Planned Economy

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21 Aug, 2024

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Table Of Contents

What Is A Planned Economy?

A Planned Economy is an economy where all commercial and financial activities and decisions that facilitate economic growth are made by the government. Governments of the countries following this model control agriculture, resource allocations, prices, wages, manufacturing, and the distribution of goods and services, among other crucial economic parameters.

Such an economic system is adopted by nations that aim to provide equal employment opportunities and regulate market prices to ensure resources reach every section of society. These economies are marked by strong government intervention and a lack of overall freedom as every policy decision is formulated and implemented unilaterally by the government. It is also called a centrally planned economy because all the decisions are taken by one central authority.

What Is A Planned Economy?

In a planned economy, the government outlines specific economic goals pertaining to employment, economic growth, and prices and develops plans to achieve these goals.
Targets are typically set for production, investment, and consumption. The government applies various tools to implement these plans, such as price controls, subsidies, and taxes.
A centrally planned economy follows socialist or communist ideologies with a social and public welfare agenda.
Other forms of economic systems are market economy and mixed economy.

Planned Economy Explained

A planned economy describes an economy that is operated and governed by a central body. Every major economic decision, including production, distribution, and investment, is finalized and implemented by the country’s central government. These government bodies are focused on social welfare and planned growth, employing a socialist or communist approach while making decisions to achieve defined goals.

They prioritize objectives like full employment to attain their social and public welfare goals. The activities in these countries are monitored, and government regulations are stringent. Hence, violating the government’s rules brings several challenges. As these economies have policies that define, monitor, and control nearly every sector in the country, they are sometimes considered repressive.

The planned economy definition states that the government dictates what to produce and when to produce, along with production quantity, supply, distribution, and market prices. Thus, private enterprises usually have limited scope for growth as state-owned enterprises dominate the business landscape. Certain sectors are entirely operated by the government, and the government adopts a prohibitive approach to prevent the proliferation of private businesses.

Furthermore, the central authority in such economies does not generally favor monopolies since a monopoly can disrupt the government’s plans of achieving comprehensive and equal economic growth. However, a monopoly may thrive in some cases if the government believes it will help with the accomplishment of goals in the long run.

The planned economy emphasizes the command a government has over the country’s activities. Hence, it is often called a command economy. Modern-day economists are known to criticize such countries due to the lack of freedom, low competition, and inadequate private growth seen in such economies.

It must be noted that in recent times, many planned economies have welcomed private sector and foreign investments. However, the government has a significant say in the operations of businesses functioning in these economies.

Characteristics

The characteristics of such economies have been discussed below.

Agricultural production: It is regulated by the government. The production type, quantity, buyers, and pricing are defined beforehand for equal distribution of goods and services.
Economic policies: These countries have defined policies for every economic activity, from business to investment and projects to services.
Price controls: The government finalizes prices for goods and services to enhance affordability.
Restrictive policies: Private firms are not allowed to establish businesses as most sectors are run by public-owned agencies.
Subsidies: Financial assistance is made available to businesses and consumers in order to promote specific industries.
Resource allocations: The central authority allocates resources per its plan and budget.
Global market participation: Typically, countries that follow this economic model have limited or zero participation in world trade as the scope for foreign investments is low.
Taxes: The taxes levied in such economies are planned in a manner that discourages certain economic activities or businesses. Many taxation policies are designed to help fund government programs.
Entrepreneurship: These economies can stifle entrepreneurship, reducing the level of innovation and discovery.

Examples

In this section, let us discuss a few examples.

Example #1

This is a hypothetical example that explains how a planned economy functions. In Country A, the government operates and controls every economic activity. However, let us focus on agriculture for the purpose of this example. The authorities define the production targets and instruct farmers to grow the crops outlined in the plan.

The government then finalizes the prices at which farmers can sell their produce and determine the logistics of how it will reach the many markets in the region. No private agro-based businesses can get a license to begin food processing or distribution of agricultural produce. Due to restrictive policies and production barriers, agricultural exports are discouraged.

This is an overview of how planned economies operate. While the objective is to achieve price equilibrium, equal, all-around growth, and full employment, the spirit of entrepreneurship and innovation is typically curbed in such economies.

Example #2

According to an article published in The Moscow Times, the Russian Central Bank Governor Elvira Nabiullina expressed concerns over rising war expenses and economic sanctions affecting the country. She stated the country is facing the risk of returning to a planned economy, given the war situation and the need to realign the economy.

She said the existing market economy is changing rapidly in the current scenario. Unless funds are allocated to specific industries, proper realignment may be difficult. Hence, the return to a planned economy seems likely under the present circumstances.

This example illustrates the thought process a country’s policymakers may adopt to make economic decisions.

Advantages And Disadvantages

The advantages are listed below:

The government targets full employment. Therefore, the unemployment rate is low, with such governments making focused efforts to reduce unemployment.
As authorities intervene to stabilize markets, the prices of goods and services become affordable for everyone, irrespective of their financial capacities.
Planned economies discourage privatization and capitalism; therefore, wealth inequality is eliminated.
They focus on socialism and public welfare. Some countries follow the mixed economy model, which introduces capitalism alongside socialism and improves economic results.
The government restricts private entities or foreign players from entering certain essential sectors. This prevents monopolies, and every citizen gets access to essential goods and services.
As resources are budgeted for and allocated by a single central body, expenditure is streamlined, fund availability for welfare projects improves, and wastages are reduced.

The disadvantages include the following:

The scope for profit-making and privatization is low.
A sense of loss of freedom is noted in such economies as people do not find the opportunities to undertake the activities or businesses they like.
As private players are prohibited from entering markets, customers do not have product choices. They are forced to buy whatever is available in a particular category. Hence, customer satisfaction is usually low.
Since governments introduce production barriers, supply shortages are often seen in such economies.
The prices are not aligned with the demand, which eventually harms manufacturers and producers, including farmers.

Planned Economy vs Market Economy

The key differences between a planned economy and a market economy are:

In a planned economy, the government dictates the economic activities. On the other hand, in a market economy, market forces of supply and demand determine economic activities and the resultant growth.
Planned economies focus on public welfare. In contrast, a market economy focuses on profit and economic growth.
Economies controlled by governments are also called command economies. A market economy is also referred to as a capitalist economy.

Frequently Asked Questions (FAQs)

1. Who owns capital in a planned economy?

Most of the capital is owned by the government in such economies. In a country with a planned economy, the scope for private investment is low. Businesses are not allowed to freely make profits because the government controls all economic activities, from the production of goods and services to their consumption.

2. How is freedom affected in a planned economy?

Planned economies limit economic, political, and social freedom. People have limited access to jobs, business opportunities, and other commercial endeavors. The level of freedom a country allows or does not allow depends entirely on the government following such an economic system.

3. How are resources allocated in a planned economy?

The central government allocates resources in such economies. Such allocations are based on the targets the central government sets for the uniform growth of each sector or group in the economy. They use tools like taxes, subsidies, and price control measures to ensure money is not concentrated in a single domain or market and overall economic growth is facilitated.