Planned economy
Encyclopedia
A planned economy is an economic system
in which decisions regarding production and investment are embodied in a plan formulated by a central authority, usually by a government agency. The justification for central planning is that the consolidation of economic resources can allow for the economy to take advantage of more perfect information
when making decisions regarding investment and production. In an entirely centralized economy, a universal survey of human needs and consumer wants is required before a comprehensive plan for production can be formulated. The state would require the power to allocate the workforce for production, for setting production values and for overseeing the distribution system of the economy. The most extensive form of a planned economy is referred to as a command economy, centrally planned economy, or command and control economy.
In such economies, central economic planning
by the state
or government
controls all major sectors of the economy and formulates all decisions about the use of resources. Planners decide what should be produced and direct lower-level enterprises to produce those goods in accordance with national and social objectives.
Planned economies are in contrast to unplanned economies, i.e. 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
, in which the state employs "influence, subsidies, grants, and taxes, but does not compel." This latter is sometimes referred to as a "planned market economy".
A planned economy may consist of state-owned enterprises, cooperative enterprises, private enterprises directed by the state, or a combination of different enterprise types. Though "planned economy" and "command economy" are often used as synonyms, some make the distinction that under a command economy, enterprises need not follow a comprehensive plan of production. That is, 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.
Beginning in the 1980s and 1990s, many governments presiding over planned economies began deregulating (or as in the Soviet Union, the system collapsed) and moving toward market-based economies by allowing individual enterprises to make the pricing, production, and distribution decisions, granting autonomy to state enterprises and eventually expanding the scope of the private sector
through privatization. Although most economies today are market economies
or mixed economies
(which are partially planned), planned economies exist in very few countries such as Cuba
, Libya
, North Korea
, Saudi Arabia
, Belarus
, and Myanmar.
, which is based on indirect allocation. An economy based on economic planning (either through the state, an association of worker cooperative
s 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 rather than market transactions involving the purchasing of assets by one government agency or firm by another. Decision-making is carried out by workers and consumers on the enterprise-level.
This is contrasted with the concept of a centrally-planned, or command economy, where most of the economy is planned by a central government authority, and organized along a top-down administration where decisions regarding investment, production output requirements are decided upon by planners from the top, or near the top, of the chain of command. Advocates of economic planning have sometimes been staunch critics of command economies and centralized planning. For example, Leon Trotsky
believed that central planners, 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 would be unable to effectively coordinate all economic activity.
Another key difference is that command economies are strictly authoritarian in nature, whereas some forms of economic planning, such as indicative planning
, direct 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.
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
. Mixed economies usually employ macroeconomic planning, while micro-economic affairs are left to the market and price system.
The People's Republic of China
currently has a socialist market economy
in place. Within this system, macroeconomic plans are used as a general guidelines and as government goals for the national economy, but the majority of state-owned enterprises
are subject to market forces. This is heavily contrasted to the command economy model of the former Soviet Union.
The 1970 Chilean computer controlled planned economy cybersyn was pioneered by Salvador Allende
's socialist government, in an attempt to move towards decentralised planning with the experimental cyberfolk component.
During the Spanish Revolution
some Anarchist areas were run under decentralised planning following the principles laid out by Diego Abad de Santillan
in the book After the Revolution http://membres.multimania.fr/anarchives/site/syndic/aftertherevolution.htm#local
De-centralised planning has been a feature in socialist and anarchist economics
. Variations of decentralized planning include participatory economics
, economic democracy
and industrial democracy
, and have been promoted by various political groups, most notably libertarian socialists, Trotskyists, Anarchists and democratic socialists.
. Also, the greatest support for planned production 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
and market socialism
, that reject economic planning as a substitute for market allocation. All of these tendencies usually reject centralized ownership, referring to such as state socialism
or state capitalism
, and instead advocate decentralized ownership based on worker cooperatives and worker self-management
.
While many socialist currents advocated economic planning as an eventual substitute for the market for factors of production, socialists define economic planning as being based on worker-self management, with production being carried out to directly satisfy human needs
, and contrast this with the concept of a command economy of the Soviet Union, which they characterize as being based on a top-down bureaucratic administration of the economy in a similar fashion to a capitalist firm. The Command economy is distinguished from economic planning, and different theories for classifying the socioeconomic system of the Soviet Union exist; most notably a command economy is associated with Bureaucratic collectivism
, State capitalism
or State socialism
.
Furthermore, planned economies are not unique to Communist state
s. 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.
, 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. This 'success' was coupled with a massive disparity between rich and poor and a disturbing new level of corruption, and 90% of Chinese billionaires are related to members of the Communist Party. 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 republic
s faced a sharp decline in GDP
during the early 1990s. One of the suggested causes is that under Soviet planning, price ceilings created major problems (shortages, queuing for bread, households hoarding money) which made the transition to an unplanned economy less easy. 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.
