Centrally Planned Economy - Explained
What is a Centrally Planned Economy?
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Table of ContentsWhat is a Centrally Planned Economy?How Does a Centrally Planned Economy Work?Key Elements of the Planned EconomyState or Collective Property in a Planned EconomyThe Planning of a Planned EconomyControl in a Planned EconomyKey Questions in a Planned EconomyThe planned economy and socialismAcademic Research on a Centrally Planned Economy
What is a Centrally Planned Economy?
A planned or centralized economy is one in which the key questions of the economy about what, how, and for whom to produce are resolved directly by the State.
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How Does a Centrally Planned Economy Work?
The main objective of the planned economy is the equal distribution of income. To this end, the State must intervene in the economy and be responsible for the tasks of distributing resources. The Government tends to take private property for the collective society in an effort to support production, exchange, and distribution. It is a type of economic system contrary to capitalism or the market economy. The origin of the centrally-planned economy is in the post WWII, Soviet Union. Subsequently, it expanded to the economies of Eastern European countries. At the end of the 20th century, it was replaced in practically all the countries that applied it (the one hundred percent pure system was never applied).
Key Elements of the Planned Economy
There are three essential elements in the operation of the planned economy.
State or Collective Property in a Planned Economy
In the centralized planning system, private property is eliminated. All resources and products are in the hands of the State. All property is considered "collective property" of all the members of society. The State determines the prices of prices of the goods and services produced. The Market has no function as a resource allocation mechanism.
The Planning of a Planned Economy
The organization of the economic activity is determined according to a centralized plan in which the State indicates in detail, for a certain period of time, the production objectives, the technology to be used, the resources available for production, investment, etc. Company profits and societys preferences do not have any influence in the allocation of the resources. Likewise, the State also defines the system of distribution of goods and services so that there are no different social classes.
Control in a Planned Economy
There is strict control of compliance with the established plan. This completely eliminates entrepreneurship, innovation, and appropriation of benefits.
Key Questions in a Planned Economy
- What to produce: the State defines it through production plans and allocation of resources.
- How to produce: it will be produced according to the technological options approved by the State.
- For whom to produce: the main objective of the planned economy would be to distribute income equally. To achieve this, the State usually relies on mechanisms such as controlled supply, rationing, quotas, price control, among others.
As we see, the role of the State is total since it controls in a centralized way all the relevant economic decisions.
The planned economy and socialism
Socialism, at least in its beginnings and in its purest form, was an economic system which argued that the economy should be planned. With this, an equal distribution of resources and greater social justice would be achieved. Modern socialism is moderated, accepting that free competition can bring benefits in the form of greater efficiency and greater benefits for consumers (such as lower prices, higher quality or variety, etc.). In any case, socialists understand that the State has a key role in the protection of consumers and the correction of certain market failures.
Academic Research on a Centrally Planned Economy
- Distribution and determinants of land development in Chinese cities in the transition from a centrally planned economy to a socialist market economy: a case study of , Wu, F., & Yeh, A. G. O. (1997). Urban studies, 34(11), 1851-1879. This paper focuses on examining the current spatial pattern of land development in the cities of China and its determinants. The paper is based on the study of land development in Guangzhou before (1979-87) and after (1987-92). The author analyzed the data obtained for this study through aerial photographs. According to the author, the study revealed that the locational and spatial distribution had changed significantly in the cities of China since the beginning of land reform in 1987 that enabled the transfer of land use rights.
- Stabilizing a previously centrally planned economy: Poland 1990, Calvo, G. A., & Coricelli, F. (1992). Economic Policy, 7(14), 175-226. This paper examines the dynamics regarding the stabilization of the centrally planned economy of Poland in 1990. This follows the sudden and substantial collapse in the industrial output that and persistence inflation in the economy. The author based their study on the existence of credit segmentation and underdevelopment of the credit market. The study attributes the collapse of the industries to the tight credit rules set by the government. Another thing, they argue that the wage hike may be the reason why credit expansion did not result in a major output recovery, and inflation persisted during the year.
