Planned economy

A planned economy is a system where a central authority manages a country's resources. In this system, the state decides how to invest money and produce goods. Leaders create economy-wide plans to allocate capital goods, which are tools and machines used in production. This differs from a market economy. In a market economy, independent firms make their own decisions about prices and distribution.

There are several different ways to organize a planned economy. A command economy uses an administrative-command system. This relies on hierarchical administration and public ownership of production. Some systems are decentralized or participatory, meaning decision-making is spread out. Other models use market socialism, which blends planning with some market elements. There is also market abolitionist socialism. This method replaces markets with direct calculation to coordinate different economic enterprises.

History shows that various civilizations used forms of planning. Scholars suggest the Incan economy was a flexible command economy. Instead of focusing on goods, it centered on the movement of labor. In the Hellenistic and post-Hellenistic worlds, compulsory state planning was common in Egypt and parts of India. Some views of mercantilism also involve planned economies. These historical examples show that managing resources through central direction is not a new idea.

In the 20th century, the Soviet Union developed a major planned system. This evolved from policies known as war communism during the Russian Civil War. In 1921, the Soviet government founded Gosplan to formally manage the economy. Before the regular five-year plans began in 1928, there was a period called the New Economic Policy. Leon Trotsky was an early proponent of planning during this time. He argued that specialization and concentration of production could raise industrial growth rates significantly.

Some famous thinkers have shared ideas about the purpose of planning. Albert Einstein wrote an article in 1949 titled "Why Socialism?" He argued for a socialist economy where the means of production are owned by society. Einstein believed a planned economy could adjust production to meet community needs. He thought this would guarantee a livelihood for every person. He also believed it would promote a sense of social responsibility.

Modern technology has led to ideas about computational economic planning. In 1959, Anatoly Kitov proposed using a distributed computing system to manage the Soviet economy. However, the Defense Ministry rejected his plan. In 1971, the Allende administration in Chile launched Project Cybersyn. They installed telex machines in various organizations to communicate economic data. This data went into a computer-simulated economy for forecasting. A control room allowed for real-time observation of the economy.

Project Cybersyn aimed for a decentralized system through a model called Cyberfolk. This involved bottom-up, participative decision-making. While the project showed promise during a trucker's strike, it was abolished after a 1973 coup. Since then, computer scientists like Paul Cockshott and Allin Cottrell have argued that modern technology makes democratic planning possible. They suggest such a system could be more stable than free-market economies.

Planned economies have distinct advantages and disadvantages. Supporters say the state can use land and labor to meet specific national goals. For example, the Soviet Union built massive heavy industries in the 1930s. To do this, the government reduced the share of national income used for private consumption from 80% to 50%. This led to rapid industrial growth but caused a contraction in the agricultural sector. Critics, however, point to problems with resource distribution. Economists like Ludwig von Mises and Friedrich Hayek argued that planners cannot easily detect consumer preferences. They suggested that without market signals, it is difficult to meet actual human needs efficiently.