Still, most of the economic hardship that struck many of the former East Bloc countries and the post-Soviet states comes from the program of shock therapy
. The idea behind this program is to convert from a centrally planned economy to a market economy in a short space of time. This means mass-scale privatization
, budget cuts and liberalization of economy and finance regulations. This shock therapy program was implemented in several former communist states like Poland
and Russia
.
Iraq
, after the fall of Saddam Hussein
following the 2003 invasion of Iraq
, is currently experiencing the transition from a command economy under Hussein to a free market economy. Iran
is currently privatizing companies
.
programs or public education
).
rather than individual
needs: under such a system, rewards, whether wages or perquisites, are to be distributed according to the value that the state ascribes to the service performed. A planned economy eliminates the individual profit motives as the driving force of production and places it in the hands of the state planners to determine what is the appropriate production of different sets of goods.
The government can harness land, labor, 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. 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 80 percent to 50.0 percent. As a result, the Soviet Union experienced massive growth in heavy industry.
s; it does not experience alleged crises of overproduction
such as the one that was believed to have contributed to the Great Depression
. From the modern perspective, planned economies theoretically do not result in asset bubbles – massive misallocations of resources such as the dot-com bubble
of the late 1990s or the housing bubble of mid-2000s.
The other aspect is that a centrally planned economy can provide public goods which would not have been available at all, or might require explicit government provision, in a market economy, resulting in a mixed economy. In a mixed economy, the government would have to achieve this goal through taxation or inflation. In a planned economy, state planners would allocate state resources toward public goods and state projects.
is intended to serve this purpose). For example, even though the Soviet Union
had its own passenger car manufacturing industry going back to the 1940's, it was not possible for a Soviet citizen to walk into a store and buy a car as the entire output of all car manufacturing plants was allocated for years in advance. From the modern viewpoint, such a shortage indicates a mismatch between supply and demand, suggesting that planners have misjudged the demand for the product, the equilibrium price, or both.
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).
A problem of surpluses exists. Surpluses indicate a waste of labour and materials that could have been applied to more pressing needs of society. Critics of central planning say that a market economy prevents long-term surpluses because the operation of supply and demand causes the price to sink when supply begins exceeding demand, indicating to producers to stop production or face losses. This frees resources to be applied to satisfy short-term shortages of other commodities, as determined by their rising prices as demand begins exceeding supply.
It is argued that this "invisible hand
" prevents long-term shortages and surpluses and allows maximum efficiency in satisfying the wants of consumers. Critics argue that since in a planned economy prices are not allowed to float freely, there is no accurate mechanism to determine what is being produced in unnecessarily large amounts and what is being produced in insufficient amounts. They argue that efficiency is best achieved through a market economy where individual producers each make their own production decisions based on their own profit motive.
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."
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.
As Hahnel explains, "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."
Without economic democracy there can be troubles with the flow of knowledge as is shown with the initiative for backyard furnaces and other efforts in the Great Leap Forward
.
in Aldous Huxley's and Airstrip One in George Orwell's dystopian novels, Brave New World
and Nineteen Eighty Four respectively, are fictional examples in command economies. Albeit with diametrically opposed aims: The former is a consumer one designed to engender productivity and the latter is a shortage economy
intentionally designed as an agent of totalitarian social control. The latter is organised by the intentionally misleading and even sarcastically named Ministry of Plenty. Other artistic 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
.
Socialist Realism
often portrayed a command economy in action, such as the paintings of Piotr Buchkin
, Rudolf Frentz
, Alexander Samokhvalov, Isaak Brodsky
, Kuzma Petrov-Vodkin
, Kazimir Malevich
, Nikolai Dormidontov and Mikhail Avilov. Though these artworks were often propagandist in nature, jokingly criticised as "girl meets tractor". Many socialist realist novels often portrayed the successes of the command economy, with criticism being suppressed by the censors (even if it was fair and accurate).
Economic system
An economic system is the combination of the various agencies, entities that provide the economic structure that defines the social community. These agencies are joined by lines of trade and exchange along which goods, money etc. are continuously flowing. An example of such a system for a closed...
in which decisions regarding production and investment are embodied in a plan formulated by a central authority, usually by a government agency. The justification for central planning is that the consolidation of economic resources can allow for the economy to take advantage of more perfect information
Perfect information
In game theory, perfect information describes the situation when a player has available the same information to determine all of the possible games as would be available at the end of the game....
when making decisions regarding investment and production. In an entirely centralized economy, a universal survey of human needs and consumer wants is required before a comprehensive plan for production can be formulated. The state would require the power to allocate the workforce for production, for setting production values and for overseeing the distribution system of the economy. The most extensive form of a planned economy is referred to as a command economy, centrally planned economy, or command and control economy.
