Planned Economy
(Command Economy)
• Economy directed by the
government
• All means of production
(land, labor, capital) are
state owned and
controlled.
• The government makes
all economic choices of
what to produce, how to
produce, how to
distribute.
Rise of the Planned Economy
• People believed that
other economic
systems were exploiting
the working class.
• Came as a response to
the industrial revolution.
• Some people believed
that if the government
controlled the economy
and chose what should
be produced, how and
for whom; there would
be greater economic
equality.
Problems Created
by the
Industrial Revolution
• Low wages
• Long hours
• Urbanization
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Crime
Poverty
Disease
Pollution
• Unfair labor practices
• Unsafe working
conditions
Elements of a Planned
Economy
•
•
•
•
Cooperation
Public ownership
Equality as incentive
Central planning
– A group of economic
experts carry out the goals
of the government.
– See “Corkscrews vs Bottle
Openers” page 325
Ideologies
Advantages of the Planned
Economy
• Income & wealth more evenly distributed
• Little unemployment
• Experiences fewer booms and busts in
economy
• Profits used to expand production
• Production of goods and services is
planned to meet society’s needs
• Consumers receive basic necessities.
Disadvantages of the Planned
Economy
• Lack of incentive
• Lack of technological
progress
• Bureaucracies (planning
creates inflexibility)
• Black markets
• Loss of individuality
• Inefficient and
widespread waste of
resources.
Father of Communism
• Karl Marx was the most well
known advocate of the
planned economy.
• Wrote the Communist
Manifesto & Das Kapital (with
Engels)
• Moved by the problems of the
industrial revolution.
• Did not believe in gradual
change rather REVOLUTION.
• Believed workers (proletariat)
must replace the ruling
class(bourgeoisie) through
revolution.
Marx’s Beliefs
• The bourgeoisie exploited the workers by forcing
them to create goods and services with a greater
value than the wages received.
• Capitalism would bring itself to ruin
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Economic depression
Imperialism
Wars
Revolution by the proletariat.
• After a series of revolutions capitalism would be
eliminated and people would live in a cooperative and
voluntary society.
• Production would be distributed by the motto…
“from each according to his abilities, to each
according to his needs.”
The Ideal Marxist Society
• Individual differences would still exist but no one
could amass enormous wealth while others lived
in poverty.
• Equal opportunity (classless society)
• Abolish private property and profit motive (public
ownership)
• With the existence of surplus goods crime and
greed would not exist.
• Common Good
Lenin’s Additions To Marxism
• Adapted Marx’s ideas to conditions in Russia.
• Views referred to “Marxist-Leninist”
Marx
Lenin
• revolution could only
occur in a capitalist and
industrialized country
• organized a dedicated
group of professional
revolutionaries (who
sought support from
peasants and workers) to
overthrow Russian
autocratic government.
CASE STUDY
Central Planning in the Former
USSR
FIVE KEY ELEMENTS OF
CENTRAL PLANNING IN THE
FORMER SOVIET UNION
1. NATIONALIZATION
Nationalization
– The taking over of ownership of a company by the
government.
• No individual owns capital (mines, mills,
machines, railways).
• Government controls them and appoints
managers to manage them.
• No one can make a profit from the nation’s
resources.
2. COLLECTIVIZATION OF
AGRICULTURE
Collectivization
– The practice of working together in groups supposedly
for the good of all.
• During the 1920’s & 30’s privately owned farms
were seized by the government and made into
large state owned farms. (Kulaks)
• 97% of farmland was government owned.
• Workers worked on immense government owned
farms. (500-700 workers)
• State farms also set up to test new agricultural
methods. (operated by government but workers
were paid on a wage basis.
3. CONTROLLED
DISTRIBUTION OF WEALTH
• Controlled planners decide how to distribute the goods
produced. (Gossnab determined how commodities were
distributed.)
