Planned economy

A planned economy is an economic system in which a single agency makes all decisions about the production and allocation of goods and services. The term is used most often to refer to a centrally-planned economy (or command economy), in which the state or government controls the factors of production and makes all decisions about their use and about the distribution of income.^[1] In a centrally-planned economy, the planners decide what should be produced and direct enterprises to produce those goods.^[2] A planned economy is usually contrasted with a market economy, where production, distribution, and pricing decisions are made by the private owners of the factors of production and influenced by market forces. A planned economy may either consist of state owned enterprises, private enterprises who are directed by the state, or a combination of both. Though planned economies are usually defined in contrast to market economies, it is not necessary for an economy to be either market-based or centrally-planned; other systems also exist.

Important planned economies that existed in the past include the Economy of the Soviet Union, which was for a time the world's second-largest economy. Beginning in the 1980s and 1990s, many governments presiding over planned economies began deregulating and moving toward market based economies by introducing market forces to determine pricing, distribution, and production. Although most economies today are market economies or mixed economies, planned economies exist in some countries such as Cuba and North Korea.^[3]

While the term planned economy usually refers to centrally-planned economies, it may also be used to refer to decentralized systems of planning such as participatory economics. [1] [2] [3].

1 Support for centrally planned economies
2 Objections to central planning
3 Planned economies and socialism
4 Transition from a planned economy to a market economy
5 Similar economic models
6 See also
7 References

[edit] Support for centrally planned economies

Supporters of planned economies cast them as a practical measure to ensure the production of necessary goods—one which does not rely on the vagaries of free markets.

The government can harness land, labor, and capital to serve the economic objectives of the state (which, in turn, may be decided by the people through a democratic process). Consumer demand can be restrained in favor of greater capital investment for economic development in a desired pattern. 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.
Consumers do not need money to express their economic demands, but may do so through democratic councils (sometimes called workers councils or soviets) to decide and implement democratic decisions about the economy. [4]
A planned economy can maximize the continuous utilization of all available resources. This means that planned economies do not suffer from a business cycle. Under a planned economy, neither unemployment nor idle production facilities should exist beyond minimal levels, and the economy should develop in a stable manner, unimpeded by inflation or recession.
A planned economy can serve social rather than individual ends: under such a system, rewards, whether wages or perquisites, are to be distributed according to the social value of the service performed. A planned economy eliminates the dependence of production on individual profit motives, which may not in themselves provide for all society's needs.
While a market economy maximises wealth by evolution, a planned economy favors design. While evolution tends to lead to a local maximum in aggregate wealth, design is in theory capable of achieving a global maximum. For example, a planned city can be designed for efficient transport, while organically grown cities tend to suffer from traffic congestion.

Taken as a whole, a centrally planned economy would attempt to substitute a number of firms with a single firm for an entire economy. As such, the stability of a planned economy has implications with the Theory of the firm. After all, most corporations are essentially 'centrally planned economies', aside from some token intra-corporate pricing (not to mention that the politics in some corporations resemble that of the Soviet Politburo). That is, corporations are essentially miniature centrally planned economies and seem to do just fine in a free market. As pointed out by Kenneth Arrow and others, the existence of firms in free markets shows that there is a need for firms in free markets; opponents of planned economies would simply argue that there is no need for a sole firm for the entire economy.

[edit] Objections to central planning

Critics of command economy argue that planners cannot detect consumer preferences, shortages, and surpluses with sufficient accuracy and therefore can not efficiently co-ordinate production (in a market economy, a free price system is intended to serve this purpose). For example, during certain periods in the history of the Soviet Union, shortages were so common that one could wait hours in a queue to buy basic consumer products such as shoes or bread. These shortages were due in part to the central planners deciding, for example, that making tractors was more important than making shoes at that time, or because the commands were not given to supply the shoe factory with the right amount of leather, or because the central planners had not given the shoe factories the incentive to produce the required quantity of shoes of the required quality. This difficulty was first noted by economist Ludwig von Mises, who called it the "economic calculation problem". Economist János Kornai developed this into a shortage economy theory (advocates could claim that shortages were not primarily caused by lack of supply, but hoarding by consumers afraid of future price changes; this was especially the case in the late Soviet Union).

