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What is a Centrally Planned Economy?

Jessica Ellis
Jessica Ellis
Jessica Ellis
Jessica Ellis

A centrally planned economy is one where all major economic decisions are under the control of the government. This type of economy is typically associated with socialist and communist ideals, and was first attempted in the Soviet Union in the early 20th century. In contrast to a free market or capitalist economy, a centrally planned economy does not allow the supply and demand of the market to define prices, wages, or the production of goods.

The theory behind a centrally planned economy begins with the idea that the market is not a measure of what is best for the country. Subject to whim, trend, and a myriad of opinions, the free market can slow or even impede the goals of a central government. By having the state run the economy, the government is totally able to enact the programs, schemes, and plans deemed as best for the country by the leaders.

The Soviet Union was the first country to adopt a centrally planned economy.
The Soviet Union was the first country to adopt a centrally planned economy.

Most modern economies include a mix of centrally planned and free market behavior. While the government may control certain areas of the economy, much of the market runs at the whim of the people. In such an economy, a person has the right to start a private business, thanks to the free market, but may have to pay business taxes and charge a sales tax based on the centrally planned aspects.

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Vladimir Lenin led a centrally planned economy in Russia in the early 1900s.
Vladimir Lenin led a centrally planned economy in Russia in the early 1900s.

A centrally planned economy first sprang up in the Soviet Union around 1917 under Vladimir Lenin. By 1928, the economy adopted a system of five year plans, where the needs of the country were reviewed and policies altered to fit every five years. Under this system, the government seized almost all private businesses and set wage levels throughout the region. People were encouraged to sacrifice personal career goals and plans to go into industries deemed desirable by the state, and the price of goods and services was fixed by the government rather than altered by the open market.

Under a command economy, such as that wielded by the Soviet Union, resources are placed in some fields, such as space technology, without concern for how the returns will stimulate the economy or benefit individuals in the long run.
Under a command economy, such as that wielded by the Soviet Union, resources are placed in some fields, such as space technology, without concern for how the returns will stimulate the economy or benefit individuals in the long run.

One of the side effects of a centrally planned economy is a marked upswing in secondary economies, also called black markets. Since choices are limited to what the government chooses to offer, many people find it profitable and often necessary to secretly obtain or make goods illegally and trade them under the table. The high prices of a black market often mean that wealthy people are able to obtain items that poorer people cannot, leading to large amounts of corruption and a sense of injustice among the poorer citizens.

The people of the Ukraine, which was once part of the Soviet Union, suffered severe famine in the 1930s due to the mismanagement of the USSR's communist leaders.
The people of the Ukraine, which was once part of the Soviet Union, suffered severe famine in the 1930s due to the mismanagement of the USSR's communist leaders.

Historically speaking, centrally planned governments have not fared well in the modern world. Although many countries have some centrally planned programs, the global free market has made it generally more profitable to allow the market to dictate economic policy. Nevertheless, this innovative form of government altered the world economy extensively, and the principle of state-run enterprises still plays a large part in many modern regimes.

Jessica Ellis
Jessica Ellis

With a B.A. in theater from UCLA and a graduate degree in screenwriting from the American Film Institute, Jessica is passionate about drama and film. She has many other interests, and enjoys learning and writing about a wide range of topics in her role as a SmartCapitalMind writer.

Jessica Ellis
Jessica Ellis

With a B.A. in theater from UCLA and a graduate degree in screenwriting from the American Film Institute, Jessica is passionate about drama and film. She has many other interests, and enjoys learning and writing about a wide range of topics in her role as a SmartCapitalMind writer.

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Discussion Comments

anon294523

Why is Libya a command economy?

GlassAxe

What an interesting discussion. So what kind of economy is China? Does China have a traditional economy, or is it a mixed economy? I do not quite know how to classify China's economic model. Are there any other countries that have an economy like China?

FrameMaker

@Georgesplane- There are a few command and planned economies left in the world, although some of the biggest have collapsed, and a few are in the process of collapsing. Probably the most notable centrally planned economy is North Korea. In North Korea, the government has total control over all economic sectors and there is no public ownership of industry. Other planned and command economies are found in Libya (collapsing), Saudi Arabia, Cuba, and Myanmar. I do not think that Iran is a command economy.

The difference between a planned economy (North Korea) and a command economy (Saudi Arabia), is that command economies allow for public ownership of businesses, but government still centrally controls pricing in those sectors. This means that a command economy can be a planned economy, but not the other way around.

Georgesplane

What a great article. It gave me a straightforward explanation of a centrally planned economy. Are there any pure centrally planned economies left in the world?

I know that China is a communist country, but I do not think that the country falls under the category of a central economy. The country is too involved in the global economic markets that it cannot be...am I right? I know they control the value of their money to some extent, which in turn controls the pricing of their gods, but the country does not directly control the price of each good or service.

What about Iran or North Korea, do these countries operate under a centrally planned economy?

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    • The Soviet Union was the first country to adopt a centrally planned economy.
      By: axellwolf
      The Soviet Union was the first country to adopt a centrally planned economy.
    • Vladimir Lenin led a centrally planned economy in Russia in the early 1900s.
      By: Arkady Chubykin
      Vladimir Lenin led a centrally planned economy in Russia in the early 1900s.
    • Under a command economy, such as that wielded by the Soviet Union, resources are placed in some fields, such as space technology, without concern for how the returns will stimulate the economy or benefit individuals in the long run.
      By: unclepodger
      Under a command economy, such as that wielded by the Soviet Union, resources are placed in some fields, such as space technology, without concern for how the returns will stimulate the economy or benefit individuals in the long run.
    • The people of the Ukraine, which was once part of the Soviet Union, suffered severe famine in the 1930s due to the mismanagement of the USSR's communist leaders.
      By: dmitrykobets
      The people of the Ukraine, which was once part of the Soviet Union, suffered severe famine in the 1930s due to the mismanagement of the USSR's communist leaders.