announcement

Give investment tips and advice.

Centrally Planned Economy

Centrally Planned Economy

If you want to understand properly, the concept of a centrally planned economy, then read ahead to know more.
Sujata Iyer
Last Updated: Jan 29, 2019
Economics can be a confusing subject for many to understand. The various theories propounded by leading economists influence our daily lives in ways that we are totally unaware of. How we receive all the goods and services that we do.
What all goes on behind the scenes before we finally get our jar of jam or that car that we've booked since ages, is all unknown to us. We just pay our taxes and let the 'economy' do the rest. Let us focus on this word economy.
An economy that is planned makes more sense than one that is not. But who plans this economy? And how does their planning affect what we get and don't get? Though most countries today follow a policy of a mixed economy, there are a few countries that yet adhere to a centrally planned economy. Let us try to understand the concept of this type of economy.
What is a Centrally Planned Economy
finance
First of all, let's begin with what a planned economy is. In a planned economy, the control over the basic dynamics of the economy lies with the state or the government.
This way, the government controls what goes into the market and what stays away from the market. Now, what is a centrally planned economy? There isn't much difference between the two, except for the fact that in a centrally planned economy, the entire planning, directing and executing of the various economic directives is authorized solely by the government.
This means that all the decisions that deal with the economics of a nation are taken only by the government. These decisions include decisions about:
  • How the allocation of resources should be done.
  • How the optimum utilization of these resources can be made a reality.
  • How these resources can be used to produce goods and services that are required by the country.
  • How these goods and services are distributed within the economy.
The production of said goods and services is undertaken by the state itself. Unlike market or capitalist economy where there is little to no government participation in the economic activities of the country except the timely collection of taxes.
The government of a centrally planned economy chalks out an entire plan right from the pre-production stage to the production to the distribution and also the post-production stage.
Its Advantages
  • Because the entire economy is controlled by the government, there is no stream of middlemen who can exploit the labor and producing class.
  • The chances of economic recession in a centrally planned economy are lower than other economies because the government can bail itself out of an economic crisis.
  • The government can also keep proper tabs on the demand, supply, and prices of all the goods and services, thereby indirectly keeping a watch on any sings of inflation that may creep in.
  • Another advantage of having an economy centrally planned is that there is no need to wait for private investment for a particular project to go underway, as opposed to capitalism. Here, the state reigns supreme, so it can begin and end a project related to anything that the country may require. It could be infrastructure, health services, sanitation, etc.
  • Since the economy is centrally controlled, it has a tendency to be more stable and develop at a steady rate.
  • A centrally planned economy serves the social interest of the entire country as a whole, as opposed to other types of economies which focus on the interests of individuals who bring in the capital and investment.
Some examples of centrally planned economies are Libya, Saudi Arabia, North Korea, Cuba, Iran, etc. These countries reap the benefits of being part of an economic system that ensures maximum welfare of the people as a whole, rather than being a profit-centric economy.