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.
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.