In such economies, central economic planning
Economic planning
Economic planning refers to any directing or planning of economic activity outside the mechanisisms of the market, in an attempt to achieve specific economic or social outcomes. Planning is an economic mechanism for resource allocation and decision-making in contrast with the market mechanism...
by the state
State (polity)
A state is an organized political community, living under a government. States may be sovereign and may enjoy a monopoly on the legal initiation of force and are not dependent on, or subject to any other power or state. Many states are federated states which participate in a federal union...
or government
Government
Government refers to the legislators, administrators, and arbitrators in the administrative bureaucracy who control a state at a given time, and to the system of government by which they are organized...
controls all major sectors of the economy and formulates all decisions about the use of resources. Planners decide what should be produced and direct lower-level enterprises to produce those goods in accordance with national and social objectives.
Planned economies are in contrast to unplanned economies, i.e. the market economy
Market economy
A market economy is an economy in which the prices of goods and services are determined in a free price system. This is often contrasted with a state-directed or planned economy. Market economies can range from hypothetically pure laissez-faire variants to an assortment of real-world mixed...
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
Macroeconomics
Macroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of the whole economy. This includes a national, regional, or global economy...
plan. Less extensive forms of planned economies include those that use indicative planning
Indicative planning
Indicative planning is a form of central economic planning implemented by a state in an effort to solve the problem of imperfect information in economies and thus increase economic performance...
, in which the state employs "influence, subsidies, grants, and taxes, but does not compel." This latter is sometimes referred to as a "planned market economy".
A planned economy may consist of state-owned enterprises, cooperative enterprises, private enterprises directed by the state, or a combination of different enterprise types. Though "planned economy" and "command economy" are often used as synonyms, some make the distinction that under a command economy, enterprises need not follow a comprehensive plan of production. That is, 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.
Beginning in the 1980s and 1990s, many governments presiding over planned economies began deregulating (or as in the Soviet Union, the system collapsed) and moving toward market-based economies by allowing individual enterprises to make the pricing, production, and distribution decisions, granting autonomy to state enterprises and eventually expanding the scope of the private sector
Private sector
In economics, the private sector is that part of the economy, sometimes referred to as the citizen sector, which is run by private individuals or groups, usually as a means of enterprise for profit, and is not controlled by the state...
through privatization. Although most economies today are market economies
Market economy
A market economy is an economy in which the prices of goods and services are determined in a free price system. This is often contrasted with a state-directed or planned economy. Market economies can range from hypothetically pure laissez-faire variants to an assortment of real-world mixed...
or mixed economies
Mixed economy
Mixed economy is an economic system in which both the state and private sector direct the economy, reflecting characteristics of both market economies and planned economies. Most mixed economies can be described as market economies with strong regulatory oversight, in addition to having a variety...
(which are partially planned), planned economies exist in very few countries such as Cuba
Economy of Cuba
The economy of Cuba is a largely centrally planned economy dominated by state-run enterprises overseen by the Cuban government, though there remains significant foreign investment and private enterprise in Cuba...
, Libya
Economy of Libya
The Economy of Libya is centrally planned. It depends primarily upon revenues from the petroleum sector, which contributes practically all export earnings and over half of GDP....
, North Korea
Economy of North Korea
The economy of North Korea is an industrialized and centrally planned economy.North Korea's economy remains one of the world's last centrally planned systems. The role of market allocation is sharply limited – mainly in the rural sector where some peasants sell produce from small private plots....
, Saudi Arabia
Economy of Saudi Arabia
Saudi Arabia has an oil-based economy with strong government control over major economic activities. Saudi Arabia possesses 18% of the world's proven petroleum reserves, ranks as the largest exporter of petroleum, and plays a leading role in OPEC, although its influence has waned in recent...
, Belarus
Economy of Belarus
Recently, the Belarusian economy has shifted into sustained high gear, along with Ukraine, Russia, and many other Commonwealth of Independent States economies. The economic boom provided by mineral wealth of Russia and other CIS nations and its key location as a transit route between the EU and...
, and Myanmar.
Economic planning versus the command economy
Economic planning is a mechanism for resource allocation of inputs and decision-making based on direct allocation, in contrast with the market mechanismMarket economy
A market economy is an economy in which the prices of goods and services are determined in a free price system. This is often contrasted with a state-directed or planned economy. Market economies can range from hypothetically pure laissez-faire variants to an assortment of real-world mixed...
, which is based on indirect allocation. An economy based on economic planning (either through the state, an association of worker cooperative
Worker cooperative
A worker cooperative is a cooperative owned and democratically managed by its worker-owners. This control may be exercised in a number of ways. A cooperative enterprise may mean a firm where every worker-owner participates in decision making in a democratic fashion, or it may refer to one in which...
s 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 rather than market transactions involving the purchasing of assets by one government agency or firm by another. Decision-making is carried out by workers and consumers on the enterprise-level.
This is contrasted with the concept of a centrally-planned, or command economy, where most of the economy is planned by a central government authority, and organized along a top-down administration where decisions regarding investment, production output requirements are decided upon by planners from the top, or near the top, of the chain of command. Advocates of economic planning have sometimes been staunch critics of command economies and centralized planning. For example, Leon Trotsky
Leon Trotsky
Leon Trotsky , born Lev Davidovich Bronshtein, was a Russian Marxist revolutionary and theorist, Soviet politician, and the founder and first leader of the Red Army....
believed that central planners, 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 would be unable to effectively coordinate all economic activity.
