Market economies and centrally planned economies

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The Making the Connection argues that a key difference between market economies and centrally planned economies, like that of the former Soviet Union, is as follows: In market economies, decisions about which investments to make and which technologies to adopt are made by entrepreneurs and managers with their own money on the line. In the Soviet system, these decisions were usually made by salaried bureaucrats trying to fulfill a plan formulated in Moscow. But in large corporations, investment decisions are often made by salaried managers who do not have their own money on the line. These managers are spending the money of the firm's shareholders rather than their own money. Why, then, do the investment decisions of salaried managers in the United States tend to be better for the long-term growth of the economy than were the decisions of salaried bureaucrats in the Soviet Union?

Reference no: EM131022765

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