Planned Economy

Has that economics assignment literally ruffled your feathers? Or are you, by any chance, planning to complete the assignment by simply copying and pasting relevant information blindly? What would you say to getting your economics concepts cleared, topic by topic? Oh no, don't worry! This ain't gonna be one of those lengthy academic sessions designed to further bewilder you! This article is an attempt to keep things as simple as possible and explain what is planned economy all about. Hence, read on to get to the roots of the mechanics behind a planned economy.

What is Planned Economy?

A planned economy is a state-run economy. In such an economic system, the central governing body is in charge of all major industries of the country and regulates everything relating to the volume of production and method and proportion of distribution of all goods and services produced by these industries. Although the concepts of command economy and centrally planned economy come quite close to a planned economy, the latter are not synonymous to planned economy. A command or centrally planned economy is a couple of notches more extensive than a planned economy as under such an economic system, the economic dynamics of price and supply of goods and services are completely in the hands of the government. In fact, there is a separate government planning body, complete with administrative bureaucracy, that oversees the economic planning, investment and resource allocation of the entire country. The most prominent distinction between a planned and a command economy is the fact that while the government owns all means of production in the latter case, the government only regulates the economic machinery without expressing state ownership of the means of production in the former case.

On the other hand, in a planned economy, there can be either state-owned enterprises or a private sector that follows state regulations or there can be a harmonious combination of both. The definition framed by Wikipedia very lucidly distinguishes between planned and command economy. The definition goes as follows:
...a planned economy is "an economic system in which the government controls and regulates production, distribution, prices, etc." but a command economy, while also having this type of regulation, necessarily has substantial public ownership of industry. Therefore, command economies are planned economies, but not necessarily the reverse.

Today, very few countries - Iran, Cuba, North Korea, Libya, Myanmar and Saudi Arabia - follow the system of a planned economy.

Planned Economy vs Other Economic Systems

Hence, we can clearly see that a planned economy is a stark contrast to a market economy, which is based upon the principles of capitalism, where the economic decisions of the private sector prevail. Although the concept of planned economy may remind you of the concept of communist economy, the two are not at all the same thing. While communism is a political philosophy which, by default, necessitates the economy to be planned and run by the state, a planned economy is an economic system and not all planned economies follow communism. In short, a communist economy has to be planned but a planned economy need not be communist. Most planned economies today are in the form of socialist economies where the principles of socialism, i.e. free association, production planning to coordinate the use of the means of production, and production are used.

Advantages of Planned Economy

The most significant advantage of following a planned economic system is the absence of cyclical fluctuations and stability of the economy. Things like overproduction, over capitalization and business cycles do not get the upper hand in planned economies. Also, planned economies aim at meeting the collective economic goal of the nation, rather than individual objectives. There is also a better, more economic utilization of resources since a concrete, centralized economic plan goes in a focused direction to achieve maximum benefits. Consider this yourself - what would be more economical? The government setting up one big cement plant in a particular region that is sufficient to meet the demands of that region alone or ten private enterprises setting up ten different cement plants in the same region and constantly competing with each other to gain market share? Which alternative makes most economic use of resources and which is more wasteful?

Disadvantages of Planned Economy

There tends to be a lot of gap between theory and practice. Despite its theory of equitable distribution of resources and allocation of revenue, most planned economies face the problem of irregular allocation of resources and income and there are always instances of surplus and deficit. Also, the fact that the government plans the economy goes against the principles of economic democracy. Sometimes, and in certain sectors, it is good to let the market forces decide the economic course of action and a planned economy often misses out on these advantages. This is the reason why most countries today prefer to go along with a mixed economy rather than a completely centrally planned one.

That was a brief overview of what a planned economy is all about. Hope the explanation and comparisons with other major economic systems, given here, served their purpose of clarifying the concept. In case you had any difficulty in understanding the basics of this economic system, do let me know exactly where you faced a hurdle. I'd be more than glad to help! And hey, wish you all the best for that assignment - do let me know what grades you got!