A centrally planned economy is controlled by the government and does not allow market supply and demand to define prices, wages, or output. It was first attempted in the Soviet Union in the early 20th century but has not fared well in the modern world.
A centrally planned economy is one in which all major economic decisions are under the control of the government. This type of economy is typically associated with socialist and communist ideals and was first attempted in the Soviet Union in the early 20th century. Unlike a free market or capitalist economy, a centrally planned economy does not allow market supply and demand to define the prices, wages, or output of goods.
The theory behind a centrally planned economy begins with the idea that the market is not a measure of what is best for the country. Subject to whim, trend and a myriad of opinions, the free market can slow down or even hinder the goals of a central government. By having the state in charge of the economy, the government is able to implement programs, schemes and plans that are deemed best by the country’s leaders.
Most modern economies include a mix of centrally planned behavior and free markets. While the government may control certain areas of the economy, much of the market operates on the whim of the people. In such an economy, a person has the right to start a private business, thanks to the free market, but may have to pay trade taxes and charge sales tax based on centrally planned aspects.
A centrally planned economy first arose in the Soviet Union around 1917 under Vladimir Lenin. In 1928, the economy adopted a system of five-year plans, where the country’s needs were reviewed and policies changed to match every five years. Under this system, the government seized nearly all private businesses and fixed wage levels across the region. People were encouraged to sacrifice personal career goals and plans to enter industries deemed desirable by the state, and the price of goods and services was set by the government rather than altered by the open market.
One of the side effects of a centrally planned economy is a strong recovery of secondary economies, also called black markets. Because choices are limited to what the government chooses to offer, many people find it profitable and often necessary to secretly obtain or manufacture goods illegally and trade them under the table. The high prices of a black market often mean that wealthy people are able to obtain goods that poorer people cannot, leading to a great deal of corruption and a sense of injustice among poorer citizens.
Historically speaking, centrally planned governments have not fared well in the modern world. While many countries have centrally programmed agendas, the global free market has generally made it more profitable to allow the market to dictate economic policy. However, this innovative form of government has vastly changed the world economy, and the state-owned enterprise principle still plays an important role in many modern regimes.
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