Definition – A centrally planned economy is an economy where decisions on what to produce, how to produce and for whom are taken by the government in a centrally managed bureaucracy.
Central planning is also referred to as a ‘Command economy’ or ‘Communist economy.’
WIth Central planning, the theory is that the government will take ownership of the means of production and run the economy in the interest of workers. The theoretical basis of a planned economy stems from the work of Karl Marx
“To my mind, the so-called ‘socialist society’ is not anything immutable… It’s crucial difference from the present order consists naturally in production organized on the basis of common ownership by the nation of all means of production.”
- Karl Marx (Letter to Otto Von Boenigk (1890)
In theory, a Centrally planned economy can overcome market failure and achieve equality of distribution. Supporters of centrally planned economy argue that when economic decisions are left to the free market – monopolies emerge to exploit consumers. Furthermore, the Capitalists (those who own private property) can earn money through exploiting the labour of others. A centrally planned economy allows a fair distribution to all and not just the capitalist class.
The Soviet Union often announced ‘5-year plans’ where targets for steel production would be created. In the period 1928-40 and after the Second World War, these Five-year plans were very successful in terms of expanding the Soviet Union’s industrial production. The Soviet Union achieved very rapid rates of economic growth. However, by the 1960s, the system was struggling with corruption, inefficiency and a lack of incentives.
The rapid economic growth of the Stalin years also occurred against a backdrop of political repression.
Examples of Central Planning
- The Soviet Union 1917-1991 and Soviet Bloc
- China until the late 70s
Features of a Centrally planned economy
- Ownership by government
- Decisions on what to produce, how to produce and how to distribute goods taken at national bureaucratic level
- Prices usually set by price controls rather than market forces.
- Distribution according to ration books.
- Production could be planned for five or ten years in advance
- Requires more levels of bureaucracy to manage and plan economic decisions
- Scope for inefficiency due to lack of incentive
- Scope for corruption due to power of bureaucrats
- Often required degree of political control and censorship.
Problems of Central Planning Economies
- Governments poor at predicting future trends.
- Lack of incentives when income is guaranteed.
- Inflexible. Difficult to respond to shortages and surpluses
- Greater scope for corruption
- Planned economies often associated with greater political repression
- People achieve targets for the sake of it, rather than what is needed. There was a joke in the Soviet Union made by workers “They pretend to pay us, and we pretend to work.” The goal was often to achieve targets, rather than really meet needs, therefore as much effort went into massaging figures and reports and producing socially useful goods.
Centrally planned economy vs Free market economy