Planned economy

Planned economy

Planned economy is an economic system in which state directs the economy.[1] It is an economic system in which the central government controls industry such that it makes major decisions regarding the production and distribution of goods and services.[2] The justification for it is that agents of the free market do not distribute services and products ideally for the society. In a centrally planned economy a universal survey of needs has to be done by the state, and it has a right to allocate the workforce for production, for setting production values and for managing the distribution system of the economy. The most extensive form of a planned economy is referred to as a command economy,[3] centrally planned economy, or command and control economy.[4]

In such economies, central economic planning by the state or government controls all major sectors of the economy and formulates all decisions about the use of resources and the distribution of output.[5] Planners decide what should be produced and direct lower-level enterprises to produce those goods in accordance with national and social objectives.[6]

Planned economies are in contrast to unplanned economies, i.e. the market economy, where production, distribution, pricing, and investment decisions are made by the private owners of the factors of production based upon their individual interests rather than upon a macroeconomic plan. Less extensive forms of planned economies include those that use indicative planning, in which the state employs "influence, subsidies, grants, and taxes, but does not compel."[7] This latter is sometimes referred to as a "planned market economy".[8]

A planned economy may consist of state-owned enterprises, private enterprises directed by the state, or a combination of both. Though "planned economy" and "command economy" are often used as synonyms, some make the distinction that under a command economy, the means of production are publicly owned. That is, a planned economy is "an economic system in which the government controls and regulates production, distribution, prices, etc."[9] but a command economy, while also having this type of regulation, necessarily has substantial public ownership of industry.[10] Therefore, command economies are planned economies, but not necessarily the reverse.

Beginning in the 1980s and 1990s, many governments presiding over planned economies began deregulating (or as in the Soviet Union, the system collapsed) and moving toward market-based economies by allowing the private sector to make the pricing, production, and distribution decisions. Although most economies today are market economies or mixed economies (which are partially planned), planned economies exist in very few countries such as Cuba, Libya, North Korea, Saudi Arabia, Belarus, and Myanmar.[11]


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.[12] 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.[13]

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.[citation needed]

Decentrally Planned economy

A decentrally planned economy is an economy where members of a society, acting with equal economic power, democratically plan economic activity.

The 1970 Chilean computer controlled planned economy cybersyn was pioneered by Salvador Allende's socialist government, in an attempt to move towards decentralised planning with the experimental cyberfolk component.

During the Spanish Revolution some Anarchist areas were run under decentralised planning following the principles laid out by Diego Abad de Santillan in the book After the Revolution [1]

De-centralised planning has been a feature in socialist and anarchist economics. Variations of decentralized planning include participatory economics, economic democracy and industrial democracy, and have been promoted by various political groups, most notably libertarian socialists, Trotskyists, Anarchists and democratic socialists.

Planned economies and socialism

In the 20th century, most planned economies were implemented by states that called themselves socialist. Also, the greatest support for planned production comes from socialist authors. For these reasons, the notion of a planned economy is often directly associated with socialism. However, they do not entirely overlap. There are branches of socialism such as libertarian socialism and market socialism, that reject economic planning as a substitute for market allocation. All of these tendencies usually reject centralized ownership, referring to such as state socialism or state capitalism, and instead advocate decentralized ownership based on worker cooperatives and worker self-management.

While many socialist currents advocated economic planning as an eventual substitute for the market for factors of production, socialists define economic planning as being based on worker-self management, with production being carried out to directly satisfy human needs, and contrast this with the concept of a command economy of the Soviet Union, which they characterize as being based on a top-down bureaucratic administration of the economy in a similar fashion to a capitalist firm.[14] The Command economy is distinguished from economic planning, and different theories for classifying the socioeconomic system of the Soviet Union exist; most notably a command economy is associated with Bureaucratic collectivism, State capitalism or State socialism.

Furthermore, planned economies are not unique to Communist states. There is a Trotskyist theory of permanent arms economy, put forward by Michael Kidron, which leads on from the contention that war and accompanying industrialisation is a continuing feature of capitalist states and that central planning and other features of the war economy are ever present.[15]

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 many consider successful is that of the People's Republic of China, in which there was a period of some years lasting roughly until the early 1990s during which both the command economy and the market economy coexisted, so that nobody would be much worse off under a mixed economy than a command economy, while some people would be much better off. This 'success' was coupled with a massive disparity between rich and poor and a disturbing new level of corruption, and 90% of Chinese billionaires are related to members of the Communist Party.[16] Gradually, the parts of the economy under the command economy decreased until the mid-1990s when resource allocation was almost completely determined by market mechanisms[citation needed].

