There are several different ways that an economic system distributes resources throughout a society. When it is the government or state that makes these decisions instead of privately-owned businesses and their customers, then you have what is called a centrally planned economy.
What distinguishes a centrally planned economy from a market economy is that the production and distribution responsibilities and resources are 100% controlled by the government or state. Even though there may be businesses which control the transaction process, the CEOs of those companies have a role to play in the governing of society too. These companies are the only ones that are permitted to undertake the provision of services or production of goods.
There are 4 other parts to this definition.
- The government makes the economic decisions in addition to controlling all aspects of production.
- The state also decides how all resources are used or distributed.
- The government determines the final price for all goods and services.
- The state is in a position where it must make these decisions for society to function.
The reason why most governments shy away from a system that is a complete centrally planned economy is that the system does not take the will of the people or their needs into account. It will always make decisions based on what is good for the government instead of what the overall society requires. Most systems are not a complete free market economy either, instead choosing to combine the two elements into something that offers public service coordination and pricing protections.
These are the advantages and disadvantages of a centrally planned economy to consider.
List of the Advantages of a Centrally Planned Economy
1. Prices are kept under control in a centrally planned economy.
Because supply and demand does not enter into the equation for a centrally planned economy, the government can dictate what the prices should be for everyone in society. That makes it much easier to set cost levels to a place where the average consumer can afford to have the items that they require. The theory is that by creating a system where everyone can have what they need, then there are no longer class systems present that can start to separate the “haves” from the “have-nots,” which is a step toward overall equality.
2. There is not the same level of economic inequality in this system.
In a centrally planned economy, the only people who tend to get “wealthy” from their employment or actions are those who hold high-level government positions. Even then, the net worth is tightly controlled for most parties in the system. Because the goal is to ensure that everyone receives the same access to all of their needs, you will find that the inequality of wealth in this system is considerably smaller than it is in free market systems.
3. You will not see a duplication of resource allocation in this economy.
The centrally planned economy wants to become as efficient as possible when producing and distributing goods. It can create an advantage in this circumstance because the state controls everything that is offered to consumers throughout society. Instead of spending resources on the same product made by three different companies, there is one state-owned enterprise which is responsible for each item that is necessary. This advantage goes up and down the value chain. Think about the last time you went shopping for toilet paper. How many brands were available on the store shelves? Instead of encouraging multiplication, this system seeks to use those resources elsewhere while offering one essential choice each time.
4. There are lower levels of unemployment found in centrally planned economies.
Because the government is the one in charge of all of the businesses is a centrally planned economy, then they are responsible for the overall unemployment rate. You will find that jobs are readily available in this system because the goal of the state is to ensure that everyone has work to do. Although you may not receive a choice in what you get to pursue as a career, the government does make an active effort to find positions that are representative of your skills, education, and talent.
You can still find artists, musicians, and other creative careers thriving in the midst of a centrally planned economy. The only difference is that the state can decide to move you into another position, such as toilet paper manufacturing, if they deem that such a transfer would be for the greater good of society.
5. A centrally planned economy eliminates waste from the system.
When you have multiple firms all competing with one another for customer revenues, then it is true that you can inspire more innovation than you would typically see in a centrally planned economy. You will also discover that a lot of waste occurs when there are inferior products which don’t make the grade at the consumer level in that system. Instead of writing off the discarded elements as a loss, a centrally planned economy will not allow them to occur in the first place. Competition is discouraged in this system because of how resources receive allocation.
That’s not to say innovation cannot occur in such a system. The state is consistently working to make improvements in the production and distribution cycles to reduce costs. You just won’t have multiple firms working on the same research simultaneously.
6. Distribution responses are improved in a centrally planned economy.
When Hurricane Maria struck Puerto Rico, the island was largely forgotten by the United States from an aid standpoint. President Donald Trump even mentioned that is was challenging to bring supplies there because the island was surrounded by vast amounts of water. Over one-third of those who applied for aid in the aftermath of this storm were denied aid because they didn’t have deeds to their property. It took months to restore basic power throughout the territory. Hospitals are still sitting abandoned after 24 months of recovery because there aren’t enough resources available.
