Centrally Planned Economy Essay ⋆ Political Science Essay Examples ⋆ EssayEmpire

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In a centrally planned economy, the government decides which goods are produced, the quantity of the goods produced, the price at which the goods are sold, and the wages paid to laborers. The bureaucratic authority in a centrally planned economy takes responsibility for determining the maximal output for particular products. The bureaucracy orders manufacturers to produce at a given level and then manages the distribution network for those products. In a pure centrally planned economy, there is no private property and the government owns all of the physical assets in an economy such as factories, industrial machinery, land, and all facets of production. Workers in such an economy are paid a flat rate, set by the government, and buy goods at government-fixed prices. The same goods can be purchased from any state-run distribution center. Ideally, each good would available to each consumer.

Theoretical Advantages And Disadvantages Of Centrally Planned Economies

Proponents of centrally planned economies argue that planned economies can allocate raw materials and other industrial inputs to producers more efficiently than market economies. Some of the wastes of a market economy are evidently absent due to central planning; competitive advertising, for instance, is relatively unnecessary. Another potential advantage of centrally planned economies is the ability of the state to correct what economists call externalities, which are socially undesirable outcomes arising from each individual and firm pursuing their own self-interest in the market. Since the government controls the economy, it can pursue environmental policies, achieve full employment, or prevent income disparities. These are all goals pursued by governments in market economies, but they have much less control than centrally planned economies. Finally, a centrally planned economy should, in theory, be able to avoid market shocks. A central planner may maintain full employment even when the economy is failing, because employment is decided by the state. Moreover, if disaster strikes, the state has the infrastructure in place to effectively redistribute food or raw materials as needed.

The criticism of centrally planned economies, however, is widespread, especially among economists. Some, like F.A. Hayek, argue on ideological grounds that removing decision making from producers and consumers is an affront to human freedom. More typically, critics have identified many practical problems with centrally planned economies. Proponents of free markets argue that no bureaucracy can match the ability of free markets to meet consumer demand. Individuals, pursuing their own self-interest, will seek the most efficient way to produce and purchase goods. Firms will seek the most efficient way to produce and distribute their goods in order to compete in the market.

Productivity growth is a driving force for economic growth, but centrally planned economies give little incentive for workers to increase their own efficiency. If workers are paid the same wage regardless of their output, they have no reason to work harder. Further, workers may seek to reduce their production to a minimum: workers or firms that consistently meet their quotas might be forced to produce more. The quality of industrial work often suffers because quota standards in centrally-planed economies are typically quantitative, and thereby irresponsive to the market’s demand for quality products. In market economies, consumers seek a balance between quality and quantity, and are free to choose between products.

The incentive structure of centrally planned economies not only stifles efficiency growth and quality; it also stifles innovation. First, innovation only happens in government institutions, not only because the government owns all the research and development institutions, but also because there is little incentive for individuals to invent or refine products. Second, there is a conflict of interest between innovators and manufacturers. Manufacturers must meet government-ordered quotas, and retooling due to research advances may slow production. Further, such advancements also cause governments to seek new or different resources, complicating chains of production and supply. Because of these production problems, critics frequently claim centrally planned economies lack the flexibility of efficient market economies.

Observations From Historical Centrally Planned Economies

The two most prominent centrally planned economies in the twentieth century were the Soviet Union (roughly from 1928–1991) and China (1950s–late 1970s). During the cold war era, both states created public firms and severely limited privately owned property. Their bureaucracies assumed the responsibility for all significant manufacturing and agricultural output. Many critics of the Soviet Union blame its eventual economic collapse on the faults of the centrally planned economy. Its central planning proved inefficient in meeting consumer needs; rationing, shortages, and inferior quality were common and helped erode support for the regime. Peasants and workers responded by creating a robust black market to trade luxury, imported, or otherwise scarce goods, as they have in other centrally planned economies.

At the same time, the theoretical advantages of centrally planned economies were not observed. Waste in the Soviet Union far outstripped the wastefulness of its contemporary market economies. The central planners focused on heavy industry to achieve military goals and fulfill different social goals, but responded slowly to advances in light industry and consumer technology. Environmental quality deteriorated more quickly than in market economies. Despite the socialist rhetoric of equality, party officials and bureaucrats became an elite, which directed resources to themselves rather than the public good. If central planning allowed for the redistribution of food in famines, it also allowed for the creation of artificial famine as a political tool, most especially in the Ukraine from 1932 to 1933 when Josef Stalin required such a high quota of grain exports from the region that millions of Ukrainians starved.

Conclusion

In the early twenty-first century, pure central planning economies are rare; the Soviet Union collapsed in 1991, and China has gradually shifted from a planned to a mixed economy, beginning in earnest in the late 1970s. Nevertheless, most states engage in some economic planning. Typically, popularly elected governments have mandates to achieve high rates of employment. Governments may coordinate incentives for firms and individuals to produce different goods. In other states, firms cooperate with governments to set research and production levels in order to construct a home-country champion industry and compete against other international firms. Developing states may also pursue forms of central planning in order to limit imports, strengthen exporting firms, or otherwise achieve economic goals. Economies often combine elements of state planning with free markets to secure certain objectives. Thus, while the pure centrally planned economy is now rare, contemporary mixed economies reflect many of its elements.

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