Planned economy

Definition

A planned economy, also known as a command economy, is an economic system where the government or central authority makes all decisions regarding the production and distribution of goods and services. In such economies, resource allocation is determined through a comprehensive planning process, often aiming to achieve specific social or economic objectives rather than relying on market forces.

5 Must Know Facts For Your Next Test

1. In a planned economy, the government typically owns most, if not all, of the resources and means of production, including factories, land, and businesses.
2. Planned economies are often associated with socialist or communist ideologies that prioritize collective welfare over individual profit.
3. These economies seek to eliminate the inefficiencies and inequalities that can arise in market-based systems by controlling prices and regulating production levels.
4. While planned economies aim for equitable resource distribution, they can struggle with issues like lack of innovation, inefficiency, and bureaucratic challenges.
5. Historical examples of planned economies include the former Soviet Union and Maoist China, both of which employed extensive central planning to direct economic activity.

Review Questions

• How does a planned economy differ from a market economy in terms of decision-making and resource allocation?
  • In a planned economy, decision-making and resource allocation are centralized under government control, which determines what to produce, how much to produce, and at what price. In contrast, a market economy relies on individual choices driven by supply and demand, allowing consumers and producers to make decisions based on market signals. This fundamental difference affects how resources are distributed, with planned economies aiming for equitable access while market economies focus on efficiency and consumer preference.
• Discuss the advantages and disadvantages of a planned economy compared to alternative economic systems.
  • A planned economy offers potential advantages such as equitable distribution of resources and the ability to direct economic resources toward social goals. However, it also faces significant disadvantages like lack of innovation due to reduced competition, potential inefficiencies from bureaucratic processes, and challenges in responding quickly to consumer needs. Alternative systems like market economies encourage innovation and efficiency but may lead to unequal wealth distribution and market failures without regulatory oversight.
• Evaluate the long-term sustainability of planned economies based on historical examples like the Soviet Union or Maoist China.
  • The long-term sustainability of planned economies has been questioned due to their tendency to face economic stagnation and inefficiencies. Historical examples such as the Soviet Union struggled with innovation gaps and bureaucratic red tape, leading to economic decline. Similarly, Maoist China's heavy-handed planning ultimately resulted in severe famines and economic hardships. These cases illustrate that while planned economies can achieve short-term goals or address crises effectively, their rigid structures often hinder adaptability and growth in a rapidly changing global economy.

Related terms

Socialism: An economic and political system advocating for collective or governmental ownership of the means of production and distribution, with the aim of achieving equality and addressing societal needs.

Market economy: An economic system where the decisions regarding investment, production, and distribution are based on supply and demand, with minimal government intervention.

Central planning: The process by which a government or central authority makes decisions about the economy, including what to produce, how to produce, and for whom to produce.