planned economy

Background

A planned economy refers to a system in which the government centrally manages and directs the production, distribution, and pricing of goods and services. This model contrasts sharply with a free-market economy, where these functions are driven by market forces like supply and demand. The central authority, often a government agency, decides what industries to invest in, determines the cost of products, and assigns resources, aiming to allocate them in the manner that it deems most beneficial for the society as a whole.

Historical Context

The most well-known examples of planned economies are those of the former Soviet Union and its satellite states in Eastern Europe during the 20th century. These economies were structured around the concept of centralizing economic decisions to achieve collective objectives and to avoid the cyclical uncertainties and inequalities often seen in capitalist systems. However, the centralized approach led to several inefficiencies and eventual economic stagnation, contributing to the collapse of these regimes during the late 20th century.

Definitions and Concepts

In a planned economy:

Centralized Control: Government agencies are responsible for the formulation and execution of economic plans.
Resource Allocation: Resources, including labor, capital, and land, are allocated according to government plans rather than market dynamics.
Price Setting: The prices of goods and services are set by the government to reflect the social or political objectives rather than supply and demand.
Production Targets: Enterprises and industries are given specific production targets to achieve, based on the national economic plan.

Major Analytical Frameworks

Classical Economics

Although focusing predominantly on laissez-faire policies, Classical Economics also discusses the role of government interventions, quite critical of planned economies for impeding natural competition and economic growth.

Neoclassical Economics

Neoclassical Economics critiques planned economies, emphasizing the importance of market conditions for optimal resource allocation and the necessity of incentives for driving productivity.

Keynesian Economics

While supporting government intervention for stability and employment, Keynesian Economics does not advocate for a fully planned economy. Instead, it endorses targeted fiscal and monetary interventions within a primarily market-driven economy.

Marxian Economics

Originating from Karl Marx’s critiques of capitalist economies, Marxian Economics heavily influenced the formation of planned economies. It emphasizes collective ownership, centralized planning, and equitable distribution as means to achieve a classless society.

Institutional Economics

Focusing on the impact of institutional settings on economic outcomes, Institutional Economics critiques planned economies’ ability to consider and adapt to societal and behavioral nuances, thus fostering inefficiency.

Behavioral Economics

Behavioral Economics examines the effects of psychological, social, and emotional factors on economic decisions. It highlights the limits of rationality in both individual and government decisions within a planned setup leading to unintended consequences and inefficiencies.

Post-Keynesian Economics

Post-Keynesians emphasize the need for macroeconomic management through strong but not exclusive government intervention, often occupying a middle ground between market and planned economies.

Austrian Economics

Fundamentally opposed to planned economies, Austrian Economics values individual actions and free markets, notoriously critiquing centralized planning for its inability to utilize dispersed knowledge effectively.

Development Economics

Development economics literature examines the use of planned economies in developing countries, frequently highlighting mixed results where, short term ascensions often give way to long-term constraints and inefficiencies.

Monetarism

Monetarism, championing the importance of monetary policy and a limited role for the state, stands in stark opposition to the centralization inherent in planned economies.

Comparative Analysis

In practical applications, elements of planned economies can intermix with market features in varying extents, resulting in mixed economies, such as China’s current system, blending market-driven growth with state-controlled aspects. This demonstrates the fluidity in economic system implementation and challenges the binary view of planned versus market economies.

Case Studies

Former Soviet Union: An examination of the rise and fall.
China’s Great Leap Forward: Initial strict centralized planning, transition to mixed systems, and resulting economic boom.
India’s Five-Year Plans: An analysis of progressive liberalization over decades.

Suggested Books for Further Studies

“The Road to Serfdom” by Friedrich A. Hayek
“State and Revolution” by Vladimir Lenin
“The Commanding Heights” by Daniel Yergin and Joseph Stanislaw

Free-Market Economy: An economy where prices for goods and services are determined by open competition in the market with minimal government intervention.
Mixed Economy: An economic system that blends elements of both planned and market economies.
Command Economy: Another term often synonymous with a planned economy, highlighting the authoritative nature of economic planning.