Planned economy
A planned economy is an economic system where a central authority makes decisions about the production and distribution of goods and services, contrasting with a free market economy where such decisions are driven by supply and demand. Often referred to as "command economies," these systems aim to meet the needs of society by pre-determining resource allocation, theoretically promoting fairness and efficiency. Notable examples historically include the Soviet Union and its satellite states, which implemented centralized planning through initiatives like Five-Year Plans, although the effectiveness of these plans was frequently compromised by unrealistic goals and bureaucratic inefficiencies.
In theory, planned economies can expedite projects that private entities may avoid, as they can mobilize resources rapidly without waiting for market signals. However, significant challenges include susceptibility to poor forecasting and the potential for shortages or surpluses, as economic planning is complex and influenced by many unpredictable variables. Critics argue that these systems may also foster corruption and disincentivize innovation and hard work. In contemporary times, Cuba and North Korea are among the few nations still operating under planned economies, often facing severe economic difficulties and shortages. Meanwhile, Venezuela's heavily state-influenced economy shares some characteristics of a planned system, yet it has also been marked by economic turmoil.
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Planned economy
A planned economy can best be defined by reference to a free market economy. In a free market, the forces of supply and demand interact to allocate goods and services in a manner that, to outside observers, can seem random. Planned economies, on the other hand, are systems of resource allocation in which a group seeks to determine in advance what a society’s needs will be, and then issues directives to ensure that those needs will be met. Because planned economies rely on a governing body to issue orders for resource allocation, such systems are also referred to as “command economies” or “command and control economies.”
Planned economies have goals of fairness and efficiency. They are based on the idea that if economic planning is performed by a defined group of rational actors, then the decisions the group makes will benefit the largest possible number of people while keeping waste to a minimum. While in a free market economy, goods would gravitate towards the greatest demand, thus driving up prices and making the goods unattainable for those without enough money, in a planned economy central planning would instead define a price for the goods and determine who would have the opportunity to purchase them at that price.
Background
The Soviet Union and its client states are the most frequently referenced examples of planned economies. Although some would argue that these regimes, based on Marxist-Leninist ideals, were not true planned economies because not all sectors of the economy were encompassed in the planning process, they remain the most notable examples of this approach to the regulation of production.
The Soviet approach was to adopt the now infamous Five-Year Plans, in which goals were set for industrial production, agriculture, utilities, capital goods such as factories and machinery, and consumer goods. Targets were set within each of these sectors of the economy, so that the nation as a whole could modernize itself as quickly as possible. Often, these targets were unrealistic, and in many cases, they were attained only on paper, as the bureaucrats tasked with meeting the goals falsely reported progress where there was none.
With the passage of time, many nations moved away from strict planned economies, adopting some or all of the features of a market economy. These countries ceded some state involvement in economic decision-making to private entities. The collapse of the Soviet Union in 1991 was widely interpreted as long awaited proof of central planning’s many shortcomings.
Overview
In theory, the concept of a planned economy appears to offer many advantages. Instead of having to wait for demand for a particular social end to accumulate enough capital to accomplish that end—for example, the construction of the interstate highway system in the United States—the planning group can simply act to accomplish the goal as soon as it has been persuaded of its necessity. The planners only need to order the production sector to create the materials needed for the project and direct the workforce to assemble the materials. In contrast, an economy driven entirely by market forces would languish without its highway system until a private entity concluded that, by constructing a road system and charging for its use, it could realize a profit substantial enough to justify the initial use of capital. This could take months or years, or might never happen at all. The foremost strength of a planned economy is that by removing the element of personal choice from the equation, it can move ahead with projects that no private entity is willing or able to undertake independently. A prime example of this phenomenon can be found in the origins of the Internet, which in its very early stages was a government effort to improve the military’s communications capability in the event of war or other large scale emergencies. No private investor took the initiative to establish a fundamental architecture and protocol for communications between computers because it was not in widespread demand, so the task fell to a centrally planned effort.
At the same time, a planned economy is subject to a number of significant drawbacks. Chief amongst these is its susceptibility to unrealistic projections. Economic planning is not an exact science, as it must consider a large number of variables in order to determine how much of a resource is needed and how much is actually capable of being produced. This is particularly true in the area of planning for agricultural production, where the weather is a highly influential factor, but is only partially predictable. This can lead to the phenomenon for which planned economies are often criticized: shortages or surpluses of goods and resources as production of a given item either underperforms or outpaces the predictions of the central planning agency. It is generally difficult for large scale bureaucracies to either make up for shortages or efficiently utilize surpluses, the result being a number of deviations from the plan that compound to bring the system as a whole further out of alignment with the plan.
The potential for economic planning to become divorced from the reality a society faces also raises other concerns over its reliability as a system of economic regulation. For example, fraud, influence peddling, and falsification of performance metrics are areas of concern in a planned economy, as the planning group’s members are only human, and may be persuaded to craft plans that benefit themselves and their associates disproportionately. In a similar vein, critics of planned economies often observe that they tend to discourage the values of hard work and innovation, and instead reward mediocrity and corruption.
Such conclusions remain subject to debate. What is more certain is that, of the societies that have—at least in name—claimed to use economic planning as their central approach to the regulation of markets, few have persisted in this approach for more than a short period, and none have succeeded in outperforming those nations that have adopted a more market-based strategy.
In the twenty-first century, Cuba and North Korea are the only two countries that maintain command economies. Their economic performance is perennially recognized as abysmal, with their populations subjected to reoccurring bouts of famine and shortages. The governments of both are categorized as authoritarian police states, a characteristic of countries that resort to command economies. Venezuela does not fully subscribe to a command economy, but the socialistic government has a very active role in distribution of goods and services. Like Cuba and North Korea, experts note that Venezuela's economic output is woeful, subject to hyperinflation, and reliant on autocratic rule. It is routinely described as a failed state.
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