Background
Central planning involves the operation of an economy through centralized decision-making. In this model, decisions regarding production and investments are made at a central point, usually by the government or a designated central authority.
Historical Context
The concept of central planning is historically associated with socialist and communist economies, most notably those of the former Soviet Union and other Eastern European countries. Central planning was used extensively in the mid-20th century, peaking during the Cold War era.
Definitions and Concepts
Central planning (noun): The operation of an economy through centralized decision-taking whereby decisions are taken at the centre and orders issued to enterprises concerning their production and investment plans.
Major Analytical Frameworks
Classical Economics
Central planning contrasts with the concepts of classical economics, which advocates for minimal government interference and relies on market forces to allocate resources.
Neoclassical Economics
Neoclassical economics dismisses central planning as inefficient due to the immense quantity of information required and the lack of proper incentives. Neoclassical theorists argue that a market economy is more effective in resource allocation due to the comparative competition among independent decision-makers.
Keynesian Economics
While Keynesian economics supports substantial government intervention in the economy, primarily during recessions, it stops short of endorsing full central planning, advocating instead for a mixed economy that combines elements of both market and planned economies.
Marxian Economics
Marxian economics is perhaps more sympathetic to central planning, rooted in the belief that such a system can allocate resources equitably. However, historical attempts under Soviet-style systems indicated practical shortcomings in achieving Marxian ideals.
Institutional Economics
Institutional economics assesses central planning through the lens of institutional efficiency and the role of different socio-economic structures in facilitating economic outcomes. It critiques central planning for its rigidity and inability to adapt swiftly to changes.
Behavioral Economics
Behavioral economics highlights the limitations of central planning in terms of human psychology, emphasizing that centralized officials may lack adequate motivation and reliable information to work in the public interest.
Post-Keynesian Economics
Post-Keynesian economics might incorporate elements of central planning in their frameworks but often emphasize more nuanced and targeted government interventions rather than strict, broad-based central controls.
Austrian Economics
Austrian economists fundamentally oppose central planning, arguing that it leads to inefficiencies due to a lack of price signals and essential market information.
Development Economics
Development economics considers central planning in the historical contexts of emerging economies that adopted such systems in attempts to accelerate industrialization. The efficacy of central planning in these scenarios has often been deemed modest at best.
Monetarism
Monetarism, focusing on the influence of monetary policy over economic processes, inherently conflicts with concepts of central planning, favoring instead a system guided by financial and market mechanisms.
Comparative Analysis
Comparing central planning to other economic frameworks illuminates its deficiencies in resource allocation and efficiency. Decentralized markets, driven by competitive forces, are generally concluded to be more efficient and adaptable.
Case Studies
- The Soviet Union: Despite ambitious early results, the Soviet Union’s centrally planned economy faced glaring inefficiencies, particularly evident during the later years of its existence.
- China: Initially following central planning, China introduced market-oriented reforms (like the “Open Door Policy” in the late 1970s), resulting in significant economic growth and development.
Suggested Books for Further Studies
- “The Road to Serfdom” by Friedrich A. Hayek
- “Socialism: An Economic and Sociological Analysis” by Ludwig von Mises
- “Red Plenty” by Francis Spufford
Related Terms with Definitions
- Market Economy: An economy in which production and prices are determined by unrestricted competition between privately owned businesses.
- Command Economy: Another term for a centrally-planned economy where the government typically makes the majority of the economic decisions.
- Mixed Economy: An economic system featuring characteristics of both capitalism and socialism, including private and state intervention.
- Decentralization: The dispersion or distribution of functions and powers from a central authority to regional and local authorities.
