The planned or centralized economy is an economic system where the key questions of the economy about what, how and for whom to produce are resolved directly by the State .
The planned economy has as its main objective the equal distribution of income. For this, the State must intervene in the economy and take care of the tasks of resource distribution. They require the replacement of private property by the collective in the means of production, exchange and distribution. It is a type of economic system contrary to capitalism or market economy.
Its origins are in the Soviet Union, after the First World War. Subsequently, it expanded to the economies of Eastern European countries. At the end of the 20th century, it was replaced in practically all countries that applied it (the system was never applied one hundred percent pure).
Although the concept of communism is broader, it is associated with that of planned economy.
Key elements of the planned economy
There are three essential elements in the operation of the planned economy. Next we will explain them.
- State or collective property
In the central planning system, private property is eliminated . All resources and products remain in the hands of the State, which represents “collective property” that is, of all members of society.
The State determines the prices of the productive factors and also the prices of the goods and services produced. The market has no function as a resource allocation mechanism.
The organization of economic activity is determined according to a centralized plan where the State sets out in detail, for a certain period of time, the production objectives, the technology to be used, the resources available for production and investment, etc. The benefits of companies and the wishes or preferences of people have no interference in the allocation of resources.
Likewise, the State also defines a system for the distribution of goods and services so that there are no different social classes.
- The control
There is a strict control of compliance with the established plan, completely eliminating entrepreneurship, innovation or appropriation of benefits.
Answer to the three key questions of the economy
- What to produce: The State defines it through production plans and resource allocation.
- How to produce: It will be produced according to the technological options approved by the State.
- For whom to produce: The main objective of the planned economy would be to distribute income equally. To achieve this, the State usually relies on mechanisms such as controlled supply, rationing, quotas, price control, among others.
As we can see, the role of the State is total since it centrally controls all relevant economic decisions.
The planned economy and socialism
The socialism , at the least initially and in its purest version, was an economic system which argued that the economy should be planned. With this, a more equal distribution of resources and greater social justice would be achieved.
Modern socialism has moderated, accepting that free competition can bring benefits in the form of greater efficiency and greater benefits for consumers (lower prices, higher quality or variety, etc.). In any case, the Socialists understand that the State has a key role in the protection of consumers and in the correction of certain market failures .