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Planned Economy

Planned Economy

The concept of a planned economy, its advantages, disadvantages, and the list of countries in the world that run their economies on this concept are all explained in the article below.
Ishani Chatterjee Shukla
Has that economics assignment literally ruffled your feathers? Or, are you, by any chance, planning to complete the assignment by simply copying and pasting relevant information blindly? What would you say to getting your economics concepts cleared, topic by topic? Oh no, don't worry! This ain't gonna be one of those lengthy academic sessions designed to further bewilder you! This article is an attempt to keep things as simple as possible and explain what a planned economy is all about. Hence, read on to get to the roots of the mechanics behind this concept.

The Basics

A planned economy is a state-run economy. In such an economic system, the central governing body is in charge of all major industries of the country and regulates everything relating to the volume of production and method and proportion of distribution of all goods and services produced by these industries. Although this concept comes quite close to a centrally-planned economy, it is not really synonymous. In fact, it is a couple of notches more extensive, since, under such an economic system, the economic dynamics of price and supply of goods and services are completely in the hands of the government. In fact, there is a separate government planning body, complete with administrative bureaucracy, that oversees the economic planning, investment, and resource allocation of the entire country. The most prominent distinction between the planned and command types is the fact that while the government owns all means of production in the case of the latter, the government only regulates the economic machinery without expressing state ownership of the means of production in the former.

A planned economy can have either state-owned enterprises or a private sector that follows state regulations or there can be a harmonious combination of both. The definition framed by Wikipedia very lucidly distinguishes between a planned and command economy. The definition goes as follows:
A planned economy is "an economic system in which the government controls and regulates production, distribution, prices, etc." but a command economy, while also having this type of regulation, necessarily has substantial public ownership of industry. Therefore, command economies are planned economies, but not necessarily the reverse.

Today, very few countries, i.e., Iran, Cuba, North Korea, Libya, Myanmar, and Saudi Arabia follow this system.

Comparison with Other Economic Systems

This economic system is a stark contrast to a market economy, which is based upon the principles of capitalism, where the economic decisions of the private sector prevail. Although the planned type may remind you of the concept of communism, the two are not at all the same thing. While communism is a political philosophy, which, by default, necessitates the system to be planned and run by the state, the planned type is an economic system, not all planned economies follow communism. In short, a communist economic system has to be planned, but the reverse need not be true. Most planned economies today are in the form of socialist economies where the principles of socialism, i.e., free association, production planning, etc., to coordinate the use of the means of production, and production are used.

  • The most significant advantage is the absence of cyclical fluctuations and stability.
  • Things like overproduction, over capitalization and business cycles do not get the upper hand.
  • Also, this system aims at meeting the collective economic goal of the nation, rather than individual objectives.
  • There is also a better, more economic utilization of resources, since a concrete, centralized economic plan goes in a focused direction to achieve maximum benefits.
  • Consider this yourself - what would be more economical? The government setting up one big cement plant in a particular region that is sufficient to meet the demands of that region alone or ten private enterprises setting up ten different cement plants in the same region and constantly competing with each other to gain market share? Which alternative makes most economic use of resources and which is more wasteful?
  • There tends to be a lot of gap between theory and practice. Despite its theory of equitable distribution of resources and allocation of revenue, most of these systems face the problem of irregular allocation of resources and income, and there are always instances of surplus and deficit.
  • Also, the fact that the government plans everything goes against the principles of economic democracy.
  • Sometimes, and in certain sectors, it is good to let the market forces decide the economic course of action, and this system often misses out on these advantages. This is the reason why most countries today prefer to go along with a mixed economy rather than a completely centrally-planned one.
That was a brief overview of what a planned economy is all about. Hope the explanation and comparisons with other major economic systems, given here, served their purpose of clarifying the concept.