• Soviet Union used price controls to influence buying practices
based on what was in the best interest of the country.(i.e. low
prices on school books, high prices on vodka)
• Standard of living in the USSR lagged behind other major
countries because…
– Planners believed in economic equality, those who were
efficient producers had their efforts used to provide income
for others.
– Planners concentrated on needs for the future rather than
wants for the present.
4. COMPREHENSIVE
PLANNING
Gosplan
– The economic planning commission for
the former USSR.
• With the best experts, advisors, computers
available it was Gosplan’s task to decide…
– What to produce?
– How to produce?
– For whom to distribute to?
• Major advantage of central planning was it
allowed the govt. to determine which goods
the country needed/equality in distribution.
Disadvantages to Central
Planning
–Slow to respond to changes
–Shortages
–Absence of initiative/incentive
–One bad decision was effected the
whole nation
5. CONTROL BY THE COMMUNIST
PARTY
• Gosplan was the economic planning
committee for the former Soviet Union.
• Gosplan took orders from the Communist
Party.
• The Communist Party established the
national goals and it was Gosplan’s task to
achieve these goals.
A Little More On…
War Communism:
 Lenin introduced this right after the
Communist Revolution to bring about the
perfect Communist Society – occurred
during the civil war
Involved nationalization and was a failure
Actually resulted in DECREASED
agricultural and industrial output.
A Little More On…
The New Economic Policy
• Introduced by Lenin to try and kick-start the
economy
• Re-introduced some limited prive ownership
of land and business, allowed farmers to sell
surplus for profit
• Obviously this is a step away from “pure”
communism, but Lenin saw it as “one step
backwards to take two steps forward”
• Only intended to be a temporary policy
• Had limited success
JOSEPH STALIN
• Transformed the economy
and society of the USSR
into the form it would
remain until 1991
• Known for his FIVE YEAR
PLANS
• This involved setting
goals and “quotas” for
every industry in the
Soviet economy in 5 year
chunks of time
The Five Year Plans
The First Plan (1928-32)
• Concentrated on heavy industry (oil,
construction, steel, etc)
• Citizens asked to make sacrifices in
their standard of living because
production was not concentrated on
consumer goods
• Stalin promised to concentrate on
consumer goods during the second plan
(HAHAHA!)
The Five Year Plans
• Stalin concentrated on heavy industry for
two reasons:
1. Fear of capitalist democracies attacking
2. Knew war with Fascist Germany was inevitable
• In order to encourage production, planners
used incentives such as bonuses (for
meeting quotas) or harsh punishments (for
failing to meet quotas)
• For the most part, it was a success in
helping the USSR “catch up” with the rest of
the world
The Five Year Plans
The Second Plan (1933-38)
• Heavy industry (especially communications)
• Huge rise in steel production
The Third Plan (1938-42)
• Mechanization for the war
The Fourth Plan + Fifth Plan (1946-55)
• Reconstruction
Mikhail Gorbachev
• Took power in 1985 – USSR way behind in
standard of living and quality of life
• Huge lineups for basic necessities
• USA and USSR in the midst of the Cold War
• Gorbachev was faced with an economic
crisis
Gorbachev’s Changes: Opening
Pandora’s Box
• Reform was needed to keep peace and
stability
• Gorbachev wanted change and reform for
his people, but really had no idea what
would happen once he allowed this to take
place.
• You give ‘em an inch…..
Gorbachev’s Changes
GLASTNOST
• Means “openness”
• A policy allowing the citizens to “open up”
through freedom of expression and dissent
• The hope was to stimulate creative sprit and
boost the economy
PERESTROIKA
• Means “restructuring”
• A program of economic reforms
• Limited private enterprise and and pursuit of
profit
Glastnost and Perestrokia
• Gorbachev as caught between two rival
factions in the Communist Party:
- The Communist hardliners (conservatives) who
thought he was crazy for deviating from past practice
and creating change way to fast
- The liberal reformers who wanted him to speed up his
program reforms and bring in even more change
• Gorbachev attempted to appease both, until
the Soviet Union ceased to exist on
December 25th, 1991.