Lesson Objectives:
By the end of this lesson you will be able to:
*Describe how a centrally planned economy is organized.
*Distinguish between socialism and communism.
*Analyze the use of central planning in the Soviet Union and China.
*Identify the disadvantages of a centrally planned economy.
Economies and You
Suppose you lived in Cuba. Each month, the government would give you cards entitling you to
buy a set amount of food at low prices. However, this amount often will not last the entire
month. To buy enough food for the rest of the month, you would need to pay much higher
prices. If you are like most Cubans, this is difficult because your salary is low. Even if you had
money, you might not be able to buy the food you want because shortages are common.
Why is the situation in Cuba so different from that of the United States? One reason is that the
two countries have different economic systems. Cuba does not have a market economy, but a
centrally planned one.
How Central Planning Works
In a Centrally planned economy, the government, rather than individual producers and
consumers, answer the key economic questions. A central bureaucracy decides what items to
produce, how to produce them, and who gets them. The government owns both land and
capital. In a sense it owns labor, too, because it controls where people work and what they are
paid. The government directs workers to produce a certain number of trucks, so many yards of
cotton fabric, and so on. Farmers are told what to plant and where to send their crops.
Centrally planned economies, also known as command economies, operate in direct contrast to
free market systems. Command economies oppose private property, free market pricing,
competition, and consumer choice.
Example of a Command Economy:
Production of uniforms for members of the military
& Production of sweaters for consumers
1. Planners decide more military uniforms than sweaters will be made. A message is sent to
the materials committee telling them to decrease production of sweaters and increase
military uniform production.
2. Materials committee decides how many uniforms and sweaters to produce based on
supplies available. They send their decision to the makers of cotton, buttons, and elastic.
3. Cotton, buttons, and elastic arrive at the factories.
As you can see there is no consumer sovereignty (individual
choice/individual control). Many people may need or want a new
sweater, but will be unable to buy them because the sweaters
were not produced.
Socialism and Communism
The terms, Socialism and communism are often linked to central
Planning. These systems are somewhat similar to CPE.
Socialism
Socialism is not a single economic system. Rather, the term
describes a range of economic and political systems based on
the belief that wealth should be evenly distributed throughout
society. Socialists believe that economic equality, can exist only
if the centers of economic power are controlled by the
government or by the public as a whole, rather than by individuals
or corporations.
“Market socialism”- Combination of a market economy and
socialism. The government uses its powers of taxation to
redistribute wealth and provide extensive services.
Communism
In the 1800s, socialism gave rise to communism. Under
communism, the central government owns and controls all
resources and means of production and makes all economic
decisions.
Karl Marx- Karl Marx is known as the creator of communism. He
stressed the conflict between labor and capital. He believed that
labor was the source of all value. But under capitalism, he said, all
the profit created by the labor of workers ended up in the hands
of capitalists, such as factory owners. Marx believed that
capitalism always resulted in the exploitation of workers and an
unfair distribution of wealth. Marx believed that a socialist
society could only happen if there was a violent revolution.
Communist governments are authoritarian. Authoritarian
governments limit individual freedoms and require strict
obedience from their citizens. Every communist nation has been
dominated by a single dictator or political party.
The Soviet Union
*A Violent Revolution in Russia (1917) destroyed their government.
After the revolution the Soviet Union was established (world’s
first communist State).
* In 1928, Soviet leader Joseph Stalin imposed the first in a series
of strict 5 year plans to boost industrial and agricultural
production.
*Until it broke apart in 1991, the Soviet Union continued to operate
as a command economy.
*Soviet economic planners gave the best land, labor, and capital
to the armed forces and to heavy industry (producers of
chemicals and steel).
*The decision to favor heavy industry hurt factories that made
consumer goods. These factories were stuck with low quality, left over
resources. The products that were made for consumers were usually poorly
made. Shortages were also very common.
The Soviet Union continued
*Agriculture faced similar problems. Farmers were forced to work on large,
state-run farms. The government supplied all materials and set all wages.
*The Soviet Union had a difficult time producing enough grain to feed its own
people.
*Economic weaknesses eventually led to the fall of communism and the
collapse of the state.
China
*From 1949-1970
Chinese economy.
‘s, government planner in China controlled every aspect of the
*The government tried to build small factories to produce goods to be sold in
nearby areas. But these goods were expensive to make and the quality was
very poor.
*In the 1950’s, the government forced peasants to join farming communes.
Within a few years, farm production dropped sharply.
*Chinese leaders began to institute new economic policies in the 1970’s. They
gave farmers the chance to own more land and offered bonuses to factory
managers for making better quality products. As a result, Chin’s economy
began to grow.
*Today, the Chinese government still owns firms in major industries. At the
same time, they allow entrepreneurs far more economic freedom than in the
past. Such changes have given a tremendous boots to China’s economy.
Disadvantages of Centrally Planned Economies
1. Economic Efficiency- In a Centrally planed economy, the
government owns all production factors. Since the government fixes wages, workers lack
incentive to work faster or produce more. It is difficult to adjust quickly to consumer
demands and changing economic decisions.
2. Economic Freedom- Command economies sacrifice individual freedoms in order to pursue
societal goals. Central planning discourages competition and takes most or all economic
choices away from producers and consumers.
3. Economic Growth- Command economies do not reward innovation. They usually
discourage change. There is no profit incentive to encourage entrepreneurship.
Disadvantages of Centrally Planned Economies continued
4. Economic equity- A major goal of communism is to increase equity by distributing goods
and services fairly. Unfortunately, this is often not the case. Most citizens suffer shortages
and our forced to buy poorly made goods.
The disadvantages of central planning have caused leaders in
many countries to move away from command economies and
towards mixed economies.