Another key difference is that command economies are strictly authoritarian in nature, whereas some forms of economic planning, such as indicative planning
Indicative planning
Indicative planning is a form of central economic planning implemented by a state in an effort to solve the problem of imperfect information in economies and thus increase economic performance...
, direct 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.
Another example of this is the utilization of dirigisme
Dirigisme
Dirigisme is an economy in which the government exerts strong directive influence. While the term has occasionally been applied to centrally planned economies, where the state effectively controls both production and allocation of resources , it originally had neither of these meanings when...
, 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
Urban planning
Urban planning incorporates areas such as economics, design, ecology, sociology, geography, law, political science, and statistics to guide and ensure the orderly development of settlements and communities....
. Mixed economies usually employ macroeconomic planning, while micro-economic affairs are left to the market and price system.
The People's Republic of China
People's Republic of China
China , officially the People's Republic of China , is the most populous country in the world, with over 1.3 billion citizens. Located in East Asia, the country covers approximately 9.6 million square kilometres...
currently has a socialist market economy
Socialist market economy
The socialist market economy or socialist market economy with Chinese characteristics is the official term used to refer to the economic system of the People's Republic of China after the reforms of Deng Xiaoping. It is also referred to as socialism with Chinese characteristics...
in place. Within this system, macroeconomic plans are used as a general guidelines and as government goals for the national economy, but the majority of state-owned enterprises
Government-owned corporation
A government-owned corporation, state-owned company, state-owned entity, state enterprise, publicly owned corporation, government business enterprise, or parastatal is a legal entity created by a government to undertake commercial activities on behalf of an owner government...
are subject to market forces. This is heavily contrasted to the command economy model of the former Soviet Union.
Decentrally Planned economy
A decentrally planned economy is an economy where members of a society, acting with equal economic power, democratically plan economic activity.The 1970 Chilean computer controlled planned economy cybersyn was pioneered by Salvador Allende
Salvador Allende
Salvador Allende Gossens was a Chilean physician and politician who is generally considered the first democratically elected Marxist to become president of a country in Latin America....
's socialist government, in an attempt to move towards decentralised planning with the experimental cyberfolk component.
During the Spanish Revolution
Spanish Revolution
The Spanish Revolution was a workers' social revolution that began during the outbreak of the Spanish Civil War in 1936 and resulted in the widespread implementation of anarchist and more broadly libertarian socialist organizational principles throughout various portions of the country for two to...
some Anarchist areas were run under decentralised planning following the principles laid out by Diego Abad de Santillan
Diego Abad de Santillán
Diego Abad de Santillán , born Sinesio Vaudilio García Fernández, was an author, economist and leading figure in the Spanish and Argentine anarchist movements.-Early years:...
in the book After the Revolution http://membres.multimania.fr/anarchives/site/syndic/aftertherevolution.htm#local
De-centralised planning has been a feature in socialist and anarchist economics
Anarchist economics
Anarchist economics is the set of theories and practices of economics and economic activity within the political philosophy of anarchism.-Early views:...
. Variations of decentralized planning include participatory economics
Participatory economics
Participatory economics, often abbreviated parecon, is an economic system proposed primarily by activist and political theorist Michael Albert and radical economist Robin Hahnel, among others. It uses participatory decision making as an economic mechanism to guide the production, consumption and...
, economic democracy
Economic democracy
Economic democracy is a socioeconomic philosophy that suggests a shift in decision-making power from a small minority of corporate shareholders to a larger majority of public stakeholders...
and industrial democracy
Industrial democracy
Industrial democracy is an arrangement which involves workers making decisions, sharing responsibility and authority in the workplace. While in participative management organizational designs workers are listened to and take part in the decision-making process, in organizations employing industrial...
, and have been promoted by various political groups, most notably libertarian socialists, Trotskyists, Anarchists and democratic socialists.
Planned economies and socialism
In the 20th century, most planned economies were implemented by states that called themselves socialistSocialism
Socialism is an economic system characterized by social ownership of the means of production and cooperative management of the economy; or a political philosophy advocating such a system. "Social ownership" may refer to any one of, or a combination of, the following: cooperative enterprises,...
. Also, the greatest support for planned production 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
Mutualism (economic theory)
Mutualism is an anarchist school of thought that originates in the writings of Pierre-Joseph Proudhon, who envisioned a society where each person might possess a means of production, either individually or collectively, with trade representing equivalent amounts of labor in the free market...
and market socialism
Market socialism
Market socialism refers to various economic systems where the means of production are either publicly owned or cooperatively owned and operated for a profit in a market economy. The profit generated by the firms system would be used to directly remunerate employees or would be the source of public...
