How the Command Economy Functioned.

In the Soviet-style command economy, the broad categories of output were determined by political decisions. Military spending’ in the Soviet Union was always allocated a substantial part of output and scientific resources, while the other major priority was investment. Consumption claimed the residual output after the quotas of higher-priority sectors were filled. In large part, decisions about how goods were to be produced were made by the planning authorities .. Planners first decided on the quantities of final outputs (the to hat), Then they worked backward from outputs to the required inputs and the flows among different firms. Investment decisions were specified in great detail by the planners, while firms had considerable flexibility in deciding upon their mix of labor inputs.

The principal-agent problem crops up in organizations in all countries, but the Soviet model had few mechanisms (like bankruptcy in markets and elections for .public goods) to provide an ultimate check on waste.