Planned Economy

Definition and Overview

A planned economy, also known as a command economy, is an economic system in which a central authority, usually a government, has the power and responsibility to make all economic decisions. This includes determining what goods and services to produce, how to produce them, and who will receive them. This contrasts with a market economy, where such decisions are decentralized and made by individuals and businesses interacting in a market.

Characteristics

In a planned economy, the central authority makes decisions based on a comprehensive plan that outlines the society's economic goals and the means to achieve them. This plan is typically developed using a combination of economic forecasting and analysis, and it covers a specific period, often five years. The plan sets production targets and allocates resources, including labor, capital, and natural resources, to meet these targets.

Types of Planned Economies

There are several types of planned economies, each with its own unique characteristics and methods of planning and coordination.

Centrally Planned Economy

In a centrally planned economy, the central authority has direct control over all major economic decisions. It owns and controls all the means of production, including land, labor, and capital, and it decides what goods and services to produce, how to produce them, and who will receive them.

Socialist Planned Economy

A socialist planned economy is a type of planned economy in which the means of production are owned and controlled by the state, but economic planning is carried out in a democratic and participatory manner. This type of economy is often associated with socialist and communist countries.

Mixed Economy

A mixed economy combines elements of both market and planned economies. In a mixed economy, some sectors of the economy are left to private ownership and free market mechanisms, while other sectors have significant state ownership and government planning.

Advantages and Disadvantages

Like all economic systems, planned economies have both advantages and disadvantages.

Advantages

One of the main advantages of a planned economy is that it can focus on the long-term economic goals of a society, such as economic stability, full employment, and the equitable distribution of wealth and income. It can also mobilize and allocate resources on a large scale to meet these goals.

Disadvantages

However, planned economies also have several disadvantages. They can be less efficient than market economies, as the central authority may not have the necessary information to make optimal economic decisions. They can also be less responsive to changes in consumer preferences and market conditions.

Examples of Planned Economies

Several countries have implemented planned economies at various points in their history.

Soviet Union

The Soviet Union is perhaps the most well-known example of a centrally planned economy. From the 1920s until its dissolution in 1991, the Soviet Union's economy was directed by a series of five-year plans.

China

China also implemented a centrally planned economy after the establishment of the People's Republic of China in 1949. However, since the late 1970s, China has gradually transitioned to a more market-oriented economy.

Conclusion

In conclusion, a planned economy is an economic system in which a central authority makes all major economic decisions. While this system can focus on long-term societal goals, it can also be less efficient and responsive than a market economy.