In a centrally planned economy, these problems would be easily solved because the government would have the means to move resources as needed to wherever an emergency happens to be. State-owned companies can ramp up production immediately to produce more items that people might need for their survival. That process decreases the response time necessary to deliver help when compared to other economies.
7. Each person receives the same chance to pursue their goals or dreams.
The idea of a centrally planned economy is to eliminate the decision-making processes for the average person over employment, goods, and housing. Most systems even provide households with a residence in this economy as partial compensation for their work. You may not have any choice with regards to where you get to live, but it is also a cost that doesn’t come out of your paycheck. There are zero inherent household benefits that can give one group a beginning advantage over someone else. The idea is that the way you get ahead in this system is that you use your own gifts and talents to the betterment of the nation.
8. If you want an education in a centrally planned economy, then you get one.
The government requires workers with specific skills in a centrally planned economy, so it works hard to ensure people receive the schooling necessary to become productive within this system. There may be restrictions on the subject choices which are available in some years, as well as limitations on your schedule since you may be asked to work as well. If you want to receive an advanced degree, this economy is one of the better ways to make it happen. Your education is a priority if you make it one.
9. A centrally planned economy often emphasizes manufacturing and agriculture.
When a centrally planned economy is the driving force of an economy, then the two sectors which see the most success are usually manufacturing and agriculture. These roles do more than encourage the GDP to rise because of domestic productivity. It is a way to build the infrastructure by offering the population access to food and raw materials that are necessary for production. It works to drive innovation forward because the need to produce higher yields and affordable products never really goes away.
Although there is no competition in a centrally planned economy between businesses, the government still competes with itself by looking for new ways to reduce costs while providing opportunities.
List of the Disadvantages of a Centrally Planned Economy
1. There are high levels of inefficiency in a centrally planned economy.
Because there is no motive for profit thanks to the price-setting schemes of the state in a centrally planned economy, there is no reason for the companies that produce goods to become more efficient in their processes. That means it typically costs more to create inferior items compared to privately-owned companies in a free market system or one that is mixed. This disadvantage results in a lower quality of life for the average household since they have no choice in what they can purchase. There is almost always one item, supplied by the government, and that is what you use – whether you like it or not.
2. You will still find a lot of waste in this system.
Although a centrally planned economy does work hard to eliminate financial waste and duplication from their system, it does not do a good job of reducing the amount of productivity waste that occurs. There is a lot of time that could be used more efficiently in this type of economy because government officials must always stay in communication with each business to ensure that all instructions are accurately followed. There is a labor and monetary concern with this disadvantage as well, since people relaying state-based orders are not actually creating something with that activity.
3. Consumers receive a complete lack of choice throughout their society.
There is virtually zero entrepreneurialism to find in a centrally planned economy because everything is run by the state. Even if you have a fantastic idea to improve a product or service, the government will control the business you might want to start. You aren’t even guaranteed a position in your company if the state allows you to pursue the idea that you have. Consumers in this system can only choose the goods and services that the government decides is appropriate for society. Anything that falls outside of that perspective could even be illegal.
4. Most centrally planned economies restrict individual rights.
The goal of a centrally planned economy is to have everyone working toward a common goal and vision that the government decides. People are not usually free to pursue their own interests in this structure. Even when the state gives its permission to engage in non-traditional activities, that right can be revoked at any time. You are given employment in the sector where the state-owned businesses require the most help. If there is a shortage of farmers in a region, then that is what your career will be until another decision is made about the employment options which benefit the state.
5. You cannot oppose the decisions made by a centrally planned economy.
Because the government is in charge of the decisions in a centrally planned economy, there is rarely any permission to offer opposition to an idea. Only when the state authorizes such an activity will a dissenting idea be entertained. Even when it is, the results are intended to provide a benefit to the government in some way, such as letting the rest of the world see that their society can be tolerant of differing ideas.
