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In: Economics

Western observers of the planned socialist economic systems typically argued that these systems were “distorted.” What...

Western observers of the planned socialist economic systems typically argued that these systems were “distorted.” What does the concept of distortion mean, and why might it be relevant to an understanding of the transition process?

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Expert Solution

The central argument built against socialist economic systems based on planning is generally based on uses of dispersed knowledge. In this view socialism is unfeasible and cannot be aggregated by a single body and is effectively used for formulating a plan for entire economy, because doing this can result in distorted price signals.
Transition process is the changing the fundamental organization of the economy and making an entirely different free market institution. Reducing budget deficits, stabilization of the economy and expanding the credit availability of the economy is included in the transition process of the economy. The distortions lead to a pervasive slight budget constraints, misallocation of resources and rent-seeking. During the transition process a country adopts gradual, dual-track and pragmatic approach. In the process, stagnation and social and economic crisis begin to beset the economies. The socialists and many other developing countries should remove the distortions by making programs of liberalization, marketization and privatization with the aim of achieving efficient and best outcomes in less amount of time.


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