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.
Examples of Centrally planned economy
- The former Soviet Union was a classic example of a centrally planned economy. In this system, the state-owned and managed the majority of the economy, setting prices, production and distribution levels. The idea behind this was to ensure that resources were used efficiently to meet the needs of the population.
- Cuba is another example of a centrally planned economy. The Cuban government controls the majority of the country’s economic activities, including the setting of prices, production levels and distribution of goods and services. This system has been in place since the Cuban Revolution in 1959, and has resulted in a relatively stable economy.
- North Korea is a third example of a centrally planned economy. As in the former Soviet Union and Cuba, the government controls most of the economy, setting prices, production levels, and distribution of goods and services. The North Korean government has also imposed strict regulations on international trade, leading to a highly isolated economy.
Limitations of Centrally planned economy
A centrally planned economy has certain limitations, which include:
- Limited production and consumption – Centrally planned economies suffer from limited production and consumption of goods and services, which means that there is not enough of a variety of goods and services to meet the needs of the people. This can lead to shortages of goods and services, leading to higher prices, and ultimately leading to a decrease in the overall standard of living.
- Low incentives to innovate – Incentives to innovate are often lacking in centrally planned economies, as the government sets prices and production goals, which do not reflect the true value of the goods and services being produced. This can lead to a lack of investment in new technologies and processes, resulting in a lack of economic growth and development.
- Inefficient allocation of resources – Centrally planned economies are often inefficient in allocating resources, as the government typically sets prices and production goals which do not reflect the true value of the goods and services being produced. This can lead to a misallocation of resources, resulting in inefficient production and a lack of economic growth.
- Lack of competition – Centrally planned economies are often characterized by a lack of competition, as the government typically controls the production and pricing of goods and services. This can lead to a lack of innovation, resulting in a lack of economic growth and development.
- Political interference – Centrally planned economies are often subject to political interference, as the government typically sets prices and production goals which do not reflect the true value of the goods and services being produced. This can lead to corruption and inefficiency, resulting in a lack of economic growth and development.
Centrally planned economies have several other approaches related to them, such as:
- Command Economy: This approach is characterized by the complete control of economic activity by the government. Prices, production and distribution of resources are all determined centrally by the government.
- Market Socialism: This approach combines some aspects of a command economy with the price-determination of the market. The state owns and controls the main means of production while the market allocates resources and labor.
- Democratic Socialism: This approach is based on the idea that the government should manage the economy, but decisions should be made democratically by the people. This could be achieved through a combination of public and private ownership of the means of production.
- Mixed Economy: This approach combines elements of a centrally planned economy with aspects of a market economy. It allows for some private ownership of the means of production, but the state also plays a role in the economy through regulation and ownership of certain industries.
To summarize, centrally planned economies have several other approaches related to them, such as Command Economy, Market Socialism, Democratic Socialism and Mixed Economy. These approaches combine elements of a centrally planned economy with aspects of a market economy, however the degree of control of the government varies.
References
- Zhou, Y. (2005). The making of an innovative region from a centrally planned economy: institutional evolution in Zhongguancun Science Park in Beijing. Environment and Planning A, 37(6), 1113-1134.
- Calvo, G. A., & Frenkel, J. A. (1991). From centrally planned to market economy: the road from CPE to PCPE. Staff Papers, 38(2), 268-299.
- Kamath, S. J. (1990). Foreign direct investment in a centrally planned developing economy: the Chinese case. Economic Development and Cultural Change, 39(1), 107-130.
