Planned economy

type of economic system

A planned economy is an economic system in which inputs are based on direct allocation. Economic planning may be carried out in a decentralized, distributed or centralized manner depending on the specific organization of economic institutions.

The Schumpeterian pressure that forced capitalist firms to innovate or die was not present in the planned economy. ~ Barry Eichengreen
Industry controlled by society as a whole, and operated according to a plan, presupposes well-rounded human beings, their faculties developed in balanced fashion, able to see the system of production in its entirety. ~ Friedrich Engels


  • Aside from Yugoslavia, experiments with decentralization did not extend to planning innovation, the greatest weakness of the socialist economies. Even where markets were allowed to exert more influence over current production, the state was still responsible for planning the future. And state socialism provided only weak incentives for innovation. The Schumpeterian pressure that forced capitalist firms to innovate or die was not present in the planned economy.
    • Barry Eichengreen, The European Economy since 1945: Coordinated Capitalism and Beyond Chap. 5: “Eastern Europe and the Planned Economy”, Princeton University Press, 2008, p. 154.
  • The economic anarchy of capitalist society as it exists today is, in my opinion, the real source of the evil. We see before us a huge community of producers the members of which are unceasingly striving to deprive each other of the fruits of their collective labor – not by force, but on the whole in faithful compliance with legally established rules. ... I am convinced there is only one way to eliminate these grave evils, namely through the establishment of a socialist economy, accompanied by an educational system which would be oriented toward social goals. In such an economy, the means of production are owned by society itself and are utilized in a planned fashion. A planned economy, which adjusts production to the needs of the community, would distribute the work to be done among all those able to work and would guarantee a livelihood to every man, woman, and child. The education of the individual, in addition to promoting his own innate abilities, would attempt to develop in him a sense of responsibility for his fellow men in place of the glorification of power and success in our present society. Nevertheless, it is necessary to remember that a planned economy is not yet socialism. A planned economy as such may be accompanied by the complete enslavement of the individual.
  • Big industry, competition and generally the individualistic organization of production have become a fetter which it must and will shatter. ... It makes unavoidably necessary an entirely new organization of society in which production is no longer directed by mutually competing individual industrialists but rather by the whole society operating according to a definite plan and taking account of the needs of all.
  • What will be the consequences of the ultimate disappearance of private property? Society will take all forces of production and means of commerce, as well as the exchange and distribution of products, out of the hands of private capitalists and will manage them in accordance with a plan based on the availability of resources and the needs of the whole society. In this way, most important of all, the evil consequences which are now associated with the conduct of big industry will be abolished. There will be no more crises; the expanded production, which for the present order of society is overproduction and hence a prevailing cause of misery, will then be insufficient and in need of being expanded much further. Instead of generating misery, overproduction will reach beyond the elementary requirements of society to assure the satisfaction of the needs of all; it will create new needs and, at the same time, the means of satisfying them. It will become the condition of, and the stimulus to, new progress, which will no longer throw the whole social order into confusion, as progress has always done in the past.
  • I still see Hayek as the best critic of all forms of centralized economic planning. It is to his merit to have shown scientifically that centralized planning cannot work for an economy because complete knowledge of that economy is never available centrally. As nice as it would be to have one, there is no mastermind who knows and can control everything, and there never will be. This was Hayek's scientific argument for the superiority of the market economy. A planned economy is only a viable means where there is a clear overarching goal – during wartime. A war economy is always a planned economy. Supporters of central economic dreams should therefore hear it once and for all: centralized economic planning is not suitable during peacetime.
  • As a result of the efforts of Hayek, Friedman, and the many others who share their general outlook, the idea of a centrally planned and centrally administered economy, so popular in the 1930s and early 1940s, has been discredited.
    • Irving Kristol, Neoconservatism: The Autobiography of an Idea, Chap. 9: “Capitalism, Socialism, and Nihilism”, (1995), p. 93.
  • Without a market in which allocations can be made in obedience to the law of supply and demand, it is difficult or impossible to funnel resources with respect to actual human preferences and goals.
    • Tibor R. Machan, Liberty and Research and Development: Science Funding in a Free Society, Introduction chapter: “Some Skeptical Reflections on Research and Development”, Hoover Institution Press, Stanford University (2002) p. xiii [4]
  • Under central planning neither planners, managers, nor workers had incentives to promote the social economic interest. Nor did impeding markets for final goods to the planning system enfranchise consumers in meaningful ways. But central planning would have been incompatible with economic democracy even if it had overcome its information and incentive liabilities. And the truth is that it survived as long as it did only because it was propped up by unprecedented totalitarian political power.
    • Robin Hahnel, The ABC's of Political Economy, (2002) London: Pluto Press. p. 262.
  • A fully planned economy was based on the government deciding the priorities for production. Government ministries then issued production quotas, which factories strove to fulfill. The allocation of raw materials, energy, and workers was decided centrally, based on calculations of how much was needed to achieve the quotas on time. Transport, repairs, or new machinery were requested by the individual factory and decided on, according to political priority, by state institutions allocated such tasks. Investment and output were imagined to be in perfect balance, and resources therefore utilized to the utmost. Distribution replaced the market as a mechanism of dividing the output. No factories ever closed, and no workers were laid off. There was therefore full employment at all times. The country was a socialist economic machine, the purpose of which was to maximize production. Reality, of course, diverged rather substantially from this economic ideal, as did capitalist practices from free market thinking in nonsocialist countries. Although much was achieved in terms of increasing production during the first decades of full economic planning, mainly in industry (socialist agriculture always lagged behind), growth slowed later. Some of this is undoubtedly explained by the first phase of growth being pushed forward simply by unrealized potential from earlier decades. The resource advantages of centralization in an underdeveloped economy played a part in initial successes, as did the enthusiasm of workers to rebuild and see their factories and countries succeed. But there were also inefficiencies built into the planned economy, which became more glaring as economies matured. There was a lack of efficient allocation, innovation, and product differentiation. There was also a lack of incentives for workers, and a lack of economizing or preservation of resources, natural or industrial.
    • Odd Arne Westad, The Cold War: A World History (2017)
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