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 less easy. 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.[17] Iran is currently privatizing companies.

Advantages of economic planning


Long-term infrastructure investment can be made without fear of a market downturn (or loss of confidence) leading to abandonment of a project. This is especially important where returns are risky (e.g. fusion reactor technology) or where the return is diffuse (e.g. immunization programs or public education).[citation needed]

Meeting collective objectives

Planned economies may be intended to serve collective rather than individual needs: under such a system, rewards, whether wages or perquisites, are to be distributed according to the value that the state ascribes to the service performed. A planned economy eliminates the individual profit motives as the driving force of production and places it in the hands of the state planners to determine what is the appropriate production of different sets of goods.

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 80 percent to 50.0 percent.[18] As a result, the Soviet Union experienced massive growth in heavy industry.

Advantages over market economies

An advantage of a planned economy, one which was among the most important for socialist economists of the early 20th century, is that it is theoretically not subject to major pitfalls of market economies and marked-oriented mixed economies. A planned economy, in theory, does not suffer from business cycles; it does not experience alleged crises of overproduction such as the one that was believed to have contributed to the Great Depression. From the modern perspective, planned economies theoretically do not result in asset bubbles – massive misallocations of resources such as the dot-com bubble of the late 1990s or the housing bubble of mid-2000s.

The other aspect is that a centrally planned economy can provide public goods which would not have been available at all, or might require explicit government provision, in a market economy, resulting in a mixed economy. In a mixed economy, the government would have to achieve this goal through taxation or inflation. In a planned economy, state planners would allocate state resources toward public goods and state projects.

A new point of view

According to Anatoly Wasserman today's computing power of modern computer technology enable to create a unique and accurate production plan, devoid of defects that afflict the market economy[19]

Disadvantages of economic planning

Inefficient resource distribution: surplus and shortage

Critics of planned economies argue that planners cannot detect consumer preferences, shortages, and surpluses with sufficient accuracy and therefore cannot efficiently co-ordinate production (in a market economy, a free price system is intended to serve this purpose). For example, even though the Soviet Union had its own passenger car manufacturing industry going back to the 1940's, it was not possible for a Soviet citizen to walk into a store and buy a car as the entire output of all car manufacturing plants was allocated for years in advance. From the modern viewpoint, such a shortage indicates a mismatch between supply and demand, suggesting that planners have misjudged the demand for the product, the equilibrium price, or both.

This difficulty was first noted by economist Ludwig von Mises, who called it the "economic calculation problem". Economist János Kornai developed this into a shortage economy theory (advocates could claim that shortages were not primarily caused by lack of supply).

A problem of surpluses exists. Surpluses indicate a waste of labour and materials that could have been applied to more pressing needs of society. Critics of central planning say that a market economy prevents long-term surpluses because the operation of supply and demand causes the price to sink when supply begins exceeding demand, indicating to producers to stop production or face losses. This frees resources to be applied to satisfy short-term shortages of other commodities, as determined by their rising prices as demand begins exceeding supply.

It is argued that this "invisible hand" prevents long-term shortages and surpluses and allows maximum efficiency in satisfying the wants of consumers. Critics argue that since in a planned economy prices are not allowed to float freely, there is no accurate mechanism to determine what is being produced in unnecessarily large amounts and what is being produced in insufficient amounts. They argue that efficiency is best achieved through a market economy where individual producers each make their own production decisions based on their own profit motive.

