A centrally planned economy, also known as a command economy, is an economic system in which the state or government makes all economic decisions, including the allocation of resources, pricing of goods and services, and regulation of production and distribution. This is contrasted with a market economy, where such decisions are made by market participants based on supply and demand.
Core Characteristics
- Centralized Decision-Making: All major economic decisions are made by a single central authority, often the government.
- Resource Allocation: The government determines how to allocate resources efficiently to meet the needs and goals of the society.
- Price Control: Prices of goods and services are set by the government rather than by market forces.
- Production Targets: Government sets production targets and quotas for different sectors and industries.
- Limitation of Competition: Little to no competition exists as the government usually owns all significant entities involved in production and distribution.
Historical Context
Centrally planned economies were most prominently implemented in the 20th century, particularly in socialist and communist states. The Soviet Union, China, and East Germany are notable examples. The model was aimed at reducing inequalities and achieving rapid industrialization without the fluctuations and uncertainties associated with market economies.
Types of Centrally Planned Economies
- Pure Command Economy: An economic system in which all property is publicly owned and each person works and is paid according to their abilities and needs.
- Mixed Economy with Central Planning: A system that incorporates aspects of both centrally planned economies and market economies, allowing some private enterprise alongside central planning.
Special Considerations
- Efficiency Issues: Centrally planned economies often struggle with inefficiency due to the lack of competition and profit incentives.
- Innovation and Motivation: Such economies are typically criticized for stifling innovation and reducing worker motivation.
- Economic Growth: While these economies can achieve rapid initial growth, they often face long-term sustainability issues.
Examples
- Soviet Union: Highly centralized, with the government controlling all aspects of the economy.
- China (pre-1978): Centralized planning dominated until market reforms were introduced.
- Cuba: Continues to have a largely centrally planned economy.
Applicability
Centrally planned economies are often applied during wartime or in developing nations aiming for rapid industrialization. However, they have largely been phased out in favor of more mixed or market-oriented approaches.
Comparisons
- Market Economy: Decisions made by individuals and firms; less central control.
- Mixed Economy: Combines elements of both market and command economies; allows some level of private enterprise.
FAQs
What is the main advantage of a centrally planned economy?
- Predictable and stable production targets, potentially reducing waste.
What are the disadvantages of a centrally planned economy?
- Often inefficient due to lack of competition, poor innovation, and low worker motivation.
Can a centrally planned economy coexist with market elements?
- Yes, many countries implement mixed economies with aspects of both systems.
Related Terms
- Socialism: An economic system characterized by social ownership and democratic control of the means of production.
- Communism: An ideology advocating for a classless system where property is communally owned.
- Market Economy: An economy where decisions are guided by market mechanisms and individuals.
References
- Marx, Karl. “Das Kapital”.
- Hayek, F. A. “The Road to Serfdom”.
- Kornai, Janos. “Economics of Shortage”.
Summary
Centrally planned economies represent a system where the government holds significant sway over economic activities. While aiming to reduce inequalities and achieve controlled growth, they face challenges such as inefficiency and lack of innovation. This system contrasts significantly with market and mixed economies and offers unique insights into the range of global economic ideologies.
