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Home / Introduction to Economics / What Is Planned Economy In Economics;Definition And Examples

What Is Planned Economy In Economics;Definition And Examples

Planned Economy is an economic system whose production is controlled by the state , which defines the planning and goals of the country’s economy.It is Also called Centralized Economy or Centrally Planned Economy.It is the model proposed by Socialism.Its purpose is to supply the market and guarantee the social needs of the population, which is done through the economic prosperity of the state.

Planned economy, is an economic system in which production is planned  by specialists in which the means of production are owned by the state and that sets production targets and distributes raw materials to production units.

The main characteristics of the planned economy are:

  • predominance of state-owned enterprises
  • lack of business competition
  • disadvantage of the dynamisation of the companies and, therefore, lack of innovation
  • opposes the economic model of market economy.

A planned economy, also termed command economy, is one where the basic economic choices are made by a planning authority rather than by individual buyers and sellers in markets. The planning authority may be a government agency, bureau, commission, or the like. If the economy is purely planned, allowing no market activity, an extensive bureaucracy may be necessary to make millions of detailed economic decisions and to deal with the vast numbers of problems that invariably arise. A planned economy usually operates according to a blueprint (termed a “plan”) that establishes stated general objectives to be accomplished in some specified period of time.

There may be an overall long-range plan (perhaps for ten or twenty years) with several short-range plans (perhaps for two or five years) and some yearly or quarterly plans. For example, the Soviet Union, which was considered to be a planned economy until important changes occurred in 1989, operated under a series of five-year plans.

Although the objectives of most plans are primarily economic, non-economic considerations such as political, social, and military goals can be important as well. For example, a plan may call for the development of a steel industry, the buildup of a powerful navy, the elimination of unemployment, or any other objective

Economic Decisions in a Planned Economy.

The first economic question, what should be produced, is decided by the planning authority. The types, as well as the amounts, of goods and services to be produced are decided by administrative command in order to accomplish the stated objectives of the plan. Planners, through their value judgments, determine whether and how many cars, buses, stoves, submarines, dry-cleaning plants, shoes, and other items are to be produced. For example, if the planning authority feels that resources that could be used for assembling television sets are needed for computers, then fewer television sets are produced, regardless of how much they are in demand. If the planners determine that every household should have a television set, then forces will be set into motion to accomplish that objective.

The second economic question, how goods and services are to be produced, is again decided by the planning authority, although the authority’s influence is less direct than it is for the first question. Imagine the difficulty in instructing every enterprise about how to produce a particular type of good or service. Because of this complexity, pure planning to resolve this economic question becomes cumbersome and may force the planning authority to depend on salary incentives, bonuses, and other inducements to accomplish its objectives.

The main influence planners have over how goods and services will be produced comes through determining which factors of production and processes will be made available to producers. For example, in printing, type can be set by a staff of keyboard operators or automatically by sophisticated electronic equipment. If planners wish to keep keyboard typesetters employed, they will simply not permit or “plan for” the production of electronic typesetting machinery. Printers will then use what is available – the keyboard typesetter. In a purely planned economy, a producer cannot order a machine, part, or piece of equipment if the authority has not permitted it to be produced

To whom the produced goods and services go, the third economic question, is again decided by the planners. A rationing system for the distribution of goods and services could be instituted where individuals are allotted specific items (for example, two pairs of shoes per year or one coat). An alternative distribution method would be to permit individuals to freely purchase what has been produced through the plan. If individuals are allowed to choose goods and services for themselves, then planners face the additional problem of income determination. That is, they must decide how much the various factors of production should be paid for their services.

Evaluating a Planned Economy.

Several problems can emerge in a planned economy. First, the goods and services that planners consider to be important may not be valued by the consumers for whom they are intended, or the elapsed time from the beginning to the end of a plan may cause products that were once desirable to lose their importance. Either of these problems could result in the overproduction of some items and the underproduction of others. Second, the complexity of planning the allocation of resources and the choice of allowable processes could lead to bottlenecks, shortages, and stoppages in the production of goods and services. Third, inferior quality products could result from a lack of producer incentives, from the fact that it is easier to mandate the quantity than the quality of outputs, or from a planning apparatus that has become so large and cumbersome that it adversely affects the flow of commands and information to and from producing units. Finally, the planning process, especially one where decision makers are removed from production locations, could result in long-term environmental damage..

What advantages of the planning mechanism offset these weaknesses? First, certain goals of society may be achieved faster in a planned economy than in a less formally organized economy. For example, the development of a “high-tech” industry or the buildup of the agricultural sector might be accomplished more rapidly when efforts are coordinated by a central authority. Second, it should be easier to eliminate unemployment when producers can simply be ordered to use more labor in their production processes.

Finally, the ability to control the distribution of goods and services can be a benefit when there is a question about the equity, or fairness, of people’s shares in the output of the economy. For example, it would be a simple matter for the planning authority to remedy a situation where elderly poor people were not getting enough heating fuel.

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