Planned Economy

Definition

A planned economy is an economic system where the government or central authority makes all decisions regarding the production and distribution of goods and services. This system contrasts with market economies, where decisions are driven by supply and demand. In a planned economy, the state directs resources to meet national goals, which was a defining characteristic of the Soviet Union during its existence, particularly through initiatives like the Five-Year Plans and in response to the global dynamics following World War II.

5 Must Know Facts For Your Next Test

1. The Soviet Union implemented its first Five-Year Plan in 1928, aiming to transform its economy from agrarian to industrialized.
2. Under a planned economy, there was often a focus on heavy industries, which led to rapid industrial growth but neglected consumer goods and living standards.
3. The central government set quotas for production, which sometimes resulted in exaggerated reporting and inefficiencies due to lack of competition.
4. During the aftermath of World War II, the planned economy was used as a tool to rebuild and strengthen the Soviet state, allowing for rapid reconstruction of war-torn areas.
5. Planned economies faced significant challenges, including bureaucratic inefficiencies and lack of innovation, contributing to eventual economic stagnation in the late Soviet period.

Review Questions

• How did the implementation of the Five-Year Plans illustrate the principles of a planned economy in the Soviet Union?
  • The Five-Year Plans exemplified a planned economy by establishing specific production targets set by the government to guide industrial growth. These plans focused on developing key sectors like steel, coal, and machinery while ignoring consumer needs. By prioritizing heavy industry over consumer goods, these plans aimed to boost overall economic output but often led to shortages and poor living standards for citizens.
• In what ways did the aftermath of World War II shape the strategies employed in the Soviet planned economy?
  • After World War II, the Soviet Union used its planned economy to facilitate reconstruction efforts in devastated regions. The government focused on rebuilding infrastructure and expanding heavy industries as part of their broader strategy for national strength. This approach not only aimed to restore productivity but also sought to solidify the USSR's position as a superpower during the early stages of the Cold War.
• Evaluate how the flaws within the planned economy contributed to the eventual decline of the Soviet Union.
  • The planned economy's inherent flaws, such as bureaucratic inefficiency and lack of market responsiveness, played a crucial role in the decline of the Soviet Union. As central planners struggled to meet citizens' needs and adapt to changes, economic stagnation set in during the 1970s and 1980s. This stagnation weakened public confidence in the system, ultimately leading to calls for reform and contributing to the dissolution of the USSR in 1991.

Related terms

Five-Year Plans: A series of nationwide centralized economic plans in the Soviet Union aimed at rapidly industrializing the economy and increasing production output.

Central Planning:

The process by which the government makes decisions about the production and distribution of goods, often associated with planned economies.

Collectivization:

The policy of consolidating individual land and labor into collective farms in the Soviet Union, intended to increase agricultural production and efficiency.