A planned economy is an economic system where production, resource allocation, and pricing decisions are centrally controlled by a government rather than determined by market forces.

Planned Economy

A planned economy, also known as a command economy or centrally planned economy, represents an economic system where the state exercises direct control over major economic decisions. This system stands in stark contrast to market economy systems and emerged as a key component of socialist economics in the 20th century.

Core Characteristics

Central Planning
- Government agencies determine production goals
- Resource allocation is managed through bureaucratic channels
- Prices are administratively set rather than market-determined
- Economic planning occurs through comprehensive multi-year plans
State Ownership
- Means of production are typically owned by the state
- Private enterprise is limited or non-existent
- Public goods are directly provided by government entities

Historical Implementation

The most prominent historical example of a planned economy was the Soviet Union, which implemented a series of Five-Year Plans to guide economic development. Other notable examples include:

Pre-reform China (1949-1978)
Eastern European countries under the Warsaw Pact
Cuba (continuing to present)

Advantages and Disadvantages

Advantages

Ability to mobilize resources for major projects
Elimination of market inefficiencies and speculation
Guaranteed employment and basic services
Reduced income inequality

Disadvantages

Information problem in resource allocation
Lack of innovation incentives
Bureaucratic inefficiency
Shortages and surpluses due to mismatched supply and demand
Limited consumer choice

Modern Adaptations

While pure planned economies are rare today, elements of economic planning exist in various forms:

Mixed economy systems incorporating both market and planned elements
Industrial policy in market economies
State capitalism as practiced in some contemporary nations
Economic development planning in developing countries

Theoretical Foundations

The intellectual foundations of planned economies draw from various sources:

Legacy and Influence

Though pure planned economies have largely given way to market-based systems, their influence persists in debates about:

Role of government in economic affairs
Economic democracy
Market socialism
Contemporary approaches to economic planning

The experience of planned economies continues to inform discussions about economic organization, regulation, and the balance between state and market forces in modern economic systems.