What Is a Centrally Planned Economy?

A centrally planned economy, also known as a command economy, is an economic system where a government body makes economic decisions regarding the production and distribution of goods. Centrally planned economies are different from 澳洲幸运5官方开奖结果体彩网:market economies, where these decisionওs are the result of thousands of choices by producers and consumers.

The production of goods and services in planned economies is often done by 澳洲幸运5官方开奖结果体彩网:state-owned enterprises, although independent companies may sometimes be incorporated into economic planning. Prices, wages, and production schedules are typically set by a centralized 澳洲幸运5官方开奖结果体彩网:bureaucracy.

Understanding Centrally Planned Economies

Central planning is frequently associated with 澳洲幸运5官方开奖结果体彩网:Marxist-Leninist governments such as the Soviet Union, North Korea, and East Germany. For most of their hisꦬtory, market activity was extremely limited in these countries and the governments directed economic activity through state-owned enterprises.

After World War II, many socialist countries chose to adopt economic planning in order to focus resources on government priorities that may not be adequately served by market forces alone. Moreover, since these countries were ideologically opposed to 澳洲幸运5官方开奖结果体彩网:private enterprise, central planning also helped eliminate 澳洲幸运5官方开奖结果体彩网:capitalist modes of production.

While central planning is typically associated with 澳洲幸运5官方开奖结果体彩网:socialist or 澳洲幸运5官方开奖结果体彩网:communist political systems, many other countries may enact elements of economic planning in times of war or national emergency. For example, many countries implemented 澳洲幸运5官方开奖结果体彩网:rationing systems during the world wars in order to prevent shortages and 澳洲幸运5官方开奖结果体彩网:control the prices of essential goods.

Advocates of Central Planning

Advocates of central planning believe that the government can direct economic investment more efficiently than private actors, especially towards social goals with lower potential for profits. Moreover, since the planning authority has more resources than any single company or business, government projects can also benefit from economies of scale that make government projects more productive in🌌 the long run.

However, in order to coordinate among different producers and resources, central planning typically requires a highly educated technical bureaucracy. This creates something of a paradox for socialist countries since the bureaucrats may take the role of a de facto ruling class.

Criticism of Central Planning

The concept of central planning is subject to heavy criticism, especially from scholars in the 澳洲幸运5官方开奖结果体彩网:Austrian school of economics. One major critique, associated with 澳洲幸运5官方开奖结果体彩网:Friedrich Hayek, is that central p🅘lanners cannot efficiently respond to supply and demand.

In a market economy, businesses respond to price signals by increasing or decreasing the production of their goods. Meanwhile, in a planned economy, there are no price signals, so planners cannot accurately forecast 🔯which products will be needed or adapt to changing conditions. This means that there may be unnecessary shortages or surpluses of certain goods.

Another critique is that command economies may be less efficient due to the lack of competitive pressures. While private companie🧔s must avoid waste in order to remain profitable, enterprises in a command economy have no pressure to earn profits or reduce expenses.

Examples of Centrally Planned Economies

Central planning is typically associated with the formerly communist countries of Eastern Europe and the Soviet Union, as well as the contemporary governments of Cuba, China, and parts of Asia. In each of these examples, the state acted as the principal manufa🦄cturer, distributor, and employer in almost all sectors of the economy.

Almost all of these countries abandoned central planning in favor of a capitalist or 澳洲幸运5官方开奖结果体彩网:mixed economic model starting in the 1980s. In some cases, such as in China, the privatization of state assets, combined with an influx of foreign investment, resulted in extremely rapid 澳洲幸运5官方开奖结果体彩网:economic growth.

The Bottom Line

In contrast to market economics where producers and consumers affect the economy, centrally planned economics rely on a central authority, such as a government, to make t🍷he major economic decisions in regard to th൩e production and distribution of goods and services.

Centrally planned economies are generally heavily criti𓆉cized and few economies practice it, with most having shifted to mixed models including private enterprise.