Understanding the Power and Challenges of a Centrally Planned Economy
A centrally planned economy, or command economy, is an economic system where a government body makes key economic decisions about the production and distribution of goods. This stands in contrast to market economies, where decisions stem from choices made by producers and consumers.
In centrally planned economies, the production of goods and services typically involves state-owned enterprises, although independent companies may sometimes be included in the planning. Prices, wages, and production schedules are usually determined by a centralized bureaucracy.
Key Takeaways
- In a centrally planned economy, major economic decisions are made by a central authority such as the government.
- Centrally planned economies differ from market economies, where individual consumers and profit-seeking private firms make most economic decisions.
- Central planning enables the government to mobilize society’s resources for goals that may not be achieved through market forces alone.
- Central planning is commonly associated with socialist or communist forms of government.
- Other countries may resort to central planning in times of war or national emergencies.
Exploring Centrally Planned Economies
Central planning is often associated with Marxist-Leninist governments such as those of the Soviet Union, North Korea, and former East Germany. In these countries, market activities were extremely limited, and the government directed economic activities through state-owned enterprises.
Post World War II, many socialist countries adopted economic planning to concentrate resources on government priorities not adequately served by market forces. Additionally, these countries were ideologically opposed to private enterprise, and central planning helped eradicate capitalist modes of production.
While central planning is usually linked with socialist or communist political systems, other countries may enact elements of economic planning in times of war or national emergencies. For instance, many countries implemented rationing systems during the world wars to prevent shortages and control the prices of essential goods.
Although few countries today can genuinely be described as purely command economies, even North Korea sees more economic activity in the private sector than the state.
The Theory Behind Central Planning
Proponents of central planning argue that the government can direct economic investment more efficiently toward social goals that have less profit potential. With greater resources than any single company or business, the government can achieve economies of scale, making projects more productive in the long run.
However, coordinating among various producers and resources necessitates a highly educated technical bureaucracy, creating a paradox in socialist countries as bureaucrats may evolve into a de facto ruling class.
Criticisms of Centrally Planned Economies
Central planning faces substantial criticism, particularly from Austrian school economists. Friedrich Hayek argued that central planners cannot efficiently respond to supply and demand without price signals, leading to potential shortages or surpluses.
Critics also contend that command economies lack competitive pressures, resulting in inefficiencies. Private companies must avoid waste to remain profitable, but enterprises in a command economy are not subjected to similar pressures.
Real-World Examples of Centrally Planned Economies
Central planning was a hallmark of former communist countries in Eastern Europe and the Soviet Union, as well as current governments in Cuba, China, and parts of Asia. In these environments, the state was the primary manufacturer, distributor, and employer in nearly all sectors.
Beginning in the 1980s, most of these countries transitioned to capitalist or mixed economic models. In China, this shift to privatization, paired with foreign investment, led to extremely rapid economic growth.
The Current State of Centrally Planned Economies
Though central planning once dominated Eastern Europe and much of Asia, most of these economies have since adopted free market systems. Words like Vietnam, Laos, Cuba, and China sustain elements of economic planning while welcoming private enterprise. Today, only North Korea can be classified as a genuine command economy, despite some underground market activities.
Decision Making in Planned Economies
In a planned economy, crucial economic decisions are made by political or administrative bodies, involving local administrators sending their capacity and needs data to central authorities. Using this information, a nationwide economic plan is crafted, revised, and finally submitted to the government or legislature for approval.
Do All Socialist Countries Use Central Planning?
Not all socialist countries utilize rigid central planning. Some incorporated market price signals or private enterprise into their economies. Examples include market socialism in the former Yugoslavia, the Socialist Market Economy in Vietnam, and the economic reforms initiated by China under Deng Xiaoping.
Related Terms: market economy, state-owned enterprises, bureaucracy, socialism, communism.