- Fiscal policy, monetary targets, and the price level in a centrally planned economy: an application to the case of China, Feltenstein, A., & Farhadian, Z. (1987). Journal of Money, Credit and Banking, 19(2), 137-156. The main role of the government in policy making is to determine an appropriate target for the microeconomic variables which they have control over. This paper demonstrates how for example, in China, the use of the concept of price indices with standard appropriation procedures make the economic targets to be mis-specified. The authors tend to estimate the degree of repressed economy in determining the money supply and price level.
- The influence of black markets on a queue-rationed centrally planned economy, Stahl II, D. O., & Alexeev, M. (1985). Journal of Economic Theory, 35(2), 234-250. This paper discusses the impacts of the black market on a queue-rationed centrally planned economy. This paper presents that, in centrally planned economies where the prices of goods and services are fixed, and the rationing model awaits line queues, it is shown that the equilibrium of awaiting times exists.
- The making of an innovative region from a centrally planned economy: institutional evolution in Zhongguancun Science Park in Beijing, Zhou, Y. (2005). Environment and Planning A, 37(6), 1113-1134. This article investigates the evolution of institutions of o] Zhongguancun (ZGC), which is one of the prominent technologies and science park in China. The author cites that Since ZGC was formed during the planned economy, it has evolved and passed through various radical tragedies compared to the regions in the developed country.
- Marketing in Romania: the challenges of the transition from a centrally-planned economy to a consumer-oriented economy, Lascu, D. N., Manrai, L. A., & Manrai, A. K. (1993). European Journal of Marketing, 27(11/12), 102-120. This study discusses and describes the differences that occur between the conditions of the market before and after the collapse of the communism. More specifically, the paper evaluates the changes that occurred in the components of the marketing mix between 1989 to 1993. The paper further presents a detailed survey of how the Romanian consumers perceive the evolutions that have occurred in the market in terms of promotion, prices, products, and distribution and give recommendations for future Romanian marketing
- Internal and external balance in a centrally planned economy, Portes, R. (1979). Journal of Comparative Economics, 3(4), 325-345. This paper discusses the model of an open centrally planned economy. The authors seek to present the effects of domestic macro variables on both trade flows and foreign-sector phenomena under a framework that allows disequilibrium and (informal) quantity. The paper further investigates the adjustment of the system to exogenous shudders and the policy trade-offs facing the planners through the use of a diagrammatic analogous to the Swan and Mundell diagrams for an open developed market economy
- The transformation of the urban planning system in China from a centrally-planned to a transitional economy, Yeh, A. G. O., & Wu, F. (1999). Progress in planning, 51(3), 167-252. This article discusses the transformations that have occurred in the urban planning systems in China based on the centrally planned to the transformational economy. The authors present that the economic reforms have triggered a reorganization of the economy and society on which urban planning operates. The authors further reveal that the decentralization of market-led urban development initiatives, decision making, deregulation, retreat from socialist ideology, an increase in the number of actors and conflicts of interests in land development have challenged the practice of urban planning fundamentally.
- How to reform a planned economy: lessons from China, McMillan, J., & Naughton, B. (1992). Oxford Review of Economic Policy, 8(1), 130-143. This paper describes mechanisms that can be used by the state and other economists to reform a planned economy. The author points out that most of the countries in the eastern Europe including China has been facing some difficulties in managing their economies and tend to seek help from the west. The government of China has for many decades ignored the reforms in the economy. Therefore, this paper presents some practical lessons that help to determine the kind of reforms that fit a particular region.
- From centrally planned to a market economy: the road from CPE to PCPE, Calvo, G. A., & Frenkel, J. A. (1991). Staff Papers, 38(2), 268-299. This paper examines various cycles in the transformation of centrally planned economies into market economies. The paper develops a model that analyses the impacts of expected price liberalization and the benefits of the developments that have occurred in the financial market. Besides, the paper also discusses the ways to minimize liquidity overhang, the effects of privatization, and the benefits of an effective tax system