I would like to express my agreement with Barkley Rosser's explanation of the soft budget constraint as a problem in market socialist economies where different levels of government extended credit to insolvent firms for political reasons, but as a problem that does not afflict centrally planned economies. In addition to the points Rosser has made, I might point out that since prices in centrally planned economies were in some measure arbitrary and not reflective of opportunity costs there was no REASON for central planners to conclude that firms running losses ON PAPER were necessarily socially inefficient and therefore should be shut down. Nor was there reason to conclude that firms running positive profits were necessarily operating in the social interest. But coherent central planning DOES have ways of figuring out which firms should and should not be shut down in the social interest -- which is not to say that central planners acted on this criterion. One last note of interest. A different market economy has often operated with a soft budget constraint -- Japan. Firms on good terms with MITI are often extended whatever credit they need to weather a financial crisis by comercial banks at the behest of the Bank of Japan. This means, if you were in the good graces of MITI you effectively had a soft budget constraint. Now this is not to say that MITI rewarded something other than social efficiency, nor that MITI did not extract a high price in terms of replacing management and changing corporate strategies in ex- change for bail outs. The Japanese were always surprised when the US Congress bailed out US companies who were "too big to fail" but then did not insist on requiring drastic changes in corporate management.
