Planned economy

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A planned economy is an economic system in which inputs are based on direct allocation.[1] Economic planning may be carried out in a decentralized, distributed or centralized manner depending on the specific organization of economic institutions. An economy based on economic planning (either through the state, an association of worker cooperatives or another economic entity that has jurisdiction over the means of production) appropriates its resources as needed, so that allocation comes in the form of internal transfers involving the purchasing of assets by one government agency or firm by another. In a traditional model of planning, decision-making would be carried out by workers and consumers on the enterprise-level.

Planned economies are held in contrast to unplanned economies, such as the market economy and proposed self-managed economy, where production, distribution, pricing, and investment decisions are made by autonomous firms based upon their individual interests rather than upon a macroeconomic plan. Less extensive forms of planned economies include those that use indicative planning as components of a market-based or mixed economy, in which the state employs "influence, subsidies, grants, and taxes, but does not compel."[2] This latter is sometimes referred to as a "planned market economy".[3] In some instances, the term planned economy has been used to refer to national economic development plans and state-directed investment in market economies.

Planned economies are usually categorized as a particular variant of socialism, and have historically been associated with Marxist-Leninist states and the Soviet economic model. However, some argue that the Soviet economic model did not actually constitute a planned economy in that a comprehensive and binding plan did not guide production and investment; therefore the term administrative command economy emerged as a more accurate designation for the economic system that existed in the former Soviet Union and Eastern bloc, highlighting the role of centralized hierarchical decision-making in the absence of popular control over the economy.[4] The possibility of a digital planned economy was explored by Chile with the creation of Project Cybersyn.

Planned versus command economies[edit]

Main article: Economic planning

Planned economies are held in contrast with command economies, where most of the economy is organized in a top-down administrative model by a central authority, where decisions regarding investment and production output requirements are decided upon at the top in the chain of command, with little input from lower levels. Advocates of economic planning have sometimes been staunch critics of these command economies. For example, Leon Trotsky believed that those at the top of the chain of command, regardless of their intellectual capacity, operated without the input and participation of the millions of people who participate in the economy and understand/respond to local conditions and changes in the economy, and therefore would be unable to effectively coordinate all economic activity.[5]

Another key difference is that command economies are usually authoritarian in nature, whereas economic planning in general can be either participatory and democratic or authoritarian. Indicative planning is a form of planning in market economies that directs the economy through incentive-based methods. Economic planning can be practiced in a decentralized manner through different government authorities. For example, in some predominately market-oriented and mixed economies, the state utilizes economic planning in strategic industries such as the aerospace industry. Mixed economies usually employ macroeconomic planning, while micro-economic affairs are left to the market and price system.

Another example of this is the utilization of dirigisme, both of which were practiced in France and Great Britain after the Second World War. Swedish public housing models were planned by the government in a similar fashion as urban planning.

Advantages of economic planning[edit]

The government can harness land, labour, and capital to serve the economic objectives of the state. Consumer demand can be restrained in favor of greater capital investment for economic development in a desired pattern. In international comparisons, state-socialist nations compared favorably with capitalist nations in health indicators such as infant mortality and life expectancy.[6] The state can begin building a heavy industry at once in an underdeveloped economy without waiting years for capital to accumulate through the expansion of light industry, and without reliance on external financing. This is what happened in the Soviet Union during the 1930s when the government forced the share of GNP dedicated to private consumption from eighty percent to fifty percent.[7] As a result, the Soviet Union experienced massive growth in heavy industry, with a concurrent massive contraction of its agricultural sector, in both relative and absolute terms.

Disadvantages of economic planning[edit]

Inefficient resource distribution: surplus and shortage[edit]

Critics of planned economies argue that planners cannot detect consumer preferences, shortages, and surpluses with sufficient accuracy and therefore cannot efficiently co-ordinate production (in a market economy, a free price system is intended to serve this purpose). This difficulty was notably written about by economists Ludwig von Mises and Friedrich Hayek, both of whom called it the "economic calculation problem". These opponents of central planning argue that the only way to satisfy individuals who have a constantly changing hierarchy of needs, and are the only ones to possess their particular individual's circumstances, is by allowing those with the most knowledge of their needs to have it in their power to use their resources in a competing marketplace to meet the needs of the most amount of consumers, most efficiently. This phenomenon is recognized as spontaneous order. Additionally, misallocation of resources would naturally ensue by redirecting capital away from individuals with direct knowledge and circumventing it into markets where a coercive monopoly influences behavior, ignoring market signals. According to Tibor R. Machan, "Without a market in which allocations can be made in obedience to the law of supply and demand, it is difficult or impossible to funnel resources with respect to actual human preferences and goals."[8]

Suppression of economic democracy and self-management[edit]

Economist Robin Hahnel notes that, even if central planning overcame its inherent inhibitions of incentives and innovation, it would nevertheless be unable to maximize economic democracy and self-management, which he believes are concepts that are more intellectually coherent, consistent and just than mainstream notions of economic freedom.[9]

Says Hahnel, "Combined with a more democratic political system, and redone to closer approximate a best case version, centrally planned economies no doubt would have performed better. But they could never have delivered economic self-management, they would always have been slow to innovate as apathy and frustration took their inevitable toll, and they would always have been susceptible to growing inequities and inefficiencies as the effects of differential economic power grew. Under central planning neither planners, managers, nor workers had incentives to promote the social economic interest. Nor did impeding markets for final goods to the planning system enfranchise consumers in meaningful ways. But central planning would have been incompatible with economic democracy even if it had overcome its information and incentive liabilities. And the truth is that it survived as long as it did only because it was propped up by unprecedented totalitarian political power."[9]