, that reject economic planning as a substitute for market allocation. All of these tendencies usually reject centralized ownership, referring to such as state socialism
State socialism
State socialism is an economic system with limited socialist characteristics, such as public ownership of major industries, remedial measures to benefit the working class, and a gradual process of developing socialism through government policy...
or state capitalism
State capitalism
The term State capitalism has various meanings, but is usually described as commercial economic activity undertaken by the state with management of the productive forces in a capitalist manner, even if the state is nominally socialist. State capitalism is usually characterized by the dominance or...
, and instead advocate decentralized ownership based on worker cooperatives and worker self-management
Workers' self-management
Worker self-management is a form of workplace decision-making in which the workers themselves agree on choices instead of an owner or traditional supervisor telling workers what to do, how to do it and where to do it...
.
While many socialist currents advocated economic planning as an eventual substitute for the market for factors of production, socialists define economic planning as being based on worker-self management, with production being carried out to directly satisfy human needs
Production for use
Production for use is a defining criterion of a socialist economy and distinguishes socialism from capitalism...
, and contrast this with the concept of a command economy of the Soviet Union, which they characterize as being based on a top-down bureaucratic administration of the economy in a similar fashion to a capitalist firm. The Command economy is distinguished from economic planning, and different theories for classifying the socioeconomic system of the Soviet Union exist; most notably a command economy is associated with Bureaucratic collectivism
Bureaucratic collectivism
Bureaucratic collectivism is a theory of class society. It is used by some Trotskyists to describe the nature of the Soviet Union under Joseph Stalin, and other similar states in Central and Eastern Europe and elsewhere .- Theory :...
, State capitalism
State capitalism
The term State capitalism has various meanings, but is usually described as commercial economic activity undertaken by the state with management of the productive forces in a capitalist manner, even if the state is nominally socialist. State capitalism is usually characterized by the dominance or...
or State socialism
State socialism
State socialism is an economic system with limited socialist characteristics, such as public ownership of major industries, remedial measures to benefit the working class, and a gradual process of developing socialism through government policy...
.
Furthermore, planned economies are not unique to Communist state
Communist state
A communist state is a state with a form of government characterized by single-party rule or dominant-party rule of a communist party and a professed allegiance to a Leninist or Marxist-Leninist communist ideology as the guiding principle of the state...
s. There is a Trotskyist
Trotskyism
Trotskyism is the theory of Marxism as advocated by Leon Trotsky. Trotsky considered himself an orthodox Marxist and Bolshevik-Leninist, arguing for the establishment of a vanguard party of the working-class...
theory of permanent arms economy, put forward by Michael Kidron
Michael Kidron
Michael Kidron was a revolutionary thinker and cartographer. He was part of the leadership of the International Socialists through the 1960s and 1970s. He is perhaps best remembered for his visually arresting The State Of The World Atlas.-Early life and career:Kidron was born on 20 September...
, which leads on from the contention that war and accompanying industrialisation
Industrialisation
Industrialization is the process of social and economic change that transforms a human group from an agrarian society into an industrial one...
is a continuing feature of capitalist states and that central planning and other features of the war economy
War economy
War economy is the term used to describe the contingencies undertaken by the modern state to mobilise its economy for war production. Philippe Le Billon describes a war economy as a "system of producing, mobilising and allocating resources to sustain the violence".Many states increase the degree of...
are ever present.
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 many consider successful is that of the People's Republic of ChinaPeople's Republic of China
China , officially the People's Republic of China , is the most populous country in the world, with over 1.3 billion citizens. Located in East Asia, the country covers approximately 9.6 million square kilometres...
, 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. This 'success' was coupled with a massive disparity between rich and poor and a disturbing new level of corruption, and 90% of Chinese billionaires are related to members of the Communist Party. 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
Soviet Union
The Soviet Union , officially the Union of Soviet Socialist Republics , was a constitutionally socialist state that existed in Eurasia between 1922 and 1991....
's transition was much more problematic and its successor republic
Succession of states
Succession of states is a theory and practice in international relations regarding the recognition and acceptance of a newly created sovereign state by other states, based on a perceived historical relationship the new state has with a prior state...
s faced a sharp decline in GDP
Gross domestic product
Gross domestic product refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living....
during the early 1990s. One of the suggested causes is that under Soviet planning, price ceilings created major problems (shortages, queuing for bread, households hoarding money) which made the transition to an unplanned economy less easy. 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.
Still, most of the economic hardship that struck many of the former East Bloc countries and the post-Soviet states comes from the program of shock therapy
Shock therapy (economics)
In economics, shock therapy refers to the sudden release of price and currency controls, withdrawal of state subsidies, and immediate trade liberalization within a country, usually also including large scale privatization of previously public owned assets....
. The idea behind this program is to convert from a centrally planned economy to a market economy in a short space of time. This means mass-scale privatization
Privatization
Privatization is the incidence or process of transferring ownership of a business, enterprise, agency or public service from the public sector to the private sector or to private non-profit organizations...
