A planned economy is controlled by the government, but it is difficult to achieve in a democratic state due to competing interests. It can provide stability and produce “social goods,” but it has disadvantages such as chronic shortages and the inability to predict consumer behavior. Indicative planning or mixed economy systems are more successful when leaving final choices to individual economic actors.
A planned economy is an economic system in which economic decisions regarding the allocation of resources, production, investment and prices are under the control of the government or some other authoritative body. In the 20th century, it was commonly believed that a centrally planned economy would do a better job than an unplanned economy of addressing the needs of the people without subjecting those needs to the uncertainties and business cycles of a free market economy . A planned economy is characterized by government control over the means of production, even if the actual ownership is private. By contrast, in a command economy, a more coercive type of a planned economy, the means of production are almost exclusively owned by the state.
Necessary decisions in economic planning are difficult to reach in a democratic state due to many competing interests. Most planned economies, therefore, have generally only existed where the form of government is an oligarchy or a dictatorship, such as the former Soviet Union, and in India before 1991. China, another major dictatorship, had a command economy until 1978, when it started allowing private ownership of small businesses with some level of autonomy in decision making.
There are many benefits to planned economies, including the ability of the state to impose stability on sometimes volatile free markets. In such an economy, manufacturing concerns are eased by the pressure of earning revenue and profits to continue their operations. Thus, they can keep the workforce employed and provide a market for the raw materials they consume in their production.
Another advantage of a centrally planned economy is the ability to ensure the production of “social goods” – goods and services deemed necessary, even if not very profitable. These could include low-income housing and “orphan” drugs. Proponents of central planning argue that in a free market economy, such goods would not be given priority until they could be made to produce a higher profit, usually at the expense of the consumer.
Planned economies are impervious to market forces and business cycles, making major goals easier to achieve. Underdeveloped nations, for example, may require levels of investment in modernization and industrialization that would not be sustained in a free market economy.
There are many disadvantages of national planned economies. It’s nearly impossible to plan everything out, so when something goes wrong and it’s not accounted for, the whole system starts to malfunction. Historically, planned economies do not effectively account for machine or equipment failures and are therefore generally characterized by chronic shortages of spare parts. Planned economies don’t handle the details well.
Another serious disadvantage of a planned economy is the inability of planners to predict consumer behavior. Economic planning is conducted with the aim of achieving some macroeconomic or social goal, but it cannot guarantee that consumers will respond as expected. In essence, not all consumers are fully committed to government goals and objectives.
While planned economies are impervious, at least in theory, to business cycles and free market pressures, they have not been very successful in terms of promoting long-term economic growth and consumer satisfaction. Large nations that employed economic planning in the 20th century evolved into economies that allow for a significantly greater level of involvement in economic decision-making by components of the economy other than government. Nations that still employ economic planning are usually small and struggling.
Although planned economies have not been very successful, no large nation has a completely free market. Instead, they use a system of government influence on the economy, sometimes called indicative planning or a mixed economy system. These systems are characterized by the use of government influence, fiscal policy, grants, and subsidies to influence economic decisions, but generally not coercion. Furthermore, all governments use a more or less comprehensive system of regulation to govern the behavior of the different components of the market, even if they do not control the allocation of resources. That is, a government may not dictate car production or prices, but it will dictate safety standards.
While all governments routinely seek to influence their economies for a variety of reasons, these attempts have been most successful when they leave the final choices to individual economic actors. The more extensively planned economies enforced by authoritarian governments have sometimes been successful in the short term in achieving economic stability, but have not prevailed in the long run.
Protect your devices with Threat Protection by NordVPN
