PLANNED ECONOMY: CHARACTERISTICS, ADVANTAGES, DISADVANTAGES - ECONOMY - 2024

A planned economy is a type of economic system where investment and the allocation of capital goods is done through economic and production plans for the entire economy. It can be based on centralized, decentralized or participatory forms of economic planning.

A command economy is any of the nominally planned economies of the former Soviet Union and the Eastern Bloc, highlighting the central role of hierarchical administration in guiding resource allocation in these economic systems as opposed to planned coordination.

The planned economy is generally associated with Soviet-type central planning, which involves centralized state planning and administrative decision-making. It basically gives the government dictatorship-like control over the country's resources.

Planned economies can provide stability, but they can also limit the country's growth and advancement if the government does not allocate resources to innovative companies. The government or a collective owns the land and the means of production. It does not depend on the laws of supply and demand that operate in a market economy.

A planned economy also ignores the customs that guide a traditional economy. In recent years, many planned economies have started adding aspects of the market economy.

Planned economies are in contrast to unplanned economies, specifically market economies, where production, distribution, pricing, and investment decisions are made by autonomous firms operating in markets.

characteristics

A planned economy is an economic system in which the government makes economic decisions, rather than those made through interaction between consumers and businesses.

Unlike a market economy, a planned economy controls what is produced, the distribution, and the use of resources. State companies undertake the production of goods and services.

Economic plan

The government creates an economic plan. The five-year plan establishes economic and social objectives for each sector and region of the country. Short-term plans turn goals into actionable objectives. The government decides what to produce, how much to produce and for whom to produce.

The government creates laws, regulations and directives to enforce the central plan. The companies follow the production targets of the plan; they cannot respond alone to the forces of the free market.

Resource allocation

This type of economy gives the government total control over the allocation of resources. The government allocates all resources according to a central plan.

A planned economy reduces the use of private companies and allows the government to determine everything: from distribution to pricing. Market forces cannot set the price of goods and services.

Try to use the nation's capital, labor, and natural resources in the most efficient way possible. He promises to use each person's abilities to their fullest potential.

Production priorities

The planned economy sets the priorities for the production of all goods and services. These include production quotas and price controls.

Their goal is to provide enough food, shelter, and other basic items to meet the needs of everyone in the country.

Neg

The government owns monopoly businesses. These are industries considered essential and basic for the objectives of the economy.

They generally include financial companies, utilities, and the auto industry. There is no internal competition in these sectors.

Advantage

Mobilize resources quickly

Planned economies can quickly mobilize economic resources on a large scale. They can run massive projects, create industrial power, and meet social goals. They are not slowed down by individual lawsuits or environmental impact statements.

In an underdeveloped economy the state can begin at once to build heavy industry without having to wait years for capital to accumulate through the expansion of light industry, and without depending on external financing.

Transform society

Planned economies can completely transform societies to fit the government's vision.

The new administration nationalizes private companies. Workers are given new jobs based on government assessment of their skills.

In international comparisons, socialist nations compared favorably to capitalist nations on health indicators, such as infant mortality and life expectancy, although infant mortality statistics are self-reported and based on varying standards.

Economic objectives

The government can harness land, labor, and capital to serve the economic objectives of the state. Consumer demand can be restricted in favor of greater capital investment for economic development with a desired pattern.

This was what happened during the 1930s in the Soviet Union, when the government reduced the share of GDP devoted to private consumption from 80% to 50%.

As a result, the Soviet Union experienced massive growth in heavy industry with a massive contraction of its agricultural sector, both in relative and absolute terms.

Prices are kept under control and therefore everyone can afford to consume the goods and services. There is less wealth inequality and low unemployment, as the government aims to provide employment for everyone.

Disadvantages

Inefficient distribution of resources

Planners of planned economies cannot detect consumer preferences, shortages, and surpluses with sufficient precision and, therefore, cannot efficiently coordinate production.

The planned economy annihilates certain social needs. For example, the government tells workers what jobs to do. The goods you produce are not always based on consumer demand.

Often there is too much of one thing and not too much of another. It is difficult for central planners to get up-to-date information on consumer needs.

Planned economies struggle to produce the right exports at world market prices. It is challenging for central planners to meet the needs of the domestic market, but it is even more complex to meet the needs of international markets.

Suppression of economic democracy

The economist Robin Hahnel indicates that, even if the planned economy surpassed its intrinsic withdrawals towards innovation and incentives, it would not have the capacity to extend self-management and economic democracy, which are more just and consistent concepts than the conventional generality of economic freedom. Says Hahnel:

“Combined with a more democratic political system, and remaking themselves closer to a better version, the planned economies would undoubtedly have performed better, but they could never have achieved economic self-management, they would always have been slow to innovate, since apathy and frustration would take its inevitable price.

The planned economy would have been incompatible with economic democracy, even if it had overcome its information and incentive deficiencies. It survived while it did so only because it was propped up by unprecedented totalitarian political power. '

Economic instability

Studies by American economists of the planned economies of Eastern Europe in the 1950s and 1960s found that, contrary to their expectations, they showed greater fluctuations in output than market economies during the same period.

Countries with a planned economy

Belarus

This former Soviet satellite is still a planned economy. The government owns 80% of the businesses and 75% of the banks.

China

After World War II, Mao Tse Tung created a society ruled by communism; imposed a strictly planned economy.

Today's leaders are moving toward a market-based system. They continue to create five-year plans to outline financial goals and objectives.

Cuba

Fidel Castro's revolution in 1959 installed communism and a planned economy. The Soviet Union subsidized the Cuban economy until 1990. The government is slowly incorporating market reforms to stimulate growth.

Iran

The government controls 60% of the economy through state companies. Use price controls and subsidies to regulate the market. This created recessions, which it has ignored.

Instead, it dedicated resources to expanding its nuclear capacity. The United Nations Organization imposed sanctions on him, thus worsening his economic recession. The economy improved after the 2015 nuclear trade agreement ended sanctions.

Libya

In 1969 Muammar Gaddafi created a planned economy dependent on oil revenues. Most Libyans work for the government.

Gaddafi had been instituting reforms to create a market economy, but his assassination in 2011 halted these plans.

North Korea

After World War II, President Kim Il-sung created the most planned economy in the world.

It created food shortages, malnutrition, and several episodes of mass starvation. Most state resources are used to build the armed forces.

Russia

In 1917, Vladimir Lenin created the first communist planned economy. Josef Stalin built military power and quickly rebuilt the economy after World War II.

The Soviet State Planning Committee, or "Gosplan," has been the most studied entity in planned economics.

The USSR was also the longest-running planned economy, lasting from the 1930s to the late 1980s. The state then transferred ownership of the largest companies to the oligarchs.

References

1. Wikipedia, the free encyclopedia (2018). Planned economy. Taken from: en.wikipedia.org.
2. Kimberly Amadeo (2018). Command Economy, Its Characteristics, Pros, and Cons. The Balance. Taken from: thebalance.com.
3. Tejvan Pettinger (2016). Central Planned Economy. Economics Help. Taken from: org.
4. Tejvan Pettinger (2017). Command Economy. Economics Help. Taken from: economicshelp.org.
5. CFI (2018). What is a Command Economy? Taken from: corporatefinanceinstitute.com.
6. The Editors of Encyclopaedia Britannica (2018). Command economy.