A planned economy is a type of economic system where investment and the allocation of capital goods is determined by an economy-wide plan of production. A planned economy may be based on centralized, decentralized or participatory forms of economic planning. A command economy or administrative command economy refers to the nominally-planned economies of the former Soviet Union and eastern bloc to highlight the central role of hierarchical administration in guiding the allocation of resources in these economic systems, as opposed to planned coordination.
- Planned versus command economies
- Advantages of economic planning
- Inefficient resource distribution surplus and shortage
- Suppression of economic democracy and self management
- Economic Instability
- Relationship with socialism
- Fictional portrayals of planned economies
Planned economies are usually associated with Soviet-type central planning, which involves centralized state planning and administrative decision making. In command economies, important allocation decisions are made by government authorities and are imposed by law. Planned economies are held in contrast to unplanned economies, specifically market economies, where production, distribution, pricing and investment decisions are made by autonomous firms operating in markets. Market economies that use indicative planning are sometimes referred to as “planned market economies”.
The traditional conception of socialism involves the integration of socially-owned economic enterprises via some form of planning, with direct calculation substituting factor markets. As such, the concept of a planned economy is often associated with socialism and socialist planning, although such an economic system has not yet been established anywhere in the world. Some economists and computer scientists have proposed forms of socialist planning based on advances in computer science and information technology in recent decades.
Planned versus command economies
Planned economies are held in contrast with command economies, where 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.
Whereas 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.
Although planned economies have historically been associated with Marxist-Leninist states and the Soviet economic model, 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 further distinction of an 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. The possibility of a digital planned economy was explored by Chile with the creation of Project Cybersyn and Alexander Kharkevich head of the Department of technical physics in Kiev in 1962.
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, or government direction of the economy through non coercive means, 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 in a project called Million Programme.
Advantages of economic planning
The government can harness land, labours, 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, although the statistics concerning infant mortality are self-reported and based on varying standards. 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. 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.
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 system is intended to serve this purpose). This difficulty was notably written about by economists Ludwig von Mises and Friedrich Hayek, who referred to different aspects of the problem respectively as the "economic calculation problem" or "local knowledge 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."
Suppression of economic democracy and self-management
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.
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."
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.
Relationship with 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. The specific forms of planning proposed for socialism and their feasibility are subjects of the socialist calculation debate.
Fictional portrayals of planned economies
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.