to own
amount
direction
to take decision
private property
to pass orders
to expand -
complicated
a number of common features
five years ahead
to set a plan
production target
advantages
disadvantages
to ensure
to meet the needs
incentive
to fix wages
profits ,
to respond to changes
to underproduce -
to predict ,
delays and queues - (
)
to overproduce
Planned economy is sometimes called command economy because the state plans and controls the use of resources (such as labour and factories) that are used to produce goods and services as a state owns factories, land and natural resources. Planned economy is an economy with a large amount of central planning and direction, when the government takes all the decisions. There might be no private property at all. For example, in the former Soviet Union state planners decided what was to be produced and in what quantities. They passed orders down to factories, allocating raw materials, workers, and other factors of production to them. Factories were then told how much they should produce with these resources and where they should be sent. The workers are told where to work and what work to perform.
Planning of this kind is very difficult, very complicated to do, and the result is that there is no society, which is completely a command economy. The actual system varies from state to state, but command or planned economies have a number of common features. In such a system the state decides what the nation is to produce. It usually plans five years ahead. The planners set the plan and each industry and factory is set a production target.
A planned economy is simple to understand but not simple to operate. It does, however, have a number of advantages and disadvantages.
Advantages:
- Everyone in society receives enough goods and services to enjoy a basic standard of living.
- There should be work for everybody.
- The state can use its control of the economy. It can ensure that everyone receives a good education and proper health care.
- The needs of the population are met, but there is little production of luxury goods for the wealthy.
Disadvantages:
- There is no incentive for individuals to work hard in planned economies as the government fixes wages and private property is not allowed.
- Any profits that are made are paid to the government.
- Citizens cannot start their own businesses and so new ideas seldom come forward and this leads to low efficiency.
- The government may not produce goods which people want to buy.
A major problem faced by command or planned economies is that of deciding what to produce. Command economies are slow when responding to changes in peoples tastes and fashions. Consumers have little choice because planners sometimes underproduce some items as they cannot predict changes in demand. This leads to delays and queues for some products. Conversely, some products, which are out of fashion and unattractive, may be overproduced.
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The clearest example of command economies is the communist systems which exist in China and existed in Eastern European countries before 1989. Even China is now introducing economic changes which involve less state control. There is now much more freedom of choice than before and some private property and trading are allowed.
