Planned economy

In the planned economy, the government has a central role in all decisions that are made.

The command economy is usually associated with a socialist or communist economic system, where land and capital are collectively owned.

The main features of such an economic system are:

Production decisions (what, how and for whom production should take place) are decided by the government.

Hence, resources are controlled by the government on behalf of its citizens.

Examples of Central Planning
The Soviet Union 1917-1991 and Soviet Bloc
China until the late 70s
Cuba

Characteristics of a Centrally Planned Economy

Government ownership

National bureaucratic decisions on what to produce, how to produce, and how to distribute things are made.

Price regulations, rather than market forces, typically establish prices.

Distribution based on ration books.

Production could be planned five or 10 years ahead of time.

More levels of bureaucracy are required to manage and plan economic decisions.

Scope for inefficiency due to lack of incentive

Because of the power of bureaucrats, there is a high risk of corruption.

A high level of political control and censorship was frequently required.

Pros

With central planning, the government could take an overall view of the economy.

It could direct the nation’s resources in accordance with specific national goals. For example, Unemployment could be largely avoided if the government carefully planned the allocation of labour in accordance with production requirements and labour skills

Economies of scale

Large state monopolies can achieve huge cost savings known as economies of scale . This is achieved by operating on a very large scale, such as a national supplier of electricity or postal services

National income could be distributed more equally or in accordance with needs.

A planned economic system enables basic needs to be met for everyone in society. For example, everyone in society has access to education, health care and employment.

The social repercussions of production and consumption (e.g. the effects on the environment) could be taken into account, provided the government was able to predict these effects and chose to take them into account.

Cons

Bureaucracy

Government intervention involves administrative costs. The more wide-reaching and detailed the intervention, the greater the number of people and material resources that will be involved. These resources may be used wastefully.

Lack of economic freedom

Complete state control over resource allocation would involve a considerable loss of individual liberty. As the state plans all production decisions, individuals do not have economic freedom to choose from competing goods and services. Workers would have no choice where to work.

Lack of incentives

As resources, jobs, goods and services are determined (planned) by the government, there is a lack of incentive to be innovative. The absence of a profit motive for firms means there is less of an incentive to produce more goods and services or to produce these at a higher quality.

Inefficiency

If there is no system of prices, or if prices are set arbitrarily by the state, planning is likely to involve the inefficient use of resources. It is argued that planned economies cannot detect consumer preferences resulting in shortages and surpluses