, budget cuts and liberalization of economy and finance regulations. This shock therapy program was implemented in several former communist states like Poland
Poland
Poland , officially the Republic of Poland , is a country in Central Europe bordered by Germany to the west; the Czech Republic and Slovakia to the south; Ukraine, Belarus and Lithuania to the east; and the Baltic Sea and Kaliningrad Oblast, a Russian exclave, to the north...
and Russia
Russia
Russia or , officially known as both Russia and the Russian Federation , is a country in northern Eurasia. It is a federal semi-presidential republic, comprising 83 federal subjects...
.
Iraq
Iraq
Iraq ; officially the Republic of Iraq is a country in Western Asia spanning most of the northwestern end of the Zagros mountain range, the eastern part of the Syrian Desert and the northern part of the Arabian Desert....
, after the fall of Saddam Hussein
Saddam Hussein
Saddam Hussein Abd al-Majid al-Tikriti was the fifth President of Iraq, serving in this capacity from 16 July 1979 until 9 April 2003...
following the 2003 invasion of Iraq
2003 invasion of Iraq
The 2003 invasion of Iraq , was the start of the conflict known as the Iraq War, or Operation Iraqi Freedom, in which a combined force of troops from the United States, the United Kingdom, Australia and Poland invaded Iraq and toppled the regime of Saddam Hussein in 21 days of major combat operations...
, is currently experiencing the transition from a command economy under Hussein to a free market economy. Iran
Iran
Iran , officially the Islamic Republic of Iran , is a country in Southern and Western Asia. The name "Iran" has been in use natively since the Sassanian era and came into use internationally in 1935, before which the country was known to the Western world as Persia...
is currently privatizing companies
Privatization in Iran
According to the Fourth Five-Year Economic Development Plan , the Privatization Organization of Iran affiliated to the Ministry of Economic Affairs and Finance is in charge of setting prices and ceding shares to the general public and on the Tehran Stock Exchange...
.
Stability
Long-term infrastructure investment can be made without fear of a market downturn (or loss of confidence) leading to abandonment of a project. This is especially important where returns are risky (e.g. fusion reactor technology) or where the return is diffuse (e.g. immunizationImmunization
Immunization, or immunisation, is the process by which an individual's immune system becomes fortified against an agent ....
programs or public education
Public education
State schools, also known in the United States and Canada as public schools,In much of the Commonwealth, including Australia, New Zealand, South Africa, and the United Kingdom, the terms 'public education', 'public school' and 'independent school' are used for private schools, that is, schools...
).
Meeting collective objectives
Planned economies may be intended to serve collectiveCollective
A collective is a group of entities that share or are motivated by at least one common issue or interest, or work together on a specific project to achieve a common objective...
rather than individual
Individual
An individual is a person or any specific object or thing in a collection. Individuality is the state or quality of being an individual; a person separate from other persons and possessing his or her own needs, goals, and desires. Being self expressive...
needs: under such a system, rewards, whether wages or perquisites, are to be distributed according to the value that the state ascribes to the service performed. A planned economy eliminates the individual profit motives as the driving force of production and places it in the hands of the state planners to determine what is the appropriate production of different sets of goods.
The government can harness land, labor, 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. 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 80 percent to 50.0 percent. As a result, the Soviet Union experienced massive growth in heavy industry.
Advantages over market economies
An advantage of a planned economy, one which was among the most important for socialist economists of the early 20th century, is that it is theoretically not subject to major pitfalls of market economies and marked-oriented mixed economies. A planned economy, in theory, does not suffer from business cycleBusiness cycle
The term business cycle refers to economy-wide fluctuations in production or economic activity over several months or years...
s; it does not experience alleged crises of overproduction
Overproduction
In economics, overproduction, oversupply or excess of supply refers to excess of supply over demand of products being offered to the market...
such as the one that was believed to have contributed to the Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
. From the modern perspective, planned economies theoretically do not result in asset bubbles – massive misallocations of resources such as the dot-com bubble
Dot-com bubble
The dot-com bubble was a speculative bubble covering roughly 1995–2000 during which stock markets in industrialized nations saw their equity value rise rapidly from growth in the more...
of the late 1990s or the housing bubble of mid-2000s.
The other aspect is that a centrally planned economy can provide public goods which would not have been available at all, or might require explicit government provision, in a market economy, resulting in a mixed economy. In a mixed economy, the government would have to achieve this goal through taxation or inflation. In a planned economy, state planners would allocate state resources toward public goods and state projects.
A new point of view
According to Anatoly Wasserman today's computing power of modern computer technology enable to create a unique and accurate production plan, devoid of defects that afflict the market economyMarket economy
A market economy is an economy in which the prices of goods and services are determined in a free price system. This is often contrasted with a state-directed or planned economy. Market economies can range from hypothetically pure laissez-faire variants to an assortment of real-world mixed...
