This article is about an economic system based on centralized planning. For economic systems that employ decentralized forms of planning, see Decentralized planned economy.
A planned economy is an economic system in which decisions regarding production and investment are embodied in a plan formulated by a central authority, usually by a public body such as a government agency. Although a planned economy may be based on either centralized or decentralized forms of economic planning, it usually refers to a centrally planned economy. Central planning aims to improve productivity and coordination by enabling planners to take advantage of more perfect information achieved through a consolidation of economic resources when making decisions regarding investment and the allocation of economic inputs.
In an entirely centrally-planned economy, a universal survey of human needs and consumer wants is required before a comprehensive plan for production can be formulated. The public body responsible for production and resource allocation would need to allocate factors of production in order to fulfill the plan targets and oversee the distribution system of the economy. In some cases, the most extensive form of a planned economy is referred to as a command economy, or command and control economy. In such economies, central economic planning by the state or government directs all major sectors of the economy and formulates decisions about the use of economic inputs and the means of production. Planners would decide what would be produced and would direct lower-level enterprises and ministries to produce those goods in accordance with national and social objectives. Implementation of this form of economy is sometimes called planification.
Planned economies are held in contrast to unplanned economies, such as the market economy and proposed self-managed economy, where production, distribution, pricing, and investment decisions are made by autonomous firms based upon their individual interests rather than upon a macroeconomic plan. Less extensive forms of planned economies include those that use indicative planning as components of a market-based or mixed economy, in which the state employs "influence, subsidies, grants, and taxes, but does not compel." This latter is sometimes referred to as a "planned market economy".
A planned economy may consist of state-owned enterprises, cooperative enterprises, private enterprises directed by the state, or a combination of different enterprise types. Though "planned economy" and "command economy" are often used as synonyms, some make the distinction that under a command economy, enterprises need not follow a comprehensive plan of production. That is, a planned economy is "an economic system in which the government controls and regulates production, distribution, prices, etc." but a command economy, while also having this type of regulation, necessarily has substantial public ownership of industry. Therefore, command economies are planned economies, but not necessarily the reverse.
Beginning in the 1980s and 1990s, many governments presiding over planned economies began marketization (or as in the Soviet Union, the system collapsed) and moving toward market-based economies by allowing individual enterprises to make the pricing, production, and distribution decisions, granting autonomy to state enterprises and ultimately expanding the scope of the private sector through privatization. Although most economies today are market economies or mixed economies (which are partially planned), fully planned economies exist in the remaining few countries of Cuba, Libya, North Korea, Saudi Arabia, Belarus, and Burma.
Economic planning versus the command economy
Economic planning is a mechanism for resource allocation of inputs and decision-making based on direct allocation, in contrast with the market mechanism, which is based on indirect allocation. An economy based on economic planning (either through the state, an association of worker cooperatives or another economic entity that has jurisdiction over the means of production) appropriates its resources as needed, so that allocation comes in the form of internal transfers rather than market transactions involving the purchasing of assets by one government agency or firm by another. Decision-making is carried out by workers and consumers on the enterprise-level.
This is contrasted with the concept of a centrally planned, or command economy, where most of the economy is planned by a central government authority, and organized along a top-down administration where decisions regarding investment, production output requirements are decided upon by planners from the top, or near the top, of the chain of command. Advocates of economic planning have sometimes been staunch critics of command economies and centralized planning. For example, Leon Trotsky believed that central planners, regardless of their intellectual capacity, operated without the input and participation of the millions of people who participate in the economy and understand/respond to local conditions and changes in the economy would be unable to effectively coordinate all economic activity.
Another key difference is that command economies are strictly authoritarian in nature, whereas some forms of economic planning, such as indicative planning, direct the economy through incentive-based methods. Economic planning can be practiced in a decentralized manner through different government authorities. For example, in some predominately market-oriented and mixed economies, the state utilizes economic planning in strategic industries such as the aerospace industry.
Another example of this is the utilization of dirigisme, both of which were practiced in France and Great Britain after the Second World War. Swedish public housing models were planned by the government in a similar fashion as urban planning. Mixed economies usually employ macroeconomic planning, while micro-economic affairs are left to the market and price system.
The People's Republic of China currently has a socialist market economy in place. Within this system, macroeconomic plans are used as a general guidelines and as government goals for the national economy, but the majority of state-owned enterprises are subject to market forces. This is heavily contrasted to the command economy model of the former Soviet Union.
Transition from a planned economy to a market economy
The shift from a command economy to a market economy has proven to be difficult; in particular, there were no theoretical guides for doing so before the 1990s. One transition from a command economy to a market economy that manyWho? consider successful is that of the People's Republic of China.
By contrast, the Soviet Union's transition was much more problematic and its successor republics faced a sharp decline in GDP during the early 1990s. One of the suggested causes is that under Soviet planning, price ceilings created major problems (shortages, queuing for bread, households hoarding money) which made the transition to an unplanned economy more difficult. While the transition to a market economy proved difficult, many of the post-Soviet states have been experiencing strong, resource-based economic growth in recent years, though the levels vary substantially. However, a majority of the former Soviet Republics have not yet reached pre-collapse levels of economic development.
