Planned economy

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Planned economy (or command economy) is an economic system in which the state directs the economy.^[1] It is an economic system in which the central government controls industry such that it makes all decisions regarding the production and distribution of goods and services.^{[2][dead link]} Its most extensive form is referred to as a command economy,^[3] centrally planned economy, or command and control economy.^[4]

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 and the distribution of output.^[5] Planners decide what should be produced and direct lower-level enterprises to produce those goods in accordance with national and social objectives.^[6]

Planned economies are in contrast to unplanned economies, i.e. the market economy, where production, distribution, pricing, and investment decisions are made by the private owners of the factors of production 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."^[7] This latter is sometimes referred to as a "planned market economy".^[8]

A planned economy may consist of state-owned enterprises, private enterprises directed by the state, or a combination of both. Though "planned economy" and "command economy" are often used as synonyms, some make the distinction that under a command economy, the means of production are publicly owned. That is, a planned economy is "an economic system in which the government controls and regulates production, distribution, prices, etc."^[9] but a command economy, while also having this type of regulation, necessarily has substantial public ownership of industry.^[10] Therefore, command economies are planned economies, but not necessarily the reverse.

Important planned economies that existed in the past include the economy of the Soviet Union, which, according to CIA Factbook estimates, was for a time the world's second largest economy,^[11] China before 1978 and India before 1991.

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 the private sector to make the pricing, production, and distribution decisions. 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, Saudi Arabia, Iran, North Korea, and Burma.^[12]

Contents 1 Advantages of economic planning 1.1 Stability 1.2 Meeting collective objectives 1.3 Comparison with capitalist corporations 1.4 Advantages over market economies 2 Disadvantages of economic planning 2.1 Inefficient resource distribution: surplus and shortage 2.2 Suppression of economic democracy and self-management 3 Economic planning versus the command economy 4 Planned economies and socialism 5 Transition from a planned economy to a market economy 6 See also 7 Further reading 8 Notes 9 External links

[edit] Advantages of economic planning

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[edit] 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. immunization programs or public education).^{[citation needed]}

[edit] Meeting collective objectives

Planned economies may be intended to serve collective 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.^[13] As a result, the Soviet Union experienced massive growth in heavy industry, at the expense of massive starvation.

[edit] Comparison with capitalist corporations

Taken as a whole, a centrally planned economy would attempt to substitute a number of firms with a single firm for an entire economy. As such, the stability of a planned economy has implications with the Theory of the firm. After all, most corporations are essentially 'centrally planned economies', aside from some token intra-corporate pricing. As pointed out by Kenneth Arrow and others, the existence of firms in free markets shows that there is a need for firms in free markets; opponents of planned economies would simply argue that there is no need for a sole firm for the entire economy. Anarchist theorists like Kevin Carson however point to the numerous ways in which government intervention in the market magnify economies of scale, offsetting the natural inefficiencies of centrally planned economies by means of privileges and historical subsidies granted by force, and argues that in a truly free market corporations wouldn't exist.^{[citation needed]}

[edit] 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 not subject to major pitfalls of market economies and marked-oriented mixed economies. A planned economy, in theory, does not suffer from business cycles; it does not experience crises of overproduction such as the one that was believed to have contributed to the Great Depression. From the modern perspective, it does 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.

[edit] Disadvantages of economic planning

[edit] 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). For example, even though the Soviet Union had its own passenger car manufacturing industry going back to 1940's, it was impossible for a Soviet citizen to simply walk into a store and buy a car—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. An imbalance, which would have been corrected naturally in a matter of years in a free-market economy, persisted for decades, while central planners turned a blind eye on it.

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.

In particular, it is possible to create unprofitable but socially useful goods within the context of a market economy. For example, one could produce a new drug by having the government collect taxes and then spend the money for the social good.It is possible to see things of value being produced by the state taxing and using those funds to undertake projects which are believed to be social goods, but not to see what social goods have not been produced due to wealth taken out of the hands of those who would have invested and spent their money in other ways according to their own goals.

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."^[14]

If the government in question is democratic, democratically-determined social priorities may be considered legitimate social objectives in which the government is justified in intervening in the economy. It must be noted that to date, most if not all countries employing command economies have been dictatorships or oligarchies – few or none were democracies. Many democratic nations, however, have a mixed economy, where the government intervenes to a certain extent and in certain aspects of the economy, although other aspects of the economy are left to the free market.

[edit] Suppression of economic democracy and self-management

Central planning is also criticized by elements of the radical left. Libertarian socialist 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.^[15]

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 impending 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."^[16]

[edit] 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 mechanism, which is based on indirect allocation.^[17] An economy based on economic planning (either through the state, an association of worker cooperatives 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.^[18]

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.^{[citation needed]}

[edit] Planned economies and socialism

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In the 20th century, most planned economies were implemented by states that called themselves socialist. 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.^[19] 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, State socialism or Coordinatorism.

Furthermore, planned economies are not unique to Communist states. 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.^[20]

[edit] 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 China, 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.^[21] 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^{[citation needed]}.

By contrast, the Soviet Union's transition was much more problematic and its successor republics 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.^[22] Iran is currently privatizing companies.

[edit] See also

Criticisms of Socialism Criticisms of communism Communist economics Dirigisme Economic calculation problem Economic interventionism Economics of fascism

Market economy Mixed economy

Participatory economics Public ownership Socialist economics Technocracy

Case studies:

• Economy of India
• Economy of Saudi Arabia
• Economy of the Soviet Union
• Great Leap Forward (China)
• Project Cybersyn (Chile)
• Eastern Bloc economies

[edit] 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.

[edit] Notes

[edit] External links

• An article against "The myth of the permanent arms economy"
• The Stalin Model for the Control and Coordination of Enterprises in a Socialist Economy