What is a planned economy?
A planned economy, also known as a directed economy, is an economic system in which a central authority, such as a government, makes economic decisions regarding the manufacturing and distribution of products. Planned economies are different from market economies, in which these decisions are traditionally made by businesses and consumers.
The production of goods and services in directed economies is often carried out by public enterprises, which are public enterprises. In planned economies, sometimes called “directed economies”, prices are controlled by bureaucrats.
Key points to remember
- In a planned economy, important economic decisions are made by a central authority.
Planned economies contrast with market economies where a large number of individual consumers and private for-profit enterprises operate most or all of the economy.
- Many economists have criticized centrally planned economies as suffering from various economic problems linked to bad incentives, information constraints and inefficiency.
Centrally planned economy
Understanding planned savings
Most developed countries have mixed economies that combine aspects of central planning with the free market systems promoted by classical and neoclassical economists. The majority of these systems are strongly oriented towards free markets, where governments only intervene to implement certain trade protections and coordinate certain public services.
Central planning theory
Proponents of planned economies believe that central authorities can better meet social and national objectives by more effectively tackling egalitarianism, environmentalism, the fight against corruption, the fight against consumption and d ‘other problems. These supporters believe that the state can set prices for goods, determine how many items are produced, and make labor and resource decisions, without necessarily waiting for private sector investment capital.
Opponents of central economic planning believe that central entities do not have the bandwidth necessary to collect and analyze the financial data necessary to make major economic determinations. In addition, they argue that central economic planning is compatible with socialist and communist systems, which traditionally lead to inefficiencies and a loss of overall utility.
Free market economies assume that people seek to maximize personal financial utility and that companies strive to generate the maximum possible profit. In other words: all economic actors act in their own interest, taking into account the consumption, investment and production options with which they are confronted. The impetus inherent in success therefore guarantees that the balance of prices and quantities is achieved and that utility is maximized.
Problems with planned savings
The centrally planned economic model has its share of criticism. For example, some believe that governments are too ill-equipped to respond effectively to surpluses or shortages. Others believe that government corruption far exceeds corruption in market or mixed economies. Finally, there is a strong feeling that planned economies are linked to political repression, as consumers ruled with an iron fist are not really free to make their own choices.
Examples of centrally planned savings
The communist and socialist systems are the most remarkable examples in which governments control the facets of economic production. Central planning is often associated with Marxist-Leninist theory and the former Soviet Union, China, Vietnam and Cuba. Although the economic performance of these states has been mixed, they have generally followed the capitalist countries in terms of growth.