Centrally Planned Economy - Definition
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Back to: ECONOMIC ANALYSIS & MONETARY POLICY
Centrally Planned Economy Definition
Centrally planned economy refers to an economic state in which the government controls all the activities that take place in the economy.
A Little More on What is a Centrally Planned Economies
The key aim of a centrally planned economy is to ensure that income is distributed equally. This call for the intervention of the government into the economy. The state must play a role in regulating the distribution of resources. Under the planned economy, the government take private goods and use them collectively to enhance production, distribution, and exchange. This type of economic system is contrary to the capitalism or market economy. Centrally planned economy originated following the end of world war II by the Soviet Union. After that, the model expanded to eastern European countries. By the end of the 20th century, the model has been ignored by almost every country that has been using it. The planned economy has three essential elements in operation.
State or Collective Property
In a centrally planned economic system, the concept of private property is ignored, and all the resources and properties belong to the government. In other words, all properties are considered to be a "collective property" of all the members of the state. The government determines the prices of goods and services and the market forces are not allowed to determine the prices of goods and services.
The state indicates in details the plans to be used in the organization of the economic activities. The government set the production objectives, methods of production, technology to be used, types of investment and distribute the resources available over a given period of. The preference of the society and the profits of the companies do not have any impact on the allocation of resources. Similarly, the state also determines the distribution system for goods and services to eliminate social classes.
The state takes the control of the economy to ensure that every person complies with the established plans. The control eliminates innovation, entrepreneurship, and appropriation of benefits. Key Questions in a Planned Economy
- What to produce: the government determines in the plans what to be produced and allocate resources for such production.
- How to produce: the state determines the ways through which production should take place. This is based on the technology approved by the government to be used for production.
- For whom to produce: through the allocation of resources the government determines the individuals to produce a given product or service. The state usually depends on the rationing, quotas, controlled supply and piece control mechanisms to control the production of goods and services.
As provided in the controlled economy, the state has a complete role since it makes all the economic decisions.
The planned economy and socialism
Socialism is also an economic system that provides that the economy should be controlled. In this regard, this will help in achieving equal distribution of resources and social justice among the people in the society. However, the modern socialism is moderated and presents that free market competition can benefit the economy in terms of efficiency in production and quality of goods and fair pricing to the consumers. In some cases, the socialists argue that the state plays an important role in protecting the consumers and also correct some market externalities
References for Centrally Planned Economy
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