Cambridge International as and a level Economics Ebook

The planned economy
Like the market economy, the command or planned 
economy in its purest form exists only in theory. In this 
second type of economy, the government has a central 
role in all decisions that are made and, unlike the market 
economy, the emphasis is on centralisation. Central 
planning boards and organisations make decisions in 
enterprises that are state-owned or under state regulation 
and control. In a market economy, consumer sovereignty 
infl uences resource allocation, whereas in a command 
economy it is central planners who determine the 
collective preferences of consumers and manufacturing 
enterprises. Th
e planned economies of the past 50 years 
or so have their economic logic in the Marxian criticism 
of the market economy. Th
is particular objection was 
essentially one of class confl ict between the wealthy 
owners of capital and the poor working classes who 
provided this wealth through the production process. 
Marx was also critical of the built-in unemployment 
arising out of the market system. For example, he had 
observed the trend to replace labour with machines 
(capital) and the inability of labour to secure higher wages. 
Under a planned economy, unemployment is not an issue. 
Marx was also very concerned about the way in which the 
market economy fostered the concentration of productive 
resources in the hands of large monopolistic industrial 
and commercial organisations. As such he maintained 
that they corrupted the workings of the market and, if 
powerful enough, could exert pressure on governments. 
Retrospectively, and in the light of empirical experience, 
economists have with some justifi cation concluded that 
Marx’s criticisms were excessive. Nevertheless, his general 
recommendation that more centralisation should occur 
and that more emphasis should be placed on economic 
planning has been applied by those countries that have 
pursued the notion of a planned economy.
So, the key features of a planned economy are that 
central government and its constituent organisations take 
responsibility for:
■
the allocation of resources
■
the determination of production targets for all sectors of 
the economy
■
the distribution of income and the determination of wages
■
the ownership of most productive resources and property
■
planning the long-term growth of the economy.
From a practical standpoint, some of these decisions have 
to be decentralised, either geographically or by sector, 
to other government organisations. In certain cases, 
these bodies have control over the workings of a limited 
market mechanism. A good example of this is where basic 
foodstuff s such as bread and meat are heavily subsidised 
to keep prices at a fi xed level and so spare consumers 
from the price fl uctuations that are so commonplace 
in the market economy. Artifi cially low prices result in 
excess demand relative to supply – queuing becomes a way 
of life. Also from a practical standpoint it is very diffi
cult