These opponents of central planning argue that the only way to determine what society actually wants is by allowing private enterprise to use their resources in competing to meet the needs of consumers, rather those taking resources away and allowing government to direct investment without responding to market signals. According to Tibor R. Machan, "Without a market in which allocations can be made in obedience to the law of supply and demand, it is difficult or impossible to funnel resources with respect to actual human preferences and goals."[20]

Suppression of economic democracy and self-management

Central planning is also criticized by elements of the radical left. Libertarian socialist economist Robin Hahnel notes that, even if central planning overcame its inherent inhibitions of incentives and innovation, it would nevertheless be unable to maximize economic democracy and self-management, which he believes are concepts that are more intellectually coherent, consistent and just than mainstream notions of economic freedom.[21]

As Hahnel explains, "Combined with a more democratic political system, and redone to closer approximate a best case version, centrally planned economies no doubt would have performed better. But they could never have delivered economic self-management, they would always have been slow to innovate as apathy and frustration took their inevitable toll, and they would always have been susceptible to growing inequities and inefficiencies as the effects of differential economic power grew. Under central planning neither planners, managers, nor workers had incentives to promote the social economic interest. Nor did impeding markets for final goods to the planning system enfranchise consumers in meaningful ways. But central planning would have been incompatible with economic democracy even if it had overcome its information and incentive liabilities. And the truth is that it survived as long as it did only because it was propped up by unprecedented totalitarian political power."[21]

Without economic democracy there can be troubles with the flow of knowledge as is shown with the initiative for backyard furnaces and other efforts in the Great Leap Forward.

Artistic portrayals of planned economies

The World State in Aldous Huxley's and Airstrip One in George Orwell's dystopian novels, Brave New World and Nineteen Eighty Four respectively, are fictional examples in command economies. Albeit with diametrically oppoosed aims: The former is a consumer one designed to engender productivity and the latter is a shortage economy intentionally designed as an agent of totalitarian social control. The latter is organised by the intentionally misleading and even sarcastically named Ministry of Plenty. Other artistic 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 potrayal of a command economy that was influenced by "We". The difference is that it was a primitivist planned economy, as opposed the the advanced technology of We or Brave New World.

Socialist Realism often portrayed a command economy in action, such as the paintings of Piotr Buchkin, Rudolf Frentz, Alexander Samokhvalov, Isaak Brodsky, Kuzma Petrov-Vodkin, Kazimir Malevich, Nikolai Dormidontov and Mikhail Avilov. Though these artworks were often propagandist in nature, jokingly criticised as "girl meets tractor". Many socialist realist novels often portrayed the successes of the command economy, with criticism being suppressed by the censors (even if it was fair and accurate).

See also

Case studies:

Further reading

  • 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.


  1. ^ Alec Nove (1987), "planned economy," The New Palgrave: A Dictionary of Economics, v. 3, pp. 879–80.
  2. ^ See Myant, Martin; Jan Drahokoupil (2010). Transition Economies: Political Economy in Russia, Eastern Europe, and Central Asia. Hoboken, New Jersey: Wiley. ISBN 978-0470596197. 
  3. ^ "Command Economy." Encyclopædia Britannica. 2007. Encyclopædia Britannica Online. 11 June 2007.
  4. ^ 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
  5. ^ Myers, Danny. Construction Economics (2004), Spon Press (UK), p. 288
  6. ^ Ollman, Bertell. Market Socialism: The Debate Among Socialists (1997), Routledge (UK), p. 12
  7. ^ Alec Nove (1987), "Planned Economy," The New Palgrave: A Dictionary of Economics, v. 3, p. 879.
  8. ^ John Barkley (1991). Comparative Economics in Transforming World Economy. MIT. p. 10 
  9. ^ planned economy. Unabridged (v 1.1). Random House, Inc. (accessed: May 11, 2008).
  10. ^ command economy. In Merriam-Webster Online Dictionary (2008) (accessed May 11, 2008).
  11. ^ von Brabant, Jozef M. The Planned Economies and International Economic Organizations, Cambridge University Press, 1991, p. 16
  12. ^ 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."
  13. ^ Writings 1932-33, P.96, Leon Trotsky.
  14. ^ "Command Economy", Glossary of Terms:
  15. ^ "A Permanent Arms Economy" by Michael Kidron, first printed in International Socialism 1:28 (Spring 1967)
  16. ^ Naomi Klien, The Shock Doctrine.
  17. ^
  18. ^ Paul Kennedy. The Rise and Fall of the Great Powers, pp. 322–3
  19. ^ Анатолий Вассерман: Социализм уже возможен (Anatoly Wasserman: Socialism is Already Possible)
  20. ^ Machan, R. Tibor, Some Skeptical Reflections on Research and Development, Hoover Press
  21. ^ a b Hahnel, Robin. The ABC's of Political Economy, Pluto Press, 2002, 262

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