Inefficient resource distribution: surplus and shortage
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 systemFree price system
A free price system or free price mechanism is an economic system where prices are set by the interchange of supply and demand, with the resulting prices being understood as signals that are communicated between producers and consumers which serve to guide the production and distribution of...
is intended to serve this purpose). For example, even though the Soviet Union
Soviet Union
The Soviet Union , officially the Union of Soviet Socialist Republics , was a constitutionally socialist state that existed in Eurasia between 1922 and 1991....
had its own passenger car manufacturing industry going back to the 1940's, it was not possible for a Soviet citizen to walk into a store and buy a car as the entire output of all car manufacturing plants was allocated for years in advance. From the modern viewpoint, such a shortage indicates a mismatch between supply and demand, suggesting that planners have misjudged the demand for the product, the equilibrium price, or both.
This difficulty was first noted by economist Ludwig von Mises
Ludwig von Mises
Ludwig Heinrich Edler von Mises was an Austrian economist, philosopher, and classical liberal who had a significant influence on the modern Libertarian movement and the "Austrian School" of economic thought.-Biography:-Early life:...
, who called it the "economic calculation problem
Economic calculation problem
The economic calculation problem is a criticism of central economic planning. It was first proposed by Ludwig von Mises in 1920 and later expounded by Friedrich Hayek. The problem referred to is that of how to distribute resources rationally in an economy...
". Economist János Kornai
János Kornai
János Kornai , is an economist noted for his analysis and criticism of the command economies of Eastern European communist states.- Biography :...
developed this into a shortage economy
Shortage economy
Shortage economy is a term coined by the Hungarian economist, János Kornai. He used this term to criticize the old centrally-planned economies of the communist states of the Eastern Bloc...
theory (advocates could claim that shortages were not primarily caused by lack of supply).
A problem of surpluses exists. Surpluses indicate a waste of labour and materials that could have been applied to more pressing needs of society. Critics of central planning say that a market economy prevents long-term surpluses because the operation of supply and demand causes the price to sink when supply begins exceeding demand, indicating to producers to stop production or face losses. This frees resources to be applied to satisfy short-term shortages of other commodities, as determined by their rising prices as demand begins exceeding supply.
It is argued that this "invisible hand
Invisible hand
In economics, invisible hand or invisible hand of the market is the term economists use to describe the self-regulating nature of the marketplace. This is a metaphor first coined by the economist Adam Smith...
" prevents long-term shortages and surpluses and allows maximum efficiency in satisfying the wants of consumers. Critics argue that since in a planned economy prices are not allowed to float freely, there is no accurate mechanism to determine what is being produced in unnecessarily large amounts and what is being produced in insufficient amounts. They argue that efficiency is best achieved through a market economy where individual producers each make their own production decisions based on their own profit motive.
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."
Suppression of economic democracy and self-management
Central planning is also criticized by elements of the radical left. Libertarian socialist economist Robin HahnelRobin Hahnel
Robin Hahnel is a Professor of Economics at Portland State University. He is best known for his work on participatory economics with Z Magazine editor Michael Albert. He is currently a visiting professor at Lewis & Clark College....
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.
As Hahnel explains, "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."
Without economic democracy there can be troubles with the flow of knowledge as is shown with the initiative for backyard furnaces and other efforts in the Great Leap Forward
Great Leap Forward
The Great Leap Forward of the People's Republic of China was an economic and social campaign of the Communist Party of China , reflected in planning decisions from 1958 to 1961, which aimed to use China's vast population to rapidly transform the country from an agrarian economy into a modern...
.
Artistic portrayals of planned economies
The World StateThe World State
The World State is the primary setting of Aldous Huxley's 1932 dystopian novel Brave New World. In the novel, The World State is a unified government which administers the entire planet, with a few isolated exceptions....
in Aldous Huxley's and Airstrip One in George Orwell's dystopian novels, Brave New World
Brave New World
Brave New World is Aldous Huxley's fifth novel, written in 1931 and published in 1932. Set in London of AD 2540 , the novel anticipates developments in reproductive technology and sleep-learning that combine to change society. The future society is an embodiment of the ideals that form the basis of...
and Nineteen Eighty Four respectively, are fictional examples in command economies. Albeit with diametrically opposed aims: The former is a consumer one designed to engender productivity and the latter is a shortage economy
Shortage economy
Shortage economy is a term coined by the Hungarian economist, János Kornai. He used this term to criticize the old centrally-planned economies of the communist states of the Eastern Bloc...
intentionally designed as an agent of totalitarian social control. The latter is organised by the intentionally misleading and even sarcastically named Ministry of Plenty. Other artistic portrayals of planned economies were Yevgeny Zamyatin
Yevgeny Zamyatin
Yevgeny Ivanovich Zamyatin was a Russian author of science fiction and political satire. Despite having been a prominent Old Bolshevik, Zamyatin was deeply disturbed by the policies pursued by the CPSU following the October Revolution...
's We
We (novel)
We is a dystopian novel by Yevgeny Zamyatin completed in 1921. It was written in response to the author's personal experiences during the Russian revolution of 1905, the Russian revolution of 1917, his life in the Newcastle suburb of Jesmond, and his work in the Tyne shipyards during the First...
