The concept of planned economy refers to a particular form of political-economic system by which the state controls and affects the development of the country’s economy.
What is planned economy?
In a planned economy society, the economic market – i.e. prices and quantities of goods produced – is controlled by the government. Society is most often centralized, and all economic plans and decisions regarding public activities are carried out by a government. Normally, the planning will be based on an overall prioritization of the societal needs for goods and services. Plan economy can therefore be seen as a counterpart to the market economy, where prices and production are determined by just supply and demand in the market. In cases where political governance is not made by democratically elected politicians, it can be defined as ‘command economy’. Command economy is the direct counterpoint to pure market economy and tends to cause economic anarchy.
Planned economy is often associated with socialism. In certain social economy models, some reasonable space is provided for private companies with the right to self-determination over their own economic activities.
Planned economy in practice
The planned economy aims to improve the country’s productivity and coordinate the economic activities. In this way, it can be precisely determined how much to produce from certain goods for a specific period. However, it can be problematic to decide how much to produce each product for their own possible demands. Demand is basically impossible for the state to predict. Therefore, it often happens that too much of some goods and too little of others are produced in a planned economy. On the one hand, it causes a huge waste of resources which easily exceeds the waste of resources seen in the market economies. This is one of the biggest disadvantages of plannned economy. In addition, there is a lack of product development because the decisions of the top-level authority are not dictated by demanding customers in the market. On the other hand, one of the benefits of planned economy is that; government programs allow stronger resilience to global economic crises, which often hit the market economies hard.
The state’s possibilities for planned economy management
A state can choose to organize its planning economy through various activities and decision-making procedures. For example, the state may choose to directly decide over parts of the production process in the economy. In this way, the state’s planning of production has an indirect effect on other parts of the economy, as it controls supply and demand for certain goods. It has a domino effect on associated product areas, which is also influenced by the state’s plans.
Other examples for economic governance may be; the ability of the state to limit the scope and permits of private property and to regulate interest rates as well as to set limits on bank lending and investment.
Third example is to influence the economy indirectly through financial measures. It can be through new taxes and charges on various goods, various forms of assistance to individuals and businesses and actions that affect the development of the economic market.
Fourth example is the state’s ability to influence decision-making processes in areas where the economy is already controlled by private companies and organizations. This can be achieved by influencing the basis of the decisions and organizing the cooperation in a certain way. This is called indicative planning and is characterized by the state’s own decisions, orders and prohibitions against private parts of the economy. The state’s decisions can thus have a direct impact on the way in which private companies operate their business and plan their financial activities.
It can be said that economies of many countries contain planned-economic elements and efficiency of these plans will change according to the countries’ economic regimes. The planning in capitalist countries, where private property and private companies can freely thrive, is largely done through government by indicative planning. On the other hand, planning in a socialist economy will be dominated, to a much greater extent, by the state’s direct planning.
Planned economy social models
Over time, planning economics has primarily been practiced by communist-led countries around the world. Planning economies are especially associated with the Soviet Union, whose economy was governed by five and seven-year plans between 1928-1991. The financial plans were reconciled through coordination between the supreme planning authority, Gosplan (abbreviation of Gosudarstvennyy Planovyy Komitet, in English State Planning Committee), and a number of ministries of the individual industries, who then aligned the plans with the community companies.
Planning economics was also part of Adolf Hitler’s economic policy, which regulated Germany from 1934 in the form of four-year plans. In addition, the United States has also tried planning economy models, which was expressed in the country’s war economy during World War II, where the economy was largely controlled by the government. Further examples are France, Norway and Sweden, which have experienced successful implementation of long-term economic plans during various periods after World War II .
From the 1980s and especially after 1990s, many societies began to move to market economy by allowing private companies to make their own decisions in terms of managing and pricing their goods and services. Gradually, free market activities were opened up, especially in Eastern Europe after 1992, when the new independent Russia abolished Soviet price control.
Although most socialist economies today are market-based mixed economies (ie with planning economy in certain areas), there are still perfectly planned economies in various places around the world such in North Korea, Laos and Cuba.