Economic Instability[edit]

Studies of Eastern European planned economies in the 1950s and 1960s by both American and Eastern European economists found that, contrary to the expectations of both groups, they showed greater fluctuations in output than market economies during the same period.[10]

Relationship with socialism[edit]

Main article: Socialism

While socialism is not equivalent to economic planning or to the concept of a planned economy, an influential conception of socialism involves the replacement of capital markets with some form of economic planning in order to achieve ex ante coordination of the economy. The goal of such an economic system would be to achieve conscious control over the economy by the population, specifically, so that the use of the surplus product is controlled by the producers.[11] The specific forms of planning proposed for socialism and their feasibility are subjects of the socialist calculation debate.

Fictional portrayals of planned economies[edit]

The 1888 novel Looking Backward by Edward Bellamy depicts a fictional planned economy in a United States around the year 2000 which has become a socialist utopia.

The World State in Aldous Huxley's Brave New World and Airstrip One in George Orwell's Nineteen Eighty Four are both fictional examples of command economies, albeit with diametrically opposed aims: The former is a consumer economy designed to engender productivity while the latter is a shortage economy designed as an agent of totalitarian social control. Airstrip One is organised by the euphemistically named Ministry of Plenty.

Other literary portrayals of planned economies were Yevgeny Zamyatin's We, which was an influence on Orwell's work. Like Nineteen Eighty Four, Ayn Rand's dystopian story Anthem was also an artistic portrayal of a command economy that was influenced by We. The difference is that it was a primitivist planned economy, as opposed to the advanced technology of We or Brave New World.

See also[edit]

Case studies


  1. ^ Mandel, Ernest (1986). "In Defence of Socialist Planning" (PDF). New Left Review 159: 5–37. Planning is not equivalent to 'perfect' allocation of resources, nor 'scientific' allocation, nor even ‘more humane’ allocation. It simply means ‘direct’ allocation, ex ante. As such, it is the opposite of market allocation, which is ex post. 
  2. ^ Alec Nove (1987), "Planned Economy," The New Palgrave: A Dictionary of Economics, v. 3, p. 879.
  3. ^ Barkley, John (1992). Comparative Economics in Transforming World Economy. MIT. p. 10. ISBN 0-262-68153-6. 
  4. ^ Ellman, Michael (2007). "The Rise and Fall of Socialist Planning". In Estrin, Saul; Kołodko, Grzegorz W.; Uvalić, Milica. Transition and Beyond: Essays in Honour of Mario Nuti. New York: Palgrave Macmillan. p. 22. ISBN 0-230-54697-8. Realization of these facts led in the 1970s and 1980s to the development of new terms to describe what had previously been (and still were in United Nations publications) referred to as the ‘centrally planned economies’. In the USSR in the late 1980s the system was normally referred to as the ‘administrative-command’ economy. What was fundamental to this system was not the plan but the role of administrative hierarchies at all levels of decision making; the absence of control over decision making by the population... 
  5. ^ Trotsky, Leon. Writings 1932–33. p. 96. 
  6. ^ Michael Ellman (2014). Socialist Planning. Cambridge University Press. ISBN 1107427320 p. 372.
  7. ^ Kennedy, Paul (1987). The Rise and Fall of the Great Powers. New York: Random House. pp. 322–3. ISBN 0-394-54674-1. 
  8. ^ Machan, R. Tibor (2002). "Some Skeptical Reflections on Research and Development". Liberty and Research and Development: Science Funding in a Free Society (PDF). Hoover Press. ISBN 0-8179-2942-8. 
  9. ^ a b Hahnel, Robin (2002). The ABC's of Political Economy. London: Pluto Press. p. 262. ISBN 0-7453-1858-4. 
  10. ^ Zielinski, J. G. (1973). Economic Reforms in Polish Industry. New York: Oxford University Press. ISBN 0-19-215323-4. 
  11. ^ Feinstein, C.H. (1975). Socialism, Capitalism and Economic Growth: Essays Presented to Maurice Dobb. Cambridge University Press. p. 174. ISBN 0-521-29007-4. We have presented the view that planning and market mechanisms are instruments that can be used both in socialist and non-socialist societies...It was important to explode the primitive identification of central planning and socialism and to stress the instrumental character of planning. 

Further reading[edit]

  • Michael Ellman (2014). Socialist Planning. Cambridge University Press; 3 edition. ISBN 1107427320
  • Gregory Grossman (1987): "Command economy," The New Palgrave: A Dictionary of Economics, v. 1, pp. 494–95.
  • Carl Landauer (1947): Theory of National Economic Planning. University of California Press. Berkeley and Los Angeles, Second edition.
  • Alec Nove (1987): "Planned economy," The New Palgrave: A Dictionary of Economics, v. 3, pp. 879–85.
  • Myant, Martin; Drahokoupil, Jan (2010), Transition Economies: Political Economy in Russia, Eastern Europe, and Central Asia, Wiley-Blackwell, ISBN 978-0-470-59619-7 
  • Cox, Robin 2005, "The Economic Calculation controversy: unravelling of a myth" [1]'
  • Devine, Pat.'Democracy and Economic Planning. Polity. 2010. ISBN 978-0745634791
  • Mandel, Ernest. In Defence of Socialist Planning. New Left Review, Issue 159. 1986.

External links[edit]