, which was an influence on Orwell's work. Like Nineteen Eighty Four, Ayn Rand
Ayn Rand
Ayn Rand was a Russian-American novelist, philosopher, playwright, and screenwriter. She is known for her two best-selling novels The Fountainhead and Atlas Shrugged and for developing a philosophical system she called Objectivism....
's dystopian story Anthem
Anthem (novella)
Anthem is a dystopian fiction novella by Ayn Rand, written in 1937 and first published in 1938 in England. It takes place at some unspecified future date when mankind has entered another dark age characterized by irrationality, collectivism, and socialistic thinking and economics...
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
Brave New World
Brave New World is Aldous Huxley's fifth novel, written in 1931 and published in 1932. Set in London of AD 2540 , the novel anticipates developments in reproductive technology and sleep-learning that combine to change society. The future society is an embodiment of the ideals that form the basis of...
.
Socialist Realism
Socialist realism
Socialist realism is a style of realistic art which was developed in the Soviet Union and became a dominant style in other communist countries. Socialist realism is a teleologically-oriented style having its purpose the furtherance of the goals of socialism and communism...
often portrayed a command economy in action, such as the paintings of Piotr Buchkin
Piotr Buchkin
Piotr Dmitrievich Buchkin – Soviet, Russian painter, watercolorist, graphic artist, illustrator, and art teacher, Honored Arts Worker of the RSFSR, lived and worked in Leningrad, member of the Leningrad branch of Union of Artists of Russian Federation, regarded as one of the founder and ...
, Rudolf Frentz
Rudolf Frentz
Rudolf Rudolfovich Frentz - Soviet, Russian painter, watercolorist, graphic artist, illustrator, and art teacher, lived and worked in Leningrad, member of the Leningrad Union of Artists, regarded as one of the founder and representatives of the Leningrad school of painting, most famous for his...
, Alexander Samokhvalov, Isaak Brodsky
Isaak Brodsky
Isaak Izrailevich Brodsky , was a Soviet painter whose work provided a blueprint for the art movement of socialist realism. He is known for his iconic portrayals of Lenin and idealized, carefully crafted paintings dedicated to the events of the Russian Civil War and Bolshevik Revolution.Brodsky was...
, Kuzma Petrov-Vodkin
Kuzma Petrov-Vodkin
Kuzma Sergeevich Petrov-Vodkin, was an important Russian and Soviet painter and writer.-Early years:...
, Kazimir Malevich
Kazimir Malevich
Kazimir Severinovich Malevich was a Russian painter and art theoretician, born of ethnic Polish parents. He was a pioneer of geometric abstract art and the originator of the Avant-garde Suprematist movement.-Early life:...
, Nikolai Dormidontov and Mikhail Avilov. Though these artworks were often propagandist in nature, jokingly criticised as "girl meets tractor". Many socialist realist novels often portrayed the successes of the command economy, with criticism being suppressed by the censors (even if it was fair and accurate).
See also
Case studies:- Economy of the Soviet UnionEconomy of the Soviet UnionThe economy of the Union of Soviet Socialist Republics was based on a system of state ownership of the means of production, collective farming, industrial manufacturing and centralized administrative planning...
- Five-Year Plans in the Soviet Union
- Five-year plans of ArgentinaFive-Year Plans of ArgentinaThe Five Year Plan was an Argentine state-planning strategy, during the first government of Juan Domingo Perón.- The preparations :Early in the second half of 1946, the Technical Secretariat of the Presidency began to prepare a Plan of Government for the five-year period from 1947 to 1951...
- Great Leap ForwardGreat Leap ForwardThe Great Leap Forward of the People's Republic of China was an economic and social campaign of the Communist Party of China , reflected in planning decisions from 1958 to 1961, which aimed to use China's vast population to rapidly transform the country from an agrarian economy into a modern...
(China) - Economy of IndiaEconomy of IndiaThe Economy of India is the ninth largest in the world by nominal GDP and the fourth largest by purchasing power parity . The country is a part of the G-20 major economies and the BRICS, in addition to being partners of the ASEAN. India has a per capita GDP of $3,608 as per 2010 figures, making it...
- Project CybersynProject CybersynProject Cybersyn was a Chilean attempt at real-time computer-controlled planned economy in the years 1970–1973 . It was essentially a network of telex machines that linked factories with a single computer centre in Santiago, which controlled them using principles of cybernetics...
(Chile) - Eastern Bloc economiesEastern Bloc economiesAfter the Soviet Union's occupation of much of the Eastern Bloc during World War II, Soviet leader Joseph Stalin implemented socioeconomic transformations of each of the Eastern Bloc economies that comported with the Soviet Communist economic model...
- Economy of Saudi ArabiaEconomy of Saudi ArabiaSaudi Arabia has an oil-based economy with strong government control over major economic activities. Saudi Arabia possesses 18% of the world's proven petroleum reserves, ranks as the largest exporter of petroleum, and plays a leading role in OPEC, although its influence has waned in recent...
Further reading
- 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.