Central Planning

Definition

Central planning indicates the total body of government actions to organise, regulate, and coordinate directions of national economic development. A central planning process is mainly composed of pre-plan studies and forecasts, formulation of aims for a given time period, establishment of their priorities, listing ways and means, and finally, the plan’s implementation. Central planning is a term that is mainly associated with centrally planned economies (CPE) in opposition to mixed economies (UN official classification) or free market economies. But central planning is often used in a broader sense to represent any systematic macroeconomic control by the government. 

 Examples

Typically, central planning is associated with the communist countries of the former Soviet Union and Eastern European countries, along with the contemporary governments of the People's Republic of China, Yugoslavia, Cuba, and some parts of Asia. In all the above examples, the state is the one who acted as the principle producer, distributor, supplier, and employer in almost all sectors of a country’s economy.

For Tinbergen (1964), the central planning referred to planning by governments or national planning. In the Netherlands as well as in other countries, there are Central Planning Bureaus, even though these types of economies cannot be classified as a group of CPEs (Centrally Planned Economies).

In the 1980s, almost all of these countries neglected central planning by adopting capitalist or mixed economic models. In some cases, like China, the denationalisation of state assets, when combined with a flood of foreign investment, led to extremely rapid economic growth.

Historical Background

In 1947, Mises used this word to criticise socialism and socialist economies, and he in fact denounced any kind of government intervention as “planned chaos.” The meaning and scope of central planning change with the changing fashion. In 1949, when Arthur Lewis confessed that we all are planners now, at that time it was fashionable to describe any kind of state interventionism as “planning.” In 1947, Robbins also termed his proposal for a modest anti-deflationary and anti-inflationary fiscal policy as “overall financial planning.” Till the 1970s, though, general opinions appeared to have been increasingly cautious of planning, in fact sceptical about its effectiveness. Therefore, some planners in the state administration who loyally stood by that idea preferred to cover their economic activity under less emotionally charged terms, like steering.

Centrally Planned Economies (CPEs)

An economic system where a government body or any central authority makes economic decisions regarding the production and distribution of goods rather than by market participants is called a centrally planned economy. The centrally planned economy is also known as the command economy or communist economy because decisions are made by governments in a centrally managed bureaucracy. The centrally planned economies are totally different from the market economic model, where all decisions are the result of thousands of choices by consumers and producers.

The manufacturing of goods or services in a centrally planned economy is typically done by state-owned enterprises. Sometimes independent companies may be incorporated into economic planning. A centralised bureaucracy is responsible for setting the prices, wages, and production schedules.

Features of a Centrally Planned Economy

The following are some features of a centrally planned economy:

Ownership by Government

In a centrally planned economy, the government has all the ownership of resources.

National Bureaucratic Level

Major decisions about what to produce, how to produce, and how to distribute manufactured goods are made at the national bureaucratic level.

Price Controls

Prices are generally set by price controls instead of market forces in a centrally planned economy.

Ration Books

In this type of economy, distribution is done according to ration books.

Advance 5-Year Planning

Planning about production could be in advance for about five to ten years in a centrally planned economy.

Levels of Bureaucracy

A centrally planned economy needs more levels of bureaucracy to plan and manage economic decisions.

Scope for Inefficiency

There may be a higher scope for inefficiency due to a lack of rivalry and incentives.

Power of Bureaucrats

In this type of economy, there is a high scope of corruption due to the power of bureaucrats.

Centrally Planned Economy vs. Free Market Economy

The following diagram illustrates the key differences between a centrally planned economy and a free market economy.

Central Planning Theory

According to central planning theory, the government will take ownership of the means of production and run the economy in the interest of the population. This theory also states that a centrally planned economy can reduce market failure and obtain equality of distribution. Advocates of this theory argue that when economic decisions are left to the free market, then monopolies emerge to undertake consumers. Moreover, the capitalists, those who own private property for their business and personal use, can earn money by using the labour of others. A centrally planned economy allows a fair distribution of resources among all and not just among the capitalist class.

Example

For example, the Soviet Union sometimes announced “5-year plans” where targets for steel production would be made. During 1928-1940 and after the Second World War, these five-year plans were very productive in terms of expanding the industrial production of the Soviet Union, including Poland and Czechoslovakia (later became Czech Republic and Slovakia). With the help of those five-year plans, the Soviet Union achieved very rapid rates of economic growth. Therefore, in the 1960s, the system was struggling with inefficiency, lack of incentives, and corruption. The rapid economic growth of the Stalin years was also reduced due to politics.

Upholders of central planning believe that the governments are the ones who can direct economic investment more effectively and efficiently as compared to the private sectors, particularly towards social goals with lower or no potential for profits. However, planning authority has more resources as compared to any other single company or business. Also, government projects can benefit from economies of scale that make government projects more supportive and productive for the long term. Therefore, the process of central planning typically requires a highly educated technical bureaucracy in order to communicate among different producers and resources. Since bureaucrats may take on the role of de facto ruling class, this creates something of a paradox for socialist countries.

Problems of Central Planning

The following are some major problems of the planned economy and the central planning:

Poor Prediction

In this type of planning, governments are poor at predicting future trends about production and distribution. 

Lack of Incentives

Another critique is that there is a lack of incentives when the income is guaranteed.

Inflexible Economy

Many scholars have said that central planning is inflexible and does not quickly respond to surpluses and shortages.

Corruption

Governments have greater scope for corruption because only they are responsible for implementing economic activities.

Political Repression

It is also a problem that central planning is often associated with greater political repression.

Marx’s Criticism on Capitalism

In order to overcome the chaotic anarchy of capitalist production, Marx commended centralised, systematised, and comprehensive planning where everything that is going to happen in an economy is arranged in advance. Marx also argued that economies should be “scientifically planned” as compared to letting them function on their own. Scientific planning would put an end to both alienation and inefficiencies of markets, like overproduction. Alienation arises from the producer’s inability to see the product of their labour being put into effective use. In a capitalist market, commodities are produced at fast speed, but then this commodity is circulated for long periods of time before being purchased by the final consumer. For example, in order to explain the difference between production and circulation time, consider a bookshop in which huge masses of books remained on shelves for many years before being sold to final customers. Marx criticised that the long circulation time is also a characteristic of capitalism and its quantitative approach, which is inefficient and leads to alienation. According to utopian scientific planning, everything can be pre-planned so that everything can reach the final consumer exactly when the consumer needs the product.

Conclusion

In conclusion, central planning is usually associated with Marxist-Leninist governments. North Korea, the Soviet Union, and East Germany are the classical examples. In the past years, market activities were extremely limited in these countries. Governments imposed economic activities through state-owned enterprises. Central planning is also associated with socialist and communist political systems; many other countries may legalise the elements of central economic planning in times of any national emergency or war. For example, many developed or developing countries implemented rationing systems during the world wars in order to control the prices of necessary goods and prevent shortages.