Some who oppose planned economies argue that some central planning is justified. In particular, it is possible to create unprofitable but socially useful goods within the context of a market economy. For example, one could produce a new drug by having the government collect taxes and then spend the money for the social good. On the other hand, opponents of such central planning say that "absent the data about priorities conveyed through price signals created by freely acting individuals, [it is questionable] whether determinations about what is socially important can even be made at all." Opponents do not dispute that that something useful can be produced if money is expropriated from private businesses and individuals, but their complaint is that "it’s far from certain that those monies could not have been spent better" if individuals were allowed to spend and invest as they wished according to their own wants. We can see things of value being produced by the state taxing and using those funds to undertake projects which are believed to be social goods, but we cannot we cannot see what social goods have not been produced due to wealth taken out of the hands of those who would have invested and spent their money in other ways according to their own goals. These opponents of central planning argue that the only way to determine what society actually wants is by allowing private enterprise to use their resources in competing to meet the needs of consumers, rather those taking resources away and allowing government to direct investment without responding to 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."^[4]

Critics also hold that certain types of command economies may require a state which intervenes highly in people's personal lives. For example, if the state directs all employment then one's career options may be more limited. If goods are allocated by the state rather than by a market economy, citizens cannot, for example, move to another location without state permission because they would not be able to acquire food or housing in the new location, as the necessary resources were not preplanned (however, advocates of planned economy may point out that a market economy does not guarantee the existence of food and housing at the new location either).

[edit] Planned economies and socialism

Main article: Socialist economics

In the 20th century, most planned economies were implemented by states that called themselves socialist. Also, the greatest support for planned economics comes from socialist authors. For these reasons, the notion of a planned economy is often directly associated with socialism. However, they do not entirely overlap. There are branches of socialism such as libertarian socialism, that reject a centralized state, and some of these tendencies reject economic planning as well.

Furthermore, planned economies are not unique to socialist states. Socialism is concerned above all with achieving some degree of equality of wealth between members of society, but a planned economy, as such, does not necessarily imply an egalitarian distribution of wealth. Some authors have argued that elements of centralized economic planning exist in various modern non-socialist systems, such as the mixed economies of liberal democracies (widely seen as being capitalist countries) and the economies of fascist nations. Pre-modern economies (those existing before the industrial revolution) are more difficult to analyze by today's standards, but a number of them, particularly those of hydraulic empires, may be seen as having been centrally planned as well.

There is a Trotskyist theory of permanent arms economy, put forward by Michael Kidron, which leads on from the contention that war and accompanying industrialisation is a continuing feature of capitalist states and that central planning and other features of the war economy are ever present. ^[5]

[edit] Transition from a planned economy to a market economy

The shift from a command economy to a market economy has proven to be difficult; in particular, there were no theoretical guides for doing so before the 1990s. One transition from a command economy to a market economy that is widely considered to be successful is that of the People's Republic of China, in which there was a period of some years lasting roughly until the early 1990s during which both the command economy and the market economy coexisted, so that nobody would be much worse off under a mixed economy than a command economy, while some people would be much better off. Gradually, the parts of the economy under the command economy decreased until the mid-1990s when resource allocation was almost completely determined by market mechanisms.

By contrast, the Soviet Union's transition was much more problematic and its successor republics faced a sharp decline in GDP during the early 1990s. While the transition to a market economy proved difficult, many of the post-Soviet states have been experiencing strong, resource-based economic growth in recent years, though the levels vary substantially. However a majority of the former Soviet Republics have not yet reached pre-collapse levels of economic development.

[edit] Similar economic models

A palace economy may be considered as a subsistence economy augmented with elements of command economy.

[edit] See also

[edit] References

^ Myers, Danny. Construction Economics (2004), Spon Press (UK), p. 288
^ Ollman, Bertell. Market Socialism: The Debate Among Socialists (1997), Routledge (UK), p. 12
^ von Brabant, Jozef M. The Planned Economies and International Economic Organizations, Cambridge University Press, 1991, p. 16
^ Machan, R. Tibor, Some Skeptical Reflections on Research and Development, Hoover Press
^ A Permanent Arms Economy by Michael Kidron, First printed in International Socialism 1:28 (Spring 1967)