Centrally planned economy

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Centrally planned economy
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A centrally planned economy is an economy based on the domination of state ownership of factors of production and management through state bureaucracy, mainly through various types of indicators resulting from the central plan. The concept of a centrally planned economy is related to the economy of countries, the so-called real socialism, ie countries ruled by a communist-type party.

The basic assumptions of this economy are derived from the Marxist vision of communism. It arose first of all from the total criticism of capitalism.

The essential features of a centrally planned economy, otherwise known as the command-and-distribution system:

  • monotheistic social order - the structure of this system was distinguished by the political center (the system of supreme party authorities) followed by the state authorities (the Seym and the Council of State) and the central state administration (government, ministries, various central offices),
  • domination of state ownership of production factors - state ownership prevailed in all areas of the economy. In the formal and legal sense, the owner of the means of production concentrated in the so-called the state sector was the state. State ownership was created as a result of the nationalization of larger private enterprises and land estates. This property and cooperative property were officially treated as two forms of social ownership, with state ownership as a "higher" form, and a "lower" cooperative one (it was assumed that the cooperative ownership was used in the interest of only one group and the state in the interest of the whole society). As for private property, it was in the form of the so-called small-scale ownership. It covered the land and other factors of production, was concentrated in individual farms and small enterprises and production, craft and service facilities,
  • central planning and economic management - very strong centralization of economic decisions, important economic decisions were made at the central level. The hierarchical nature of the plan and the vertical arrangement of links between various organizations and the prescriptive way of communicating the decisions were in force. Tasks included in the plan had to be treated by other economic entities as mandatory to be carried out. Material planning over financial planning prevailed. The plan was created primarily in natural (physical) quantities. Goods and money categories (prices, costs, profitability) in the sphere of relations between the central level and enterprises and between enterprises themselves played a passive role in the sense that they did not affect the activeness of the choice made by enterprises,
  • non-market allocation of resources - the distribution of raw materials, materials, foreign currency, investment and credit funds, and to a large extent also consumer goods and services. The allocation of resources was influenced by subjective assessments of economic politicians and tender procedures between various pressure groups,
  • shortage economy - shortages were ubiquitous, they concerned both production factors and consumption items. An important cause of shortages was that enterprises faced the so-called a "mild" monetary and budgetary constraint. It was expressed in the fact that:

prices were not external to enterprises, which means that they had an impact on them, they could manipulate them and hide waste in them,

  • the tax system was mild, relieves, deferrals and tax exemptions were applied to enterprises,

the state granted non-returnable subsidies to enterprises,

  • banks gave loans to business organizations even in a situation where there was no guarantee that they would be able to return loans from their own revenues.

Weaknesses of the system

The existence of a mild financial and budgetary constraint meant that enterprises did not have to fight for survival and development, which were guaranteed by the state and did not depend on the realized profitability. The weakness of the command and distribution system was that the system:

  • it did not ensure the correct allocation of economic resources, i.e. it did not encourage the rational use of production factors and cost reductions,
  • turned out to be completely inflexible from the point of view of adapting production to the structure of the recipients' needs,
  • it was not able to absorb information,
  • it was not conducive to economic balance,
  • it inhibited the bottom-up initiative and creation of the strength in society,
  • it tended to hide reserves by business entities,
  • it led to excessive growth of business administration and party and state bureaucracy,
  • in practice it prevented any democracy.

The advantages of the system

The command and distribution system had one strong point, the so-called high selectivity, i.e. the ability to concentrate limited resources at the central level, and then their distribution between the objectives considered the most important.

References