Explain why a centrally-planned economy might not grow as rapidly as a market economy

What will be an ideal response?

Technological change is very important for growth. Simply accumulating inputs will not ensure growth unless technological change occurs. This is essentially what happened in the Soviet Union. The Soviet Union failed to enhance growth when it simply increased its capital to labor ratio because it did not foster technological change at the same time. In a market economy, entrepreneurs make decisions about employing technology and seeking innovations. If the entrepreneur makes a correct decision, then he or she stands to make a large profit. In a centrally planned economy, these decisions are made by managers employed by the government. If the innovation works out, the manager may not reap any sort of benefit from it. Likewise, if the innovation fails, the manager's financial position is unaffected. Because of this, managers employed by the central government may be slower to adopt new technologies as compared to entrepreneurs in a market economy. The profit incentive spurs entrepreneurs in market economies to move more quickly.