It is not an understatement to say that the government in a centrally planned economy has absolute rule over society. Anything can be outlawed at a moment’s notice. The value of the currency is dictated by the policies set at the legislative level. If you step outside of this structure (even if your idea has merit), then there is a chance that you could face house arrest, jail time, or worse.
6. The government does not openly communicate with its people.
When a centrally planned economy is the structure of a country, then the state controls the message that receives distribution to reach the people. No one accesses the information provided by the outside world unless there is permission from the government to do so. The only data that families receive comes straight from those who manufacture it. That is why populations in this system often feel like they are better off than those who live in a mixed or free market economy. They are so used to being told what to do, say, or think that there is no recognition that the government could be wrong.
7. It is a structure that can encourage violence in society.
Because a centrally planned economy authorizes whatever opposition receives publicity, the only way the people feel like they can make their opinions count is to resort to violent conduct. It is not unusual to see actions that the rest of the world would classify as terrorism in this system. Even the rhetoric offered in this economy becomes a tool that is useful in the destabilization efforts of the people.
The response to this violent conduct is to institute secret police agencies and other law enforcement tools that criminalize political dissent. This structure helps to maintain control within the government, but it also locks down society to the point where the people feel like they can barely breathe.
8. There are earning caps in place for workers.
When you live in a centrally planned economy, then there is an excellent chance that you may not receive any income at all. Instead of earning a paycheck each month, your labor provides you with the provisions needed for yourself and your household until the next distribution period occurs. If you do receive currency in exchange for your work, then there is usually an income cap placed on what you can earn. Should you miss your production quota for the period, the state often reserves the right to restrict how many supplies you receive. That makes it easier for the government to keep asking more of its people while providing them with only the bare essentials to squeak by each day.
9. Poverty levels typically rise in a centrally planned economy.
The goal of a centrally planned economy might be to lift up everyone equally throughout the nation, but it is typically a reverse outcome which occurs. The structures of this system drive down the value of one’s work to the point where most households live in poverty. Because there is only one level of supervision with 100% authority to make decisions on a whim, there is no way to change this spiral unless those in oversight have the compassion to do so. That is why this system looks great on paper with regards to the equality it can provide, but everyone living in poverty is hardly the same as allowing each person to stand on their merit, talents, and work ethic.
10. A centrally planned economy may not let you save any money.
The idea behind a centrally planned economy is that all wealth belongs to the government. If you are given permission to be responsible for it, then you might see an improvement in your living conditions. If not, then you won’t. The issue here is that everything that you “own” in this system actually belongs to the government in the first place. You are not given permission to inherit anything because there is nothing available for you to give. Even your family is technically the property of the state since it can tell you where to work or live. It is a system that isn’t classified as slavery, but it is one that could be based on how the implementation of the economy occurs.
11. Employment is not meaningful in this system.
When you are working in a centrally planned economy, then you are essentially a laborer who earns a paycheck that you will never get to invest. Most systems will give you enough currency to provide for yourself and maybe a couple of luxuries. The rest goes toward the inefficient systems that are producing the goods and services that you are required to use. Because every position is based on community need, most individuals are following a career path that is not reflective of who they are as a person. It is not unusual for households to give up working since the benefits of receiving a basic stipend are only slightly worse than the small extras you can earn by being a productive member of society.
Conclusion of the Advantages and Disadvantages of a Centrally Planned Economy
What sets a centrally planned economy apart from the other options that are available for production and distribution is that the government needs to make all of the decisions. It is a system which makes the assumption that the needs of the nation are not being met by market forces. The state then takes over all areas of decision-making within the economy to provide what it feels are the essential products and services that make life possible.
The pros and cons of a centrally planned economy show us that even though the government makes the economic decisions, it may not be a positive choice. You have no choice in what goods are produced, or how the production process will occur. There are more employment options, but there are also fewer choices available for individual careers. It is a system which promotes equality by providing the lowest-quality items to everyone while hoarding resources for itself.
Crystal Ayres has served as our editor-in-chief for the last five years. She is a proud veteran, wife and mother. The goal of ConnectUs is to publish compelling content that addresses some of the biggest issues the world faces. If you would like to reach out to contact Crystal, then go here to send her a message.