say 10 people decide to make a factory and each factory is capable of making 100 trucks a day.

You’ll note this increases the total supply of trucks to 1500, the original 500 plus additional capacity of 1000.

But these factories take some time to build so for a while everyone is happy. Slowly and gradually supply catches up to demand but only slowly. At first we reach 600 trucks per day, then 700, then 800… demand still exceeds supply so the economy is growing and we are all making profit.

But then the rest of the factories get finished. Now we are making 1500 trucks per day which exceeds demand. Now we have a problem. Now supply exceeds demand and the price of trucks crash which means we can’t pay back the loan we took to fund our factory.

We overinvested in the capacity to build trucks because we all wanted a piece of that profit, and as a result of over investing we have now crashed the market for trucks because we are simply making too many trucks.

This creates a cascading effect in the economy since now the market needs to “correct” this imbalance, which is economics-speak for some of us need to go bankrupt and shut down our factories since the market only supports 1000 trucks per day but we are making 1500.

As some factories start losing money, we lay off staff, some of us start going bankrupt which means the banks (we got a loan from to build our factories) have to take a loss. The economy is now in recession because in our earlier exuberance to chase that amazing profit we built too much capacity and over invested creating a “bubble” in the market. Bubbles have to pop to restore equilibrium.

You don’t get this dynamic in a centrally planned economy because in a centrally planned economy we can make a more straightforward investment decision: there is demand for 1000 trucks but we are only making 500, so only create capacity for 500 more trucks. Since our centralized planning allows for a coordinated investment decision with access to full economic data, we don’t over-invest meaning we don’t create excess capacity meaning there is no need for a “correction”.

A market based system is decentralized. Every corporation is making their own investment decisions, each corporation is trying to make and sell as many trucks as they can. A corporation doesn’t care if the economy as a whole is making too many trucks, their sole interest is to sell as many of their trucks as possible which is why a market system results of cycles of over- and under- supply.

It’s a cycle. Capital chases profit and invests in production, leading to first a boom as production soars but then inevitably leading to a bust as capital keeps piling in chasing that profit result in over-investment and excess capacity.

Markets are decentralized. A socialist system is centralized meaning it can make decisions that take the entire economy into consideration instead of only the immediate interests of a single corporation.

Obviously this pretty idealized and all actually existing socialist systems have had at least some degree of internal markets and all have had exposure to markets in the form of international trade so you still see ups and downs in centrally planned economies since an economy is never fully centralized or fully decentralized.

Also in socialist systems there is still the risk of over-investment due to bad decision making or inaccurate economic data, or eg in the USSR the economic interests of the collective farms were over-protected which resulted in something analogous to overinvestment in agriculture so there is also political risk, etc.

So you still saw periods of economic stagnation in socialist systems but the swings are massively dampened. Also with centralized planning the state can more easily intervene to correct these issues when they arise (assuming the political will exists) which makes it easier to reboot the economy when things go awry - eg the socialist economies recovered more rapidly following WW2.

The main drawback is that a socialist economy can be less responsive to demand. Like, if blue jeans suddenly become very fashionable, in a socialist system the economic planners might be worried that denim is a passing fashion trend and averse to the risk of over investing in denim production, whereas in a market system the corporations will say fuck it let’s make money today and let the future worry about excess supply issues not my problem I’ll already be rich.

So the benefit of central planning is that growth is more stable and sustained at the cost of being potentially less responsive, whereas a market economy can be very responsive but at the cost of boom-bust cycles, and at the cost of concentrating enormous political and economic power into the hands of the individuals who own the factories.

China for example seeks to get the benefit of both in a partially mixed system where consumer products and growth industries that are more likely to see rapid shifts in demand are left to private industry while the backbone of the economy that is more stable (eg mining, energy generation, etc) are subject to planning directives.

The other comments here do not mention the most important part: the fiscal recession cycles caused by publicly traded, unregulated markets. In other words, the predictable 8-year pattern of booms and busts - the creation of a speculative bubble of growth followed by that bubble popping - that defines modern Capitalist economies.

No recession or depression in recent memory has truly been caused by a mismatch of supply and demand. Instead, they are caused by our complex financial investment apparatus; they have nothing to do with the "producing and buying things" side of Capitalism and everything to do with the "Moving money around" side of it. A thing - real estate, tech startups, comic books, whatever - begins to grow in value not because it is actually worth more but because people are speculating on its future value.

This is why Uber keeps growing in valuation despite never making a profit: the people buying Uber stock are not betting on Uber making a profit, but that other people will buy Uber stock in the future, further increasing the price of the shares. This is a bubble that will eventually burst, when they run out of potential investors to keep propping up the share price - but you maximize return on investment if you jump ship at the very last moment.

The '08 housing crisis is a great example. It followed an almost identical speculative bubble, except with mortgage-backed securities.

While these things will happen to some extent in Socialist countries with market economies, there are two reasons why they hit Capitalist countries extremely hard.

The first is that modern Capitalism has made every person into their own little Capitalist. Retirement funds are tied to the stock market, rent and housing prices aren't fixed. Ephemeral financial-sector bullshit affects ordinary people when it has no reason to.

The second is that strong regulation can prevent the worst effects on ordinary people. Socialist governments can fix prices and forgive debts in order to minimize the effects of a fiscal downturn.

Every country can have some years that are better than others. That's just the nature of reality. Socialist countries don't generally have recessions the same way capitalist ones do because capitalists can exploit them to increase their wealth at the expense of everyone else, so they've stopped being a bug and become a feature.

They can have recessions, depending on how plugged in their economy is to the broader international capitalist market. But often socialist countries don't because the capitalist free market operates on supply and demand self-correction. This is dipping a bit into control theory and dynamic systems, but broadly, you get oscillations (business cycles) if there are delays and/or too much correction/amplification of signals. So, if there is unmet demand, it is overshot or as the market is correcting, the demand reduces, so that there is overproduction. This overshoot, is often seen as a bubble inflating and bursting.

But to get to why this can be avoided in socialist countries, we have to recognize that this is one of the few dimensions where central planning, even very flawed and crude versions, is robust. The planners can say "we have a demand of 500 units, and only 400 were delivered, increase production by 25%." Where multiple competing enterprises could just say "There is a market for 100 more units. So expand production by a significant fraction of that (leading to the many competing firms to produce a factor more)". Because of the lack of coordination, and the incentive to try to capture a large fraction of a market for profit, a lot of these self-correction mechanisms in capitalism overshoot their targets, causing a firm to go into bankruptcy and not pay back debts. But any form of planning can somewhat dampen that, even if fluctuations and errors can lead to some overproduction or shortfall.

What countries do you mean