Still, most of the economic hardship that struck many of the former East Bloc countries and the post-Soviet states comes from the program of shock therapy. The idea behind this program is to convert from a centrally planned economy to a market economy in a short space of time. This means mass-scale privatization, budget cuts and liberalization of economy and finance regulations. This shock therapy program was implemented in several former communist states like Poland and Russia.
Iraq, after the fall of Saddam Hussein following the 2003 invasion of Iraq, is currently experiencing the transition from a command economy under Hussein to a free market economy. Iran is currently privatizing companies.
Advantages of economic planning
The government can harness land, labor, and capital to serve the economic objectives of the state. Consumer demand can be restrained in favor of greater capital investment for economic development in a desired pattern. The state can begin building a heavy industry at once in an underdeveloped economy without waiting years for capital to accumulate through the expansion of light industry, and without reliance on external financing. This is what happened in the Soviet Union during the 1930s when the government forced the share of GNP dedicated to private consumption from eighty percent to fifty percent. As a result, the Soviet Union experienced massive growth in heavy industry.
The possibility of a digital planned economy was explored by Chile with the creation of Project Cybersyn, the project was a success in many ways but due to the lack of computer technology and need for constant human input was limited in comparison to modern and more advanced technology.
Fictional portrayals of planned economies
The World State in Aldous Huxley's Brave New World and Airstrip One in George Orwell's Nineteen Eighty Four are both fictional examples of command economies, albeit with diametrically opposed aims: The former is a consumer economy designed to engender productivity while the latter is a shortage economy designed as an agent of totalitarian social control. Airstrip One is organised by the intentionally sarcastically named Ministry of Plenty. Other literary portrayals of planned economies were Yevgeny Zamyatin's We, which was an influence on Orwell's work. Like Nineteen Eighty Four, Ayn Rand's dystopian story Anthem was also an artistic portrayal of a command economy that was influenced by We. The difference is that it was a primitivist planned economy, as opposed to the advanced technology of We or Brave New World.
In Ursula K. Le Guin's science fiction novel The Dispossessed, published 1974, mainstream capitalist and state socialist economies on the planet Urras are contrasted with an anarchist self-managed economy on its orbiting twin Anarres.
- Analysis of Soviet-type economic planning
- Five-Year Plans in the Soviet Union
- Eastern Bloc economies
- Gregory Grossman (1987): "Command economy," The New Palgrave: A Dictionary of Economics, v. 1, pp. 494–95.
- Carl Landauer (1947): Theory of National Economic Planning. University of California Press. Berkeley and Los Angeles, Second edition.
- Alec Nove (1987): "Planned economy," The New Palgrave: A Dictionary of Economics, v. 3, pp. 879–85.
- Myant, Martin; Drahokoupil, Jan (2010), Transition Economies: Political Economy in Russia, Eastern Europe, and Central Asia, Wiley-Blackwell,
- Alec Nove (1987), "planned economy," The New Palgrave: A Dictionary of Economics, v. 3, pp. 879–80.
- See Myant, Martin; Jan Drahokoupil (2010). Transition Economies: Political Economy in Russia, Eastern Europe, and Central Asia. Hoboken, New Jersey: Wiley. . http://www.wiley.com/college/myant.
- "Command Economy." Encyclopædia Britannica. 2007. Encyclopædia Britannica Online. 11 June 2007.
- James R. Barth and Gerard Caprio, Jr. China's Changing Financial System: Can It Catch Up With, or Even Drive Growth. Networks Financial Institute. March 2007; Thomas O Bouman and David George Brand. Sustainable Forests: Global Challenges and Local Solutions. Haworth Press 1997 page 91
- Myers, Danny. Construction Economics (2004), Spon Press (UK), p. 288
- Ollman, Bertell. Market Socialism: The Debate Among Socialists (1997), Routledge (UK), p. 12
- Alec Nove (1987), "Planned Economy," The New Palgrave: A Dictionary of Economics, v. 3, p. 879.
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- von Brabant, Jozef M. The Planned Economies and International Economic Organizations, Cambridge University Press, 1991, p. 16
- In Defense of Socialist Planning, by Mandel, Ernest. 1986. From "New Left Review": "Planning is not equivalent to ‘perfect’ allocation of resources, nor ‘scientific’ allocation, nor even ‘more humane’ allocation. It simply means ‘direct’ allocation, ex ante. As such, it is the opposite of market allocation, which is ex post."
- Writings 1932-33, P.96, Leon Trotsky.
- Paul Kennedy. The Rise and Fall of the Great Powers, pp. 322–3
- Анатолий Вассерман: Социализм уже возможен (Anatoly Wasserman: Socialism is Already Possible)
- An article against "The myth of the permanent arms economy"
- The Stalin Model for the Control and Coordination of Enterprises in a Socialist Economy
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