Planned Economy

Definition

A planned economy, also known as a command economy, is an economic system where the government makes all decisions regarding the production and distribution of goods and services. This system contrasts sharply with market economies, where supply and demand dictate economic activity. In a planned economy, the state controls resources and often sets prices, aiming to achieve specific social and economic goals.

5 Must Know Facts For Your Next Test

1. Planned economies are typically associated with socialist or communist governments, where the aim is to eliminate inequalities generated by capitalist systems.
2. In the Soviet Union, a strict planned economy was implemented, which included five-year plans to direct economic activity and output.
3. Planned economies often struggle with inefficiencies due to lack of competition and limited consumer choice, leading to shortages or surpluses of goods.
4. The concept of a planned economy became particularly significant during the Cold War, as it represented one of the key ideological differences between Eastern and Western blocs.
5. Many countries that initially adopted planned economies have shifted towards mixed economies in recent decades, allowing for some market-driven mechanisms.

Review Questions

• How does a planned economy differ from a market economy in terms of decision-making processes?
  • In a planned economy, decision-making is centralized and made by government authorities who determine what to produce, how much to produce, and at what prices. In contrast, a market economy relies on decentralized decision-making where supply and demand influence production and pricing. This fundamental difference impacts how resources are allocated and how responsive each system is to consumer needs and preferences.
• Discuss the implications of Soviet expansion on the establishment of planned economies in Eastern Europe after World War II.
  • After World War II, Soviet expansion led to the imposition of planned economies in Eastern European countries that fell under Soviet influence. The Soviet model was adopted as these nations sought to align with communist ideology, resulting in centralized control over economic activities. This shift aimed to promote industrialization and collectivization but often resulted in economic difficulties due to inefficiencies inherent in planned systems, contrasting sharply with the market-oriented economies of Western Europe.
• Evaluate the long-term consequences of adopting a planned economy in Eastern Europe after the Cold War ended.
  • The adoption of planned economies in Eastern Europe created significant challenges that became evident after the Cold War ended. Many countries struggled with transitioning to market economies, facing high unemployment rates and inflation as they dismantled state-controlled systems. This transition revealed deep-rooted inefficiencies and led to social unrest as citizens dealt with economic hardship. The legacy of centralized planning continues to influence political and economic structures in these nations, highlighting ongoing debates about the balance between state control and market freedom.

Related terms

Central Planning:

The process by which government authorities make decisions about the allocation of resources and the direction of economic activity in a planned economy.

Command Economy: An economic system where the government has substantial control over production, investment, prices, and incomes, typically seen in socialist or communist states.

State Ownership: A situation in which the government owns and controls major industries and resources, often a characteristic of planned economies.