Planned Economy

What It Means

A planned economy (also called a command economy) is an economic system in which a government or ruler makes most or all of the important decisions about the production and distribution of goods and services in the society.

Though there have been countless different kinds of human cultures in history, there have only been three basic economic systems: traditional, planned, and market economies. Traditional economies are those in which production and distribution are governed by inherited ideas and attitudes. In societies based on this form of economic system, people usually hunt and gather to satisfy their needs, as their ancestors before them did, and they distribute the proceeds of their hunting and gathering according to traditional hierarchies or rules. This is the oldest form of economic system, and it has been by far the most common one during the course of human history.

In a market system, by contrast, such forces as supply (the amount of any good or service that a seller is willing to sell over a range of prices), demand (the amount of any good or service that buyers are willing to buy over a range of prices), and prices determine the shape of the economy. Sellers want to supply the largest amount of their products possible at the highest prices possible. When prices are too high, however, buyers generally demand less of any given product, and when prices are low, they generally demand more. Neither buyers nor sellers usually get their way entirely. Prices rise or fall in proportion to supply and demand, negotiating the opposing desires of buyers and sellers.

In a planned economy central planners (rather than tradition or market forces) decide most matters of production and distribution. This means that they determine what goods and services should be produced and made available (from airplanes to bicycles, medical care to haircuts, houses to paper clips) and in what amounts. Central planners also determine, for example, whether these and other items should be produced by hand or by machine, in what part of the country they should be produced, and how they should be transported from the place they are manufactured to the place they are purchased. Finally, central planners determine who (a ruling party, all of society, certain classes of society, a religious group) should have access to the products and receive the benefits of the economic activity.

When Did It Begin

No one knows exactly why, how, or when planned economies began to supplant traditional economic systems. Traditional economic systems had allowed for subsistence (survival and a minimal level of comfort) and stability, but they did not encourage technological or cultural advances. It was the transition to planned economies that made possible the great early civilizations, such as those of China and Egypt, in about 3000 bc

Though tradition and inheritance continued to exert a significant influence over these societies, strong rulers overpowered traditional forces and created new ways of organizing land, labor, and equipment. Instead of devoting their labor to the vocation that might have been dictated by their birth into a certain segment of society, for instance, many ancient Egyptians were ordered by the pharaohs to spend years of their lives hauling stones and assembling them into pyramids, just as many ancient Chinese men were ordered to direct their efforts toward the building of that country’s Great Wall.

Such projects are perhaps the most visible symbols of the changes brought about by planned economic systems, but the reorganization of economic resources under central authority figures in the ancient world had much more extensive effects on human life. Instead of merely subsisting, societies could produce huge amounts of wealth. This wealth, usually held by a single ruler or a small elite portion of society, could be used to change the conditions of life drastically. Planned economic systems made possible the building of great cities, the application of new technologies that improved living conditions, and such cultural advances as written language and artistic achievement. The benefits of the system were typically only enjoyed by the ruling classes of society, however.

More Detailed Information

All human communities throughout history have had to answer the same three economic questions. What will be produced? How will it be produced and distributed? And for whom will it be produced and distributed? The way in which a community responds to these questions determines its economy.

In a planned economy central planners answer the first question (What will be produced?) by first setting targets for public consumption of various products. For example, the government, and not individual consumers, determines how many bicycles the public needs in a given year. The planners must then figure out what quantities of various resources are needed to produce that number of bicycles. Resources required to produce any product include land (in addition to the physical space itself, this term is used to indicate natural resources and other raw materials), labor (human effort), and capital (equipment and other items needed to produce goods and services).

While making these determinations about resources, the planners would additionally need to solve the second of the three basic questions: How will the bicycles be produced? Is it in society’s best interest to make low-cost bicycles that will only last a few years or expensive bicycles that will last a lifetime? Numerous other factors also come into play. For instance, the planners might decide to reserve the country’s highest-quality steel for military supplies, and they might therefore allot the bicycle industry a combination of cheaper metals and plastics. Planners might decide, further, that modern, efficient bicycle factories are not in the public interest; instead, the goal might be to employ the maximum number of people, even if this means relying on outdated, more labor-intensive methods of manufacturing.

Lastly, the central planners must decide for whom the bicycles will be produced (in this case, how the bicycles will be distributed becomes part of this third question). Will consumers have to line up to buy bicycles, or will certain people be allowed to buy them and not others? Likewise, who will reap the economic rewards of bicycle production? Profits might be given to an elite group in society, they might be divided equally among all members of society, they might be channeled into national defense, or they might be used in any other way that is deemed consistent with that society’s goals.

While central planning of an economy gives the society the potential to serve the public interest, the system is a cumbersome one. All of the decisions described above must be made for a multitude of products. At the same time that the details of bicycle production are being outlined by central planners, for example, similar decisions must be made about haircuts, leather jackets, T-bone steaks, apartment buildings, medical care, computers, soap, cars, and ovens, and the list goes on and on.

For this and other reasons even the most strictly planned economies have usually allowed market forces to determine some amount of economic activity. In the area of food production, for instance, a centrally planned economy might relax its control, allowing supply and demand to dictate the production and distribution of wheat, beef, potatoes, and carrots. By the same token even the most market-oriented economies typically yield to some amount of government planning, especially in areas where society’s well-being might be most directly threatened, such as in health care and national defense. Thus, all economies are technically mixed (combinations of planned and market economies), but they are generally called either planned or market systems depending on which approach to production and distribution dominates.

Recent Trends

The most prominent planned economy in the twentieth century was that of the U.S.S.R. (Union of Soviet Socialist Republics), also called the Soviet Union. Made up of Russia and other bordering states, the Soviet Union existed from 1922 to 1991, and during this time all of its economic resources were owned and controlled by the government. Many economists applauded Soviet-style central planning during and after the Great Depression (the severe economic crisis that afflicted much of the world in the 1930s) because it allowed the nation to avert the level of suffering experienced in countries with market economic systems. The Soviet economy grew faster than the U.S. economy throughout the 1960s because it was able to mobilize huge amounts of land, labor, and capital for large-scale public projects. By the latter part of the twentieth century, the challenges of planning a modern economy had become insurmountable, however. Soviet planners had to make production and distribution decisions about an ever-growing range of products, the system became clogged and inefficient, and the society’s needs and wants went unfulfilled.

By the 1980s Soviet leaders began to admit that there were flaws in the system, and they started allowing market forces to play a greater role in the nation’s economy. In a market system countless individuals pursue their own self-interest; these pursuits determine what economic activity goes on. A market economy can process information much more quickly and efficiently than a group of central planners, no matter how skilled. In 1991 the Soviet Union was formally dissolved. Since then the nations making up the former Soviet Union have been fitfully transitioning to market economic systems.